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Defence FDI through automatic route may be hiked to 74%



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Jul 18, 2014
New Delhi: India plans to widen its doors to foreign funds in the defence sector to boost local production of armaments and cut down on imports. The department for promotion of industry and internal trade (DPIIT) and the defence ministry are in talks to ease many conditions to encourage foreign investors to set up shop here. It may also restructure the offset and export policies. “Discussions are on over further liberalisation,” a government official, privy to the deliberations, confirmed to ET.

The country allows up to 49% foreign direct investment (FDI) in defence in the automatic route and it needs government approval to go beyond the cap. This round of liberalisation is expected to raise the limit for automatic clearance to 74% along with relaxation in other conditions. “We are examining what we can offer. What kind of relaxation can be taken up,” the official said.

India was the largest importer of arms from 2012 to 2016, showed data released by Stockholm International Peace Research Institute (SIPRI) last year.

In the defence sector, any foreign investor proposing to set up a manufacturing base here requires a licence and a procurement order from the government. Clearance for the licence is needed from both the defence ministry and DPIIT. This makes duplication of work and experts believe it can be subsumed into one. “For the ease of doing business, the FDI approval process can also be subsumed in the licensing process. Another layer for a separate FDI approval process can be done away with,” said Akash Gupt, partner at PwC.

With regard to the offset policy, changes such as allowing a group company’s offsets also as part of the company placing the order could be considered. Under the defence offset policy, the foreign supplier has to source or purchase at least 30% the contract value locally.

The government may also ease the export policy for foreign defence manufacturers looking to set up base here. Some conditions specified in the licence may be relaxed like allowing exports to other countries, barring enemy nations.

The Narendra Modi-led NDA government has undertaken several relaxations in the FDI norms. In last one on August 28, allowing automatic approvals for 100% FDI in mining and sale of coal among other relaxations. Barring some sensitive sectors or select ones such as real estate, cigarettes and lotteries, the FDI policy has been liberalised substantially.


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