November 9, 2015

Government likely to simplify eligibility norms for FDI in defence sector

India is looking to simplify eligibility for foreign defence equipment manufacturers to invest up to 100% in Indian ventures as part of the big-ticket reform package to be rolled out before the winter session of Parliament.  At present, India allows up to 49% foreign direct investment in the defence sector and up to 100% FDI is allowed in projects involving state of the art technology, to be approved by the Cabinet Committee on Security on a case to case basis.
The government has begun discussions to bring clarity on what 'state of the art' implies so as to expand the basket of products to become eligible for higher foreign investment and reduce the country's reliance on imports, a top government official said. "We are looking at simplifying the overall framework," the official told ET. "A number of sectoral conditions do not mean much and create unnecessary deterrent." Another government official said that there are a host of conditions specified in the FDI policy that even cover appointment of chief security officer. The government plans to streamline and simplify these conditions, particularly for dual use products. The proposal is expected to be finalised shortly, the second official said The Narendra Modi-led government considers defence production as one of the focus areas to ramp up the country's manufacturing sector, which is slowly moving back towards recovery. "Today our nation imports defence equipment in large quantity,"
Modi had said at an event on Thursday. "Is it not possible that our institutions concentrate in the area of defence and research and prepare a human resource development pool which will help in making equipment cheaper to the extent that outside importers use this talent for manufacturing? India can be a global market if we do it," he had said. There is growing interest among foreign players in the sector and the government is keen to ensure that this interest is translated into investments. The defence ministry is separately working on simplified defence procurement procedure, expected to be unveiled this month in tandem with the overhaul of the FDI policy, officials said. India's capital acquisition budget up to 2024 is upwards of $160 billion, or about .`10,50,000 crore, according to industry estimates. This, along with offsets investment, is expected to draw foreign players and foreign capital, and also make existing domestic players ramp up their capacity.Experts say big ticket procurement could spur investments in the sector. "There is reasonable certainty of continuing demand," said Kumar Kandaswami, senior director, Deloitte in India. "While all manufacturers will be willing to take on the commercial and business risks, they would want to see action in terms of the big ticket procurements happening for them to commit significant investments," he said.
The government is pursuing a sensible policy. Over 60% of India's defence procurement is done through costly imports. China, on the other hand, has become a net exporter, with the expertise to develop indigenous systems. Allowing foreign manufacturers 100% stake, or even majority ownership in joint ventures, makes sense, and will bring in more FDI. However, the government should ensure that foreign manufacturers hand over codes and passwords for all sophisticated weapons that use critical,  advanced digital technology.


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