In a potential policy shift of enormous significance, the Manmohan Singh-led government is considering a proposal to open up the defence manufacturing sector for 100 per cent Foreign Direct Investment (FDI) by allowing big global players to set up production facilities in the country.

According to a note circulated within the Commerce Ministry and sent on to the Cabinet Secretariat for discussion, “established players” in the armament industry should be encouraged to set up their manufacturing facilities and integration of systems in the country by permitting 100 per cent equity through the FDI route.

“There need not be any commitment on procurement and these enterprises would have to participate in the RFP [request for proposal] to technologically qualify and also succeed in financial bidding. In case of such firms, we should permit 100 per cent FDI under the FIPB/CCEA approval route,'' the proposal says.

With the stated intent of cutting down the role of “touts and middlemen'' in weapons deals, the note says: “For future RPFs by the Ministry of Defence, the country could impose a condition that the successful bidder would have to set up the system integration in India with a minimum percentage of value addition. The successful bidder should be allowed to bring equity fully through the FDI route without any restriction.''

Taking note of concern over availability or reliability of supply during war, the note says that conditions could be imposed that the Government of India has the right to expropriate a manufacturing facility in case of need for reasons of national security by paying suitable compensation.

“There can be concerns about passing of the equipment, designs or source code to enemy countries. Such a possibility exists even in the case of imported equipment. In fact, in the case of indigenous equipment, we can control the production mechanism in a much better manner. The government could also reserve the right to inspect or control the production and dispatches in these facilities through deployment of necessary security agencies. Export to enemy countries could be banned through a negative list,'' it states.

Technology transfer

Referring to the advantages of easing the FDI cap, the note says this would provide significant incentive for transfer of knowhow or technology, leading to higher levels of technological expertise. In fact, there is bound to be spinoffs in terms of absorption of technology in other areas of civilian use. Worldwide, military technology is considered as a source of mother technology.

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