Defence Manufacturing FDI Cap up to 49 Percent

Joint enterprise under new limit to stay with Indian hands; higher cap if foreign investor transfers state-of-the-art technology to local venture

Published: 11th July 2014 09:03 AM  |   Last Updated: 11th July 2014 09:03 AM   |  A+A-


NEW DELHI: Providing a boost to inflow of investment in defence manufacturing, the Narendra Modi government on Thursday hiked the foreign direct investment (FDI) limit in the sector to 49 per cent from the existing 26 per cent.

Finance Minister Arun Jaitley, who also holds defence as an additional portfolio, announced during his budget speech that the FDI ceiling was being hiked, but the management of joint ventures thus formed under the new FDI limit would still be in Indian hands. However, noises from the industry, particularly those from abroad, for hiking the FDI limit to 100 per cent have not been acceded to by Jaitley.

“Currently, we permit 26 per cent FDI in defence manufacturing. The composite cap of foreign exchange is being raised to 49 per cent with full Indian management and control, through FIPB (foreign investment promotion board) route,” the Finance-cum-Defence Minister told Lok Sabha.

Jaitley admitted that India was the “largest buyer” of arms in the world now, an ignominy accorded to it since 2010 by the Stockholm-based think-tank SIPRI. India had for the first time that year, overtaken China to emerge as the largest importer of arms, spurred by its buying spree as part of its military modernisation programmes since the 1999 Kargil war. 

“Our domestic manufacturing capacities are still at a nascent stage. We are buying a substantial part of our defence requirements directly from foreign players. Companies controlled by foreign governments and foreign private sector are supplying our defence requirements to us at a considerable outflow of foreign exchange,” he said.

The FDI limit would now be automatically agreed to if it is within 49 per cent and approved by the FIPB in the Commerce Ministry, provided the Defence Ministry licence is obtained for the same. However, the government’s policy is to allow higher FDI limit in ventures above 49 per cent if the foreign investor would bring in or transfer latest, modern and state-of-the-art technology to the Indian venture. In such a case, the Cabinet Committee on Security would provide approval after considering the proposals on a case-to-case basis. The FDI limit hike in defence sector now meets a longstanding demand from the industry to allow for greater inflow of investment and technology transfer that would enable creation of a domestic military industrial base in the private sector. It was in 2001, under the then NDA government of Atal Bihari Vajpayee, that India had opened up the defence sector, till then the exclusive domain of the State-run industries, to the private sector, and allowed for 26 per cent FDI in the sector, a limit that has remained for 13 years now.

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