New Delhi: Almost on expected lines, the newly elected Bharatiya Janata Party government in India today hiked the limit for Foreign Direct Investment (FDI) in defence, to fix the new cap allowing foreign companies to hold 49 per cent stake in India–based manufacturing units
The present cap is 26 per cent and is seen as a hindrance to India’s growth as a defence equipment manufacturing country forcing it to import weapons and platforms. The present of 26 per cent allows greater investment but with impossibly strict riders.
Finance Minister Arun Jaitley while presenting the budget in Lok Sabha – India’s elected House of representatives -- today emphasised the importance of FDI in boosting the manufacturing sector of the economy, saying the cap for FDI in defence will be raised to 49 per cent.
"We will retain the Indian control in defence FDI," Jaitley assured the House and also critics who had not agreed with the original suggestion of the Commerce Ministry which had suggested three different slabs for FDI— 49 per cent, 75 per cent and 100 per cent — all linked to incentivise technology transfer
As per the Commerce Ministry proposal 49 per cent FDI will be not entail technology transfer, hence allowing more foreign vendors to set up plants in India for supply of equipment to Indian forces and also to other countries.
The automatic route for FDI may remain barred on account of security and proposals will have to be vetted by intelligence agencies. Demands have been made by US, Russian, UK and Israeli companies to lift the 26 per cent cap. FDI into India's defence sector has been very low — just Rs 24.36 crore (US $4.94 million) has come in between April 2000 and April 2013.
US Deputy Secretary of Defence Ashton Carter, who along with the Indian National Securty Advisor (NSA) co-chairs the US-India Defence Technology Trade Inititaive (DTTI), has been open is seeking a more liberal FDI policy. Among those who could benefit include US majors Lockheed Martin, Boeing, Honeywell, Textron, General Dynamcis, Raytheon and Northrop Grumman alongwith Europen companies BAE systems, Airbus, MBDA, DCNS, Navantia, Atlas electroniks besides Israelis like IMI, IAI and Rafael.
In March 2014, the Stockholm International Peace Research Institute (SIPRI) said, India was the largest global arms importer between the years 2009 and 2013. This was 14 per cent of all global trade.
Parliamentary Committee had backed it.
In August 2013, the Parliamentary Standing Committee on Defence had favoured a hike and added: "The Committee recommends enhancement in FDI limits to attract foreign companies which would benefit Indian defence industry, provide employment opportunities and save precious foreign exchange”.
The Naresh Chandra Committee , set up by Prime Minister Manmohan Singh, prepared a report in August 2012 saying "there is every need to support higher FDI so that the latest technologies already developed by foreign entities and owned by them find their way into manufacturing defence items within India".
Pipavav and HAL welcome budget
Budgetary allocation and new policy initiatives in today budget by Finance Minister Arun Jaitley, including increase in Foreign Direct Investment (FDI) for defence production have been welcomed by the industry.
Nikhil Gandhi, Chairman of the Pipavav Defence and Offshore Engineering Company Limited said that the there was general expectation of at least a 51 per cent cap for FDI. “Though 49 per cent is good beginning and we hope that the government in specific cases will consider higher FDI on case-to-case basis”, Gandhi said.
RK Tyagi, the Chairman of Defence Ministry owned Public Sector Undertaking, Hindustan Aeronautics Limited (HAL) said, “the budget’s allocation and policy initiatives will help build investor confidence and build a wider industrial base in the country”. Tyagi welcomed the setting up a Rs 100 crore Technology Development Fund and 15 per cent incentive on investment of Rs 25 crore and above on plant and machinery, saying this will be one of best moves.
Arun Jaitley in his budget speech said necessary resources are needed for public and private sector companies, including SMEs, as well as academic and scientific institutions to support research and development of Defence systems that enhance cutting-edge technology capability in the country. However, beyond the announcement, no action was taken.
Sidharth Birla, President of Industry body FICCI said “announcement to enhance the composite cap of foreign investments in defence will send a strong message to the global investor community”.