Assocham proposes raising defence FDI cap to 51% - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Wednesday 5 June 2019

Assocham proposes raising defence FDI cap to 51%

Global defence majors wary of investment in India, have invested just Rs 1.26 crore since 2014

By Ajai Shukla
Business Standard, 6th June 19

A study, released by Assocham on Wednesday, recommends that foreign defence firms be allowed a majority stake in joint ventures (JVs) that they set up in India.

In 2016, the prevailing 26 per cent cap for foreign direct investment (FDI) in defence was raised to 49 per cent through the automatic route. Further, FDI above 49 per cent became permissible through case-by-case government sanction “wherever it is likely to result in access to modern technology or for other reasons to be recorded.”

That has failed to spur investment. The defence sector has received a total of US$ 0.18 million (Rs 1.26 crore) in FDI from April 2014 to December 2017, the defence ministry told Parliament on March 7, 2018.

The Assocham study, conducted in partnership with UK consultancy firm BDO, now suggests: “The government should allow a minimum of 51 per cent FDI in defence sector without any riders to linkages with ‘modern technology’, so as to enable international defence companies to exercise adequate control over joint venture companies, intellectual property rights (IPR) and product quality.”

“The increase in FDI limit will bring in the capital for establishing new facilities and scaling up current facilities while benefitting India through large scale job creation,” noted the Assocham-BDO study titled, “Indian aerospace manufacturing ecosystem”.

The report targets a larger role for Indian industry in the $838 billion global aerospace manufacturing arena. India’s share currently stands at under 1 per cent.

The defence industry remains constrained by a complex industrial licensing regime, governed by the Industries (Development & Regulation) Act, 1951, the Arms Act, 1959 and Arms Rules, 2016. Licensing applications undergo security vetting by the defence and home ministries before the Department of Industrial Policy & Promotion (DIPP) clears them.

The report recommends that government must restore tax incentives for research and development (R&D), to encourage investments in high-technology micro, small and medium enterprises (MSMEs). “This will encourage foreign defence companies to bring best practices and technology to create domestic R&D partners and contribute towards a robust aerospace ecosystem”, said the report.

“In addition, to boost foreign investments in aerospace R&D, it should be made as an eligible activity for discharging offset obligations,” it states.

In May 2018, the defence ministry had proposed modifications to the Defence Offset Guidelines, allowing vendors to discharge offsets through investment in SEBI-regulated funds dedicated for the development of start-ups and MSMEs. That policy remains in the pipeline.

Raising the FDI cap in defence has always been politically sensitive. It is opposed by trade unions of defence public sector undertakings (DPSUs) and Ordnance Factories (OFs). Several private sector defence majors have also been wary of the entry into India of global defence and aerospace giants.

The United Progressive Alliance government from 2009-14, as also the National Democratic Alliance from 2014-19, considered raising the defence FDI cap to 74 per cent through the automatic route. However, no government has yet bitten the bullet.


  1. No body is going to give you cutting edge technology. QUANTUM TECHNOLOGIES along with DRONES and 3D PRINTING will make today's armada redundant. Aircraft carriers included.

    Cold start DOCTRINE is obsolete...1980 theory

  2. The investments will come once we start buying on large scale. Today 70% of our arms are russian & OFB origin. Will take time, no point in losing patience.
    E.g in IAF, once MMRCA 2.0 deal is done, % of russian aircraft will begin to drop. In army it will be rifles, artillery deals.

  3. A combination of private sector companies refusing to invest into product and, bureaucracy that will not support make in India is a recipe for disaster. Once you go to 51%, forget about Indian companies ever making anything indigenous.

  4. Col. Shukla, this is a nonsensical policy. At 51%, any foreign company will dictate the terms and conditions here. The armed forces will be at the mercy of these firms. On the other hand, at 49% FDI, no foreign company will bring their IP to India, forget parting with it.

    The only way out is the hard way : India must develop it's indigenous technologies. India's militray industrial complex must comprise of DRDO and the Indian private sector, and not Lockheed + Indian private sector or Saab + Indian private sector.

    Military history bears testimony to the fact that no nation has become a superpower by importing weapons. All powerful nations develop their own weapons. India too has to be self-reliant, and no Lockheed or IAI will help us do so.


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