MHA against raising FDI in defence

The ministry of home affairs (MHA) is believed to have raised strong objections on the draft Cabinet note, floated by the department of industrial policy and promotion (DIPP), for allowing 100 per cent foreign direct investment (FDI) in the defence sector.

In its response to the DIPP proposal, MHA stated it was too early to take such a drastic step, which will not be prudent, a top official involved in the matter told Business Standard, on the condition of anonymity.

The official said though the government’s immediate aim was to boost economic growth and generate jobs by reviving the sluggish manufacturing sector, it would not put the country’s security at stake.

Moreover, MHA believes the present arrangement should be continued for at least six months to a year, after which a call has to be taken on the matter.

At present, 26 per cent is allowed in the defence sector through approval route. However, proposals entailing higher FDI, including 100 per cent, can be allowed on a case-to-case basis by the Cabinet Committee on Security (CCS). This was decided in July last year during a high-level panel under former Prime Minister Manmohan Singh.  

In the draft Cabinet note, DIPP had stated allowing FDI in defence would help shrinking the country’s burgeoning import Bill. Besides, it will boost domestic manufacturing.

The note circulated on Thursday, stipulates that portfolio investors, including foreign institutional investors (FIIs), would be permitted to invest only up to 49 per cent. The note said a foreign company could also go for expansion investments, meaning acquiring existing companies if it brings state-of-the-art technology.

The issue first came to the fore in 2010 when DIPP had rolled out a discussion paper suggesting increase in FDI cap for the defence sector. India is one of the largest defence importers in the world with a minuscule component of exports. Indian conglomerates such as Tata Group, Larsen and Toubro, Bharat Forge, Mahindra and Punj Lloyd, have all been demanding opening up of the sector.  At present, only three Indian companies – Hindustan Aeronautic Limited, Ordnance Factory Board and Bharat Electronics Limited – make it to the list of top 100 defence companies in the world accounting for 1.1 per cent share of the global industry.