Government of India raises FDI limit in Defence Manufacturing

By Kealan Finnegan

Over the last five days, the Government of India has announced an INR 20 trillion (US$ 220 billion) stimulus package to revive the Indian economy.

As part of the package, the Government announced structural reforms across multiple sectors, including notable reform in the Defence sector. The stand-out announcement is that the foreign direct investment (FDI) limit in defence manufacturing under the automatic route has been raised from 49 percent to 74 percent.

The UKIBC has  long advocated for this reform, most recently in our 2020 Advocacy Report. We therefore welcome the forward-thinking announcement, which will benefit the sector by attracting further investment and technology into India, therefore supporting India’s Make in India strategy.

The change seems to be in line with the newly proposed category of ‘Buy Global (Manufacture in India)’ in DPP 2020, and will result in more cutting-edge technologies available for India’s defence forces. The move will also enhance R&D to develop and deploy solutions catering specifically to the country’s security needs.

Nik Khanna, BAE Systems MD for India, said: “We welcome the GOI’s decision to increase the foreign direct investment (FDI) limit for defence to 74% under automatic route and look forward to building on our enduring relationship with India as UK industry continues to invest and contribute more effectively to Indian domestic manufacturing aims and technology transfer.”

This increase in FDI up to 74% will, we expect, lead to at least one amendment to the DPP 2020, which currently defines ‘Indian vendors’ as  entities owned and controlled by resident Indian citizens.

Further reforms announced included:

  • Corporatisation of Ordnance Factory Boards (OFBs) to improve autonomy, accountability and efficiency has been proposed. Though privatisation has been ruled out, OFBs are to be transformed as corporations and could in future be listed on the stock exchange;
  • Trial and testing procedures to be overhauled;
  • Department of Military Affairs (DMA) to notify a list of weapons/platforms on which there are import bans. This list would be expanded annually.
  • To increase the indigenisation of spares for foreign systems already in service, industry in India to be encouraged to produce spares locally.

In February, Prime Minister Modi set a target of USD 5 billion for India’s defence exports in the next five years at the inauguration of the 11th Defence Expo in Lucknow, at which UKIBC supported the UK business delegation of over 30 companies. He invited private players to invest in India’s defence sector, benefiting from returns on investment and making India self-reliant in defence manufacturing.

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