NEW DELHI (TIP): The Indian Union Cabinet on Wednesday, August 6 approved a proposal to raise the cap on Foreign Direct Investment (FDI) in the defense sector from 26% to 49%, a move aimed at accelerating indigenization and bringing in modern technologies to meet the requirements of the armed forces. Finance minister Arun Jaitley had announced in his budget speech that the FDI cap in defense manufacturing would be increased to 49%, with full Indian management and control through the Foreign Investment Promotion Board (FIPB) route.

Foreign firms haven’t made significant investments or set up defense manufacturing facilities, with the 26% cap on FDI dampening their enthusiasm to pump money into the country. Barely $5 million of FDI has flowed into India since the defense sector was thrown open to private companies in 2001 by the then NDA government. However, it remains to be seen if lifting the FDI cap to 49% would lead to a significant inflow of foreign investment into the country and lead to greater indigenization as there are some who have been advocating raising the limit to 74%. Former defense minister AK Antony had opposed lifting the 26% cap on FDI.

He had attacked the NDA government last month for increasing the FDI cap to 49% in the Budget, saying that it would hurt national security. He had said, “I know a very strong lobby is working. Their demand is 100% FDI in defense. Successive governments since 1991 have overcome such pressure tactics. Their decision not to grant FDI beyond 26% was well thought out.” However, the commerce ministry under the UPA regime had batted for raising the FDI cap to 74% to encourage foreign firms to invest in India.

The government also approved a proposal to allow 100% foreign direct investment (FDI) for building railways infrastructure. Foreign capital in railways was not allowed till now. However, the new government led by Prime Minister Narendra Modi has been pushing for it to build infrastructure projects such as high-speed railways and railway lines to and from coal mines and ports. Currently, the cash-strapped railways cannot fund these projects without private participation. Foreign players from Japan and China are said to be keen to participate in building up of the railway infrastructure.