The limit on Foreign direct investment in defense through automatic route was increased to 74 % in mid-May this year. Regulations for FDI in defense saw another change when a national security clause was added to it following the proposition of the Ministry of Commerce and Industry. The new condition in the defense FDI regime rules that investment in the defense shall be subject to scrutiny based on the principle of national security and that the government shall reserve the right to review any FDI in defense which can affect national security. Earlier the limit on the FDI through the automatic route was kept at 49%.  FDI in defense above 49% would have required the government clearance and a nod from the ministry of defense. This was complemented with changes in the defense acquisition and procurement policy for 2020 under new guidelines.

India orders defense deals in the world market to the tune of around 100 billion USD which makes it one of the largest procurers of defense equipment, vehicles, combat suites, arsenal, and others. The national security clause comes in addition to the already four necessary conditions for FDI in defense, most important among which is security clearance. Though there has been no explicit statement describing the national security clause, it has been argued that it was necessitated as the defense is a sensitive and strategic sector. This new announcement comes in the backdrop when the country in targeting a manufacturing turn-over of around Rs 1.75 lakh crore which would have exports worth around Rs 35000 crore by 2025.

In 2018, India had introduced the categories namely IDDM which stands for Indigenously Designed Developed and Manufactured, in the realm of defense production and procurement. This was done to localize the R&D efforts in India. But, on an overall long term scale, there has not been much improvement in the local defense manufacturing.  It is a well documented and established truth that the military-industrial complexes have driven the industrialization in any nation. The prime examples of this are the cold war rivals USA and USSR. A substantial proportion of their export baskets have been composed of defense equipment. Even after the 1991 collapse of the USSR, Russia’s primary export commodities have been Oil and gas and defense items. But the problem with the Indian industrial scenario has been that after developing the primary sector which is made up of agriculture and related industries, India directly jumped stairs to the tertiary sector- ie IT, services, and others. It substantially evaded developing the secondary sector, ie manufacturing. This has led the defense sector in India to be largely export-dependent, which makes India one of the top defense spenders under its import bills as per research data of the Stockholm Institute of Peace Research Initiative. Indian conglomerates have time and again expressed their interests to heavily invest in the Indian defence sector if the government brings minimum hindrance. Even at one point of time in recent years, Baba Kalyani, the head of the Kalyani group had said that the government should step aside and let the Indian industrialists like him and the Tatas to directly deal with the demands of the Indian armed forces. He might have said that because the lengthy process of paperwork increases the time-cost of operations for the corporations and delay the fulfillment of the demand of Indian forces.

Through the 1980s the ailing PSUs have to be kept floating by the then government; after that came the liberalization, privatization, and globalization of 1991. Subsequently, foreign players gradually started investing in Indian economic space. But that gave rise to fears of crucial data breaches and missing files with details related to national security and others. This fear got materialized in 2018 in the Scorpene submarine data leak. Scorpene is a diesel-electric attack submarine primarily designed and manufactured by the French defense corporation DCNS which has planned to build submarines for India in Mumbai. Such kinds of data leaks work as a goldmine for information intelligence for spooks who are working for the traditionally hostile neighbors of India- China and Pakistan. This behooves the decision-makers to think more seriously about the issue of national security when trying to attract foreign players in a strategic sector like defense.

In 2016, India had made drastic changes to the defense procurement policy to fast track the defense items acquisition for the defense forces. It has been a cause of concern as due to many aging off fighter jets and aircrafts, the operational number of Air-Force squadrons are well below the standard 42 required to keep up to the possibility of a two-front war. This kind of deficiency could have been the driving force behind taking up the threshold level of FDI limits for the automatic route which would require a lesser amount of paperwork. As per the recommendations of the Dhirendra Singh Committee report, the IDDM clause was added later in the Defence procurement policy. This set up a hierarchy of priorities in defense procurement which included 1: Buy Indian IDDM, 2: Buy Indian, 3: Buy and Make Indian, 4: Buy & make and 5: Buy global. The priorities listed here is in the order from the one with the highest priority to that of lowest priority. This IDDM order somehow has an implicit meaning of giving stress on national security by trying to source as many materials as possible from local manufacturers. But, one cannot ignore that the larger corporations in the global defense technology space have far more advanced expertise. So a balance is required between fulfilling the needs of the Indian defense in Indian terrain, keeping the local manufacturers relevant and staying alert in terms of the security aspect. The DPP has undergone many revisions even in this year. Its role has been to fast-track the orders from the Indian armed forces and gets the materials to the desired defense units as soon as possible.

The move to add national security clause to FDI can be looked at as a step of precaution when the country is trying to bring in manufacturing operations in India giving a fillip to the local production ecosystem functioning as vendors for large corporations. Defense manufacturing has always had a positive impact on the overall industrial growth of a particular economy. The latest move of putting a national security clause is an add-on effort on a fine line between drawing investment and to take care of the security aspect. It is hoped that this step will not deter the foreign defense players to invest and operate in Indian defense manufacturing space.