Commerce Ministry Proposes Increased FDI in Defense Sector

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May 18 – India’s Commerce and Industry Ministry has released a discussion paper that suggests increasing foreign direct investment in the defense sector from 26 percent to 74 percent to improve manufacturing and technology transfer in the country.

The response to the proposal has been varied, with some suggesting an increase of 49 percent instead to keep majority shares under Indian management. “We are for 49 percent FDI which will allow control of a company to remain in the hands of Indians,” Brigadier Khutub Hai, chief executive officer of Mahindra Defense Systems told The Economic Times.

On the other hand, some feel that India needs to be more willing to let investment in to improve defense technology. A foreign investor wanting to enter the Indian market must be able to submit a Request for Proposal (RFP) to the Defense Ministry to be eligible and join bids.

The paper suggests that an RFP can come with the condition that requires the winning bidder to set up a system integration facility in the country with a certain minimum percentage of value added. The winning bidder should be able to raise equity up to the proposed sectoral cap.

“Allowing 74 percent FDI is a progressive step, but, getting someone to set up a system integration facility, which is a final assembly point, is unrealistic,” Dheeraj Mathur, India leader for PWC aerospace and defense said on the issue.