Making a strong pitch for further liberalisation of the foreign direct investment (FDI) policy, Commerce and Industry Minister Anand Sharma has proposed raising the limit in the defence sector from 26 to 74 per cent.
In a letter to Prime Minister Manmohan Singh, Mr. Sharma said the government could retain the right to impose internal security conditions, including surveillance systems or controlling the production or despatch for these facilities and deployment of defence personnel. For all such cases, Secretary, Defence Production, could be co-opted as a member of the Foreign Investment Promotion Board (FIPB). The Ministry of External Affairs could prepare a negative list of countries from time to time to which exports of Indian defence equipment would not be allowed.
The current limit of 26 per cent was not enough for transfer of state-of-the-art proprietary technologies. “The fact that in the last decade we have received only $4.12 million of FDI inflow in defence manufacturing is a clear testimony of this fact,” Mr. Sharma stated.
Currently, the domestic industry was allowed to fully participate in defence manufacture, but very limited orders were placed on them. “Understandably, in the absence of their being able to source high-end technologies, it is unrealistic to expect them to make state-of-the-art equipment. Encouraging foreign defence manufacturers to establish manufacturing bases in India will provide a platform for transfer of high-end technology and will also catalyse the growth of domestic manufacturing,” he noted.
The Minister said that during his interactions with leading defence manufacturers and during the recent state visits of the British Prime Minister and the French President they expressed strong desire to invest in defence manufacturing in India. “Globally, the defence sector has been the harbinger of new technologies and has contributed significantly to job creation. The U.S. and the EU allow 100 per cent FDI in defence manufacturing with security issues being addressed through verification and clearance procedures.”
“While increasing the current cap, we could incorporate conditions for minimum value addition to be decided by the FIPB and for those sectors where adequate capacities exist in defence PSUs, the FIPB could well take a view to disallow foreign investment. In case there is reluctance to enhance the cap to 74 per cent, a calibrated approach could be adopted and in the first instance, FDI up to 49 per cent could be allowed,” he suggested.