FDI relaxation in defence need of hour; allow at least 51%: Experts

India imports defence equipment worth over USD 8 billion annually

The government should raise the FDI cap in the defence sector to at least 51% in order to make the segment more attractive to foreign investors and reduce import dependence, experts have said.

"The government should open the defence sector for foreign players. It is the need of the hour. Keeping in mind the investment needs of the sector, the FDI cap should be increased to 51% and above. The government should also keep in mind the security-related issues," Krishan Malhotra, Head of Tax, Amarchand & Mangaldas, said.

Malhotra, who is an expert on FDI, said raising the FDI cap would help the country to drastically reduce high defence import bill and boost manufacturing in the sector.

Former Ficci President R V Kanoria said: "India should open the sector for foreign players. I do not see any reason why we do not manufacture defence equipment in India."

He said that in cases where a foreign player would bring state-of-the-art technology, the government should permit 100% FDI in defence manufacturing.

Renowned economist Rajiv Kumar said that the government should hike the FDI cap to 74%.

"FDI cap below 51% will not serve any interest of the policy. Government should in fact raise it to 74%. It will help in manufacturing indigenous defence equipment in the country," he said.

India imports defence equipment worth over $ 8 billion annually. It is one of the largest defence importers in the world with only a minuscule component of exports.

The Department of Industrial Policy and Promotion has circulated a draft Cabinet note to relax foreign investment policy in defence sector. They have proposed up to 100% FDI in case of state-of-the-art technology and 74% (FDI + FII) in case of technology transfer.

Raising FDI cap at least to 51% in defence would be a game changer for the country, government officials said.

"India can be a game-changer only by allowing at least 51% FDI in the sector. With access to critical technology, the domestic companies will be able to manufacture products indigenously and make India a global defence manufacturing and export hub," an official said.

Figures clearly reflect that India has not received any investment when the cap was 49%. Between 2001 and August 2013, 49% foreign investment (26% FDI + 23% FII) was allowed. During this time, India has attracted only USD 5 million investments, which is lowest in any sector.

As economies in the West are not growing at a healthy rate, multi-national companies want to expand their manufacturing base in Asia and India can become a major centre for that, said an industry player.

"India can become a manufacturing centre for global defence companies and they can also export from here. It would lead to creation of jobs," he added.