100 % FDI in Defence?

The government is planning to tweak the Foreign Direct Investment (FD) policy to allow 100% in the defence sector in an effort to attract foreign participation in the manufacturing of military transport aircraft, battle tanks and armoured vehicles.

The policy has been tweaked a couple of times, first by raising the FDI cap to 49 % in August 2014 and then to 100 % in June 2016 (subject to government’s approval beyond 49 %), as well as by making other changes in the FDI policy.
Since defence projects involve long gestation period and investment inflow takes time even after the projects are approved and contracts awarded, there is always a time lag before the impact of FDI is visible.

Recently, Minister of state for Defence Dr Subhash Bhamre in a written reply in Lok Sabha said “ In the year 2014-15, FDI of US$ 0.77 lakh and US$ 0.01 lakh has been received from France and Israel respectively. In the year 2015-16, FDI of US$ 0.95 lakh has been received from France. In the year 2016-17, FDI of US$ 0.01 lakh has been received from Israel. In the current year, till May 2017, no FDI inflow has been received.”

According to reports, Finance Minister Arun Jaitley had held a meeting with government officials in New Delhi, to review the current FDI policy. The cabinet has been looking to further liberalise the FDI regime to attract foreign investments in various sectors, including defence and retail.

The FDI policy is subject to industrial licence and such licences are granted by the Licensing Committee in the Department of Industrial Policy and Promotion (DIPP), which considers the security clearances by the Ministry of Home Affairs.

Presently, foreign investment up to 49% is permitted under the automatic route, and foreign investment beyond 49% and up to 100% is permitted through government approval. Though this will bring in access to modern technology for the forces, major foreign defence companies prefer to remain on the side-lines and are not interested in the real transfer of technology.

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