Defence, insurance, construction get major FDI boost

The government is looking at defence production as a key player in its strategy to revive manufacturing.

By: ENS Economic Bureau | New Delhi | Published: July 11, 2014 1:39 am

The government has relaxed the foreign direct investment (FDI) norms in the defence, insurance and construction sector, to boost manufacturing and spur growth.

Raising the FDI cap in both the defence and insurance sector from 26 per cent to 49 per cent, finance minister Arun Jaitley said, “The composite cap of foreign exchange is being raised to 49 per cent with full Indian management and control through the FIPB route”.

Jaitley, who also holds the defence portfolio, said that currently India is the largest buyer of defence equipment in the world and companies controlled by foreign governments and foreign private sectors “are supplying our defence requirements to us at a considerable outflow of foreign exchange”. ]

The development will help the country in achieving self-reliance in defence production while also enabling export of defence equipment. Experts said that though the step was in the right direction, it was limited in nature.

“This will be viewed by most foreign original equipment manufacturers and some Indian companies as a very limited step and for a real change, this limit should have been enhanced to 51 per cent,” said Ganesh Raj, national leader of policy advisory, EY.

Nidhi Goyal, director, Deloitte India, said that the recent relaxation in industrial licensing by the commerce ministry will also help the indigenous defence industry to move towards self-reliance.

On the insurance sector, while increasing the cap, the minister said that investment-starved sector needs expansion. Rajesh Sud, CEO and managing director, Max Life Insurance, said that apart from bringing in the much-required long-term capital, it will also bring in domain capital critical for growth of life insurance industry.

“The Insurance Bill, which has been pending from 2008, if passed during the current year could bring in more reforms and aid in increasing the performance and penetration levels. The general insurance sector would require capital of Rs 7,500-Rs 17,500 crore over the next five year,” Karthik Srinivasan, senior vice-president, co-head, financial sector ratings, ICRA, said.

Both these proposals had been lying pending with the UPA for several years following stiff opposition from both its allies and the Opposition. In fact, former defence minister AK Antony had also stonewalled the attempts of the UPA-II to open the defence sector raising security concerns.

Further, in line with the BJP manifesto to build smart cities, Jaitley also relaxed FDI norms in the construction sector by reducing the built-up area requirement and capital conditions from 50,000 square metres to 20,000 square metres and from $10 million to $5 million respectively. The move will pump investment in the cash-starved sector and boost affordable housing.

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