Indian Military

New Delhi — In a recent move by the Indian government which may set a precedent in terms of the Foreign Direct Investment (FDI) norms in defence, the cap of 26 per cent FDI has been relaxed for Russia. The recent decision has been seen as an upsetting move for private firms.

The recent joint venture between state-run Hindustan Aeronautics Limited (HAL) and the Russian firm Rosoboronexport is a 50:50 venture for a transport plane and  the project cost is estimated at Rs 2900 crore. The plane will be created for the Indian defence forces and will cater to the cargo airlines as well. The HAL-Rosoboronexport venture will develop a prototype within 51 months after starting work and make the plane in six years.

Although the current FDI cap in defence ventures stands at 26 per cent, the Indian government has made a provision to support 49 per cent FDI as a special case in the HAL-Rosoboronexport. It may be noted that India had decided to raise the 26 percent cap on FDI in the defence manufacturing sector to enable the co-development with Russia of the multi-role transport aircraft (MRTA) in 2008.

The Federation of Indian Chambers of Commerce and Industry (FICCI) has published a paper in response to the solicitation of views by the Department of Industrial Policy and Promotion (DIPP), arguing for conditional increase, if at all, in the limits to investment by foreign players in Indian defense industry beyond the current limit of 26 per cent, to 49 per cent. The DIPP, in its discussion paper, was considering hiking FDI limit up to 74 per cent, and even 100 per cent in some cases.

The Indian Ministry of Commerce allowed the participation of the private sector in the defense industry in May 2001, permitting 100 per cent equity with a maximum of 26 per cent of FDI, subject to licensing. Under the Defense Procurement Procedure (DPP) 2008, limit was raised to 49 per cent FDI on a case-by-case basis. But the Foreign Investment Promotion Board (FIPB) has not, so far, approved the formation of a venture with a 49 per cent FDI component.

FICCI sees little reason to permit FDI above 26 per cent, considering the existing FDI into the Indian defense sector, saying in a statement, “The 26% FDI cap in the defense sector has already attracted top overseas defense OEMs like BAe, EADS, Sikorsky, Lockheed Martin, Electtronica Defence Systems, etc to hugely invest in India’s defense sector.