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Make in India: Talks on easing defence FDI on to generate employment

Business Standard:  July 24, 2017

New Delhi: The government is in discussions with stakeholders on further liberalising the country’s foreign direct investment (FDI) in defence in order to give a fillip to Make In India and generate employment.

Talks are on among government departments, the NITI Aayog, and other stakeholders on various items such as whether it should increase the cap under the FDI automatic route from 49 per cent to 51 per cent in a broad sweep of products except for some like small arms and ammunition.

Currently, under the FDI policy, the government has opened up most products on the automatic route but has kept a cap of 49 per cent. However, it has permitted up to 100 per cent only after its approval.

Talks are also on whether FDI on the automatic route with a cap of 76 per cent should be allowed in areas where investments in a product can have a knock-on effect on the civilian sector, such as making aircraft or helicopters. So, for example, making fighter aircraft in India will give an impetus to manufacturing civilian aircraft also. So is the case with helicopters.

Also, the same cap could be kept for sunrise cutting-edge technologies to encourage companies that own them to bring them to India without any fear of losing their intellectual property.

It is also being discussed whether certain products in which India has no manufacturing capability, or which are not lethal, should be allowed an FDI limit of 100 per cent on the automatic route. These include hovercraft, seaplanes, and aero engines.

The new move comes at a time when the NITI Aayog has stipulated a target of bringing in FDI in defence worth $5 billion by 2020.

In their discussion with the government, foreign companies have pointed out that without a majority stake they are concerned about protecting their intellectual property rights (IPRs) or the business, and are wary of investing. That is reflected in the fact that not much FDI has come into the sector. They say that India has undertaken a similar exercise in other strategic areas like telecom in which the cap went up gradually from 49 per cent to 100 per cent and it has worked well.

However, stakeholders in India say that the problem is not of FDI caps but the fact that defence orders are taking a long time to come, discouraging international players. Also, many say that foreign firms with a majority stake would discourage Indian private sector defence companies, which include top corporate houses, to grow in the areas concerned because they will then become dependent on their foreign partners. The government is also looking at suggestions on how to push defence exports. The suggestions include giving aerospace and defence infrastructure status and setting up a Defence Export Promotion Council.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.