In a bid to encourage foreign firms to transfer state-of-the-art technology in defence production, the government may increase the FDI cap for the sector to 74% from 49% at present.
Several opposition parties and even some affiliates of the ruling BJP, such as the Swadeshi Jagran Manch, are opposed to opening defence to foreign investment. “Keeping the FDI cap at 49% was a political call,” the official said.
“The next big sector for foreign investments is defence. To attract serious players, the government has to ease the policy. Once the political climate cools down we will move a cabinet note to increase the cap to 74%,” a senior government official said on the condition of anonymity. This may take up to two years.
India is expected to spend $40 billion (Rs 2.4 lakh crore) on defence purchases over the next 4-5 years, mostly from abroad. India imports 75% of its defence equipment, making it the world’s largest arms importer.
Indian companies such as the Tata Group, Reliance Industries, Mahindra & Mahindra, Larsen & Toubro, Godrej Group and Bharat Forge have interests in the defence sector or are keen on entering it in a big way.
However, large western armaments companies are reluctant to transfer state-of-the-art technology without majority stakes in their Indian subsidiaries.
“Encouraging foreign defence manufacturers to establish bases in India will provide a platform for transfer of high-end technology and also catalyse domestic manufacturing,” the official said.
Currently, any foreign investment in defence exceeding 49% has to be cleared by the Cabinet Committee on Security.
“This sector definitely attracts a lot of investor interest but that does not translate into actual investments because foreign arms companies are not allowed to hold a majority stake. So, there is a need to further liberalise the cap,” said Akash Gupt, partner, regulatory services at PWC.
During the UPA regime, then commerce minister Anand Sharma had pitched for raising the limit in defence to 74%.
“Globally, the defence sector has been the harbinger of new technologies and ...job creation. The US and the EU allow 100% FDI in defence manufacturing. India needs to do the same,” the official quoted earlier said.