With an effort to attract more foreign capital, the Government intends to raise the foreign investment limit in various sectors including defence.
“The intent is to expand the cap wherever possible,” Chief Economic Advisor Raghuram Rajan told reporters.
A committee under the Chairmanship of Economic Affairs Secretary Arvind Mayaram is looking into this matter. Currently, the limit for foreign direct investment (FDI) in defence sector is 26 per cent. There is a demand to raise this to 49 per cent. “It is being examined,” Rajan said.
The move assumes significance after Prime Minister Manmohan Singh indicated that the Government would further liberalise the FDI regime in the coming months. India opened up the defence equipment industry to private sector in May 2001, but restricted foreign participation to 26 per cent in this capital intensive sector.
India is one of the largest defence importers in the world with a minuscule component of exports. The country at present imports over $8 billion (Rs 45,336 crore) worth of defence equipment and its defence budget is growing at an average of 13.4 per cent annually since 2006-07. The defence budget for the current fiscal is Rs 2.03 lakh crore, up 14 per cent over the revised estimate of Rs 1.78 lakh crore for 2012-13.
Currently, there are various sectors where FDI limit is below 100 per cent. While in multi-brand retail it is 51 per cent, in telecom and banking it is 74 per cent.
While the Cabinet has approved hiking FDI limit in insurance and pension sectors to 49 per cent, a Bill to that effect is pending in Parliament. Further, in commodity exchanges, asset reconstruction companies, credit information companies and private security agencies, up to 49 per cent FDI is allowed.
Increase in foreign investment will help the Government to face the challenge of a mounting Current Account Deficit. This deficit, which is the difference between the outflow and inflow of foreign currency, touched a record high of 6.7 per cent in the October-December quarter of 2012-13 on the back of rising oil and gold imports. CAD for the full year is expected to be around five per cent.
Gold imports
However, spurt in gold import has potential to disturb the effort to contain the CAD. That is why, on Tuesday, the Reserve Bank of India announced restricting the import of gold on consignment basis, only to meet the genuine needs of exporters of gold jewellery. Earlier, this was announced for banks, but now this will also include all nominated agencies and trading houses.
Terming the new announcements as “throwing sand in the wheels”, Rajan said that import of 400 tonnes of gold in three month ending is “not pleasant.”
He said gold imports could be curbed via better investment options, adding that rise in gold imports is not limited just to India. When asked specifically about possible import duty hike on gold, he did not give straight answer but did mention that a careful approach should be adopted in taking hard measures.