FDI cap in defence, construction eased

Donning a foreign-investor friendly avatar, the BJP-led Government, in its maiden Budget, opened up the defence and construction development sectors further to foreign direct investment while announcing its intention to liberalise the insurance sector as well.

FDI cap in the defence sector has been raised to 49 per cent from 26 per cent with full Indian management and control, Finance Ministry Arun Jaitley announced in his Budget Speech. The increased FDI will be channellised through the Foreign Investment Promotion Board.

In the construction development sector, where 100 per cent FDI is already allowed, the Government has relaxed the minimum capitalisation and minimum built-up area conditions.

The requirement of minimum built-up area for FDI has been reduced to 20,000 sq m from 50,000 sq m while minimum capitalisation requirement has been halved to $5 million.

To channelise investments into low-cost housing, the Government has done away with both the requirements of minimum built-up area and minimum capitalisation for projects which commit at least 30 per cent of project cost for low-cost affordable housing.

The relaxations come with the condition of three year lock-in of investments. On the “investment starved’’ insurance sector, Jaitley said that his Government proposed to increase the composite cap on FDI to 49 per cent from 26 per cent. This will be done by placing the Insurance Bill in Parliament.

“This single announcement has potential to be a game-changer as it can bring foreign exchange inflow of $10 billion — $15 billion as per Life Council estimates,” said TR Ramachandran, MD & CEO, Aviva Life Insurance.

Both the Insurance Bill and the proposal for relaxing conditions for FDI in the construction sector were initiated by the previous UPA regime.

The proposal to increase FDI cap in defence was, however, mooted by the BJP Government. The FDI policy on defence allows up to 100 per cent FDI in defence projects on a case-to-case basis.

Jaitley said that higher FDI in defence would help develop domestic manufacturing which is in the nascent stage, reduce dependence on companies controlled by foreign Governments and check foreign exchange outflow.

Many in the industry feel that the Budget announcement hiking the FDI limitit shows the Government’s intent to boost manufacturing and aerospace capability of the country.

A spokesman of the Tatas said, “We do see the need for significant investment in the sector and such investment, including from the Indian private sector, deserves encouragement.”