FDI and its Possible Consequences on Defence

Nowadays, India government has taken initiatives to raise FDI in defence sector to 100%. Only 26 % of FDI is allowed in defence so far. The Draft Cabinet Note prepared by Department of Industrial Policy and Promotion proposes three different caps for FDI in defence- 49 % in case of no technology transfer, 74 % in case of technology transfer and 100% in case which bring in state of the art technology. Is proposal of 100% FDI in defence a right move by India Government?

First of all, let us have a look at what FDI is? Its advantages and disadvantages.

FDI or Foreign Direct Investment means investment made by an individual or company in one country, in the economy of another country. It is a part of globalization. It is said to have been made when a foreign investor acquires 10% or more of stock or shares of the domestic company.

Concept of FDI was introduced in India by P M Manmohan Singh in 1991. FDI mainly concentrates developing countries like India and has huge impact on economy of those countries. Countries with less capital base need foreign capital for expansion and involve in developing activities. India has relaxed rules and regulations of FDI to attract more foreign investments.

FDI - Different Methods.   

1. Joint Ventures.

2. Financial Collaborations.

3. Private equity or preferential allotments.

3. Capital Markets through Euro issues.

FDI – Different Types

Classification One:

1. Inward FDI- Investment made by other countries in domestic country is inward FDI.

2. Outward FDI- Investment made by domestic country in other countries is outward FDI.

Classification Two:

1. Horizontal FDI - Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.

2. Vertical FDI - Vertical FDI arises when a firm moves upstream or downstream in different value chains through FDI.

Advantages-Main advantages of FDI in domestic country are given below

1. Inflow of Foreign Capital. Capital base of domestic country increases.

2. Increase in tax revenue.

3. Boost economy by GDP growth.

4. Increase competition, productivity and efficiency.

5. Large employment opportunities.

6. Inflow of technology, expertise and know how.

7. Infrastructure facilities improve.

8. Reduce cost of production.

9. Increase in international trade.

10. High quality products.

Disadvantages

1. May cause monopoly by foreign companies in the absence of proper control by domestic Government.

2. Internal insecurity

3. May exploit the domestic resources without giving benefits to domestic country.

4. Domestic companies may feel uprooted.

Allowing 100% FDI in defence sector of India – Pros and Cons

India aims at 8% growth rate in GDP through FDI, says Arvind Mayaram, Finance Secretary as reported by The Economic Times. He said that a decline in foreign investment could affect country’s balance of payment position and the rupee.

According to Niramala Sitaraman, Commerce and Industry Minister, FDI in defence sector will reduce imports, improve country’s capacity to produce defence equipment locally and save foreign money.

Definitely, it will create employment opportunities. Large number of unemployed people are here. It will give them a hope.

Indian defence equipments will become globally competitive. High technology and expertise will flow to the country.

Now, country is importing majority of defence equipments.Through this way, huge amount of foreign money is lost. This induces positive approach to the move.

But will it affect internal security of the country?, the opponents are strong in their views. In a country like India, where internal security issues like terrorism are more relevant, allowing 100 % FDI in the major area of protection from enemies, may have a chance of giving negative results. It may also affect the domestic companies involved in defence production.

As far as advantages of FDI are concerned, disadvantages are a few. But, these disadvantages can be turned to positive through proper polices, control and monitoring of the compliance of policies by Government. Government should ensure that there is no room for corruption. Government should not lose control on foreign investors at any stage. Good management of FDI through proper channelization is the duty of Government and it will definitely give positive results.