The Telegraph
Thursday , August 7 , 2014
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Cabinet clears FDI in rail, defence

New Delhi, Aug. 6: The Union cabinet today approved up to 100 per cent foreign direct investment in railway infrastructure and raising the cap for defence industries to 49 per cent from 26 per cent.

The push to raise the bar for foreign investment in these two sensitive sectors comes after a parliamentary logjam delayed plans to raise the cap in insurance.

Officials said a note circulated by the commerce and industry ministries had proposed FDI in high-speed train systems, suburban corridors and freight lines connecting ports, mines and power installations. However, FDI will not be permitted in railway operations.

This would mean that companies such as Mitsubishi could set up a high-speed train system and leave the train operations with Indian Railways.

Similarly, a steel company such as Posco could collaborate with Indian Railways to construct a freight line connecting a port with their factory or a mine located in a remote area.

Also, a car maker such as Honda could buy a freight train to transport its cars or spares.

The FDI liberalisation in railways would help in its modernisation and expansion.

According to estimates, the railway sector is facing a cash-crunch of around Rs 26,000 crore. At present, there is a complete ban on any kind of FDI, except in mass rapid transport systems.

With the FDI nod, the proposed Mumbai-Ahmedabad high speed rail corridor is expected to get a push.

The construction of exclusive rail corridor for freight movement is also likely to get a boost.

Defence cap

The decision to raise the foreign direct investment cap in defence to 49 per cent from 26 per cent was announced by finance minister Arun Jaitley in this year’s budget. However, the higher FDI limit comes with a rider to the effect that ownership and control should be in Indian hands.

Besides, all approvals over 26 per cent would be on a case-by-case basis.

Earlier last month, a controversy had broken up after Nirmala Sitharaman, minister of state for commerce and industry, stated in Parliament that the government was discussing FDI in defence and railways but had not come to a final decision on the issue.

The FDI cap in defence had been particularly contentious in the past, with ministries bickering over the extent of foreign control.

The commerce and industry ministry had pressed for majority control by foreigners, while the defence ministry opposed the move.

Indian companies such as Mahindra & Mahindra, Larsen & Toubro, the Tatas and Reliance are also against majority control by foreign players.

They feel that the foreign makers of missiles, weapon systems and defence electronics would never agree to transfer technology nor would Indian companies ever learn to make high-tech arms.

However, the situation has changed now with the emergence of India as a major defence market and the decline of the European market.

European and US manufacturers might now be forced to part with technology to joint ventures as long as they were assured of equitable profit and royalty sharing and the safety of proprietary technology.

Analysts have said the country imports over 75 per cent of its defence equipment and it made sense to allow foreign companies to set up units in the country as this could not only meet India’s needs but also enable the country to become a global supplier of products and components.

Global companies such as Saab, Boeing, Lockheed Martin, Rolls Royce and BaE Systems do billions of dollars of business with India by selling equipment. They are keen to set up joint ventures, or buy into Indian companies, to make and sell defence equipment in the country.