100% FDI in defence has been a long standing demand of global defence majors, and while the Narendra Modi government has still not given a go ahead for this radical move via the automatic route, some clauses have been eased in the government approval route. Defence sector experts are of the opinion that the government’s move will have a positive impact on the defence industry.
So, what exactly has the government announced today?
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.
How does the defence industry stand to benefit?
Says Ankur Gupta, Vice President Aerospace & Defence at Ernst Young India, “The step is definitely a positive one for the sector.” Gupta tells FE Online, “The revision of norms for greater than 49% defence FDI provides a wider aperture for the foreign OEMs to apply and the FIPB to approve such cases.”
Amber Dubey, Partner & India head of Aerospace and Defence at KPMG says, “It is wonderful to hear about the increase in FDI limit in defence to beyond 49%. We may see its positive impact over the next 6-12 months. This decision will now bring in real investments provided the defence ministry also speeds up the procurement process and issues big ticket orders. ”
Explaining the importance of the move, Dubey says, “‘State of the art’ is subjective and could have led to a political witch-hunt later and hence most foreign companies were a wary of using this provision to ask for higher FDI. Easy terms like ‘modern technology’ and ‘other reasons’ will allow most leading defence companies to come in unhindered. All defence technologies are ‘modern’ by their very nature.”
“Defence OEMs can now focus on actual research, design and manufacturing than wasting time on legal and regulatory issues. If MoD rejigs its defence procurement policies and insists on platform level manufacturing in India, India could become a global aerospace and defence hub instead of just being a supplier of parts and assembler of imported kits,” he adds.
Chandrajit Banerjee, Director General at CII says, “The conditionality in defence production FDI regarding ‘state of the art’ technology has been done away with, allowing more defence producers to enter the large Indian defence procurement market.”
The development also assumes significance as French defence major DCNS has approached the government with a 100 per cent FDI proposal in the sector. DCNS wants make its Air Independent Propulsion (AIP) systems for submarines in India. Today’s move is likely to be a boost for DCNS and similar proposals in the sector.