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Day 31 – Q 2.What objectives can the liberalisation of the defence sector achieve for India? Analyse.

2. What objectives can the liberalisation of the defence sector achieve for India? Analyse. 

भारत के लिए रक्षा क्षेत्र के उदारीकरण से क्या उद्देश्य पूरे हो सकते हैं? विश्लेषण करें।


The Defence Sector in India, being a strategic sector, was traditionally reserved for the Public Sector till 1991. Defence Public Sector Undertakings (Defence PSUs) and Ordnance Factory Board (OFB) monopolised defence products manufacturing while R&D was the exclusive turf of DRDO.



  • Until the year 2000, foreign direct investment (FDI) was not permitted in the Indian defence sector.
  • The year 2001 marked the advent of privatization in the defence industry and the Government permitted FDI in the defence sector up to an equity stake of 26% through the Government approval route.
  • In 2014, it was increased up to 49% FDI under the automatic route and beyond 49% under the Government approval route, subject to certain conditionality.
  • Recently, FDI in the defence sector was further liberalised to allow up to 49% under the automatic route, and beyond 49% to 100% under the Government approval route on a case to case basis.
  • Draft New Defence Production Policy liberalises licences that will be provided to defence industries and the requirements for renewal of licences will be pruned. Also, the companies with a good track record will be given favourable consideration.
  • Other steps include simplification of export procedure, streamlining of defence offset guidelines etc.

Benefits of liberalization:

  • Quality Products– Infrastructure facilities are likely to improve due to higher capital infusion. Manufacture of improved quality products due to inflow of technology, expertise, improved R&D and better production facilities. 
  • Reduced cost– The cost of production is also likely to reduce due to economies of scale and manufacturing within country, making Indian weapons and equipment globally competitive.
  • Reduction of Reserves– Higher FDI translates into better infrastructure, enhanced capacities and greater self-reliance. This would in turn also result in reducing the stock levels of reserves of munitions, weapons, equipment, assemblies and components held at various echelons of the Armed Forces.
  • Boost to Economy– The capital base of the country will be positively affected due to inflow of foreign capital. This will also lead to increase in tax revenue.
  • Positive Performance Pressure on Public Sector Enterprises- The public sector enterprises, namely, Defence Research and Development Organisation (DRDO), Defence PSUs and OFB will face increased performance pressure.
  • Employment Opportunities– Increased defence manufacturing will create employment opportunities, both in organised and un-organised sector, for large number of unemployed people due to increased level of economic activity.
  • Increase in International Trade: Increase in international trade, both by value and volume, due to enhanced production capacity, increased competitiveness and export-oriented outlook.
  • Insulation from Embargoes: Presently, India is procuring most of the critical weapons systems and equipment that are either manufactured or both manufactured and integrated abroad. When the same weapons systems and equipment are manufactured in the country, indigenous production will tend to insulate the country from unilateral imposition of embargoes by whimsical foreign suppliers.
  • Intellectual Property– The new policy and measures can promote India as a hub for defence related Intellectual Property (IP).

Challenges of liberalization:

  • Security Concerns: Security issues especially with respect to proliferation of modern communication equipment, electronic counter measure equipment and small arms may arise. Moreover, in India which has significant internal security issues including Naxal violence and terrorism, liberalization for all items in the Defence Products List has a fair potential to give negative results.
  • Competition for Domestic Private Industry: The Indian private industry is not yet well established in the defence sector. The JVs that are formed post investment by established foreign defence companies, will offer stiff competition to domestic private defence industry. Hence, opening of floodgates for more than 49 percent (and up to 100 percent) FDI in defence sector is likely to dwarf many domestic players, who may find the going difficult and get wiped out in the competition.
  • Overbearing Presence of Foreign Companies: Unrestricted FDI in defence sector may lead to overbearing presence or a kind of monopoly in production of high technology weapons and equipment by select foreign companies in the absence of majority stake holding by Indian citizens and/or lack of adequate control by the Indian Government.
  • Sharing of Benefits: Foreign investors may tend to utilise the domestic resources without sharing adequate benefits with the host country.
  • Emergence of Cartels and Lobbies: There is a likelihood of the emergence of cartels and lobbies which collude to raise defence expenditure or garner greater share of the defence procurement pie.


Self-reliance is a major corner-stone on which the military capability of any nation rests. However, to grab position among the top defense production countries of the world and improve its defense related capabilities, India must make a balance between liberalization and the security and other concerns.

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