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Raising foreign direct investment cap to at least 51% in the defence sector will help India become a major manufacturing and export hub, reducing dependency on imported equipment.
"India can be a game-changer only by allowing at least 51% FDI in the sector. With access to critical technology, the domestic companies will be able to manufacture products indigenously and make India a global defence manufacturing and export hub," said a government source.
India imports defence equipment worth over $8 billion annually. It is one of the largest defence importers in the world with only a minuscule component of exports.
Allaying concerns of few domestic industries, the sources said that the proposal mooted in the draft note has enough safeguards to protect this sensitive sector.
"Giving controlling stake to a foreign player will be an incentive for them to bring modern technologies in India. Besides making India as their manufacturing centre, they will also export from here. It would lead to creation of jobs," said a source.
While the government is holding inter-ministerial consultations, intense lobbying is being witnessed within the major industry chambers, the sources said. A section of the domestic industry, with less than 1% share in the sector, holds a view that the FDI should be restricted to 49%, while another view is that without a majority stake why would the global investor invest in India, they added.
They said that caping FDI to 49% is not going to help. It would be a status-quo type situation.
"India should not lose this chance. To become self-reliant in defence sector, 51% FDI must be allowed. Between 2001 and August 2013, 49% foreign investment (26% FDI + 23% FII) was allowed. During this time, India has attracted only $5 million investments, which is lowest in any sector," the source said.
Between 2001 and 2013, India has received about $320 billion in foreign investment. The figures clearly reflect that India has not received any investment when the cap was 49%.
The sources also argued that due to sagging economies in the West, multi-national companies want to expand their manufacturing base in Asia and India can become a major centre for that.
"Now the country cannot afford to miss the bus. Fixing foreign investment cap to 49% will not help in getting modern technologies. Figures are clearly reflecting that 49% foreign investment has not changed anything. It will be a game spoiler," they added.
The Department of Industrial Policy and Promotion has circulated a draft Cabinet note to relax foreign investment policy in defence sector. They have proposed up to 100% FDI in case of state-of-the-art technology and 74% (FDI + FII) in case of technology transfer.
