Indian companies are in favour of raising the foreign direct investment cap in the defence sector from the existing 26 per cent but with transfer of technology riders.

While most Indian players are comfortable with the idea of raising the cap to 49 per cent under automatic route, they want the Government to make it mandatory for the foreign players to transfer technology in case of higher equity participation.

The main concern for the Indian players is that they might lose out in case the Government permits 100 per cent FDI without any conditions. The Department of Industrial Policy and Promotion (DIPP) has floated a draft note for inter-ministerial consultations in which it has proposed three options: permitting 49 per cent, 74 per cent or 100 per cent FDI for the Defence production sector.

When contacted, a Tata Sons spokesperson said, “We do not comment on government policy. We have a strong presence in the defence space as demonstrated at the Defexpo, and the Indian private sector has the ability to participate in the industry’s growth. Investment, including from the Indian private sector, should receive stimulation.”

In 2001 witnessed the Government had taken the first step in the opening the FDI sector to 26 per cent in the Defence sector. However, since then only a meagre $4.8 million FDI has come in.

The Kelkar Committee Report had emphasised the need for a greater role for the private sector in the Defence manufacturing.

“There are two reasons for re-visiting and reviewing the FDI limits in the Defence Sector – India is a net importer of Defence equipment and components which comes around 70 per cent of import and secondly for strengthening the manufacturing base in India in the Defence sector, there is a need to acquire cutting edge technologies,” said an Assocham position paper.

The problem, however, is that acquiring technologies from global companies at 26 per cent stake has proven to be unrealistic. On the other hand Indian companies are not willing to give control beyond 49 per cent. Recently, Larsen & Toubro’s Group Executive Chairman AM Naik said while hiking the cap from 26 per cent to 49 per cent was desirable, going beyond that was debatable.

On the other hand, Nikhil Gandhi, Chairman, Pipavav Defence, is in favour of allowing 100 per cent FDI in defence. In a recent interview to business news channel CNBC-TV18, Gandhi said that while 100 per cent FDI will increase foreign participation, no foreign company would be doing it without an Indian partner with local knowledge and local infrastructure.

Industry bodies such as the CII and Assocham are trying to build a consensus on the isues which has sharply divided the industry. Assocham has suggested 49 per cent through the automatic route, 74 per cent on Transfer of Production and 100 per cent on global relocation of facilities for TOT in critical niche areas.

“As witnessed in the auto industry a surge in manufacturing in Defence sector will also lead to the creation of an ecosystem consisting of local suppliers, vendors, etc. thus, creating more employment locally,” Assocham said.

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