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Modi Govt's Second Big Bang Reforms | Experts Say India Can Become Defence Hub

The NDA government has allowed up to 100 per cent FDI in defence and done away with the requirement of 'state of the art' technology while considering FDI cases of above 49 per cent investment

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Experts and India Inc. have hailed the NDA Government's big ticket decision to open doors of foreign investment in several sectors including defence and aviation. Now, up to 100 per cent FDI has been permitted in the defence sector with simple riders. All FDI proposals beyond 49 per cent are permitted through the government approval route especially those that will lead to Indian forces getting access to modern technology.

"This decision will now bring in real investments provided the defence ministry also speeds up the procurement process and issues big ticket orders," says Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG. According to Dubey, India can become a global aerospace and defence hub if the defence ministry rejigs its procurement policies. "If MoD rejigs its defence procurement policies and insists on platform level manufacturing in India, India could become a global aerospace and defence hub instead of just being a supplier of parts and assembler of imported kits," Dubey said.

In fact, KPMG India had predicted last year when the FDI limit in defence was raised to 49 per cent that the step would not lead to "any meaningful FDI".

According to DS Rawat, Secretary General of industry body ASSOCHAM, “Increasing the FDI limit will also facilitate better compliance of offset obligations.”

The new norms have also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act 1959.

“Liberalization of the FDI regulations reflects the government’s commitment to reforms and openness, and reassures investors that ease of doing business remains high priority. Taken together, the FDI rules announced today will attract big new investments across key sectors such as food processing, defence production, pharmaceuticals and civil aviation, among others, thereby adding to growth and employment,” Director General of CII Chandrajit Banerjee said in a statement.

The conditionality in defence production FDI regarding ‘state of the art’ technology has been done away with, allowing more defence producers to enter the large Indian defence procurement market. Relaxation of local sourcing norms under single brand retail trading for advanced technology products would encourage global brands to build up their participation in the country, CII said.

A. Didar Singh, Secretary General, FICCI said, “Simplification in the policy framework governing investments in a whole host of sectors including strategic sectors like defence and aviation is a huge positive for the economy. The Modi administration through these moves has once again highlighted that reforms is a continuous process in order to capitalize the potential India offers”.

Rawat said the government's bold decision to increase FDI cap to 100 per cent will help India in realizing the dream of self-reliance in the defence sector which has immense possibilities for attracting investments, setting up manufacturing facilities, obtaining technologies and capabilities and generating high skilled employment. “It will also help in bringing investment and advanced technology into defence sector thereby leading to inflow of capital and setting up entities of original equipment manufacturers (OEMs) and their suppliers through transfer of technology,” said Rawat.

Talking to reports, Minister for Commerce and Industries Nirmala Sitharaman said: "Now there is a greater clarity in terms of the caps, in terms of the process of approval, in terms of making it easy so that the rigours of going through an investment proposal are all eased out."

Explaining about the relaxation in the defence sector, the minister said the idea behind dropping the term "state of the art" was "essentially we are spending time in defining things and spending time in understanding what exactly is state of the art and what exactly is this cutting edge".

"So instead of keeping it verbose and instead of making too many things binding us down on what is it that you have to comply. By using this one word 'modern', we thought we are able to cover on bring in technology which was required and there is no other thing behind the logic," she added.

FDI hike in Private Security Agencies

Expressing happiness on government announcement on liberalisation of FDI in private security industry Rituraj Sinha, Co- Chair, FICCI Committee on Private Security Industry said, “The private security industry welcomes the announcement towards relaxation of foreign investment in the sector. Allowing up to 49 percent FDI under the automatic route shall add to ease of doing business significantly and is expected to expedite the investment process in the sector substantially”.

“However, the private security industry shall be engaging with the DIPP & MHA to understand the announcement regarding allowing up to 74 per cent FDI in the private security sector under government approval route. Given that investment in the private security sector is capped at 49 per cent as result of the provisions under the Private Security Agencies Regulation Act (2005), the Government decision to allow majority foreign ownership in private security industry up to 74 per cent would require amendments to the PSAR Act (2005) prior”, Sinha added.

What Happened on June 20th 

In the afternoon of June 20, Monday, the NDA government made changes to the FDI policy at a meeting chaired by Prime Minister Narendra Modi making it the second biggest reform in FDI since those announced in November 2015. According to the amendments are meant to liberalise and simplify FDI policy to provide ease of doing business in the country, leading to larger FDI inflows that will contribute to growth of investment, incomes and employment.

As per the announcements made, the government has allowed 100 per cent FDI in the aviation sector for scheduled carriers. Under the automatic route, 49 per cent FDI has been permitted.

FDI in defence has also been hiked to 100 per cent. The present FDI regime permits 49 per cent FDI participation in the equity of a company under the automatic route. FDI above 49 per cent is permitted through government approval on a case-to-case basis. However, for foreign airlines investing in scheduled airlines, the limit stays at 49 per cent. The decision to relax FDI norms in the aviation sector had led to a sharp rally in listed carriers such as SpiceJet, Jet Airways and InterGlobe Aviation.

Under the new norms, 74 per cent FDI would be allowed in the pharmaceutical sector under the automatic route, which means that foreign investors will not need government approval to invest up in existing domestic companies. Currently, FDI up to 100 per cent is permitted in new projects in the pharma sector.

FDI limits have been hiked to 100 per cent in teleports (uplinking hubs), DTH and cable networks, with government approval required beyond 49 per cent FDI limit.

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