FDI Liberalization in Defense Industry and the Question of Self-Reliance in India

FDI Liberalization in Defense Industry and the Question of Self-Reliance in India

Santanu Bisai (Syamaprasad College, India) and Debashis Mazumdar (The Heritage College Kolkata, India)
DOI: 10.4018/978-1-5225-4778-5.ch013

Abstract

In recent years, the government of India has liberalized the FDI policy to promote economic growth. Since defense industry is highly capital—and technology—intensive and there is a scarcity of indigenous production capacity, the import dependence of India is likely to be high. Though the percentage share of FDI in defense to total FDI flow in India is remarkable, the increase in FDI share in defense is likely to enhance the dependence of the country on foreign sources at the expense of attainment of self-reliance in defense. It has been observed that the growth rate in imports on account of defense needs has increased relative to that in exports and export-import ratio has tended to decline in recent years, leading to the worsening of balance of payments. Thus, it is worth overhauling the role of FDI liberalization in promotion of the domestic manufacturing defense goods as what has been intended in this chapter.
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Review Of Literature

Before we enter into the review of the existing literature on the relevant theme it may be noted that defence expenditure in the form of capital creates defence assets and that in the form of revenue expenditure generates demand for many goods and services and stimulates economic growth. Thus the existing literature mostly deals with the interrelation between military expenditure and economic growth of a country. The empirical relationship between defense spending and economic growth in different countries over years has been analysed by some researcher like Joerding (1986), Frederiksen (1991), Reitschuler and Loening (2005). The study undertaken by Dixon and Moon (1986) has suggested that defence expenditure has a positive impact on economic development. In this context Looney (1993) has analysed the relationship between economic growth and defence spending and indicated that higher defence spending stimulates economic growth by increasing employment opportunities and enhancing aggregate demand of the economy. While exploring such relationship the study made by Faini et al. (1984), based on secondary data on 69 countries, has shown that the conventional wisdom of the positive impact of military spending upon the growth of some poor economies is proved to be wrong. Their study arrived at the conclusion that higher defence expenditure results in less saving which, in turn, leads to less investment and thus an insignificant impact upon GDP growth.

Key Terms in this Chapter

Self-Reliance in Defense: Self-reliance in defense is an important objective of any country. It is needed to safeguard national interest of the country as it is the matter of geo-political and geo-economic influence of other nations.

FDI Liberalization: In defense, foreign investment beyond 49 per cent (and up to 100 per cent) has been permitted through the government approval route, in cases resulting in access to modern technology in the country. The government’s current liberalization policy means that foreign companies can now own up to 100 percent equity in the country’s defense manufacturing sector through the automatic government approval route as it reduces the dependence of original equipment manufacturers (OEMs) on domestic manufacturers.

GDP (Gross Domestic Product): Gross domestic product is the best way to measure a country's economy. GDP is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly). There are two ways to measure a country’s GDP: nominal GDP and real GDP.

Make in India Program: The “Make in India” policy for the defense sector aims to reverse the current imbalance between the import of defense equipment and indigenous manufacture of defense equipment without adversely affecting the requirements, capability and preparedness of the user. Therefore, achieving self-reliance and reducing dependence on foreign countries in defense is a necessity today rather than a choice, both for strategic and economic reasons.

Export-Import Ratio: Export-import ratio refers to the ratio of the value of exported goods and services to imported goods and services of the countries involved in international trade. An improvement of a nation export-import ratio benefits that country in the sense that it can have more export than its value of imports.

Defense Industry: The defense industry is a strategically important sector in India. It is world’s third largest military force and over 1.3 million active personal. The ordnance factories and the defense public sector units produce a wide range of equipment starting from weapons, ammunition, electrical and electronic equipment, aircrafts, ships, vehicles, clothing, and even food items.

Research and Development: Research and development aims to create new technology or information that can improve the effectiveness of products of make the production of products more efficient. R&D is more important in defense industry. It affects investors technology and therefore investors need to pay attention to research and development.

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