The central government made the entry of foreign direct investment (FDI) into the defence sector easier by removing on Monday a so-called restrictive clause in the policy, a move dubbed as radical liberalisation.
Sources said the changes are expected to bring FDI to non-critical sectors such as small arms, clothing and accessories for military personnel.
“(The) present FDI regime permits 49% FDI participation in the equity of a company under automatic route. FDI above 49% is permitted through Government approval on case-to-case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country…” the prime minister’s office said.
“The condition of access to state-of-art technology has been done away with.”
The state-of-the-art clause was seen as restrictive, and even unrealistic, that kept away FDI from the sector.
Instead of imposing this condition, the new policy calls for “modern technology”, an official in the defence ministry said.
The FDI limit in the defence sector has been made applicable to manufacturing of small arms and ammunition under the arms act of 1959, the PMO said in a statement.
Former director general of acquisition, Vivek Rae, who heads the defence ministry’s expert committee on streamlining military purchases, said 100% FDI in the sector on a case-by-case basis has been in place since 2013.
But the sector did not attract investment because the policy was “highly discretionary”.
“The government is still being too cautious. They could have announced 51% FDI through the open route,” Rae said.
Countries that allow 100% FDI in defence impose harsh restrictions on foreign players, disallowing exports or transfer of technology to other countries through security agreements, he said.
“The idea is not to restrict investment but impose restrictions for security concerns.”
The opposition Congress criticised the government’s decision, saying tweaking the FDI regime in the military sector could raise security threats.
“The move poses a big threat to national security and India’s independent foreign policy,” former defence minister AK Antony said.
The opposition party said the decision, close on the heels of Prime Minister Narendra Modi’s visit to the US, throws the sector into the hands of global defence manufacturers.