Defense Business Options to Open Up in India

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The Indian market is currently the major market for the Israeli defense industries. During recent years, the Israeli companies, mainly IAI, supplied weapon systems to India in billions of dollars. The largest deal was made with IAI, which developed in collaboration with the Indian Defense Ministry the Barak 8 ship defense system. The Indians also purchased a ground version of the system. Currently, additional giant deals are under way, all of them under the requirement of transferring technologies and manufacturing to India.

Now, India is contemplating the implementation of a 100%Foreign Direct Investment (FDI) model in the defense sector to stimulate the participation of foreign companies in the manufacture of military transport aircraft, battle tanks and armored vehicles. Currently, foreign investment is permitted only up to 49% under the automatic route and foreign investment up to 100% is allowed only after government’s approval.

According to a defenseworld.net’s report, the disadvantage of the current system is that major foreign firms stay away as they are reluctant to agree to the transfer of technology. Finance Minister Arun Jaitley, who held a meeting with government officials recently, conducted a review of the current FDI policy. The cabinet has been eyeing to liberalize the FDI regime to attract foreign investments in various sectors, including defense and retail. 

The FDI policy is regulated by industrial license and such licenses are granted by the Licensing Committee in the Department of Industrial Policy and Promotion (DIPP), which considers the security clearances by the Ministry of Home Affairs.

The DIPP officials maintain that FDI in defense has been slow possibly because the returns on investment and government orders are low. However, FDI in defense could reverse the trend of India’s full dependence on imports of defense equipment.

Few critics also point out at the disadvantage that higher FDI will be a hassle in building self-reliance in the sector, and likely to hamper the country’s interests. Officials have said that the defense sector is in urgent need of significant capital investment and infusion of technology.