Building India by Making in India – Increase in FDI limit to boost India’s defence manufacturing

October 10, 2020 2:36 PM

The government has a huge task ahead of confidence-building amongst foreign players which would be greatly achieved by further improving the ‘Doing Business in India’ ranking.

One of the highlights of the ‘Make in India’ initiative for the defence sector is the embargo on certain products from imports.

By Rajesh Thakkar

‘Atmanirbhar Bharat Abhiyan’ is the theme of the Government of India’s policymaking. To this end, the government has launched various schemes incentivising corporates to manufacture in India. The ‘Defence’ sector, considering its importance, is identified as one of the key sectors for ‘Make in India’. The government proposes to make India a leading country in the defence sector, be it for capital acquisition, manufacturing or technology development. By 2025, turnover of USD 25 billion (including export worth USD 05 billion) is expected to be achieved in the aerospace and defence sector. With a separate budget allocation (in defence manufacturing) for procurements from domestic vendors, a mechanism must be laid forth to enable participation not only from domestic players but also foreign players in the said sector. To increase foreign participation, the government recently enhanced the foreign investment limit in the defence sector from 49% to 74% under the automatic sector for companies seeking new industrial licences. Investments beyond 74% will require government approval.

In tandem with the objective of self-sufficiency, the government has also drafted revised policies for Defence Acquisition Procedure and Defence Production & Export Promotion. While the primary focus of the policies is on the acquisition of equipment indigenously designed, developed and manufactured in India, the need for foreign collaborations is also emphasised. The Strategic Partnership model aims at the involvement of the private sector in specific defence segments. In these identified segments, manufacturing operations are to be undertaken by an Indian company i.e. a company owned and controlled by an Indian resident. If so notified, foreign investments in these identified segments would be restricted to 49%. The said foreign investment restriction would also apply for tie-ups with foreign original equipment manufacturers for manufacturing, technology transfer, manpower and support services.

One of the highlights of the ‘Make in India’ initiative for the defence sector is the embargo on certain products from imports. The government has listed down 101 items that would be exclusively procured only from Indian manufacturers, over time. The identified items, thus, would necessarily be locally manufactured in India. Further, procurement projects up to the prescribed threshold would be earmarked for the Micro, Small and Medium Enterprises (MSMEs). Defence corridors being set up in Uttar Pradesh and Tamil Nadu, providing incentives to set up manufacturing and research facilities, are also expected to attract huge foreign investments.

Initiatives as contemplated do spell out benefits that would flow therefrom. Setting up corridors, manufacturing plants especially in yet-to-be-developed areas would enable not just job creation but also supportive utilities such as local infrastructure. Participation of private players in defence manufacturing would enable technological advancement and also push competitiveness amongst such players. An innovation ecosystem for defence aiming to encourage innovation and technology development has also been set up consequent to which grants would be made available to carry out R&D that has the potential for use in the defence sector. Lastly, earmarking contracts for the MSME sector will also offer significant growth opportunities.

While the intent is right, this is only a small step in this direction. The government has a huge task ahead of confidence-building amongst foreign players which would be greatly achieved by further improving the ‘Doing Business in India’ ranking.

(The author is Partner and Leader -Transaction Tax with assistance from Malti Gidwani, Associate Director – Transaction Tax, BDO India. Views expressed are personal.)

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