Muntra, India's first unmanned tank
Muntra, India's first unmanned tankDRDO

The central government is planning a series of measures in the defence sector to boost local manufacturing of arms and ammunitions and cut down on imports. The Ministry of Defence (MoD) and the Department for Promotion of Industry and Internal Trade (DPIIT) are discussing the issue to further ease certain conditions to encourage foreign investors to set up manufacturing plants in India. Financial daily, the Economic Times reported that the involved ministries are also deliberating to restructure the offset and export policies. One of the officials close to the development said, "Discussions are on over further liberalisation."

Why is govt pushing for greater FDI in defence?

Till the Indian economy was more or less closed, defence Sector in India, being a strategic sector, was traditionally a sole field of the Public Sector till 1991. The products manufacturing was heavily monopolised by defence Public Sector Undertakings (Defence PSUs) and Ordnance Factory Board (OFB) while the exclusivity of research and development was maintained by the Defence Research and Development Organisation.

The situation led to a lack of competition, sub-standard products and lack-lustre pace of R&D while badly affected its defence forces. The defence manufacturing was structurally weakened due to this monopoly. In fact, in 2016, then Vice Chief of Army Lt Gen Sarath Chand had said 68 per cent of the army's equipment is in the 'vintage category'. The opening up of the defence sector took place in 2001 when it was thrown open to the private sector with FDI permissible up to 26 per cent, both subject to licensing.

Indian Army
Indian Army soldiers in KashmirCredit: Reuters
For the ease of doing business, the FDI approval process can also be subsumed in the licensing process. Another layer for a separate FDI approval process can be done away with.
- Akash Gupt, partner at PwC

Further, the Modi government after assuming power in 2014 raised the limit up to 49 per cent through Government route and above 49 per cent through the Cabinet Committee on Security (CCS), on a case-to-case basis. The centre is of the view that increasing the FDI would have many positives for the local defence manufacturing. The government believes that local manufacturing would lead to lesser imports which would mean greater transparency with a diminishing role for middlemen. With higher fund infusion, the local manufacturing would witness inflow of state of art technology and production of quality products. Moreover, it will create jobs in the economy and support the country to save foreign currency.

What is govt planning now?

In this round of liberalisation, the centre is planning to increase the limit for automatic clearance to 74% along with relaxation in other conditions. Notably, as per current rules, any foreign investor planning to set up a manufacturing base in India has taken licence and a procurement order from the government along with the clearance from both MoD and DPIIT. The duplication should be subsumed into one, experts believe.