The government is considering a proposal to allow 100 per cent foreign direct investment (FDI) into the country’s defence sector, despite stiff opposition from the defence ministry that has raised security concerns.

India, among the world's top 10 spenders on defence, currently allows only 26 per cent FDI in the sector.

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The move to open the doors fully to FDI in defence is aimed at giving a fillip to the domestic manufacturing sector.

“There is a strong case for opening up the defence sector to 100 per cent FDI and this should be done as early as possible,” a senior government official told Business Standard on condition of anonymity. “This could be done either directly or in a gradual manner by first lifting the cap to 49 per cent, addressing the security concerns and sensitive issues. Defence involves a lot of proprietary technology, but if it (raising the cap) does not serve the purpose in terms of transfer of technology and capital investments, then we would like to completely open up the sector.”

The proposal is currently being circulated to all the departments in the ministries of defence, home affairs and finance for their inputs to be converted into a policy.

DIPP has argued that the move has the potential to turn India into a manufacturing hub for defence equipment. The department has already held formal discussions with the defence ministry.

While the Parliamentary Standing Committee on defence has proposed raising the cap from 26 to 49 per cent, DIPP has made a case for 100 per cent FDI in the sector.

In its discussion paper, DIPP has argued that since arms and equipment manufacturing mostly involves assembling, a lot of activities concerning systems integration would take place in India engaging Indian engineers, which would eventually  lead to transfer of technical know-how.

DIPP has also explained how foreign firms would set up vendors in India, which would compel them to source increasingly from the country. “Once they start outsourcing from India, technological penetration would automatically take place,” the official added.

DIPP has also met representatives from the business chambers for their views and held a series of meetings with Indian companies such as Tata, Larsen & Toubro, Bharat Forge and Punj Lloyd, who have all demanded opening up of the sector as soon as possible.

“These Indian companies will also benefit from the opening up of the sector since there would be outsourcing opportunities for them,” said the official.

Presently, only three Indian companies — Hindustan Aeronautics Ltd, Ordnance Factory Board and Bharat Electronics Ltd  — make it to the list of the top 100 defence companies in the world accounting for 1.1 per cent share of the global industry.

“India is already a huge market for defence equipment and opening it up would mean the creation of an entire industry all together, mainly in terms of creation of an ancillary industry, engineering services outsourcing and research and development,” said Richard Rekhy, head of defence advisory services, KPMG.

The government is the sole purchaser of defence equipment, spending around 15 per cent of its total expenditure on the sector, according to KPMG-CII. The defence outlay for the current financial year is estimated at Rs 1,47,344 crore, an 8 per cent increase over the revised estimates of 2009-10.

“Several global players are waiting to enter the (Indian) market, which is full of potential and if we do not open up quickly they might go to some other country,” said Rekhy.

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