The modernisation glut that has hit the armed forces over the past two years is likely to continue with only a nominal hike in the defence budget even as stocks of key defence companies have taken a substantial hit over the decision by the government to cap FDI to 49 percent, raising fears that substantive investments will not come through due to the control restriction.
Finance minister Arun Jaitley, who holds dual charge of Defence, announced in his budget speech an increase of Rs 5,000 crore from the interim budget of the UPA government, taking it up to Rs 2.29 crore lakh crore. While this increase is in the capital section, it will have no impact on various procurements lined up by the three services as most of the extra funds are earmarked for research and development.
While Rs 1,000 crore extra has been allocated for construction of strategic railway lines to the North and the Northeast that have long been demanded by the Army, the bulk of the increase of Rs 4,000 crore is for research and development and would go mainly to the Defence Research and Development Organisation (DRDO).
The decision to increase the FDI cap to 49 per cent from the current limit of 26 per cent has also had a lukewarm response with the stocks of Indian companies falling by as much as six per cent. Although corporate associations have welcomed the increase, most foreign investors and companies are disappointed as they expected an increase to 51 per cent to bring in substantive investments. Jaitley said the increase will still allow “full Indian management and control through the FIPB route”.
The contention of foreign investors, however, is that an increase to 49 per cent is a very limited step and would not encourage foreign investments or a significant transfer of technology as control of the company would remain in the hands of the Indian partner, raising issues of quality control and branding. “Ultimately, this does not make any material change and may not be enough incentive for foreign firms to bring in investments and proprietary technology,” said Dhiraj Mathur, Leader Aerospace & Defence, PwC India.