FDI in defence still in limbo

There has been no progress in the government’s efforts to open up the defence sector for more foreign direct investment (FDI), while a number of deliberations have been taking place on the issue for the last one and a half years.

“There has been a number of brainstorming sessions on the issue of opening up the defence sector. Defence is a strategic subject. However, there has been no formal proposal which has been moved,” Commerce and Industry Minister Anand Sharma told Business Standard on the sidelines of the India-Africa Summit before leaving for the OECD ministerial in Paris.

At present, a maximum of 26 per cent is allowed in the defence sector. The Department of Industrial Policy and Promotion (Dipp), under the Ministry of Commerce and Industry, had proposed a 100 per cent FDI cap in order to enable global defence entities to set up manufacturing units in the country. However, the proposal had faced severe resistance from the Ministry of Defence (MoD). According to senior officials in the Ministry of Commerce and Industry, the Ministry of Defence is against raising the limit to 100 per cent or even 74 per cent. However, it had supported the idea to increase the cap to 49 per cent.

But there had been no movement since then even though Dipp had been pushing for it. In the discussion paper floated by the department early last year, the government had argued that under the present norms, trade in illegal arms is flourishing unabated. Even as MoD is opposed to opening up the sector due to security reasons, Dipp has argued that the move would result in making India a manufacturing hub for defence equipment. The department has already had formal discussions with MoD but a series of meetings on raising the cap would be discussed gradually.

Dipp has also met representatives from the business chambers for their views and had a series of meeting with Tata, Larsen and Toubro, Bharat Forge, Mahindra and Punj Lloyd. All of them have demanded for opening up the sector as soon as possible.

At present, only three Indian companies — Hindustan Aeronautic Ltd, Ordnance Factory Board and Bharat Electronics Ltd — make it to the list of top 100 defence companies in the world accounting for 1.1 per cent share of the global industry. The government is the sole purchaser of defence equipment spending around 15 per cent of the central government expenditure.

Defence budget for 2009-10 increased 34.19 per cent compared to the previous year’s budget estimate of Rs 1,05,600 crore, while defence spending grew Rs 1,42,000 crore in 2009-10 from Rs 161 crore in 1950-51, making India one of the top 10 spenders, according to a India Defence Report by KPMG-CII.