Commerce Ministry for 74% FDI cap in defence sector .

The Ministry of Commerce and Industry on Monday proposed hiking the FDI cap in the defence sector to 74 per cent from the existing 26 per cent.

Releasing a discussion paper to seek the industry's views on the issue by July 31, the Ministry argued that easing the FDI cap would incentivise transfer of know-how and bring higher levels of technological expertise, while strengthening export potential in the sector.

“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 per cent under the Government route,” the note said.

Proposing specific safeguards, it said that since there is licensing provision in the defence sector, Government could reject FDI in the sector by refusing the licence in case the background of the company is suspect.

Informed discussion

“We want all stakeholders to react, and based on that we will have an informed discussion. A policy will emerge out of it,” Mr R P Singh, Secretary, Department of Industrial Policy and Promotion (DIPP), said on the sidelines of a FICCI event. Once the feedback is received, the inter-ministerial consultations will follow and the proposal would then be placed before the cabinet. Mr Singh did not specify the timeframe for the same.

The US and the European Union permit 100 per cent FDI in defence; the security issues are addressed through verification and clearance procedures as well as export controls.

Listing out the benefits of hiking the FDI ceiling, the Ministry pointed out that such a move, if implemented, could provide a significant incentive for transfer of know-how and technology, leading to higher levels of technological expertise. This would also assist in achieving the government's objective of 70 per cent indigenisation in the sector.

The present FDI cap of 26 per cent is seen to discourage original equipment manufacturers from bringing in proprietary technology, since their participation is restricted to minority equity.

Another advantage would be in terms of addressing the incremental fund requirement in the defence industry, which by nature is capital-intensive.

Higher levels of foreign investment would reduce the fund requirements of the Indian partners, at the same time promoting growth and expansion of Indian companies.

Significant savings

Allowing higher FDI would also result in significant savings in foreign exchange, as more foreign companies will establish defence industries in India, the DIPP said, adding that the proposal would also strengthen the export potential. India's defence exports have ranged 1.5-2.4 per cent of the total production, with an import-export ratio of 194:1.

This is far higher than 1.3:1 for Israel, 8.8:1 for South Korea and 19.7:1 for Singapore.

Source : Business Line