New Delhi: In a major policy initiative, the Narendra Modi government is proposing to raise foreign direct investment (FDI) cap in defence sector to 100 per cent through the approval route, according to sources. The UPA government had pegged FDI in the defence sector at 26 per cent but allowed the Cabinet Committee on Security (CCS) to approve proposals entailing higher investments.
"The Commerce and Industry ministry has circulated a Cabinet note for inter-ministerial consultation," they said.
Earlier, the Defence Minister Arun Jaitley had indicated that he would consider the issue of FDI in the sector.
The proposal to raise FDI cap in defence from 26 per cent to 100 per cent is aimed at giving a boost to manufacturing activities.
As per the 15-page Cabinet note circulated on Thursday, portfolio investors, including foreign institutional investors (FIIs), would be permitted to invest only up to 49 per cent.
Further, the note said that a foreign company can even take over a domestic entity provided it brings in state-of-the-art technology.
This is the first major initiative of the ministry after new Commerce and Industry Minister Nirmala Sitharaman took charge this week.
Sources said that permitting FDI in the sector "will hugely help in reducing import bill for defence equipment" and "will help in boosting manufacturing and creating jobs".
In May 2010, the Department of Industrial Policy & Promotion (DIPP) had rolled out a discussion paper suggesting increase in FDI cap for the defence sector.
India opened up the defence equipment industry to private sector in May 2001, but restricted foreign participation to 26 per cent in this capital-intensive and sensitive sector.
India is one of the largest defence importers in the world with a minuscule component of exports.
India ranks among the top ten countries in the world in terms of military expenditure. At present, it imports over $8 billion worth of defence equipment and its defence budget is growing at an average of 13.4 per cent annually since 2006-07.
"The bulk of the domestic production is met either through the Ordnance Factories or the Defence PSUs. Even when defence products are manufactured domestically, there is a large component of imported sub-systems," the DIPP had said.