The Department of Industrial Policy and Promotion (DIPP) on Monday proposed to increase the FDI cap in the defence sector to 74 % from the current 26 %.
However, the defence ministry continues to oppose any move to raise it beyond 26% in the sector citing security concerns.
In its discussion paper at the website the DIPP has also suggested that the government?s procurement programme should not be linked in anyway to opening up of the defence sector. DIPP is the nodal department for framing of the FDI policy. It has been recommended that the government agencies should be have the liberty to buy defence equipment from any local or global vendor.
At the recently concluded Parliament Session defence minister of state MM Pallam Raju had said, ?The government is not planning to make provision for 100 % FDI in defence production sector. As per rules, 26 % FDI is permitted in defence sector on approval of the Foreign Investment Promotion Board.? The latest move from the DIPP are seen as pressure building tactics for opening up of the highly guarded defence sector
The working paper circulated by the commerce and industry ministry suggesting this be raised to 74%, from the existing 26 %, to encourage established players enter the field.
According to DIPP secretary RP Singh, increasing the FDI cap to 49%, instead of 74%, would not make much difference as there would not be extra benefits to investors.
Speaking to mediapersons on the sidelines of a function, in response to a question whether other ministries had been taken on board, Singh said they would respond to the discussion paper.
?We have to complete the inter-ministerial discussions, and after that we will take further steps depending upon what kind of consensus emerges,? he said.
?The established players in the defence industry should be encouraged to set up manufacturing facilities and integration of systems in India with FDI up to 74 % under the government route,? says the paper, circulated among different stakeholders in the field for their views and suggestions by July 31. However there is a caveat: ?The views expressed in this discussion paper should not be construed as the views of the government. The department (of industrial policy and promotion that has generated it) hopes to generate informed discussion on the subject, so as to enable the government to take an appropriate policy decision at an appropriate time.?
The defence ministry often says that the existing cap could be raised to 49 % in selective cases but has been reluctant to do so when proposals are actually made. Infact the joint venture between Mahindra and Mahindra?s joint venture with UK based BAE systems is one of the examples where the FDI was raised to 49 %.
The working paper from DIPP has noted that the present cap has failed to attract state-of-the-art technology in the defence sector. An increase to 49 % ?will not give any additional say to the foreign investor in the affairs of the company? under India?s Company Law, it points out.
Observing that raising the cap to 49 % ?will not really help us in getting the best technology partners to invest in India?, the paper states that by merely increasing the limit to 49 % ?we may be accused by posterity of doing too little and too late?.
Therefore, ?in case we really want to have the state of the art technology, we have to permit anything above 50 % if not 100 %. It may, therefore, be desirable to allow either 100 % or 74 % as in the case of the telecom sector?, the paper says, pegging its recommendation at the latter figure. It notes in this context that indigenous R&D ?has not kept pace with the requirements of present day warfare and manufacture through transfer of technology to public sector units (PSUs)/ordnance factories (OFs) has proved to be an ineffective and slow process?.
