Budget 2014: Finance Minister Arun Jaitley raises FDI in Defence from 26% to 49%

MUMBAI/NEW DELHI: The Narendra Modi government has bitten the bullet on a long-stalled proposal to allow greater foreign investments in the defence sector as it aims to boost domestic manufacturing and create jobs while cutting India’s dependence on import of military equipment.

“India today is the largest buyer of defence equipment in the world… Companies controlled by foreign governments and foreign private sector are supplying our defence requirements to us at a considerable outflow of foreign exchange,” Finance Minister Arun Jaitley said in his maiden Budget speech, raising the composite cap for foreign direct investment in defence manufacturing from 26% to 49%.

“The composite cap of foreign exchange is being raised to 49% with full Indian management and control through the Foreign Investment Promotion Board route,” Jaitley said, pointing out that the country’s manufacturing capacities are ‘still at a nascent stage’ forcing it to buy a substantial part of its defence requirements directly from foreign players.

The government’s decision is in line with the promises made by the BJP during its election campaign to scale up India’s domestic defence industrial manufacturing base and is also aimed at curbing the current account deficit.

India Inc as well as global industry bodies lauded the move though the jury is still out on the scope of technology transfer required under the new regime and whether foreign players will bet on joint ventures with local firms without management control.

“The decision to lift the FDI cap in defence from 26% to 49% is a welcome incremental step forward in bolstering India’s defence manufacturing capability while leveraging international industrial cooperation,” said Diane Farrell, acting president of the US India Business Council. She, however, sought greater clarity on the scope of technology transfer required to cross the 49% threshold, so as to achieve maximum potential investment in this important sector.

“We are happy that the permissible composite foreign investment cap for joint ventures in defence has been increased to 49%. It is a progressive and pragmatic step in this strategically important sector and will serve as a booster for indigenous manufacturers,” said M V Kotwal, president ( Heavy Engineering) L&T.

Jaitley also revived a non-starter fund from the 2011 Budget to promote cutting-edge research in defence systems.