In an effort to attract more foreign funds into the defence sector and promote domestic manufacturing of hi-tech equipment, the Union Cabinet on Wednesday increased the foreign direct investment (FDI) cap in the sector to 49 per cent, with Indian management control. Earlier, the cap was at 26 per cent.
All foreign investment proposals in the defence sector will continue to be routed through the Foreign Investment Promotion Board and proposals with an FDI component of over 26 per cent have to get the approval of the Cabinet Committee on Security.
The Government’s decision to increase the foreign investment limit is largely to attract more money into the sector, especially to modernise the domestic industry. India imports defence equipment worth $8 billion (about 70 per cent of its requirement) annually and its import bill is growing by more than 10 per cent every year.
The Department of Industrial Policy & Promotion (DIPP), the nodal ministry for formulation of FDI policy, had been pushing for the foreign investment cap to be raised to 51 per cent to give investors a controlling stake, but this was shot down by the Defence Ministry.
“Foreign investors would have been more interested in pumping in money and bringing modern technology had they got a controlling stake,” a DIPP official told BusinessLine .
The move was, however, opposed by some domestic defence equipment manufacturers, who lobbied against raising the FDI limit beyond 49 per cent, the official added.
The UPA regime, too, had examined the proposal to increase the FDI limit in defence to 49 per cent, but did not do it.
The decision to raise the ceiling was announced by Finance Minister Arun Jaitley in this year’s Budget.