FDI in Defence Manufacturing Sector – Emerging Legal

Issues and Challenges

Research Dissertation submitted to:

Amity Law School, Noida
Amity University Uttar Pradesh
Under the supervision of:
Ms. Neelma Devi

In Part Fulfilment of Requirements for the Degree of LLB, 3 Years

Submitted By:
NISHI CHAUDHARY
LL.B. (H)
Enrolment No.: A3256119195
Batch: 2019-2022

1
 DECLARATION

I declare that the dissertation entitled “FDI in Defence Manufacturing Sector – Emerging
Legal Issues And Challenges” is the outcome of my own work conducted under the
supervision of Ms. NEELMA DEVI, Professor of Law at Amity Law School, Noida - Amity
University, Uttar Pradesh. I further declare that to the best of my Knowledge the dissertation
does not contain any part of any work, which has been submitted for the award of any degree
either in this University or in any other University/Deemed University without proper
citation.

NISHI CHAUDHARY

Dated: 10/03/2022

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 CERTIFICATE

I have the pleasure to certify that Enrolment No.: A3256119195, a student of Amity Law
School, Noida has pursued her dissertation and prepared the present paper entitled “FDI in
Defence Manufacturing Sector – Emerging Legal Issues and Challenges” under my
supervision and guidance. To the best of my knowledge the paper is the result of her own
research work done. This is being submitted to Amity University for the degree of Bachelors
of Law in partial fulfilment of the requirements of the said degree.

Dr. Aditya Tomer Ms. NEELMA DEVI

Industry Guide
Addl. Director/HOI Professor
Faculty of Law Amity Law School, Noida
Amity Law School, Noida
BLOCK I-3, Sector 125

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 ACKNOWLEDGMENT

This dissertation is the outcome of the study by the author. Any material written by another
person that has been used in the paper has been thoroughly acknowledged. As my research
has concluded, there are a number of people I would like to thank for the successful attempt.
I thank the esteemed director of this institution, Dr. Aditya Tomer for inculcating the concept
of preparing a dissertation and allowing the researcher to present his/ her point of views in
liberal manner and encouraging the researcher by providing all the much-needed support
I would firstly like to express my exceptional gratitude and acknowledgment to Ms. Neelma
Devi who undertook the role of a supervisor mentor and guide for the successful preparation
of this dissertation and for his/her tireless guidance and support throughout the time of
research and writing. It would not have been possible without his/her constructive criticism
and efforts.
I would also like to extend my thanks and gratitude for the contribution of all those who
helped me in this work as individuals or otherwise. On a personal level I would like to extend
my appreciation to my family and friends who supported me to conclude this research paper.

NISHI CHAUDHARY
LL.B. (H)
AMITY LAW SCHOOL, NOIDA

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 TABLE OF CONTENTS

S.NO TOPIC PAGE NO.

1 INTRODUCTION 6-12
2 DEFENCE MANUFACTURING - INFOGRAPHICS 13
3 RECENT MEASURES IN DEFENCE 14 – 16
MANUFACTURING
4 FDI IN DEFENCE MANUFACTURING SECTOR 17 – 21
5 INDIAN EXAMPLES 22 – 23
5 CONCLUSION 24 – 25
6 BIBLOGRAPHY 26 – 27

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CHAPTER 1 – INTRODUCTION

The Indian defence manufacturing industry is a significant sector for the economy. The
industry is likely to accelerate with rising concerns of national security. Demand for defence
equipment in India has been growing due to the ongoing territorial disputes with Pakistan and
China over the ownership of the Northern State of Kashmir and the North Eastern State of
Arunachal Pradesh, respectively.
Over the last five years, India has been ranked among the top importers of defence 1
equipment to gain technological advantages over rival countries such as China and Pakistan.
To modernise its armed forces and reduce dependency over external dependence for defence
procurement, several initiatives have been taken by the government to encourage ‘Make in
India’ activities via policy support initiatives.

Investment in India's protection production zone, previously restrained to publicly traded

businesses, began in 2001, allowing for one hundred% home personal area participation and
as much as 26% FDI. Initially, foreign capital changed into handiest allowed through
government routes, and both domestic and overseas groups were issue to obligatory
commercial licensing. India has due to the fact that raised the FDI limit to 100%, but now
allows 74% for automated routes and the relaxation for authority’s routes.
India is based on imports for greater than 70% of its protection desires. The United States of
America spends about three% of GDP and 25% of its annual finances on defense. However,
India become best capable of appeal to a handful of foreign corporations to partner with
Indian companies to set up a manufacturing plant in India. Defense-related FDI flowing into
India reached simply US$10 million among April and September 2020. Despite its large
defense market, India lags behind other nations in attracting overseas investment.

The policies of the Government of India to promote independence in defense manufacturing

below the Aatmanirbhar Bharat scheme. For instance, 74% FDI in defense production,
"import embargo" on one zero one navy objects, and protection manufacturing and export
promotion policy 2020. The government has formulated the "Defense Production and Export
Promotion Policy 2020" and the "Aatmanirbhar Bharat" scheme. The ministry targets to reap
sales of Rs. 1 lakh 75 thousand crore ($25 billion) inclusive of exports of Rs 10,000. Rs 350
billion (US$5 billion) in aerospace and protection-associated services and products via 2025.

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Market Dynamics
India’s defence manufacturing sector has been witnessing a CAGR of 3.9% between 2016
and 2020. The Indian government has set the defence production target at US$ 25.00 billion
by 2025 (including US$ 5 billion from exports by 2025). Defence exports in India were
estimated to be at US$ 1.29 billion in 2019-20. India’s defence import value stood at US$
463 million for FY20 and is expected to be at US$ 469.5 million in FY21. Defence exports in
the country witnessed strong growth in the last two years. India targets to export military
hardware worth US$ 5 billion (Rs. 35,000 crore) in the next 5 years. As of 2019, India ranked
19th in the list of top defence exporters in the world by exporting defence products to 42
countries.

Recent development/Investments
 Foreign Direct Investment (FDI) equity inflow in the defence sector for April 2000 -
June 2021 stood at US$ 10.15 million (Rs. 61.52 crore) as per data released by the
Department for Promotion of Industry and Internal Trade (DPIIT).
 In November 2021, Raksha Mantri, Mr. Rajnath Singh, inaugurated the first private
operationalised defence manufacturing facility in the Uttar Pradesh Defence Industrial
Corridor (UPDIC), in Lucknow. The facility operated by Aerolloy Technologies — a
wholly owned subsidiary of PTC industries — will manufacture parts for aircraft and
helicopter engines, structural parts for aircrafts, drones and UAVs, submarines, ultra-
light artillery guns, space launch vehicles and strategy systems.
 The Defence Research & Development Organisation (DRDO) and Indian Air Force
(IAF) successfully flight tested two indigenously-developed smart anti-airfield
weapons in November 2021.
 In November 2021, to demonstrate the growing India-Israeli technological
cooperation, the Defence Research and Development Organisation (DRDO), India
and Directorate of Defence Research and Development (DDR&D), Ministry of
Defence, Israel, entered a Bilateral Innovation Agreement (BIA) to promote
innovation and R&D in start-ups and MSMEs of both countries for development of
dual use technologies.
 The 11th Defence Technology and Trade Initiative (DTTI) Group meeting between
India and the United States (US) was held virtually on November 09, 2021. The aim
of the DTTI Group is to focus on a bilateral defence trade relationship and create
opportunities for co-production and development of defence equipment.
 In November 2021, the Indian Army signed an MoU with the Bhaskaracharya
National Institute for Space Applications and Geo-Informatics (BISAG-N),
Gandhinagar, Gujarat. This MoU will facilitate exchange of knowledge and
collaboration for development of GIS and IT-based enterprise resource planning
software, train content, telecast audio-visual content, research and knowledge
partnerships, technical support and upgradation for resources.

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  In October 2021, India signed contracts and cleared projects 2 worth ~Rs. 54,000 crore
(US$ 7.21 billion), in less than a month, to enhance military capability with locally
produce weapons and systems, including transport planes, tanks, helicopters, airborne
early warning systems and counter-drone weapons.
 In October 2021, India and the US at the 16th India-US Defence Policy Group (DPG)
meeting in Washington DC, discussed the possibility of expanding their bilateral
defence cooperation to new domains, including space, cybersecurity, artificial
intelligence and counter drone technologies.
 On October 27, 2021, India successfully launched the surface-to-surface ballistic
missile, Agni-5, from the APJ Abdul Kalam Island, Odisha. The missile has the
capacity and range to strike targets up to 5,000 kilometres with a very high degree of
accuracy.
 In October 2021, the Ministry of Defence signed a contract with the US Government,
under Foreign Military Sale (FMS), for procurement of MK 54 torpedo and
expendables (chaff and flares) for the Indian Navy, at a cost of Rs. 423 crore (US$
56.53 million).
 The 12th edition of DefExpo, India’s flagship event showcasing land, naval, air and
homeland security systems will be held in Gandhinagar, Gujarat, from March 10 to
March 13, 2022. The aim of DefExpo-2022 is to build and achieve ‘Aatmanirbharta’
(self-reliance) in defence and increase defence exports to US$5 billion by 2024.
 In September 2021, the Ministry of Defence announced a Rs. 22,000 crore (US$ 3.0
billion) deal with Tata-Airbus to procure 56 C-295 transport aircraft for the Indian Air
Force (IAF). This deal is part of a series of initiatives to advertise the non-public
sector in defence manufacturing.
 In September 2021, India proposed to make the India-Africa Defence Dialogue a
regular event by holding it alongside the DefExpo military exhibition held in every
two years. The dialogue will help develop existing partnerships between African
countries and India to explore new areas of convergence for mutual engagements
including capacity building, training, cyber security, maritime security, and
counterterrorism, according to a statement by the defence ministry.
 In September 2021, Defence Minister, Mr. Rajnath Singh, at the India-Australia 2+2
ministerial dialogue, said that both countries are exploring new areas in the fields of
artificial intelligence and unmanned vehicles.
 In August 2021, Defence Minister, Mr. Rajnath Singh, approved the launch of
Defence Testing Infrastructure Scheme (DTIS) with an outlay of Rs. 400 crore (US$
54 million) to create state-of-the-art testing infrastructure and boost domestic defence
& aerospace manufacturing.
 The five-year scheme is predicted to set up 6-8 new test facilities in partnership with
private industries and facilitate indigenous defence production
 In August 2021, a webinar and expo between India and Malaysia was held under the
theme of ‘Indian Defence Industry Global Outreach for Collaborative Partnership’.

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 The webinar was part of the series being organised with friendly foreign countries to
boost defence exports to US$5 billion by 2024.
 In July 2021, the Ministry of Defence and the US Department of Defence signed a
Project Agreement (PA) for Air-Launched Unmanned Aerial Vehicle (ALUAV),
under the Joint Working Group Air Systems in the Defence Technology and Trade
Initiative (DTTI). This agreement is a significant step towards deepening defence
technology cooperation between the two countries.
 In June 2021, Defence Minister, Mr. Rajnath Singh, approved a proposal for the
construction of six submarines at an estimated cost of ~ Rs. 43,000 crore (US$ 5.76
billion).
 To boost the Indian Government’s ‘self-reliant’ India initiative in June 2021, Defence
Minister, Mr. Rajnath Singh, approved the budgetary funds worth Rs. 498.8 crore
(US$ 66.83 million) to Innovations for Defence Excellence (iDEX), a Defence
Innovation Organisation (DIO) for the next five years.
 The government is also inviting foreign players to invest in India and capitalise on the
‘Make in India’ opportunity. In June 2021, Defence Minister, Mr. Rajnath Singh,
invited Swedish companies to invest in defence corridors in Uttar Pradesh and Tamil
Nadu.
 On May 12, 2021, PM CARES Fund approved the procurement of 150,000 units of
‘Oxycare’—SpO2-based oxygen supply system developed by the Defence Research
and Development Organisation (DRDO) at a cost of Rs. 322.5 crore (US$ 44.16
million).
 On May 17, 2021, the Defence Ministry unveiled the first batch of anti-COVID drug,
2-deoxy-D-glucose (2-DG) developed by the Institute of Nuclear Medicine and Allied
Sciences (INMAS), a lab of Defence Research and Development Organisation
(DRDO), along with Dr. Reddy’s Laboratories (DRL), Hyderabad.
 In April 2021, Under the Development cum Production Partner (DcPP) programme,
Defence Research and Development Organisation (DRDO) allowed private sector
firms to develop and produce missile systems, such as vertical launched surface and
air missile system programmes, to promote the domestic defence industry.
 In April 2021, Defence Research and Development Organisation (DRDO) developed
an advanced chaff technology to safeguard the naval ships against a missile attack.
Defence Laboratory Jodhpur (DLJ), a DRDO laboratory, has indigenously developed
three variants of this critical technology, namely short-range chaff rocket (SRCR),
medium-range chaff rocket (MRCR) and long-range chaff rocket (LRCR) that meet
Indian Navy’s qualitative requirements. This successful development of advanced
chaff technology by DLJ is another step towards ‘Atmanirbhar Bharat’.
 In April 2021, Defence Research and Development Organisation (DRDO) Defence
Materials and Stores Research lab and Development Establishment (DMSRDE),
Kanpur, developed a lightweight bullet proof jacket (BPJ), which weighs 9.0
kilogrammes and meets qualitative requirements of the Indian Army.
 In April 2021, Defence Research and Development Organisation (DRDO) developed
single crystal blades technology and supplied 60 of these blades to Hindustan

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 Aeronautics Limited (HAL), as part of their indigenous helicopter development
programme, for helicopter engine application.

Government Initiatives
In November 2021, Defence Acquisition Council (DAC) boosted the ‘Make in India’
initiative by according Acceptance of Necessity (AoN) — to capital acquisition proposals
worth Rs. 7,965 crore (US$ 1.07 billion) — for modernisation and operational needs of
armed forces.
On October 15, 2021, Prime Minister, Mr. Narendra Modi, dedicated the seven defence
public sector undertakings (PSUs)—created through the restructuring of the Ordnance
Factory Board (OFB)—to improve functional autonomy, efficiency, growth potential and
innovation in the defence sector.

Government formulated the ‘Defence Production and Export Promotion Policy 2020’ to
provide impetus to self-reliance in defence manufacturing under the ‘Aatmanirbhar Bharat 3’
scheme. The ministry aims to achieve a turnover of Rs. 1 lakh 75 thousand crore (US$ 25
billion), including an export of Rs. 35 thousand crore (US$ 5 billion) in the aerospace and
defence goods and services by 2025.

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To encourage more participation from start-ups and micro, small & medium enterprises
(MSMEs) in Defence Research & Development (R&D)4 in achieving the ‘Aatmanirbhar
Bharat’ goal, the Defence Minister Mr. Rajnath Singh released a new version of ‘Defence
Research and Development Organisation (DRDO) Procurement Manual 2020’ on October
20, 2020. There are plans to establish new infrastructure including a defence park in Kerala to
manufacture defence equipment for the armed forces.

The project is aimed at promoting MSMEs and boosting the ‘Make in India’ initiative. In
November 2020, the Department of Defence, in partnership with the DGDE and Armed
Forces, established a land management system (LMS) as part of efforts to enhance the overall
defence land management. In February 2021, Defence Research and Development
Organisation (DRDO) handed over Licensing Agreements for14 DRDO developed
technologies to 20 industries at Aero India 2021 in Bengaluru.

To increase defence manufacturing in India and make the country a reliable weapon supplier
to friendly countries, the Indian government allowed the following FDI limits in September
2020. For new licensees - FDI allowed up to 74% through automatic route; FDI beyond 74%
would need to be permitted under the Govt. route. For existing Licensees - Infusion of new
foreign investments up to 49% can be added by making declarations of change/transfer
within 30 days.

Defence ministry plans to put 101 defence items (artillery guns and assault rifles) under
import embargo to offer potential military hardware manufacturing opportunities to the
Indian defence industry. In February 2020, Defence Minister Mr. Rajnath Singh at Aero India
2021 announced to reduce defence imports by at least US$ 2 billion by 2022.

The defence ministry estimates potential contract worth ~Rs. 4 lakh crore (US$ 57.2 billion)
for the domestic industry in the next 5-7 years (2025-2027). To boost the domestic defence
sector manufacturing, the Ministry of Defence, in December 2020, approved the export of
indigenously-developed surface-to-air Akash missile system and set up a panel to ensure
faster approvals for acquisition proposals by various countries.

As per ‘Consolidated FDI Policy’5 of Jun 2016 (Press Note 5), the policy allows FDI in
Defence Industry subject to Industrial license under the Industries (Development &
Regulation) Act,1951; and Manufacturing of small arms and ammunition under the Arms
Act, 1959 up to 100% Equity / FDI Cap. Presently FDI is through Automatic route up to 49%
and Government route beyond 49% wherever it is likely to result in access to modern
technology or for other reasons to be recorded. The other conditions governing FDI Policy in
Defence manufacturing sector as notified in the Press Note 5 of 2016 Series dated 24/06/2016
are as under:

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1. Injecting new overseas funding into agencies not looking for an industrial license within
the approved automated path stage, converting ownership styles, or moving shares from
present traders to new overseas buyers Requires authorities’ approval.

2. The license application could be taken into consideration and the Industrial Policy
Promotion Office of the Ministry of Commerce and Industry will supply the license in
consultation with the Ministry of Defence and the Ministry of Foreign Affairs.

3. Foreign investment in this area is problem to the Security Authorization and Guidelines of
the Ministry of Defence.

4. The investee organization need to be configured to be self-sufficient within the region of

product design and improvement. The investee/joint task need to have a production facility in
addition to a life cycle and preservation help facility for products synthetic in India.

Further, the Foreign Investment Promotion Board (FIPB) is abolished and the work of
granting approval for foreign investment under the extant FDI Policy has been entrusted to
the concerned Administrative Ministries/Departments.

The Department of Industrial Policy & Promotion, Ministry of Commerce & Industry has
been given the responsibility of overseeing the applications filed on the Foreign Investment
Promotion Portal (FIFP) and to forward the same to the concerned Administrative Ministry.
DIPP has finalized a Standard Operating Procedure (SOP) 6 for examination of foreign
investment proposals by Administrative Ministries and placed on their website.

The CSS approval process is not required anymore as per the revised policy. The requirement
of a single largest Indian ownership of 51% of equity has been removed and a lock-in period
of three years on equity transfer has been done away with. This is considered as major reform
and milestone in Indian Defence industry.

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DEFENCE MANUFACTURING - INFOGRAPHICS

RECENT MEASURES IN DEFENCE MANUFACTURING

Ministry of Defence has tried 'Make in India' policy in defence manufacturing. The
development of defence manufacturing It's gradual, and the home enterprise struggles to
make excessive-tech guns and device. Following the new policy of Atma Nirbhar Bharat and
the border clash among Indian and Chinese squaddies inside the Gallowan Valley, India has
renewed its quest for independence. Several new measures were announced by the Ministry
to make India self-reliant in defence production:

(i) Import embargo on defence equipment: The Ministry of Defence, these days determined
to introduce an import embargo on one hundred and one defense equipment to be phased in
until 2024. This is to inform the Indian protection industry of the anticipated destiny wishes

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of the armed forces to encourage indigenous production. The Army and Navy brought
wheeled armoured fighting cars and submarines to their list, respectively, indicating an
import embargo from December 2021. Following this decision via the Ministry, the Defense
Research and Development Organization has posted some other listing of 108 structures and
subsystems. Designed and Developed by using the Indian Defense Industry as of
2020.DRDO will also provide support to the domestic industries including Medium, Small in
addition Micro Enterprises (MSMEs) to design, develop and test the systems.      

(ii) 74% FDI in defence production: The Department for Promotion of Industry and Internal
Trade, In the press release of September 2020, overseas direct investment inside the defense
area accelerated from 49% to 74% robotically. The authorities made the decision to increase
FDI in the protection area, increase new technologies in India and maximize the enlargement
of the private sector in defence manufacturing sector.

(iii) Capital procurement budget: For the year 2020-2021, the Ministry has created another
price range supervisor for domestic purchases and allocated a budget of INR 52,000 crore for
domestic purchases. Previously, the capital financing budget consisted of domestic and
worldwide financing. According to the government, the flow will reduce defence import law
and promote domestic production of protection gadget.

(iv) Defence Acquisition Procedure 2020: The Defence Acquisition Procedure (DAP) 2020
Increased precise content material necessities for all classes of defense acquisitions. DAP
2020 additionally proposes other measures to reinforce indigenous peoples, such as
increasing the supply of excessive-quit navy hardware to indigenous peoples, using
indigenous peoples' software in gadget/systems, and promoting innovation with the aid of
start-ups and Micro, Small and Medium Enterprises (MSMEs).

CHALLENGES

While industry stakeholders have welcomed these new measures, the countrywide protection
industry faces a few challenges that hinder India's pursuit of protection manufacturing
independence. These challenges are: 

Lack of growth in defence modernisation and defence capabilities  

Pace of defence modernisation in India has continued measured in addition original

production of high-tech weapons continues to be a challenge. This is mainly due to a

(a) declining defence budget towards long term investments, and research and development;

(b) process inefficiencies and delays in domestic production by government 7 lead

organizations;

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(c) and the government's reluctance to grant defence contracts to India's private sector.

For example, thus far the best predominant settlement awarded to the Indian non-public area
is a Rs 4,500 deal with Larsen & Tubro to supply a particular artillery gadget. As a result,
India remains depending on foreign imports for excessive-tech weapons, hampering the
development of indigenous industries.

Budgetary issues  

The loss of capital spending on national defence production and R&D is a main obstacle to
India's desires of independence. India's protection price range has expanded over the years,
but most labour charges, together with salaries and pensions, have reduced the amount of
cash to be had for protection manufacturing. For instance, of the entire defence budget from
2020 to 2021, 58.6% is going to salaries and pensions, whilst best 22.7% goes to capital
expenditures. Rising exertions prices are vast, but relative will increase in defence
manufacturing spending are also approaching. Furthermore, India's budget allocation for
R&D8 is best 4% of the whole protection price range from 2020 to 2021. This is an awful lot
lower than the capital expenditure of technologically advanced countries consisting of
America and China, which spend 12 % and 20% of its protection finances on studies and
development, respectively.

Lack of strategic planning for future needs of the Armed Forces

In the emerging geopolitical scenario, the Indian Armed Forces prepared to operate to
respond to border threats. As an end result, the fight talents of the military ought to be
continuously improved, and the generation of guns and system ought to be updated. To meet
these desires with indigenous peoples, navy desires have to be strategically and practically
planned and invested inside the long-term improvement of excessive-tech guns.
Commentators declare that that is currently missing from India's protection policy.

Production and time delays

Indigenous defensive manufacturing has been followed via production delays. For instance,
HAL Tejas, India's first regionally produced mild fighter, confronted an extended production
delay. Despite the envisioned four-year lead time, it took HAL a complete of seven years to
provide sixteen planes. HAL has yet to finish an order for 20 aircraft. Even the Defence
Research and Development Organization is under the scanner due to constant delays, poor
performance and bad supervision of initiatives. According to a 2018 document via the
Parliamentary Estimates Commission, the Defence Research and Development Organization
ignored the agenda of all 14 assignment initiatives of the Indian Air Force, severely
impacting the Air Force's air defence software.

Hierarchal and skewed decision-making

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The 2018 Ministry of Defence inner report recognized biased choice-making procedures,
bureaucratic crimson tape, and multiple decision-makers as motives for excessive delays in
defence acquisitions. Decision-making on protection and country wide protection
procurement troubles is slow and inefficient because of hierarchical complexity, and defence
modernization is growing slowly as a result. In addition, there's a loss of army participation in
selection-making on country wide protection and protection techniques. To counter those
criticisms, the Ministry of Defence these days created a new position inside the Ministry of
the Armed Forces called the Chief of the Defence Staff, two decades after being advocated
with the aid of the Kargil Commission in 2000. He is an advisor to the Ministry of Defence
and synergistically conducts 3 military operations, however is not chargeable for military
operations. However, according to enterprise observers, this will cause friction within the
military management and danger damaging the authority of the three provider chiefs.

SUGGESTIONS

(i) Supporting private sector: To build a defence industrial base. The government need to
don't forget assisting India's personal quarter and relying on the personal quarter for larger
and greater strong protection contracts. Supporting personal area R&D, design and
manufacturing capability is critical to increasing India's defence output.

(ii) Funds for Armed Forces: Due to loss of finances, numerous protection projects are
pending. The Government of India have to consider thinking about budget allocations for
protection with a purpose to make sure sufficient investment for the three troops relative to
labour fees. However, huge-scale, long-time period capital funding in protection production
and R&D is time-ingesting. The government can also improve its personal budget via taking
part in public and private zone business tasks, along with the repair and renovation of
equipment and plane for non-public organizations, and the development and restore of roads
and highways.

(iii) Decision-making and time delays: The Ministry of Defence9 need to take into account
restructuring the selection-making procedure to overcome the choice-making challenges
dealing with defence acquisition. For extra comprehensive and efficient choice-making,
representatives from all three units need to be included in national security and protection
procurement decisions. You can also lessen protection procurement delays with the aid of
making structural modifications to the decision-making system. As encouraged with the aid
of a record with the aid of an expert committee led by way of Professor Pritam Singh of the
Indian Institute of Management, an outside company known as the Defence Capital
Acquisition Agency was hooked up outdoor the Ministry of Defence to reduce delays in
defence acquisitions and corruption.

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FDI IN DEFENCE MANUFACTURING SECTOR

GROWING DEMAND
Demand growth is likely to accelerate with rising concerns of national security.
There is a critical need to build technological capabilities over countries such as China,
Pakistan due to the ongoing territorial disputes over the ownership of the Northern state of
Kashmir and the North Eastern State of Arunachal Pradesh respectively.

COMPETITIVE ADVANTAGE
Government of India changed the automatic route limit for FDI in defence sector to 74% this
will boost national security, self-sufficiency in product design, increase investments, income
and employment.
The government of India opened the defence industry for private sector participation to
provide impetus to indigenous manufacturing.

GOVERNMENT SUPPORT
In November 2021, defence Acquisition Council (DAC) boosted the Make in India initiative
by according Acceptance of Necessity (AoN) – to capital acquisition proposals worth Rs
7,965 crore for modernization and operational needs of armed forces.
On October 15, 2021 Prime Minister, Mr Narendra Modi, dedicated the seven defence public
sector undertakings (PSUs) – created through the restructuring of the Ordnance Factory
Board (OFB) – to improve functional autonomy efficiency, growth potential and innovation
in the defence sector.

OPPORTUNITIES
India proactive approach towards foreign mutual trade and rising joint agreements with
foreign countries such as USE, Kazakhtstan and the US for joint defence manufacturing and
strengthening defence ties – offer huge potential growth opportunities to boost defence
manufacturing in India.
India’s defence manufacturing sector has been witnessing a CAGR of 3.9% between 2016
and 2020. Demand growth is likely to accelerate with rising concerns of national security.
The overall production sector deceased in 2019; however, growth was observed in the value
of production by Defence PSUs due to numerous key product developments through research

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and development initiatives, in addition to various products and equipment being
manufactured through transfer of technology.
The defence exports in the country witnessed strong growth in the last one decade. Defence
exports in India was estimated to be at US$ 1.29 billion in 2019-20. India’s defence import
value stood at US$ 463 million for FY20 and is expected to be at US$ 469.5 million in FY21.
To boost the domestic defence sector manufacturing, the Ministry of Defence, in December
2020, approved the export of indigenously-developed surface-to-air Akash missile system
and set up a panel to ensure faster approvals for acquisition proposals by various countries.

India’s defence budget for 2021-22 is Rs. 478,195.62 crore (US$ 65.64 billion), 18.75%
higher than the budget estimates FY21. The total allocation for defence services and other
organisations/departments under the Ministry of Defence for FY22 is Rs. 362,345.62 crore
(US$ 49.74 billion) (excluding defence pension), an increase of Rs. 24,792.62 crore (US$
3.40 billion) over FY21. Ministry of Defence (MoD’s) gap between resource requirement and
allocation, which briefly narrowed from a high of 30% in 2018-19 to 25% in 2019-20. In
October 2020, India and the UAE have agreed to take their defence cooperation further
through joint production and mutual trade. This move is expected to boost domestic defence
exports and achieve defence export targets worth US$ 5 billion in the next five years. The
country plans to spend US$ 130 billion on military modernisation in the next five years and is
also achieving self-reliance in defence production. Additionally, 100% FDI is allowed in the
defence industry, wherein 74% is allowed the under automatic route and beyond 74% is
through the government route.

On October 15, 2021, Prime Minister, Mr. Narendra Modi, dedicated the seven defence
public sector undertakings (PSUs)—created through the restructuring of the Ordnance
Factory Board (OFB)—to improve functional autonomy, efficiency, growth potential and
innovation in the defence sector.

In October 2021, India and the US at the 16th India-US Defence Policy Group (DPG)
meeting in Washington DC, discussed the possibility of expanding their bilateral defence
cooperation to new domains, including space, cybersecurity, artificial intelligence and
counter drone technologies.

On October 27, 2021, India successfully launched the surface-to-surface ballistic missile,
Agni-5, from the APJ Abdul Kalam Island, Odisha. The missile has the capacity and range to
strike targets up to 5,000 kilometres with a very high degree of accuracy.

In October 2021, the Ministry of Defence signed a contract with the US Government, under
Foreign Military Sale (FMS), for procurement of MK 54 torpedo and expendables (chaff and
flares) for the Indian Navy, at a cost of Rs. 423 crore (US$ 56.53 million).

In September 2021, the Ministry of Defence announced a Rs. 22,000 crore (US$ 3.0 billion)
deal with Tata-Airbus to procure 56 C-295 transport aircraft for the Indian Air Force (IAF).

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This deal is part of a series of initiatives to advertise the non-public sector in defence
manufacturing.

In September 2021, India proposed to make the India-Africa Defence Dialogue a regular
event by holding it alongside the DefExpo military exhibition held in every two years. The
dialogue will help develop existing partnerships between African countries and India to
explore new areas of convergence for mutual engagements including capacity building,
training, cyber security, maritime security, and counterterrorism, according to a statement by
the defence ministry.

In August 2021, Defence Minister, Mr. Rajnath Singh, approved the launch of Defence
Testing Infrastructure Scheme (DTIS) with an outlay of Rs. 400 crore (US$ 54 million) to
create stateof-the-art testing infrastructure and boost domestic defence & aerospace
manufacturing. The five-year scheme is predicted to set up 6-8 new test facilities in
partnership with private industries and facilitate indigenous defence production.

To boost the Indian Government’s ‘self-reliant’ India initiative in June 2021, Defence
Minister, Mr. Rajnath Singh, approved the budgetary funds worth Rs. 498.8 crore (US$ 66.83
million) to Innovations for Defence Excellence (iDEX), a Defence Innovation Organisation
(DIO) for the next five years.

In April 2021, Under the Development cum Production Partner (DcPP) programme, Defence
Research and Development Organisation (DRDO) allowed private sector firms to develop
and produce missile systems, such as vertical launched surface and air missile system
programmes, to promote the domestic defence industry.

Demand for defence equipment in India has been growing due to the ongoing territorial
disputes with Pakistan and China over the ownership of the Northern State of Kashmir and
the North Eastern State of Arunachal Pradesh, respectively.
Over the last five years, India has been ranked among the top importers of defence equipment
to gain technological advantages over rival countries such as China and Pakistan. To
modernise its armed forces and reduce dependency over external dependence for defence
procurement, several initiatives have been taken by the government to encourage ‘Make in
India’ activities via policy support initiatives.

Defence ministry plans to put 101 defence items (artillery guns and assault rifles) under
import embargo to offer potential military hardware manufacturing opportunities to the
Indian defence industry. The defence ministry estimates potential contract worth ~Rs. 4 lakh
crore (US$ 57.2 billion) for the domestic industry in the next 5-7 years (2025-2027).
To encourage more participation from start-ups and micro, small & medium enterprises
(MSMEs) in Defence Research & Development (R&D) in achieving the ‘Atmanirbhar
Bharat’ goal, the Defence Minister10 Mr. Rajnath Singh released a new version of ‘Defence
Research and Development Organisation (DRDO) Procurement Manual 2020’ on October
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https://taxguru.in/rbi/fdi-defence-sector-india.html

19
20, 2020. There are plans to establish new infrastructure including a defence park in Kerala to
manufacture defence equipment for forces. The project is aimed at promoting MSMEs and
boosting ‘Make in India’ initiative in defence manufacturing.

One of the key successes of ‘Made In India’ initiative in defence manufacturing has been the
Advanced Towed Artillery Gun system (ATAGS). ATAGS is being jointly developed by the
Defence Research Development Organisation’s (DRDO) Armament Research Development
Establishment (ARDE) Pune, Defence Electronics Application Laboratory, Dehradun, and
Centre for Artificial Intelligence and Robotics, Bengaluru, along with key corporates such as
Bharat Forge, TATA Power SED, Ashok Leyland and Cummins. This 155-mm, 52-caliber
artillery gun is undergoing the last stages of the trial and could soon be inducted into the
Indian Army. A total of 201 MoUs, product launches and technology transfers were
concluded at Aero India 2021 by the Ministry of Defence.

The government is also inviting foreign players to invest in India and capitalise on the ‘Make
in India’ opportunity. In June 2021, Defence Minister, Mr. Rajnath Singh, invited Swedish
companies to invest in defence corridors in Uttar Pradesh and Tamil Nadu.
On May 12, 2021, PM CARES Fund approved the procurement of 150,000 units of
‘Oxycare’—SpO2-based oxygen supply system developed by the Defence Research and
Development Organisation (DRDO) at a cost of Rs. 322.5 crore (US$ 44.16 million).
In April 2021, Defence Research and Development Organisation (DRDO) developed single
crystal blades technology and supplied 60 of these blades to Hindustan Aeronautics Limited
(HAL), as part of their indigenous helicopter development programme, for helicopter engine
application.

India is also developing high-altitude long-endurance unmanned aircrafts for surveillance and
reconnaissance applications. The vehicle is being designed to fly 70,000 ft. for several days,
providing real-time feedback to controllers while remaining beyond the range of most air
defence systems.

Indian government policies to promote self-reliance in defence manufacturing under the

Aatmanirbhar Bharat Scheme. E.g., 74% FDI in defence manufacturing, ‘Import embargo’ on
101 military items and Defence Production and Export Promotion Policy 2020. Government
formulated the ‘Defence Production and Export Promotion Policy 2020’ to provide impetus
to self-reliance in defence manufacturing under the ‘Aatmanirbhar Bharat’ scheme. The
ministry aims to achieve a turnover of Rs. 1 lakh 75 thousand crore (US$ 25 billion),
including an export of Rs. 35 thousand crore (US$ 5 billion) in the aerospace and defence
goods and services by 2025.

On August 27, 2020, an announcement was made by Prime Minister Narendra Modi about
allowing 74?I in the defence sector through the automatic route in India. This move taken by
the government will be a major aggregator in the defence manufacturing sector in the aim of
Atma Nirbhar Bharat.

20
The ‘Aatmanirbhar Bahart Defence Industry Outreach Webinar’ was held on August 27,
2020, in which the Prime Minister said that there is the need for transforming the defence
sector of India to be self-reliant.

Prime Minister Narendra Modi said, “We aim to increase defence manufacturing in India and
make the nation a reliable weapon supplier to friendly nations.”

The focus of India now is set to boost manufacturing in the defence sector rather than being
the biggest defence importer. The main aim of this move by the government is to make
India’s position as a net security provider in the religion.

The Prime Minister said “When India got independence, it had a robust defence production
ecosystem. Unfortunately, defence production in India was not focussed on post-
independence. But we will now work towards breaking all barriers to promote defence
production in India”.

The Prime Minister further added, “Efforts are being made to boost defence production,
develop new technology and give a big role to private players in the defence sector.”

The Chief of Defence Staff General Bipin Rawat said “We do have large demands for
ammunition. We are asking for a ten years requirement for ammunition. We want to promote
defence exports. Once the government meets its requirements then the excess can be
exported.”

He further said “Product supply, which is in the pipeline will not be put on hold. A second
negative list (restricting import) of advanced technology items will be put next year, which
could be bigger than the current one with 101 items. It will be out early next year.”

“If the aerospace industry finds its feet, then we will add such items to the negative import
list also.”

The information given by CDS states that the manufacturing of AK 203 will be done through
a joint venture and this is the mainstay rifle for the Indian Defence forces.

Equal opportunity will be given to all industries for participation in the contract in the case of
Naval Utility Helicopter.

21
INDIAN EXAMPLES

India manufactures and export have some of the superior guns, however maximum of the
guns are imported. India is the simplest 7th united states of America to independently expand
the Tejas fighter (A4+ Gen fighter) and its miles a sophisticated light helicopter for army
motion and gunship. Tata Advanced Systems establishes a joint undertaking with Boeing in
India (Hyderabad), a joint task named Tata Boeing aerospace Limited, co-produces fuse mats
for Boeing AH-64 Apache helicopters, and hurries up the rush for "Make in India" 11. Initially,
the JV will build the airframe for the AH-sixty-four Apache helicopter and create a
production center with a purpose to compete for extra production work programs on Boeing
industrial and defence structures. Boeing and Tata Advanced Systems plan to expand their JV
partnership inside the future, that specialize in opportunities to collaborate at the development
and sale of embedded structures.

The Hyderabad manufacturing facility will finally become the handiest manufacturer of AH-
64 airframes inside the international. Apache has been selected for acquisition by means of
India, america and 14 different countries. In October 2016 Reliance Aerospace introduced a
joint task with Dassault to help build and maintain 36 Rafale combatants which France
agreed to sell to India in September 2016. As of February 2017, Dassault Reliance Aerospace
Limited is a joint mission with Reliance Infrastructure Limite. Promote Reliance
Aerostructure Limited and Dassault Aviation, was incorporated with joint venture of (51%
Reliance Infrastructure and 49% Dassault Aviation).

The facility will manufacture diverse components of the offset duties associated with the
purchase of 36 Rafale fighters from France, signed between the two governments in
September 2016. Euro, the biggest defence FDI in a single location in India. In February
2017, Larsen & Toubro Ltd mounted a joint task with MBDA in the UK to steer international
gamers in missile systems to develop and develop missiles and missile systems to fulfil the
potential growing requirements of the Indian Army. L&T owns 51% of the organization and
MBDA owns 49% and meets India's foreign direct investment coverage standards. The joint
venture, named "L&T MBDA Missile Systems Ltd", will operate from a dedicated work
middle that consists of a very last checkout and fireworks integration facility.

The other conditions governing FDI Policy in defence manufacturing sector as notified
in the Press Note 5 of 2016 Series dated 24/06/2016 are as under:
i. Injecting new foreign funding into businesses now not in search of commercial
license in the permitted computerized path stage, changing possession patterns, or

11
https://www.financialexpress.com/industry/sme/msme-exim-make-in-india-products-a-hit-in-international-
markets-finds-ebays-small-online-business-trade-report/2369812/

22
 transferring shares from existing investors to new foreign traders, requires
government approval.

ii. License applications The Industrial Policy Promotion Office of the Ministry of
Trade and Industry will speak and grant a license in consultation with the Ministry
of Defence and the Ministry of Foreign Affairs.

iii. Foreign investment on this sector is situation to the Security Authorization and
Guidelines of the Ministry of Defence.

iv. Invested groups have to be set up to be self-enough in the regions of product

layout and improvement. The investee/joint task ought to have a manufacturing
facility as well as a lifestyles cycle and protection support facility for products
synthetic in India.

India is one of the biggest importers of navy equipment. Therefore, you have to remember
that you permit overseas organizations Manufacturing in India It relies upon at the import.
Government must take measures to draw FDI Promote the formation of joint ventures with
industry. Among Indian and foreign agencies. This can increase R&D and technological
competencies of the countrywide industry. The cutting-edge problem with the drift of FDI on
this area is Many are intended to trade inventory holdings. Employers, now not capital
investments industry.

23
CONCLUSION
Concentration in global defense manufacturing and sales is an undeniable fact. The pattern of
restructuring of the industry, particularly after the cold war, clearly demonstrates that
national/regional affiliations of a large manufactures are significant factors. The official
Discussion Paper’s assertion that since the ownership structure of many of the important
defence production companies is in a state of continuous flux, there was no risk of exclusive
dependence on a particular country is difficult to sustain.
It has also to be understood that the developed countries would neither slacken their hold on
state-of-art technologies nor would weaken their defence industrial base. International
experience shows that newly emerged countries relied on domestic sources, both in public
and private sectors, coupled with a strong offset policy. Favorable international alignment
and circumstances further explain their ascendancy. FDI played only a limited role. Data on
global cross border Greenfield projects and the declarations of some of the large
manufactures sectors, particularly to developing countries. In fact, it suggests the possibilities
of minority participation in JVs rather than in subsidiaries.
This study made an attempt to provide evidence to show that some emerging economics that
have focused on the development of their domestic armaments industry have done so with
considerable support from state-owned enterprise. Even in some developed countries, the
government holds strategic ownership in leading defence manufactures12.
This is an area where india has an edge, for it still has considerable capacities left in the
public sector enterprises. Evidence from other countries suggests that this advantage can be
leveraged to implement an offset policy, which as we have argued, forms a critical element in
the building of the domestic defence sector. Far from pillorying the public sector, the
problems and constraints have to be identified and action plans drawn up. What is required is
strong political will.
One argument put forward for the failure of offset policy is that india does not have the
capabilities to take advantage of the offsets. But that is precisely the reason why india needs
to harness offsets, A tendency is now emerging to offer service sector employment as a carrot
to wean india away from broadening and deepening its defence industrial base. What is
required is a FDI is not going to deliver. Also, FDI is only a means to get technology and as
the global greenfield investments data showed one cannot expect huge investments. Priority
should be on outright transfer of technology.
On its part, implementation of the FDI policy should provide space for joint ventures with
strict performance requirements. The cases cited above indicate that the foreign partners of
the JVs retained the ownership of technologies and the likelihood of the JVs carrying on
without their support, in the event of foreign partners withdrawal, is minimal.

12
https://www.investindia.gov.in/sector/defence-manufacturing

24
Also, the structure of the JVs is such that the power sharing relationship defeat the edge that
was sought to be given to the Indian partner through caps. If this is the situation with JVs,
including those with some of India’s largest business house, it would be worse with the
wholly foreign owned enterprises. The repeated criticism of India weak IPR regime which is
further highlighted by the Out of Cycle Review initiated by the USTR recently is another
reflection of the intention to keep the technologies with their owners.
The general arguments in favour of raising the FDI cap for the defence sector simply assume
that higher caps are necessary to give the foreign investors control as otherwise they will not
risk bringing in advanced technologies. The arguments tend to ignore the role of home
governments, the critical factor in defence industry which aspect is nowhere better
demonstrated than with the development of India-US defence cooperation. Strategic interests
of retaining technological superiority and global dominance score over commercial interests
as well. The possibility if india moving closer to the US and the offers on DTTI front have
raised some expectation.
In practice, however, the gains for India could be limited and even these could be obtained at
some political cost. In any case, the parity with ‘closest partner’ does not ensure transfer if
state of art technologies. Even the much-publicised offer of Javelin anti-tank missile has its
downside. As the cases described in the foregoing show co-development could mean that the
Indian partners would have the right to use only that part of the technology which is
developed jointly. The base technology will remain with the foreign investors.
The game plan seems to be like this. Secure control through higher FDI 13 cap, protect
technology through further tightening the IPR regime and make dependence perpetual by
holding back key components of the technology. The perpetual dependence render the threat
of appropriation of the facilities by India, as suggested by the DP, meaningless. Also, validity
of the DP assumption that due to increasing costs of labour and other inputs western defence
companies could be attracted to new manufacturing hubs like india is open to empirical
verification. But what is more likely is that they will look to increasing sales abroad to shore
up their own manufacturing bases due to slow down and shrinking budget.

13
https://www.makeinindia.com/sector/defence-manufacturing

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 18. Press Information Bureau Government of India Ministry of Defence, Industrial Licenses to
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