Govt Opens Defence Sector to 74% FDI via Automatic Route, Adds 'National Security' Clause

The Centre is looking to ramp up defence manufacturing to Rs 1.75 lakh crore, including exports worth Rs 35,000 crore, by 2025.

New Delhi: The Union Cabinet earlier this week approved a policy for raising the cap on foreign direct investment (FDI) through automatic approval in the defence sector to 74% from 49% while affixing a ‘national security’ clause to it.

It has been reported that this new condition of national security was proposed by the Ministry of Commerce and Industry. It says, “Foreign investment in the defence sector shall be subject to scrutiny on ground of national security and the government reserves the right to review any foreign investment in the defence sector that may affect national security.”

Under the existing policy, the defence industry is allowed to bring FDI up to 49% under the automatic route. Beyond this, it can get FDI under government route, in cases resulting in access to modern technology or for other reasons to be recorded.

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Already there are four conditions, including security clearance and a few guidelines issued by the Ministry of Defence, which apply to FDI in the defence manufacturing sector. While no reason for including the national security clause has been provided, Indian Express reported, citing sources, said it has been brought in since defence is a sensitive sector.

By bringing in a more liberalised policy, the government wants foreign original equipment manufacturers (OEMs) to shift operations to India. It also wants private entities to play a bigger role in defence production.

During an online seminar on “Aatmanirbhar Bharat in defence manufacturing” held last month, Prime Minister Narendra Modi spoke about how the Centre was trying to give a fillip to defence production. He said that the commitment to self-sufficiency in defence production was not limited to talks or papers and that attempts have been made to “break all the shackles” associated with defence production over the past few years. “Our aim is to increase production in India, develop new technology in India, and maximise expansion of the private sector,” he added.

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Earlier in May, finance minister Nirmala Sitharaman had announced raising the FDI cap in defence sector through the automatic route to 74%. Thereafter, a draft defence production and export promotion policy 2020 was released which spelt out the efforts made to liberalise FDI in the defence sector. It also spoke about how private investment in manufacturing facilities was being encouraged.

The Centre is looking to ramp up manufacturing in the defence sector to Rs 1.75 lakh crore, including exports worth Rs 35,000 crore, by 2025. In the last year, production of defence equipment, such as aerospace and shipbuilding industry, stood at around Rs 80,000 crore, of which the contribution of public sector undertakings was around Rs 63,000 crore.