Answer: 

Introduction:

India has emerged as the largest arms importer in recent years. The Defence Sector in India, being a strategic sector, was traditionally reserved for the Public Sector till 1991. FDI was permitted from 2001 and the limit was recently raised to 74% under the automatic route and 100% under the government route.

Body:

Short run implications

• It can potentially boost the total FDI inflow in the defence sector, of which a great proportion will be potentially allocated to the setting up of manufacturing units, thereby accelerating employment.
• The change of the FDI limit to 100% will encourage more established foreign companies to share their technology since they can own a controlling stake, thus leading to more FDI opportunities in India.
• Reduced imports are likely to lead to greater transparency with a diminishing role for middlemen.

Long term implications

• Development of military-industrial complex in India which will increase collaboration between military, academia and industry leading to higher industrial growth and reduction in import dependence.
• Strengthening Indigenous Manufacturing: Through more liberalised FDI policy the government is seeking to attract foreign players to set up manufacturing units in India.
• It will also provide employment and business opportunities to the Indian businesses and boost self-dependency.
• Commercial aspects: It can help increase research linkages of defence industries to commercial aspects as many of the innovations in the defence sector have alternate civilian usage as well.

Conclusion:

The new FDI policy has the potential to reduce dependency on imports in the defence sector and boost manufacturing in India.