FDI in Defence

Cdr S. Shrikumar (retd)

With a view to speedily end dependence on import for its defence needs, government of India, in the year 2001, opened up defence manufacturing to the private sector. Previously, private sector participation in defence had been widely viewed as a transgression of national security. Initially, FDI in defence of up to 26 per cent was allowed under the automatic route. Later, in 2015-16 this cap was raised to 49 per cent.

In March 2018, government of India (GoI) released a draft Defence Production Policy (DProP 2018). It targeted the creation of an industry-friendly business ecosystem to promote domestic production of defence equipment by the public sector, the private sector and MSMEs.

The provisions of the DProP 2018 aimed to enable India graduate from being among the largest importer of arms in the world to being self-reliant in its defence needs. Some of the enabling provisions and incentives that were proposed included:

• Rationalising the taxation system to support domestic defence manufacturing.
• Streamlining the defence offsets policy to enable speedy execution of offset contracts.
• Enhancing the FDI cap from 49 per cent to 74 per cent under the automatic route for certain niche technologies.
• Setting up of an Aeronautical University in a 50:50 cost sharing partnership between Hindustan Aeronautics Ltd (HAL) and GoI to address the issue of skill shortage.
• Setting up of a corpus of Rs 1,000 Crore (USD 140M) to fund start-ups to meet specific defence R&D objectives.
• Easing and speeding up of the industrial licensing process.

In mid-December 2019, at the 2+2 dialogue held in Washington, the Industrial Security Annex (ISA) to the India-US General Security of Military Information Agreement (GSOMIA) was signed. The ISA provides the framework for exchange and protection of classified military information between the US and Indian defence industries. The ISA, it is expected, will open the door to greater cooperation bet