The Department of Industrial Policy and Promotion (DIPP) favours raising of the foreign direct investment (FDI) cap in defence industries from the existing 26 per cent to 74 per cent to attract global players. The department’s ‘discussion paper’ on FDI in the defence sector released on May 13 has recommended the upward revision to encourage established players in the defence industry to set up manufacturing facilities and integration of systems under the government route.

A large number of manufacturers of defence and dual use products are finding it difficult to manage their production in western countries due to increasing costs of labour and other inputs. However, they do not want to come to India with their proprietary technology unless they have majority ownership of the company.

The DIPP argues in its discussion paper that this is the right time for India to project itself as a new hub for manufacturing. A number of global defence majors would be willing to set up an alternative/additional manufacturing base in India if they were granted the majority ownership. Manufacturing within the country, through foreign capital, with full transfer of state-of-the-art technology would be a better option than importing the equipment from abroad.

It is felt that the established players in the Defence industry should be encouraged to set up manufacturing facilities and integration of systems in India with FDI up to 74% under the Government route. However, there need not be any commitment on procurement and it should be made clear that these players would have to participate in the RFP to technically qualify and also compete in the financial bid.

As a starter, to encourage setting up of manufacturing facilities by foreign vendors in India, for future RFP’s by MOD, a condition may be imposed that the successful bidder would have to set up the system integration facility in India with a certain minimum percentage of value addition in India. The successful bidder should be allowed to bring equity up to the sectoral cap, as proposed above.