Subject: Economy

The recent move to liberalize FDI in defence sector to 74% through automatic route marks a significant shift in India's approach towards defence manufacturing and economic growth, reflecting the government's commitment to 'Make in India' and 'Atmanirbhar Bharat' initiatives.

Short-term Impact on Defence and Economy

• Technology Transfer and Innovation:

  • Enhanced access to cutting-edge military technologies through partnerships with global defense manufacturers.
  • Immediate boost to domestic manufacturing capabilities through transfer of technical know-how and best practices.

• Employment Generation:

  • Creation of direct employment in defense manufacturing units.
  • Development of ancillary industries supporting the defense sector, generating indirect employment opportunities.

• Investment Inflow:

  • Current FDI inflow of USD 21.74 million (April 2000 to September 2024) expected to rise significantly.
  • Projected investment of USD 75 billion by 2025, indicating strong growth potential.

Long-term Impact on Defence and Economy

• Self-Reliance in Defense:

  • Reduction in import dependency for defense equipment.
  • Development of indigenous defense manufacturing ecosystem.
  • Strengthening of defense industrial corridors in Tamil Nadu and Uttar Pradesh.

• Economic Multiplier Effect:

  • Projected GDP growth of 0.5% to 1.5% annually with increased defense spending from 2% to 3.5% of GDP.
  • Development of MSMEs in defense supply chain.
  • Enhanced export potential of defense equipment.

• Strategic Benefits:

  • Alignment with global practices like Australia's Defence Trade Controls Amendment Act 2024.
  • Enhanced defense cooperation with strategic partners.
  • Integration into global defense supply chains.

Challenges and Way Forward

• Technology Security:

  • Need for robust mechanisms to protect sensitive technologies.
  • Implementation of strict quality control measures.

• Policy Framework:

  • Streamlining of licensing procedures.
  • Development of clear offset guidelines.
  • Enhancement of ease of doing business in defense sector.

The liberalization of FDI in defense sector, coupled with initiatives like Defense Acquisition Procedure 2020 and Strategic Partnership Model, presents a transformative opportunity for India's defense manufacturing capabilities and economic growth, positioning India as a potential global hub for defense manufacturing and export promotion.