Pie in the sky: Modi faces tough challenge to attract FDI in defence sector


FDI in Defence: India’s efforts to attract foreign direct investment in the defence manufacturing sector has not succeeded so far despite several policy changes made by Prime Minister Narendra Modi’s government in the last five years.

According to the latest official data given by the government in Parliament this month, the country has only received foreign direct investment of Rs 1,834 crore ($248 million) between 2014 to December 2019.

The bulk of this amount came into the country last year as defence sector received $2.18 million FDI in FY 2018-19.

However, it is nothing in comparison with the total amount of the Foreign Direct Investment received by the country during the same period which has been pegged at $62 billion. And FDI in defence sector accounts for less than half percent ( 0.35%) of the total FDI inflows the country in FY 2018-19.

Early this month, India’s junior defence minister Shripad Naik told the Lok Sabha, the lower house of Indian Parliament, that this figure of $2.18 million FDI investment coming to the country was based on the information given by 79 companies operating in defence and aerospace sector.

In a separate reply, India’s commerce and industries minister Piyush Goyal last year gave year-wise break-up of the FDI received in defence sector in the last five years.

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According to information given by Piyush Goyal, the country received just $0.08 million FDI in defence sector in 2014-15, $0.10 in 2015-16, no FDI in defence sector was received in 2016-17 and just $0.01 million were received in 2017-18. However, the FDI inflows in defence sector recorded a significant increase in the last financial year (April-March period) of 2018-19 when it suddenly jumped to $2.18 million.

FDI inflows in defence sector in last five years

This meager amount of $2.48 million FDI in defence sector received in the last five years highlights the challenges before the country as it embarked on a modernisation drive that leans heavily on boosting indigenous defence manufacturing by encouraging foreign firms to invest in defence sector of the country.

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In May 2001, Prime Minister Atal Bihari Vajpayee’s government had opened the defence sector for private companies and they were allowed to bring foreign direct investment of up to 26% subject to licensing.

In 2016, Prime Minister Narendra Modi’s government further relaxed the norms for bringing foreign direct investment in the country as a cap of 26% on FDI in defence was considered an impediment in attracting foreign investment therefore Modi government permitted 49% foreign direct investment in defence sector through automatic route.

The government hoped that by permitting foreign direct investment in the country, it will be able to attract global defence and aerospace giants to set up manufacturing base in the country in partnership with Indian companies.

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Through a press note (press note 5 of 2016 series) issued by the department for promotion of industry and internal trade (DPIIT), foreign direct investment above 49% in the defence sector through government route was also permitted if it was likely to result in access to modern technology.

The government can also permit more than 49% FDI in defence companies by recording the reasons in writing.

However, the total FDI inflows in the defence sector in the last five years remains at a low of just $2.48 million and total FDI inflows in the last two decades (April 2000 to December 2019) too remain at abysmally low level of just $8.82 million (Rs 52 crore).

FDI in defence vs overall FDI inflows last year

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The government believed that its new FDI policy will attract foreign defence companies to the country that will lead to greater indigenisation of defence equipment and creation of employment opportunities in the country.

However, the latest data suggests that attracting foreign direct investment in the country’s defence manufacturing sector remains a huge challenge for the country despite multiple policy interventions.

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