The issue to allow more Foreign Direct Investment (FDI) in Defence has created a rift between two senior members of the Cabinet. Defence Minister AK Antony has objected stridently to Commerce Minister Anand Sharma’s proposal to increase the 26 per cent cap on FDI and said allowing foreign companies to set up manufacturing bases in India will be a “retrograde step.”
Replying to a letter written to him by Sharma last month urging the Defence Ministry to increase the cap to 49 per cent, Antony said hiking the cut-off in FDI will also “perpetuate our dependence on foreign countries and original equipment manufacturers (OEM) for modern weapons.”
The Commerce Minister is lobbying for increasing the FDI limit in the sensitive Defence sector for the last few months and Antony has strongly objected to it.
In a letter to Sharma written on July 1, he said “the deliberated view of the Ministry of Defence, therefore, remains that the FDI cap in the Defence manufacturing sector should remain at 26 per cent.”
Antony also clarified that wherever relaxing the cap was likely to result in access to state-of-the-art technology for the country, decisions could be taken to allow higher FDI on a case to case basis by the Cabinet Committee on Security (CCS).”
At present, two projects have got the nod for higher FDI, including Brahmos supersonic missile system and multi-role transport aircraft (MTA). Brahmos is the first-ever joint design and development agreement between India and Russia, with both the countries having a 50 per cent share.
MTA is a similar pact between the two nations, with the same ratio of investment. Design and development will commence shortly. Explaining his reservations on the FDI hike proposal, Antony said in the field of Defence, India cannot afford to be dependent on foreign companies and be vulnerable to policies of their countries of origin.
“Building up our own indigenous capabilities for designing and developing our weapons systems is vital,” he said, adding, “Our effort is to build up indigenous capability by encouraging companies to get into design and development of modern weapons systems. For this purpose, we are actively encouraging the involvement of the private sector in Defence. We are importing weapons systems for immediate requirements, till we develop our own systems.”
listing these reasons, Antony said from that perspective, allowing foreign companies to set up “manufacturing/assembly facilities will be a retrograde step as it will stymie the growth of indigenous design and development.”Sharma had favoured allowing foreign companies to have manufacturing plants in India to attract more FDI.
Officials said the latest Defence Procurement Procedure (DPP) encourages the private sector to play a bigger role in production and allows them to have tie-ups with foreign manufacturers. This move gives the private and public sector access to better technology and will help expand the local industrial base at a faster pace.
The Commerce Ministry was earlier pushing for hiking the FDI cap to 74 per cent but scaled it down to 49 per cent due to the Defence Ministry’s tough stand on the issue.
“I am in favour of raising FDI in Defence to at least 49 per cent if not 74 per cent and this is what my department has recommended,” the Commerce Minister had said.
In a letter to Prime Minister Manmohan Singh in March this year, Sharma urged the Government to raise the limit of FDI to 74 per cent as the present cap was not enough for transfer of state-of-the-art proprietary technologies and said the fact that India received only $4.12 million of FDI in Defence manufacturing in the last decade “is a clear testimony to this fact.”
Sharma also said the US and European Union allow 100 per cent FDI in Defence manufacturing with security issues being addressed through verification and clearance procedure.