Foreign Direct Investment in Defence: Lessons from the Automobile Industry – orfonline.org

Report on Aligning India’s Defence Manufacturing with Sustainable Development Goals

Introduction: A Framework for Sustainable Growth

This report analyzes the strategic imperative for India to enhance its domestic defence manufacturing capabilities by drawing parallels with the nation’s successful automotive industry. The analysis is framed within the context of the United Nations Sustainable Development Goals (SDGs), focusing on how policy reforms can transform the defence sector into a significant contributor to national development. Key goals addressed include:

• SDG 9 (Industry, Innovation, and Infrastructure): Building resilient infrastructure, promoting inclusive and sustainable industrialization, and fostering innovation through technology transfer and domestic production.
• SDG 8 (Decent Work and Economic Growth): Promoting sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all through the expansion of the manufacturing base.
• SDG 17 (Partnerships for the Goals): Strengthening the means of implementation and revitalizing global partnerships for sustainable development, particularly through Foreign Direct Investment (FDI) and technology-sharing agreements.
• SDG 16 (Peace, Justice, and Strong Institutions): Developing effective, accountable, and transparent institutions at all levels to support national security and strategic autonomy.

The Automotive Sector: A Blueprint for Achieving SDG 9 and SDG 8

Policy Liberalization and Industrial Growth

India’s automotive industry provides a compelling model for achieving sustainable industrialization (SDG 9). Prior to the 1980s, the sector was characterized by stringent regulations, import restrictions, and limited innovation. The shift towards liberalization, initiated with the Maruti Udyog Limited (MUL) and Suzuki Corporation joint venture in 1981, marked a turning point. This partnership demonstrated the power of international collaboration (SDG 17) in infusing capital and technology into the domestic market.

Key Drivers of Sustainable Success

The sector’s remarkable growth, contributing 7% to GDP and supporting 30 million jobs, was propelled by policies that directly align with the principles of sustainable development:

• Fostering Global Partnerships (SDG 17): The government actively encouraged joint ventures and progressively raised FDI limits, culminating in a 100% automatic route. This attracted US$37.58 billion in FDI between 2000 and 2025, facilitating technology transfer and innovation.
• Building Resilient Infrastructure (SDG 9): Policies mandating 50-70% localization of components compelled foreign firms to invest in a domestic supplier ecosystem, strengthening the entire manufacturing value chain.
• Promoting Economic Growth and Decent Work (SDG 8): The industry’s expansion from 10 million vehicles in 2005-06 to 28 million in 2023-24 created millions of direct and indirect jobs and generated significant economic multipliers, embodying the core objectives of SDG 8.

Analysis of the Defence Sector’s Alignment with SDGs

Progress in Sustainable Industrialization (SDG 9)

India’s defence sector has made commendable strides towards self-reliance (atmanirbharta), aligning with the goal of promoting domestic industry. The transition of automotive component manufacturers like Bharat Forge, Mahindra, and BEML into defence production showcases a successful cross-sectoral synergy that builds indigenous capacity. However, the sector’s contribution to SDG 9 is constrained by a continued reliance on imported high-technology components for critical platforms, including:

• Zorawar Light Tank: Utilizes a US-origin Cummins engine and a Belgian gun turret.
• Tejas Combat Aircraft: Powered by a US-made GE engine.
• INS Vikrant: Incorporates critical systems such as arrestor gears and flight handling equipment from Russia, the UK, and the US.

This dependency indicates that while manufacturing assembly is localized, the innovation and high-value technology components of the industrial process remain largely external, limiting the full realization of SDG 9.

Challenges in Leveraging Defence Expenditure for SDG 8

With a defence budget of INR 6.81 lakh crore for 2025-26, India has a substantial opportunity to drive economic growth and create decent work (SDG 8). However, the continued import of major weapons systems means a significant portion of this capital expenditure does not generate the desired domestic economic multipliers. The low inflow of FDI—a mere INR 5,077 crore since 2001—further underscores the failure to leverage this sector for broad-based economic development, in stark contrast to the automotive industry.

Barriers to Fostering Partnerships and Innovation (SDG 17 & SDG 9)

Policy and Institutional Hurdles

Despite policies permitting up to 74% FDI via the automatic route, the defence sector has failed to attract significant foreign investment. This points to institutional weaknesses (SDG 16) and barriers to effective partnerships (SDG 17). Key impediments include:

1. Regulatory Complexity: The “automatic route” for FDI is undermined by mandatory security clearances and governmental veto power, creating an unpredictable investment climate that discourages foreign Original Equipment Manufacturers (OEMs).
2. Procurement Bias: A persistent preference for Defence Public Sector Undertakings (DPSUs) in procurement, with 75% of the domestic modernization budget reserved for them, limits market access for private and foreign-invested entities.
3. Conflicting Policy Signals: The Defence Acquisition Procedure (DAP 2020) restricts the most preferred procurement category (IDDM) to firms with less than 49% foreign ownership, directly contradicting the 74% FDI policy and disincentivizing majority-stake investments and technology transfers.
4. Weak Intellectual Property (IPR) Framework: Apprehensions regarding India’s IPR protection regime make foreign OEMs reluctant to transfer sensitive, high-end technology, which is a cornerstone of fostering innovation under SDG 9.
5. Lack of Skilled Workforce: A shortage of an “industry-ready” skilled workforce presents a challenge to developing a high-technology manufacturing ecosystem, highlighting a gap in alignment with SDG 4 (Quality Education).
6. Uncertain Order Flow: The lack of consistent, long-term order commitments, as seen with the K9 Vajra production line, makes heavy capital investment a high-risk proposition for both domestic and foreign firms.

Policy Recommendations for Sustainable Defence Industrialization

To transform the defence sector into a driver of sustainable development, India should adopt policies proven successful in the automotive industry. The following recommendations are designed to strengthen industry (SDG 9), promote economic growth (SDG 8), and foster global partnerships (SDG 17):

1. Fully Embrace Global Partnerships (SDG 17): Encourage 100% foreign-owned manufacturing facilities, with appropriate security safeguards, to stimulate the creation of a local component ecosystem, mirroring the automotive sector’s success.
2. Adopt Differentiated FDI Policy (SDG 9): Implement a tiered FDI cap system, allowing higher foreign ownership for low-tech components and mobility platforms while maintaining strategic control over critical systems. This will attract targeted investment across the value chain.
3. Harmonize Institutional Frameworks (SDG 16): Revise DAP 2020 to remove contradictions with FDI policy, ensuring that firms with higher foreign ownership can compete as primary vendors. This creates a transparent and predictable institutional environment.
4. Strengthen the Innovation Ecosystem (SDG 9): Introduce a Production Linked Incentive (PLI) scheme for defence manufacturing and bolster the IPR framework to build investor confidence and encourage the transfer of advanced technology.
5. Build Resilient Infrastructure (SDG 9): Establish a single-window clearance mechanism and create defence Special Economic Zones (SEZs) to provide an enabling environment for both domestic and foreign manufacturers.
6. Promote Progressive Industrialization (SDG 9): Replace rigid upfront indigenization requirements with a model of progressive localization, allowing manufacturers to build domestic supply chains over time, thereby reducing costs and enhancing competitiveness.
7. Enhance Public-Private Collaboration (SDG 17): Allow significant private and foreign shareholding in DPSUs to improve efficiency, accelerate technology absorption, and create a level playing field that fosters healthy competition.

Conclusion

The success of India’s automotive sector offers a clear roadmap for transforming the defence manufacturing industry into a cornerstone of sustainable development. By reforming FDI policies, harmonizing procurement procedures, and creating a predictable investment climate, India can attract the capital and technology needed to achieve self-reliance. This strategic shift will not only enhance national security but also make the defence sector a powerful engine for achieving SDG 9 (Industry, Innovation, and Infrastructure), SDG 8 (Decent Work and Economic Growth), and SDG 17 (Partnerships for the Goals). A defence product manufactured in India, regardless of ownership, contributes more to the nation’s sustainable development than one that is imported.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 8: Decent Work and Economic Growth

  The article connects directly to SDG 8 by focusing on the economic contributions of the manufacturing sector. It highlights how the automobile industry has driven economic growth, contributed significantly to the national GDP, and created millions of jobs. The analysis proposes that a similar growth trajectory in the defence manufacturing sector would generate local jobs and substantial economic multipliers, thereby promoting sustained and inclusive economic growth.

• SDG 9: Industry, Innovation, and Infrastructure

  This is a central theme of the article. It extensively discusses the need to build a resilient and technologically advanced industrial base in India, particularly in the defence sector. The article analyzes policies for industrialization, the importance of upgrading technological capabilities through technology transfer and increased R&D spending, and the goal of increasing the manufacturing sector’s share of GDP and employment. The comparison between the automobile and defence sectors serves as a case study for promoting inclusive and sustainable industrialization.

• SDG 17: Partnerships for the Goals

  The article strongly emphasizes the role of partnerships in achieving industrial and economic goals. It details the impact of Foreign Direct Investment (FDI), joint ventures (JVs) between domestic and foreign companies (e.g., Maruti-Suzuki), and public-private partnerships. The analysis argues that attracting foreign capital and fostering international collaboration are crucial for technology transfer, knowledge sharing, and mobilizing the financial resources needed to develop India’s domestic defence manufacturing capabilities.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. SDG 8: Decent Work and Economic Growth

   • Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading and innovation.

     The article discusses how the Indian automobile industry achieved high productivity by adopting “cutting-edge technology” through foreign collaborations. It advocates for the defence sector to follow a similar path of technological upgrading to reduce reliance on imports for advanced systems and enhance its manufacturing capabilities, thereby increasing economic productivity.

   • Target 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation.

     The article analyzes how “pragmatic policies” and liberalization drove the boom in the automobile sector, leading to massive job creation (“employs four million people directly and 26 million people indirectly”). It recommends policy reforms for the defence sector to create a more conducive environment for investment, innovation, and productive activities that would, in turn, generate local jobs.

2. SDG 9: Industry, Innovation, and Infrastructure

   • Target 9.2: Promote inclusive and sustainable industrialization and, by 2030, significantly raise industry’s share of employment and gross domestic product.

     The article directly addresses this target by quantifying the success of the auto industry, which “contributes 7 percent to GDP” and “accounts for 22 percent of the manufacturing GDP.” The core argument is to replicate this success in the defence sector to significantly raise its contribution to national GDP and employment through domestic manufacturing (indigenisation).

   • Target 9.5: Enhance scientific research, upgrade the technological capabilities of industrial sectors…and substantially increase…private research and development spending.

     The article explicitly points to a major gap in this area, stating that India’s R&D expenditure is low at “0.6456 percent of the GDP, compared with the global average of 2.6 percent,” which “deters foreign investors.” It argues that upgrading technological capabilities requires absorbing technology from foreign partners and increasing investment in R&D.

   • Target 9.b: Support domestic technology development, research and innovation in developing countries…by ensuring a conducive policy environment.

     The entire article is a call to create a “conducive policy environment” for the defence sector, learning from the automobile industry’s experience. It critiques the current “dual policy” framework that limits market access for foreign-invested firms and advocates for reforms that would support domestic technology development through better partnerships and clearer policies, fostering innovation and self-reliance (atmanirbharta).

3. SDG 17: Partnerships for the Goals

   • Target 17.3: Mobilize additional financial resources for developing countries from multiple sources.

     The article’s primary focus is on mobilizing financial resources through Foreign Direct Investment (FDI). It contrasts the massive FDI inflow into the auto sector (“US$37.584 billion”) with the “meagre INR 5,077 crore in foreign investment in the defence sector,” highlighting the urgent need to attract more foreign capital to build the defence industry.

   • Target 17.6: Enhance…international cooperation on and access to science, technology and innovation and enhance knowledge sharing.

     The article identifies international cooperation as a key driver of success. The Maruti-Suzuki joint venture is presented as a prime example of a partnership that led to technology transfer and knowledge sharing. The text argues that the defence sector’s growth depends on similar collaborations with “established foreign players, initially absorbing their technology and subsequently expanding independently.”

   • Target 17.17: Encourage and promote effective public, public-private and civil society partnerships.

     The article discusses various partnership models, including government-led initiatives (Maruti Udyog Limited), joint ventures with foreign OEMs (L&T and Hanwha for the K9 Vajra), and collaborations between public sector units and private firms (DRDO and Kalyani Strategic Systems). It critiques policies that create a bias towards public sector units and calls for a “level playing field” to promote more effective partnerships across the board.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

1. For SDG 8 (Decent Work and Economic Growth)

   • Contribution to GDP: The article states the auto industry “contributes 7 percent to GDP.” This metric can be used to track the economic impact of a growing manufacturing sector.
   • Employment Figures: The mention that “the auto sector employs four million people directly and 26 million people indirectly” serves as a direct indicator of job creation.
   • Economic Growth Rate: The statistic that “The auto sector has grown at a stupendous rate of 15 percent annually over the last two decades” is a clear indicator of sustained economic growth.

2. For SDG 9 (Industry, Innovation, and Infrastructure)

   • Manufacturing Value Added as a Proportion of GDP: The article notes that the auto industry “accounts for 22 percent of the manufacturing GDP,” which is a key indicator for Target 9.2.
   • Research and Development Expenditure as a Proportion of GDP: The article provides a precise indicator by stating India’s R&D expenditure is “0.6456 percent of the GDP,” which can be tracked against the global average to measure progress.
   • Degree of Indigenisation/Local Content: The article implies this indicator by mentioning that “by 1991, MUL was sourcing almost 65 percent of components locally” and that some indigenous defence platforms like INS Vikrant still have significant “import content” (24%). This percentage is a direct measure of industrial self-reliance.

3. For SDG 17 (Partnerships for the Goals)

   • Total Foreign Direct Investment (FDI) Inflows: The article provides specific figures for FDI, such as “US$37.584 billion” for the auto sector versus “INR 5,077 crore” for the defence sector, which are direct indicators of financial resource mobilization.
   • Sectoral FDI as a Proportion of Total FDI: The comparison that the auto sector received “around 5 percent of the total foreign direct investment” while defence received “just 0.003 percent” is a powerful indicator of a sector’s ability to attract foreign partnerships and capital.
   • Reliance on Imports: The statistic that “India was the second largest importer of military hardware in 2020–2024, accounting for 8.3 percent of the total global arms transfers” serves as an inverse indicator. A reduction in this figure would signify successful domestic industrialization through partnerships and technology transfer.

4. Create a table with three columns titled ‘SDGs, Targets and Indicators” to present the findings from analyzing the article.

Source: orfonline.org