June 27, 2014

Boost for Defence as licensed items list reduced by 60%

The government has spelt out the industrial licensing policy for defence production, listing items that will require permission to manufacture in a measure that industry and officials say would help encourage new players in the sector and boost investment.

Anything not mentioned on the list can be manufactured by the industry without a licence from the government.

The government has reduced the items requiring industrial licences by about 60%. "All products like castings, assemblies, etc. have been removed," an official at the department of industrial policy & promotion (DIPP) said.

"It is a breakthrough in giving thrust to manufacturing in the economy." This clarification will open many defence goods not covered by industrial licensing to foreign direct investment (FDI).

FDI in defence is currently capped at 26%, but according to experts, many of the goods previously classified as defence-related may now be considered under sectors where the limits for foreign money are as high as 100%.

Items that are not included on the list would not require industrial licence for defence purposes, the commerce and industry ministry said in a notification. "Further, it is clarified that dualuse items, having military as well as civilian applications other than those specially mentioned on the list, would also not require industrial licence from (a) defence angle."

Earlier, there were several lists doing the rounds with a lot of items classified as dual use, which created confusion and licensing constraints. Four broad categories of defence equipment will continue to require industrial licence: arms and ammunitions; defence aircraft and space aircraft; tanks and other armoured fighting vehicles; and warship equipment.

Industry sees this as a step towards self-sufficiency in defence production. "We are happy to see that the ministry of defence has pruned the list and kept it to the bare minimum," said Baba N Kalyani, chairman of the committee on defence at the Confederation of Indian Industry.

Early this month, the government took its first step towards allowing up to 100% FDI in the defence sector. In a draft Cabinet note, DIPP proposed three different FDI caps to promote technology transfer and inflow of foreign funds in defence manufacturing FDI will be limited to 49% when there is no technology transfer involved while up to 74% foreign money will be allowed when the investor is also bringing in technology, and no FDI limit will apply when the technology transferred is state of the art.

Current policy allows FDI up to 26% in the sector, but higher limits can be allowed on a case-bycase basis. A higher FDI limit is seen by many as a step towards encouraging domestic production of largely imported defence supplies.

"The Indian defence industry is already at the bottom of the value chain and there is very less incentive for anyone to set up a defence industry in India for various reasons," Kalyani said. It is important to maintain a fair balance between addressing genuine security concerns and promoting India's defence industry, said Kalyani.

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