India urged to raise cap on defence FDI

The UK-India Business Council (UKIBC) has called on the government in New Delhi to raise the cap on foreign direct investment (FDI) in the defence sector.

Such a move, it said, will boost investment in Indian defence industrial enterprises and strengthen strategic and defence ties between the two countries.

The suggestion was included in a longer list of recommendations recently submitted to India’s Finance Minister Nirmala Sitharaman for consideration in the country’s budget, which will be announced in early February.

In its proposal, the UKIBC suggested that the government raise the FDI limit in the defence sector from the existing 74% to 100%.

This limit, said the UKIBC, would be applicable through the ‘automatic route’, a categorisation of FDI in India that does not require government approvals.

Other UKIBC recommendations include the reduction by government of tariffs on components used in the defence sector.

The UKIBC has previously stated that moves by New Delhi to remove or lift the cap on FDI in the defence sector would “significantly encourage” foreign defence businesses to manufacture in the country.

In turn, it said, this would facilitate the transfer of technologies, global standards, and expertise to Indian investment partners. “This helps build a supply-chain ecosystem for India to develop larger and more complex defence programmes,” the UKIBC said in 2020.

India’s FDI cap was traditionally 26% through the automatic route, but this was raised to 49% in 2014, and raised again to 74% in 2020 to encourage greater levels of foreign investment.