Hike in defence FDI cap to 49% likely later this year

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New Delhi: Government likely to hike FDI in defence later this year. Driven by the urgent need to establish a strong defence-industrial base in the country, a notification to raise the foreign investment from the present 26% to 49% in the defence sector, is expected to be issued by the government later this year.

A senior ministry of defence official told FE that, “A notification on the hike in FDI is likely by year end. Although the Economic Survey—that was tabled in the Parliament earlier this month—which has sought raise in the FDI from 26% to 49 %, has no legal binding, but it has found favour among the defence planners who have been seeking a hike in the FDI for the defence industry.”

The Economic Survey for 2008-09 had also suggested 100% FDI be permitted for high-technology defence equipment. The Survey has also suggested 100 % FDI on a case by case basis, in high technology, strategic defence goods, services and systems that can help eliminate import dependence. It is to be noted that since the opening up of defence industry for foreign participation in 2001, very little by way of FDI has entered India’s defence industry.

According to sources in the MoD “the government is fully committed to the development of a vibrant and proactive defence industry in India. It was in May 2001 that the defence industry sector was opened up to 100% private investment, with up to 26% FDI. The defence sector till then was strictly the preserve of the public sector.”

However, the progress has been slow since then, with the Indian armed forces continuing to import the major chunk of their military hardware and software from countries like Russia, Israel, France, UK and now, increasingly the US.

It may be noted that companies, which have the state of the art technologies like Lockheed Martin, Boeing, EADS and Sikorsky etc, have also indicated major proposals for investments in India.

The problem with the present 26% ceiling on FDI in the sector is that it limits the economic incentive to the foreign investor. Why would a company bring its investment (capital, people, skills and technology) to a market in which it can only secure a limited economic return?