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July 11, 2014

FDI in defence increased to 49%


India’s defence budget went up 12 per cent in 2014-15 over the previous year, to Rs 2,29,000 crore, and further opened the sector to foreign direct investment (FDI), though only to the extent of 49 per cent from the earlier 26 per cent.

In this, the Bharatiya Janata Party (BJP) showed itself to be a follower of the previous government, which had proposed a similar dilution of the FDI cap but had held it off at the last moment.

While this disappointed analysts, some awaited clarity in the fine print. “I think this is a positive step, though it may not be as much of a move forward as everyone was hoping,” said Rahul Gangal, principal, Roland Berger Strategy Consultants. “The treatment of the balance 51 per cent will be critical. The earlier policy at 26 per cent FDI required 51 per cent to be held by one resident Indian entity. It would be interesting to note what the change in that is, if any.”

The capital budget went up from Rs 89,588 crore in February’s interim allocation to Rs 94,588 crore. The revenue budget remains Rs 1,34,412 crore. And, Rs 1,000 crore was allocated for the roll-out of the one-rank-one-pension policy announced by the previous government.

The capital budgets of the army, navy and air force stayed at roughly the same levels allocated in February. The army will have Rs 20,665 crore for modernisation, the navy Rs 22,312 crore and the air force will have Rs 31,818 crore for new equipment. The contract for 126 Rafale medium fighter aircraft, for example, would require Rs 10-15,000 crore as the signing advance. It is unclear where the Indian Air Force would find that money.

There has been a massive increase in funding to the Defence Research & Development Organisation (DRDO). DRDO’s capital allocation of Rs 5,985 crore, provided in February’s interim Budget, has been increased by almost 60 per cent to Rs 9,298 crore — the largest jump in DRDO’s history
This takes R&D in the defence sector to Rs 15,283 crore, almost seven per cent of the Rs 2,29,000 crore defence budget. DRDO, which has been receiving about five per cent of the defence budget, has long pleaded for seven to eight per cent.


The capital allocation for the Ordnance Factory Board (OFB), which will be used for modernising the ministry’s network of 41 factories that manufacture arms, ammunition and equipment for the military, was doubled. The OFB’s allocation of Rs 530 crore has been raised to Rs  1,207 crore.

Jaitley’s focus on indigenisation was evident from his speech, in which he noted: “India today is the largest buyer of defence equipment in the world. Our domestic manufacturing capacities are still at a nascent stage… Companies controlled by foreign governments and foreign private sector are supplying our defence requirements to us at a considerable outflow of foreign exchange.”

Beside big raises for DRDO and OFB, another beneficiary is a new project for building a “defence rail network” in the border areas. This network, allocated Rs 1,000 crore, is meant to facilitate the quick move of heavy equipment from cantonments in the interior to border areas. Under this project, a number of meter gauge lines will be upgraded to broad gauge.

The tri-service “joint staff” headquarters is the other beneficiary of this Budget, with its allocation raised to Rs 1,029 crore from Rs 829 crore in February. Defence analysts are wondering whether this will be followed by appointment of a tri-service commander.


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