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74% FDI IN DEFENCE NOTIFICATION TO COME

Focus: GS-III Indian Economy

Why in news?

  • The government is going to come out with a decision on 74% Foreign Direct Investment (FDI) in defence and a notification is bound to be released soon.
  • The second draft of the Defence Procurement Procedure (DPP) 2020, now renamed as the Defence Acquisition Procedure (DAP) 2020, was put out in public domain for comments from stakeholders and public.

Background to the build up

  • In May 2020, the government announced a series of measures to promote domestic defence manufacturing as part of the Fourth tranche of the Aatmanirbhar Bharat Abhiyan package.
  • These include a negative import list, separate budgetary allocation for domestic procurements, indigenisation of spares and components and raising the FDI cap through automatic route from 49% to 74%.
  • Taking of the indigenous defence manufacturing space Indian manufacturers did exceedingly well when it came to exports.
  • However, when it came to overall defence manufacturing, the major share was with the public sector, which accounted for about $8bn and the private sector did around $2bn.
  • The increase in exports by the private sector comes as several major defence companies like Lockheed Martin, Boeing, Thales and Dassault Aviation are increasingly sourcing components from India for their global supply chains.

State of Imports and Exports in the Defence sector

According to a report released by Stockholm International Peace Research Institute (SIPRI) for the period between 2009-13 and 2014-18, Indian defence imports fell even as exports increased. This is good for a nation that has had the record of being one of the biggest importers of Defence equipment.

2 Factors responsible for this shift

  1. ‘Make in India’ initiative, as part of which a number of components from Indian private and public sector enterprises have been prioritised by the government.
  2. Extraneous factors in the form of delays in supplying equipment by vendors and the outright cancellation of contracts by the Indian government or at least a diminution of existing contracts.

Explaining falling imports

Growing indigenization is not the sole reason for falling imports. It is also because of the cancellation of some big-ticket items

  1. India cancelled the India-Russia joint venture for the development of the advanced Su-57 stealth Fifth Generation Fighter Aircraft (FGFA) in 2018 due to delays and not having the actual “5th gen” capabilities
  2. In 2015, we also reduced the size of the original acquisition of 126 Rafale Medium Multi-Role Combat Aircraft (MMRCA) from Dassault to 36 aircraft
  3. Delays in the supplies of T-90 battle tanks, and Su-30 combat aircraft from Russia and submarines from France, in 2009-13 and 2014-18, also depressed imports.

Export trends

The trends look positive on the export front. Between 2012 and 2019, Indian defence exports, both Public and private, have seen a surge

The sharp rise in defence export products can be attributed to the measures introduced by Government

  • In 2014, the government delisted or removed several products that were restricted from exports.
  • It dispensed with the erstwhile No Objection Certificate (NOC) under the DPP restricting exports of aerospace products, several dual-use items and did away with two-thirds of all products under these heads.
  • Small naval crafts account for the bulk of India’s major defence exports. However, export of ammunition and arms remain low.

-Source: The Hindu

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