It is now planned to liberalize foreign direct investment (FDI) in the defense industry. What immediate and long-term effects is this anticipated to have on India’s economy and defense? (200 words) [UPSC 2014]
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Introduction: The liberalization of Foreign Direct Investment (FDI) in the defense sector marks a significant shift in India’s approach to enhancing its defense capabilities. The government has increased the FDI limit in defense manufacturing up to 74% under the automatic route, and 100% through government approval in certain cases. This policy change is expected to have both short-term and long-term impacts on India’s defence sector and overall economy.
Short-term Impacts:
Long-term Impacts:
Conclusion: The liberalization of FDI in the defence sector is expected to have a transformative impact on India’s defence capabilities and economic growth. In the short term, it will boost manufacturing and job creation, while in the long run, it will contribute to self-reliance, innovation, and strategic autonomy. To maximize these benefits, India must ensure robust regulatory frameworks and facilitate technology transfer.
Model Answer
Introduction
India has recently emerged as the largest arms importer globally, highlighting the strategic importance of its defence sector. Traditionally reserved for the public sector until 1991, Foreign Direct Investment (FDI) was first permitted in 2001. The recent increase in the FDI limit to 74% under the automatic route and 100% under the government route is expected to have significant implications for both the defence sector and the broader economy.
Short Run Implications
Long Term Implications
Conclusion
The new FDI policy in the defence sector holds the potential to significantly reduce import dependency while boosting domestic manufacturing capabilities. This strategic shift not only strengthens India’s defence preparedness but also contributes positively to the overall economy.