The Telegraph
Monday , April 28 , 2014
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Bid to tweak defence FDI

New Delhi, April 27: The industry ministry will advise the next government to allow up to 49 per cent foreign direct investment (FDI) in defence through the automatic route.

Top officials said they were preparing a note on the proposal. At present, the government allows up to 26 per cent FDI in defence after approval by the Foreign Investment Promotion Board (FIPB); investments beyond this ceiling require the clearance of the cabinet committee on security affairs.

Ideologues of Bharatiya Janata Party, tipped as a favourite to form the government, are in favour of raising the FDI limit to 49 per cent in line with the recommendations made earlier by industry association Ficci, which has been seen by many observers as being close to the previous NDA government.

Officials in the industry ministry said they would suggest the automatic route for FDI up to 49 per cent, while a 100 per cent foreign investment should be allowed after due diligence by either the FIPB or the cabinet committee on security.

When the government was considering a proposal to allow up to 100 per cent FDI in defence, Ficci had suggested allowing 49 per cent FDI only if a joint venture brought three things — technology transfer, an indigenisation programme and offset for defence purchases. This indicates that Ficci favours foreign investment up to 49 per cent in defence but only after vetting.

India Inc feels the huge size of the domestic defence market, estimated at $100 billion over the next five years, is sure to attract foreign investors. Hence, the government should set riders such as technology transfer by the foreign companies. In return, the foreign investors should be given close to a majority stake and a bigger say in the Indian venture.

Analysts said irrespective of who came to power, liberalising FDI in defence would be on the new government’s radar as it would try to rebuild relations with the US. Trade relations with Washington had soured over issues such as pharma patents and restrictions for solar and telecom equipment.

The US, which has sold aircraft and defence equipment worth billions of dollars to India, also needs to invest in the local industry as part of its offset obligation to spend 30 per cent of its order size in India. Hence, the opening up of the defence sector is crucial to both the economies.