India’s newly appointed Defense Minister Arun Jaitley has inherited the task of deciding whether or not to raise the foreign direct investment (FDI) level in the defence sector from 26 per cent to 49 per cent.
Jaitley, who is also the Finance Minister, would find it easier to address the FDI issue which is not merely a MoD matter but one which concerns the finance and industries ministries as well.
Several foreign companies who wish to partner with Indian companies have held their hand due to the cap on equity holding which would render them a minor player in the partnership. Several partnerships have collapsed due to the restrictions, most notable is the joint venture between Mahindra and Mahindra and BAE System.
The FDI issue is also bogging down the implementation of offsets in India as it is preventing foreign partners from bringing in sufficient capital to kick start their JVs with Indian entities.
Boeing also echoed similar sentiments in February when Lt Gen Jeff Kohler, Boeing's vice president of international business development in defence, Space & Security, said at the Singapore Airshow that, “India will see 49 per cent more investment from US companies.”
Kohler made the comments on aviation industry-wide speculation about the government increasing FDI in defence sector to 49 per cent from the current 26 per cent, with some expecting an announcement in the near future. "It has been very difficult to go to our senior corporate leadership and justify an investment in India at 26 per cent FDI," said Kholer.
In May, the Federation of Indian Chambers of Commerce and Industry (FICCI) released a statement saying it would be “strongly advocating policy regimes that facilitate building a strong Defence Industry in India. Towards this FICCI supports defence industry's apprehensions on the serious implications of Consolidated FDI Policy Circular of 2014 (effective from April 17, 2014) issued by Department of Industrial Policy and Promotion on the continuance of Indian conglomerates, both Public as well as Private, in the defence business.”
“With MoD now getting committed to indigenising the sector, the DIPP circular freezing FII holding as on 22nd Aug 2013 in Defence License companies’ heralds roadblocks in the process the government has embarked in the recent past,” the statement added. “FICCI has argued that a blanket ban on Investment by Foreign Portfolio Investors FDIs/FIIs in listed Indian conglomerates, where defence business is just one of the business verticals will not be a practical view in the current corporate as well as regulatory structure.”