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Govt set to tap FIIs for more foreign investment in defence

The finance ministry is understood to have also made a lengthy presentation to the defence ministry on the proposal to alleviate concerns.

New Delhi |
February 6, 2014 3:20:18 am

In a last-ditch attempt at reforms before the General Elections, the government is considering a plan to increase foreign direct investment (FDI) limit in the defence sector to 49 per cent but with the provision that this would include an internal cap of 23 per cent for foreign institutional investors (FIIs).

“The current cap of 26 per cent on FDI will remain, but we will allow up to 23 per cent investments by FIIs also, taking the overall sectoral cap for FDI to 49 per cent,” said a senior government official, adding that this would also take care of concerns over foreign investment in the strategic sector. The finance ministry is understood to have also made a lengthy presentation to the defence ministry on the proposal to alleviate concerns.

Current regulations remain conservative on foreign investment in the defence sector due to concerns flagged by defence minister AK Antony over its strategic importance and need to promote indigenous manufacturers. Under current regulations, up to 26 per cent Foreign Direct Investment is permitted in the sector after approval from the Foreign Investment Promotion Board (FIPB).

The government, however, liberalised investment norms in the sector in August last year to allow foreign investment over the limit on a case-to-case basis after being vetted by the Cabinet Committee on Security. “Enhancing foreign investment in the sector will make it more secure rather than importing arms that are produced abroad. Also FIIs are short-term investors, who are interested in making profits. It is unlikely that they would compromise the security of our production facilities,” argued the official.

The finance ministry is also of the view that higher foreign direct investment in the defence sector would improve domestic production of defence equipment, in turn curbing imports and reining in the current account deficit. India is the world’s largest importer of weapons, and imports nearly 70 per cent of its defence equipment. According to figures from the Budget FY14 documents, India’s capital expenditure on defence services was increased to Rs 86,741 crore from Rs 69,579 crore in 2012-13. Most domestic defence companies as well as senior leaders in the in the principal opposition — Bharatiya Janata Party have also supported enhancing the foreign direct investment cap in  the sector.

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