MHA stated it was too early to take such a drastic step, which will not be prudent

Nayanima Basu | New Delhi May 30, 2014 Last Updated at 20:16 IST

The ministry of home affairs (MHA) is believed to have raised strong objections on the draft Cabinet note floated by the Department ofIndustrial Policy and Promotion (DIPP) forallowing 100% foreign direct investment (FDI) in the defence sector.

In its response tothe DIPP proposal, MHA stated it was too early to take such a drastic step,which will not be prudent, a top official involved inthe matter toldBusiness Standard, on the condition of anonymity.

The official said even though the present government's immediate aim was to boost economic growth and generate jobs by reviving thesluggish manufacturing sector, it would not put the country's security at stake. Moreover, MHA also believes the present arrangement shouldbe continued for at least six months to a year, after which a concrete call has to be taken on the matter.

At present, 26% is allowed in the defence sector through approval route. However,proposals entailing higher FDI, including 100%, can be allowed on acase-to-case basis by the CabinetCommittee on Security (CCS). This was decided inJuly last year during a high-level panel under former Prime Minister ManmohanSingh. In the draft Cabinetnote, DIPP had statedallowing FDI in defence would help shrinking the country'sburgeoning import Bill. Besides, it will boost domestic manufacturing.

The draft 15-pageCabinet note circulated on Thursday, stipulates that portfolio investors,including foreign institutional investors (FIIs), would be permitted to investonly up to 49%.The note said aforeign company could also go for brownfield investments meaning acquiringexisting companies if it brings state-of-the-art technology.

The issue first cameto the forefront in 2010 when DIPP had rolled out a discussion paper suggestingincrease in FDI cap for the defence sector. India is one of thelargest defenceimporters in the world with a minuscule component of exports. Indianconglomerates such as the Tata Group, Larsen and Toubro, Bharat Forge, Mahindraand Punj Lloyd, have all beendemanding opening up the sector.

At present only threeIndian companies - Hindustan Aeronautic Ltd. (HAL), Ordnance Factory Board (OFB) and Bharat Electronics Ltd. (BEL) - make it to the list of top 100defencecompanies in the world accounting for 1.1% share of the globalindustry. The government is thesole purchaser of defence equipment spending around 15% of the Central GovernmentExpenditure.

5/30/2014 11:44 PM

1 of 1 5/30/2014 11:44 PM