India will consider FDI into defence projects beyond its current ceiling of 26% in a move to attract greater private-sector participation.

Defence minister Arun Jaitley clarified the stance of the Narendra Modi government on FDI limits in the defence sector, saying investment beyond 26% may be permitted on an individual basis.

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“Wherever FDI beyond 26% is likely to result in access to modern and state-of-the-art technology in the country, decisions can be taken to allow higher FDI on a case-by-case basis with the approval of the Cabinet Committee on Security,” he stated in Parliament. Mr Jaitley added that private-sector companies are currently allowed FDI up to 26%, but this varies.

India’s defence expenditure is expected to accelerate in the next 30 years to rival that of the US and China, according to a new UK government study, Global Strategic Trends Out to 2045. The ruling Bharatiya Janata Party had promised to make India a global platform for defence hardware and software production, while strengthening the participation of the private sector.

Leading private-sector players such as the Tatas, Mahindra, Godrej, Wipro and Larsen, and Toubro have entered the defence sector since it was opened in 2001.

To attract greater private-sector participation, India’s Department of Industrial Policy and Promotion has recently published a list of items that require compulsory production licences. These include tanks and armoured fighting vehicles, warships, arms and ammunition, and their parts and accessories. No licences are required for items not included in this list. This move has been welcomed by the private sector, especially small and medium enterprises.

There have been differing voices in the government on defence limits. The Ministry of Commerce and Industry circulated a note for inter-ministerial consultation proposing raising the FDI limit to 100%. The Ministry of Defence suggested raising the cap to 49% to help develop partnerships between Indian and foreign hardware military manufacturing firms. Mr Jaitley’s statement should set at rest speculation over FDI in defence.

India Inc is also split on the appropriate limits for FDI with local firms that prefer anything above 49% to be allowed only on a case-by-case basis if there is transfer of technology. But there is a small segment that wants 100% FDI. 

N Chandra Mohan is a business and economics commentator based in New Delhi.