FDI in Defence to Boost Manufacturing in India

The Department of Industrial Policy and Promotion (DIPP) has prepared a draft cabinet note that proposes to allow upto 100% foreign direct investment (FDI) in defense to boost domestic manufacturing. The note proposes allowing 49% FDI in case of no technology transfer; 74% FDI in case of a technology transfer; and 100% FDI for transfer of state-of-art technology. Currently, only 26% FDI is allowed in defense manufacturing.

India’s defense establishment is a major procurer of various kinds of equipment. However, there has been very limited participation by the domestic private manufacturing sector in production of such equipment, the majority of which traditionally has been imported or manufactured by government owned entities. Relaxation of rules to allow greater participation by the domestic manufacturing sector and enabling easier transfer of technology has been a long standing demand of industry.

The industrial slowdown of the past 4-5 years, which started because of project delays, lack of approvals and other supply-side constraints, has now morphed into a vicious cycle of lack of demand feeding on itself. Defense procurement from domestic industry could break this vicious cycle by providing a major external source of demand.

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