MOD Turns Down Hike in FDI Limit

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The Indian Ministry of Defence and the Indian Ministry of Commerce are at loggerheads regarding the limit of foreign direct investment (FDI) in the defence sector of India. As per the new Consolidated Foreign Direct Investment (FDI) Policy, which applies from April, the FDI in defence units has been capped to 26 per cent.

The Indian Ministry of Defence has clearly indicated the detrimental aspects of raising the FDI cap in defence and has negated the possibility of raising that cap, which the Commerce Ministry advocates. The Indian Defence Ministry had earlier rejected pleas to allow the setting up of joint venture companies with 49 per cent FDI. As for the Indian Commerce Ministry, it will need consultation and approval from the Defence Ministry to make amendments to the policy.

The DIPP, part of the Commerce Ministry, suggests that raising the FDI cap will pave the way for greater technology from international majors and the much-needed investments in the defence sector. The DIPP has written to the Defence Ministry asking them to raise the FDI cap. However, the Indian Defence Ministry feels that it will stifle the burgeoning defence public sector undertakings (DPSUs).

The Indian Defence Ministry has earlier rejected to pleas of private sector players to set-up joint venture companies with 49 per cent FDI. Even the private sector players support the raising of FDI caps in order to allow a larger share to foreign companies. This will allow the private players to gain from sensitive borrowed technology and also cut capital costs in setting up new manufacturing units.

Besides the fact that unhappy private Indian firms and international players want the FDI cap raised, even the Indian government’s Economic Survey for 2008-09 has suggested the possibility of raising this to 49 per cent.

Earlier this year, the Defence Expenditure Review Committee (DERC) of India made recommendations for the Defence Sector, which included an increase in the foreign direct investment (FDI) limit in the defence sector to 49 per cent.

However, the Indian Defence Ministry remains adamant on its stand concerning the 26 per cent FDI limit despite criticism. At the end of 2009, when the Indian Finance Ministry was initiating a new methodology to calculate the foreign investment in national firms, the Indian Defence Ministry made sure that the new norms did not create an imbalance and lead to foreign companies exceeding the 26 per cent cap.

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