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100% FDI in Defence Sector
The term FDI is an abbreviation for Foreign Direct Investment and refers to the direct
investment that any foreign company makes in another country, by the act of buying that
company or by expanding some existing business in the country.
The ways of making foreign investment include, setting up an associate of the company in
the foreign country, acquiring shares of the company or via a merger etc. Unlike, the
indirect investments where the institutions abroad invest in the equities listed on a nations
stock exchange, direct investment allows entities a higher degree of control over the
company wherein it invests. A larger amount of FDI is a characteristic of an open economy
which has good prospects of growth.From the view point of the accounts of a country, FDI
also refers to the net incoming investment (incoming-outgoing investment) in acquisition of
minimum management interest of 10% or more of voting stock in the economy where the
investment is being done.
Every country has its own set of FDI rules that decide the way he foreign country can
conduct business. A foreign company interested in investing in an Indian company can take
two routes-automatic and government route. In case of automatics route, no prior approval
from Government of India or RBI is required to invest in sectors/ activities that are defined
in consolidated FDI policy. Activities, other than those covered in FDI policy require
government approval which involves decision by the Foreign Investment Promotion Board,
Department of Economic Affairs, and Ministry of Finance.
The key benefit of FDI is the foreign capital and funds that it brings to the country where the
investment is made. Besides, it enables the exchange of skill sets, information and expertise,
job opportunities and also leads to an increase in the productivity levels. Many Asian
progressive economies like China, South Korea have experienced booms in their economies
due to higher proportion of foreign direct investment in their economies. From economic
perspective, the FDI can be defined as the measure of foreign ownership of domestic
productive assets including factories, organizations, land etc.
With internet having changed the rules of businesses across the world, FDI no longer
demands huge capital and physical investment. Advent of small internet start-ups which
require lesser investment and economies becoming knowledge oriented that lay emphasis
on human capital instead of manual labor has altered the FDI operations largely. FDI has
already captured the advanced economies of the developed nations like U.S. and is
currently moving towards the developing nations where the FDI flows are growing better.
FDI is being looked upon as a way to internationalize and have global presence for many
industries and companies. This also provides an excellent tool to the government to check

the local production and also trade to be carried on freely without any barriers. With FDI
coming, setting up of locally based sales offices ensures that companies are able to
approach the customer directly.
In a major policy initiative, the Narendra Modi government is proposing to raise foreign
direct investment (FDI) cap in defence sector to 100 per cent through the approval route,
according to sources. The UPA government had pegged FDI in the defence sector at 26 per
cent but allowed the Cabinet Committee on Security (CCS) to approve proposals entailing
higher investments.
The proposal to raise FDI cap in defence from 26 per cent to 100 per cent is aimed at giving
a boost to manufacturing activities.
As per the 15-page Cabinet note circulated, portfolio investors, including foreign
institutional investors (FIIs), would be permitted to invest only up to 49 per cent.
Further, a foreign company can even take over a domestic entity provided it brings in stateof-the-art technology.
This is the first major initiative of the ministry after new Commerce and Industry Minister
Nirmala Sitharaman took charge Permitting FDI in the sector "will hugely help in reducing
import bill for defence equipment" and "will help in boosting manufacturing and creating
jobs".
In May 2010, the Department of Industrial Policy & Promotion (DIPP) had rolled out a
discussion paper suggesting increase in FDI cap for the defence sector.
India opened up the defence equipment industry to private sector in May 2001, but
restricted foreign participation to 26 per cent in this capital-intensive and sensitive sector.
India is one of the largest defence importers in the world with a minuscule component of
exports.
India ranks among the top ten countries in the world in terms of military expenditure. At
present, it imports over $8 billion worth of defence equipment and its defence budget is
growing at an average of 13.4 per cent annually since 2006-07.
"The bulk of the domestic production is met either through the Ordnance Factories or the
Defence PSUs. Even when defence products are manufactured domestically, there is a large
component of imported sub-systems
So This move will perhaps benefit the Indian economy to a large extent and bring it in line
with the other economies.