Foreign direct investment in defence sector: Security concern or strengthening India's defence

India is surrounded by the hostile neighbors. The need for defence of its borders has been on priority since independence. For this purpose defence production has to be upgraded to make it at par with the military power of other countries. The Long-term Integrated Procurement Plan of the government gives out the planned procurement right up to 2027. To meet this requirement internally, the industry needs a capital of more than Rs 50, 000 crore over the next three years. The defence Public Sector Units (PSUs) are in no position to make this investment and the Indian private industry may not find this high risk investment lucrative enough.

The Modi government, which came to power in 2014, aimed to bring more foreign direct investment (FDI) in different sectors. This process gave way to foreign investment up to 49% in the defence sector. This has now increased to 100% in 2016. The government's decision to liberalize FDI rules for the defence sector could force Indian companies to relook at their plans as it will reduce dependence on the domestic original equipment manufacturers (OEMs). India's decision to open its defence sector for 100% FDI is likely to result in more access to modern technology.

The present paper highlights the scenario of FDI in Indian defence sector. It also exhibits the trends of FDI equity inflows The study reveals that FDI inflows in this sector have fluctuated from Rs. 2.36 millions in the year 2000–2005 to Rs. 6.40 millions in the year 2016 (up to September). The paper, in the end also dispels the myths associated with FDI in defence.