Aatma Nirbhar Bharat: Reforms in Defence Sector

Reading time: 8-10 minutes.

India’s Finance Minister Nirmala Sitharaman in a press conference declared that the Government is planning structural reforms in various sector of the economy to give a push to the economy of the country which is being affected a lot during the Covid-19 pandemic, and for this work has already been started by the government.

Aatma Nirbhar Bharat is a weapon launched by the government to fight the economic battle arose due to the pandemic which has eaten up thousands of jobs and also, has disrupted the business houses of the country. In this project the prime focus of the government will be on those industries mainly which have the potential to create wealth, employment and other benefits in the long run.

For this the government has started their part of work which includes, Investment clearance which will be done in a speedy and effective manner through the empowered secretaries. A project development cell will be established in each ministry to prepare investible projects and coordinate with the investors as well as government at central and state level. Also, for the development of the states the state will be ranked as per the investment attractiveness so that each state will compete for the investment which will lead to effective investment schemes by the states. Industrial cluster upgradation will be done through challenge mode in states, 3,376 industrial parks and SEZs in 5 lakh hectares will be mapped on Industrial Information System.

The reforms which are announced by the finance minister will affect the following eight sectors but we will be dealing with defence sector mainly in this article:

  1. Coal
  2. Mineral sector
  3. Defence
  4. Civil aviation
  5. Making India an MRO hub
  6. Power distribution companies in union territories
  7. Space
  8. Atomic energy

Reforms introduced:

Defence sector:

  1. Negative list: the list of the weapons and platforms which will be banned for import will be prepared and as per the capacity of domestic industry the list will be increased every year.
  2. Capital budget: the separate budget needs to be prepared for regarding procuring indigenous weapons and platforms.
  3. FDI limit: the major change which was announced was the increment in cap size from 49% to 74% under automatic route and also the security clearance.
  4. Ordnance Factory Board: the 41 functioning units under OFB will be corporatized to improve the accountability and efficiency.
  5. Maintenance and spares: liberalisation in the scheme for the import of expensive spares.
  6. Procurement process: a project management unit would be set up for the effective and time bound decisions, realistic framing of technical parameters and overhauling trial procedures

Objectives of reforms:

Following are the major objectives of the reforms introduced with respect to the defence sector:

  1. To attract FDI in defence:

FDI limit is increased which will lead to more investment by global companies in Indian economy. As several global arms major has for long being demanding the hike in the FDI limit on the ground that they need more management control of the JV’s to set up investment and provide top notch military technologies to India. Earlier, due to this cap the country was suffering because there was no proper investment which is being made, the countries capacity to invest was much larger but it is being underestimated, which will not remain the same in present scenario.

  • Corporatisation of Ordnance Factory Board:

There were reports earlier regarding inefficiency in work by the board and due to which corporatisation was essential so that good quality of goods can be produced and there remains proper accountability for the goods that is weapons given to the army. Also, the export field will get the expansion if the quality and quantity of goods will increase, the turnover will see a high rise and the major scheme which is being promoted, Make in India will get a good response which will be helpful for the economy in short as well as long run.

  • Promoting self-reliance:

The objective behind reform in defence sector was to promote the Made in India project so that instead of import, export can be expanded which will lead to more money in the economy as well as more job creations. The Make in India project will get a huge support from different sectors as the most critical sector that is the defence sector, from now would be buying weapons from the local market instead of international market this will lead to a push in economy as the currency will flow in Indian market only.

  • Effective and efficient results:

The establishment of project management unit which will work as a supervisor would be helpful for the sector as that will help in time bound effective results which will be essential and also, the demand for the field because the major weapons would be produced in India for the first time so to get effective results are important.

Laws and legal provisions involved:

Since the advent of the Industries (Development and Regulation) Act, 1951, the Defence sector was treated as the domain of the Government, and private industry was not permitted to participate in its development. The sector was first opened and only 26% FDI was allowed. Most foreign original equipment manufacturers were uninterested in forming ventures as there was no proper control given to foreign companies to settle and also, they have no choice in choosing their partner industry. However, increase in the sectoral cap on investment in defence remained the much-voiced industry demand.

The most significant reforms for FDI in the Defence sector came in the year 2014. By way of Press Note 3 of 2014, a list of defence items requiring industrial license under the IDRA was notified. Thereafter, by way of Press Note 7 of 2014, the sectoral cap for FDI in Defence was permitted up to 49% under the approval route, and beyond 49% on a case-to-case basis, wherever it was likely to result in access to modern and ‘state-of-art’ technology

The significant change came in the year 2015, where in an unprecedented move by way of Press Note 12 of 2015, the Government allowed FDI up to 49% in the Defence sector under the Automatic route of investment. As opposed to the previously prescribed onerous conditions on FDI in Defence, investment was subjected to only 4 conditions.

  • Requirement for Approval
  • Licensing
  • Security Clearance
  • Self-sufficiency

In 2016, the applicability of the FDI regulations governing the Defence sector was expanded. By way of Press Note 5 of 2016, the sectoral caps and conditions on FDI in Defence were extended to “Manufacturing of small arms and ammunition under the Arms Act, 1959”.

Foreign investment numbers released by the Department of Industrial Policy and Promotion (“DIPP”), the nodal agency responsible for approving and regulating foreign investment in the country, show that in spite of the liberalisation of the FDI cap, foreign investment in the sector between April 2000 and March 2017 was merely USD 5.12 million. This, when the Government is actively promoting its “Make in India” initiative with a particular emphasis on the Defence sector, and the Prime Minister personally taking up the issue of investment in the sector at each of his numerous diplomatic meets since coming to power.

For defence sector, Department of Promotion of Industry and Internal Trade, FDI flow in India did not increased even after policy change in India in 2016 and therefore the cap was increased. The draft note for the cabinet committee regarding corporatization of Ordnance Factory Board is pending.

Critical analysis:

India has an annual defence budget of Rs. 4,04,365 and this figure stands behind USA and China. It is also the second largest importer of weaponry after Saudi Arabia and has imports approximately 9.2% of the total arms during the year 2015-2019 but now the scenario will no longer remain same as now only the weapons which cannot be produced in India in present scenario will only be imported and for the rest country will produce its own weapon under Make in India scheme this will lead to reduce in huge defence import bill. India has attracted a paltry Rs. 1,834 crores as FDI in defence and aerospace sector since 2014. In the same span of time the country has gain a capital procurement contract of over 120 crores and Rs. 2 lakhs crore with foreign armament companies.

The cap demand which is increased, whether it is attractive and financially remunerative would depend upon the fine print and conditions regarding liberalisation in the field. It is also important to know that whether the companies would be willing to invest 74% FDI at par with the other Indian companies who are the majority stakeholder.

The corporatization of Ordnance Factory Board will lead to more autonomy and accountability but here corporatization did not mean the privatization of the board in anyway. There were many causalities and accident which were reported taking place in the field due to poor quality and defective ammunition being supplied for tanks, air defence and other guns by Board. The bill which is pending related to corporatisation of Board claims that the entities which are owned by state their turnover will be increased to Rs. 30000 crores by 2024-25, export will be enhanced to 25% of the turnover and the bar of self-reliance in technology will be increased by 55% i.e. from 20% to 75% by 2028-29.

But this cannot be said that whatever results are expected from this reform will emerge in the same way only because numerous other issues are to be settled to make the plan effective. The present budgetary support to OFB’s are not sufficient as and can pose an immediate financial challenge.


For the development of the country and the economy the steps are essential and the sectors stated are the major sector where there is scope for investment by the investors and elimination of the long procedure for filing of documents will lead to elimination of middle men who are the ones breaking the circular flow of money in an economy.

Although the liberalisation is made in the defence sector but the overlapping rules and regulations by government will continue to affect the growth of industries. India is having a huge scope for development in the defence sector but the delay in decision making leads to the hindrance in getting big projects to India. The defence sector is a sector where there is no scope for mistake and therefore the government will never loose the control over this sector but the process can be simplified so as to attract more investors.

Liberalization process is always welcomed by the investors and a boost in investment is seen in each sector where liberalization is being done. Also, the quality of work given by private sector is always either equal to or better then public sector and the job creations would be increased as Make in India projects are promoted in sectors like defence where there is no scope for mistake, so the steps should be welcomed by all the stakeholders who are directly or indirectly linked to this process as the demand now is “united we stand and divided we fall”.

Author: Tushti Pande from Jagran Lakecity University, Bhopal.

Editor: Dhawal Srivastava from Rajiv Gandhi National University of Law, Patiala.

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