Govt adds ‘national security’ clause to defence FDI hike to 74%

The government has added a ‘national security’ clause as a condition to the new policy that raises the cap of foreign direct investment through automatic approval in the defence sector from 49% to 74%. The Union Cabinet cleared the policy on Tuesday, reported The Indian Express.

The report said the Ministry of Commerce and Industry had proposed the condition.

“Foreign investment in the defence sector shall be subject to scrutiny on ground of National Security and the government reserves the right to review any foreign investment in the defence sector that may affect national security,” the paper quoted the new condition.

The existing policy stipulates that the defence industry can bring FDI up to 49% under the automatic route, and above it “under government route, wherever it is likely to result in access to modern technology or for other reasons to be recorded”.

The government wants the defence sector to ramp up indigenous manufacturing, and is aiming to achieve a turnover of Rs 1.75 lakh crore, including exports worth Rs 35,000 crore, by 2025. Last year, the defence industry, along with the aerospace and shipbuilding industry, was estimated to be worth Rs 80,000 crore, of which the share of PSUs was nearly 80%, or Rs 63,000 crore.

Prime Minister Modi recently outlined the government’s commitment to self-sufficiency in defence manufacturing. “The effort, in the last few years, has been to break all the shackles associated with the defence sector. Our aim is to increase production in India, develop new technology in India, and expansion of the private sector,” Modi said at an online seminar on ‘Aatmanirbhar Bharat in defence manufacturing.”

Finance Minister Nirmala Sitharaman had in May announced the raising of the FDI cap in the defence sector through the automatic route to 74%. She had mentioned it along with other measures for the sector, including a negative imports list and a dedicated budget for capital acquisition from the domestic industry.

The ‘Defence Production Policy of 2018 set a goal of becoming among the top 5 global producers of aerospace and defence manufacturing with an annual export target of $5 billion by 2025. India domestically produces only around half of defence products it uses, and the rest are imported.

India remained the world’s second largest arms importer during the period 2015-19, with Russia being the largest supplier though Moscow’s share of the Indian weapons market declined from 72% to 56%, a leading think tank that tracks arms transfers said in its annual report last year.

In its annual “Trends in international arms transfers 2019″ report, the Stockholm International Peace Research Institute (SIPRI) listed the world’s top five arms importers during the five-year period as Saudi Arabia, India, Egypt, Australia and China.