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RELAXATION OF FDI NORMS IN DEFENCE SECTOR

Why in news?

The information related to FDI was given by Raksha Rajya Mantri Shri Shripad Naik in a written reply to one MP in Rajya Sabha.

What was the content?

  • In May 2001, the Defence Industry sector, which was earlier reserved for the public sector, was opened up to 100% for Indian private sector, with Foreign Direct Investment (FDI) up to 26% both subject to licensing.  
  • Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry has allowed FDI under automatic route up to 49%.
  • Above 49% through the government route wherever it is likely to result in access to modern technology or for other reasons to be recorded. 
  • FDI in the defence industry sector is subject to industrial license under Industries (Development & Regulation) Act, 1951 and manufacturing of small arms and ammunition under the Arms Act, 1959. 
  • As per the data furnished by 79 companies in Defence and Aerospace sector, so far (i.e. till December 2019), FDI inflows of over Rs. 3155 crores have been reported in Defence and Aerospace sectors.
  •  Further, FDI inflows of over Rs. 1834 crores have been reported in Defence and Aerospace sector after 2014.
  • The top countries from where India attracted maximum FDI during the period include Mauritius, Singapore, Japan, Netherlands and the US.

Extra notes:

WHAT IS FOREIGN DIRECT INVESTMENT (FDI)

Foreign direct investment (FDI) is when a company takes controlling ownership in a business entity in another country. With FDI, foreign companies are directly involved with day-to-day operations in the other country. This means they aren’t just bringing money with them, but also knowledge, skills and technology.

Routes through which India gets FDI:

Automatic route: The non-resident or Indian company does not require prior nod of the RBI or government of India for FDI.

Govt route: The government’s approval is mandatory. The company will have to file an application through Foreign Investment Facilitation Portal, which facilitates single-window clearance. The application is then forwarded to the respective ministry, which will approve/reject the application in consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. DPIIT will issue the Standard Operating Procedure (SOP) for processing of applications under the existing FDI policy.

FDI prohibition

There are a few industries where FDI is strictly prohibited under any route. These industries are

  • Atomic Energy Generation
  • Any Gambling or Betting businesses
  • Lotteries (online, private, government, etc)
  • Investment in Chit Funds
  • Nidhi Company
  • Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)
  • Housing and Real Estate (except townships, commercial projects, etc)
  • Trading in TDR’s
  • Cigars, Cigarettes, or any related tobacco industry

Modernisation of Defence Industry

The following steps have been taken by the Indian government which would help in bringing in critical technologies and modernize the Defence Industry in the country:-

  • Defence Procurement Procedure (DPP) has been revised in 2016 wherein specific provisions have been introduced such as ‘Buy Indian Designed Developed and Manufactured (IDDM)’ for stimulating growth of the domestic defence industry.
     
  • Government has notified the ‘Strategic Partnership (SP)’ Model which envisages establishment of long-term strategic partnerships with Indian entities through a transparent and competitive process, wherein they would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains.
     
  • ‘Buy & Make (Indian)’ category of procurement under DPP-2016 provides for initial procurement of equipment in Fully Formed (FF) state in quantities as considered necessary from an Indian vendor engaged in a tie-up with a foreign OEM, followed by indigenous production in a phased manner involving Transfer of Technology (ToT) of critical technologies.
     
  • ‘Buy & Make’ category of procurement under DPP-2016 provides for initial procurement of equipment in Fully Formed (FF) state from a foreign vendor, in quantities as considered necessary, followed by indigenous production through an Indian Production Agency (PA), in a phased manner involving Transfer of Technology (ToT) of critical technologies.
     
  • Foreign Direct Investment (FDI) Policy has been revised and under the revised policy, FDI is allowed under automatic route upto 49% and beyond 49% through Government route wherever it is likely to result in access to modern technology or for other reasons to be recorded.

In addition to above, following initiatives and schemes have been initiated to contribute toward modernization of Defence Industry:-

  • Mission Raksha Gyanshakti: Mission Raksha Gyanshakti was launched in 2018-19, with the objective of creating greater Intellectual Property in Defence Production Ecosystem.
     
  • Artificial Intelligence in Defence: Creation of Defence Artificial Intelligence Project Agency(DAIPA) was done in March, 2019 for greater thrust on Artificial Intelligence (AI) in Defence, formulation of an AI roadmap for each Defence PSU and OFB to develop AI-enable products and insertion of 3 percent points in MoU with Defence PSUs for AI products being developed.
     
  • Innovations for Defence Excellence (iDEX): The objective of iDEX is bringing startups to innovate, develop technology and solve problems related to defence and aerospace. The initiative is being implemented by Defence Innovation Organization (DIO), a Section 8 company founded by BEL and HAL. DIO has initiated activities in 2018/ 2019, running Defence India Startup Challenges (DISCs), and outreach activities to activate the Indian startup ecosystem for defence.
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October 2022
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