What does 100% FDI in defence mean?

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The government’s decision  to liberalize the foreign direct investment rules and allow 100 per cent FDI in defence marks a major push to defence manufacturing under the 'Make in India' initiative as it reduces the dependence of original equipment manufacturers (OEMs) on domestic manufacturers.

100% FDI in defence sector : The current foreign direct investment (FDI) regime permits foreign companies to own 49% in Indian units through the automatic approval route but under the new rule India has opened up the defence sector allowing foreign companies to own as much as 100% equity in the local defence sector through the government approval route in cases where it is likely to result in access to modern technology. The FDI limit for the defence sector has also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act 1959.

Why earlier FDI norms were a failure ?

Under the previous rules, foreign OEMs (original equipment manufacturers) were required to form joint ventures with domestic firms if they wanted to establish a manufacturing base in India but with the amendment, an OEM can enter the market on their own and independently plan and implement operations in India. This would save the time spent on lengthy negotiations with Indian companies.

Under the earlier policy an  OEMs (original equipment manufacturers) that was  looking to set up a wholly owned subsidiary was required to get approval from the Cabinet Committee on Security which also included getting a clearance from ministry of defence, ministry of external affairs, ministry of home affairs and the ministry of defence and proving that the technology/product sought to be manufactured was modern and state of the art but now the amendment will save the time spent on lengthy Clearance process.

Advantages of the new FDI norms ?

  • It should be noted that removing the provision that required OEMs to prove that their products are modern and state of the art, will allow these companies to relocate production of slightly older and off-the-shelf products to India, which was not possible earlier.
  • Currently India imports majority of defence equipments but now 100% FDI in defence sector will reduce imports and improve country's capacity to produce defence equipment locally and save foreign money. It will also create employment opportunities.

DisadvantagesHowever it should be noted that defence is very critical and sensitive sector so allowing 100% FDI in defence sector can compromise country's security and its independent foreign policy so instead of raising the FDI limit, the Centre could have worked upon improving functioning of the defence sector public sector undertakings (PSUs) like the Defence Research and Development Organisation (DRDO), Hindustan Aeronautics Limited (HAL) and Ordinance Factory Board (OFB).

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