The Industry Ministry today proposed FDI up to 74 per cent in the defence sector from the present 26 per cent, stating urgent upgrade of equipment in the armed forces was needed as a bulk of them suffered from obsolescence.
The Department of Industrial Policy and Promotion (DIPP), however, said the hike in the foreign direct investment (FDI) need not mean any commitment on procuring from companies, which have set up the facilities in India.
"There need not be any commitment on procurement and these players will have to participate in the Request for Proposal to technically qualify and also compete in the financial bid," DIPP said in a discussion paper.
It has sought views of different stakeholders till July 31 this year.
"Only 15 per cent of India's defence equipment can be described as state-of-the-art and nearly 50 per cent is suffering obsolescence...There is, therefore, an urgent need to enhance the deterrent and the operational capabilities of the armed forces...," it said.
Since the entire issue has been placed in the public domain, the DIPP clarified that the suggested policy should not be construed as the firm views of the government.
The DIPP paper said the present 26 per cent cap in FDI has failed to attract the state-of-the-art technology in the defence sector.
It has also disagreed with views of major industry chambers like CII and Assocham that the cap be raised but to the extent of 49 per cent.
"By merely increasing the limit from 26 per cent to 49 per cent, we may be accused by posterity of doing too little and too late. Therefore, in case we really want to have the state-of-the-art technology we have to permit anything above 50 per cent if not 100 per cent," the paper said.
Allying the security concerns, it said, "We can refuse to permit FDI in the sector by refusing the licence where the background of the company is suspect."
By merely setting up a facility and bringing in investment, the foreign vendors cannot be assured of purchase contracts with the armed forces.
For future RFPs by the Ministry of Defence, a condition may be imposed that the successful bidder would have to set up a system integration facility in India with certain minimum percentage of value addition in the country.
The bidder should be allowed to bring equity up to the proposed sectoral cap, the paper said.
As one of the largest users and importers of conventional defence equipment, India's cumulative defence budget has been growing at 13.4 per cent since 2006-07 rising up to Rs 1,47,344 crore ($31.9 billion).
Of this, about 40 per cent is the capital expenditure and 70 per cent of which is met through imports.
