Amidst its FDI policy reforms blitzkrieg, Modi government today also announced changes in its Foreign Direct Investment Policy for the defence sector – changes that have elicited a positive response from global defence majors.
PM Modi-led NDA government has been trying to attract FDI in the defence sector under its ‘Make in India’ initiative. However, only Rs 1.12 crore or $0.18 million of FDI equity inflows have happened in the defence industries sector from June 2014 to March 2016 (data as on DIPP website). Modi government assumed office on May 26, 2014. The sector was first opened to FDI in 2001. Since then it has attracted Rs 25.48 crore or $5.12 million of FDI equity inflows till March 2016.
With PM Modi aiming to make India a global centre for defence industry, FDI inflows will be one big factor. Hence, the importance of any reform in the direction of enhancing foreign direct investment cannot be overstated.
According to Pierre de Bausset, President, Airbus Group India, the defence FDI policy amendment introduced by the government is very pragmatic. “State-of-the-art technology was not defined in the previous policy and the way it was, it conveyed a one-dimensional perspective on why a foreign OEM could require more equity stake,” he says. “The new policy wording communicates the realization that there may be several other genuine reasons for the government to allow more than 49% stake to the foreign OEM in a joint venture with an Indian company and they want to take advantage of these for the benefit of the indigenous industry,” adds Pierre de Bausset.
John Brosnan, Managing Director, India & South East Asia at BAE Systems feels that the government’s moves in the defence sector augur well for the industry. “Defence is a critical sector for the success of Make in India. The government’s concerted efforts in easing policy barriers signal very positively of its intent to encourage more rapid indigenisation and investment, and we welcome today’s announcement expanding the scope of investment,” he says.
Brosnan is of the opinion that with the “right incentives and enablers, predictable decision-making timelines, productive partnerships between international OEMs and Indian industry, and expansion of the existing talent pool, amongst others, India can become an aerospace and defence manufacturing hub for the region and beyond.”
Lockheed Martin, which has been pushing to manufacture its Javelin missile system and F-16 fighter aircraft in India said that it is reviewing the changes that have been made in the FDI policy by the government. “We’re reviewing the rule changes. We’re pursuing opportunities to expand our partnership with New Delhi, which spans more than 20 years and includes a strong emphasis on the ‘Make in India’ approach,” Lockheed Martin India said.
While 100% FDI in defence via government approval route has been allowed for some years now, what has been announced today is a change in the criteria on the basis of which the government will give its nod for over 49% FDI in defence.
The present FDI regime permits above 49% FDI through government approval on a case to case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country. In this regard, the following changes have been brought in the FDI policy:
- Foreign investment beyond 49% has now been permitted through government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded. The condition of access to ‘state-of-art’ technology in the country has been done away with.
- FDI limit for defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959.