Updated: September 10, 2020 8:30:57 am
The policy was approved by the Union Cabinet on Tuesday.
The new policy that raises the limit on foreign direct investment through automatic approval in the defense sector from 49% to 74% now has a “national security” clause as a condition. The policy was approved by the Union Cabinet on Tuesday. According to sources, the new condition has been proposed by the Ministry of Commerce and Industry.
“Foreign investment in the Defense Sector will be subject to scrutiny for reasons of National Security and the Government reserves the right to review any foreign investment in the Defense Sector that may affect national security,” says the new condition.
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Under existing policy, the defense industry can increase FDI up to 49 percent by the automatic route and, above that, “by the government route, wherever it is likely to lead to access to modern technology or for other reasons that must be registered. “
The national security clause is in addition to the four existing conditions specific to FDI in the defense manufacturing sector, including security authorization and some guidelines from the Ministry of Defense.
While no reason has been cited for the introduction of the national security clause, sources say it has been explicitly mentioned as defense is a sensitive sector.
The government has targeted the defense sector to act as the engine to boost manufacturing in the country, aiming to achieve a turnover of Rs 1.75 million lakh, including exports worth Rs 35 billion, by 2025. As of last year, the defense industry, along with the aerospace and shipbuilding industry, was estimated to be worth Rs 80,000 crore, of which the share of power supply units was almost the 80%, or Rs 63,000 crore.
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Through a more liberalized FDI policy, the government wants foreign OEMs to relocate their operations to India and also encourages private players to play a bigger role.
Prime Minister Narendra Modi recently said that the government was making efforts to boost defense production. Addressing an online seminar on “Aatmanirbhar Bharat in Defense Manufacturing,” Modi said, “Our commitment to self-reliance in defense production is not limited to talks or documents. The effort, in recent years, has been to break all the shackles associated with the defense sector. Our goal is to increase production in India, develop new technology in India, and maximize private sector expansion. “
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The increase of the FDI limit in the defense sector through the automatic route to 74% was announced by the Minister of Finance, Nirmala Sitharaman, in May. Sitharaman had mentioned it along with a host of other measures for the sector, including a negative import list and a dedicated budget for acquiring domestic industry capital.
A draft of the Defense Production and Export Promotion Policy released a month ago mentioned efforts to liberalize FDI in the sector, to attract companies to open manufacturing facilities, and to expand India’s presence in international supply chains.
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