Defence FDI: Composite cap may prove a stumbling block

Defence FDI: Composite cap may prove a stumbling block

In 2012, opposition parties including BJP had asked for a vote on the government’s policy of 51 per cent FDI in multi-brand retail sector.

The proposal to raise the foreign direct investment (FDI) cap in the defence sector is likely to face stiff opposition from the Congress. The party is unlikely to support the “composite cap” of 49 per cent for the defence sector, as announced in the Budget FY15.

“In (the) defence (sector), they have accepted our recommendations of ownership and control … But we don’t agree with the composite cap. You can’t have foreign institutional investors when you talk about FDI,” Anand Sharma, deputy leader of the Congress in the Rajya Sabha, told The Indian Express. He said that his party is against “hot money in sectors when you need tangible investments for development”.

The stance of the Congress on the issue means that more fireworks between the Opposition and the government are in the offing. As such, the Opposition parties, including the Congress, have refused to relent in their demand of sending the Insurance Bill, which proposes to hike the FDI cap from 26 per cent to 49 per cent, to a select committee owing to “substantial changes”.

Sharma had earlier said that his party wanted clarity on the implication of the proposed Bill, among other things, on the settled definition of FDI given the composite nature of 49 per cent FDI proposed in insurance sector. The composite cap includes both the FDI and foreign institutional investors (FII) or portfolio investment.


Although, the proposal for raising the cap in the defence sector from 26 per cent to 49 per cent is not likely to come to Parliament, as it is a “policy amendment”, the Congress may urge the NDA-led government to discuss it.

Earlier, in 2012, Opposition parties including the BJP had asked for a vote on the government’s policy of allowing 51 per cent FDI in the multi-brand retail sector. While the votes were non-binding, the UPA-II had won by a margin of 14. However, the government has the right to change the FDI policy through executive decision.

In the Budget, finance minister Arun Jaitley had said, “The policy of the NDA government is to promote FDI selectively in sectors where it helps the larger interest of the Indian economy… Currently we permit 26 per cent FDI in defence manufacturing. The composite cap of foreign exchange is being raised to 49 per cent with full Indian management and control through the FIPB route.”

Currently, up to 26 per cent FDI is allowed through the approval route in the defence sector. The FDI can go beyond 26 per cent on case-by-case basis after the approval of cabinet committee on security, where ever it is likely to result in access to modern and state-of-the-art-technology.