India’s Defence FDI Rules Should Not Treat the Sector as Homogeneous

India is the third largest defence spender in the world, only behind USA and China. Between 2015 and 2019, India was the second biggest arms importer, accounting for 9.2% of the total global arms imports.

China, on the other hand, with a 249% higher defence budget than India, accounted for only 4.9% of global arms imports. But during that period, India accounted for only 0.2% of the total global arms exports, while China accounted for 5.5% of global arms exports. This absolute and relative discrepancy in the difference between India’s arms imports and exports builds a compelling case for India’s defence requirements to be manufactured in India.

The government’s announcement to raise the cap in Foreign Direct Investment (FDI) in defence, through the automatic route, from 49% to 74% is therefore a welcome move. But the dynamics of defence manufacturing, unlike most other industries, is very complex and the recent announcement in hiking FDI limits across all types of defence manufacturing doesn’t adequately address this complexity.

Defence manufacturing is predicated on higher order engineering capabilities and cutting-edge innovation, and an economy that excels in defence manufacturing, creates a blueprint for cascading excellence in other types of manufacturing.

The correlation between GDP per-capita and a nation’s engineering advancements is also unmistakable. Central to advanced defence manufacturing capability is the development of critical technologies that form the core of cutting-edge weapons and platforms development. However, unlike in many other industries, these technologies cannot be seen as homogeneous.

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