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India Reworks Defense Licensing Categories

Confusion Remains On FDI Limits

Jul. 6, 2014 - 03:06PM   |  
French Foreign Minister Laurent Fabius, left, and Indian Defence and Finance Minister Arun Jaitley meet in New Delhi on June 30. Fabius was in India for a two-day official visit during which India and France were expected to discuss issues including a multibillion-dollar Rafale combat aircraft deal. (Raveendran / AFP)
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NEW DELHI — India has made major changes in its defense production policy that will enable foreign manufacturers to set up production in India without going through the cumbersome process of seeking licensing.

Under the changed policy, several defense products will no longer require licensing from the Defence Ministry. Only procedural approvals to set up any ordinary industrial unit will now be required for these products. Obtaining licenses for products is a cumbersome process involving security clearances.

The Department of Industrial Policy and Promotion (DIPP) announced on June 26 that it had removed several defense items from the compulsory license list, but it is not clear how many. The list of defense products that will require licensing has been reduced to only four sections.

The move to de-license several defense items is the first major move by the new Narendra Modi government to help boost the domestic defense production base, as more production units will be set up. However, there is lack of clarity among domestic firms and analysts over whether the new notification will allow 100 percent foreign direct investment (FDI) by overseas firms to produce the select list of defense products for which license is no longer required.

MoD officials declined to answer questions that would clarify the ambiguity.

The new compulsory license categories are now:

■Tanks and other armored fighting vehicles.

■Aircraft, spacecraft and parts.


■Arms and ammunition and allied items of defense equipment and their parts and accessories.

The items removed from the compulsory license list are: computers, avionics, software systems, infrastructure development, combat management systems, engineering services including validation and design, wire harnesses, avionics design, civil aerospace castings and forgings, surveillance suites, training services including simulators, bullet proof jackets and vehicle armoring, weather radar and display systems and components.

“The list [of de-licensed items] notified by the DIPP essentially covers platforms, weapons and equipment. However, most of the sub-assemblies, parts and components have been done away with,” said Sujith Haridas, deputy director general at domestic industry lobbying agency Confederation of Indian Industry. “This means that small and medium enterprises [SMEs] will be the biggest beneficiaries.”

Mrinal Suman, retired Indian Army major general and procurement expert, said it will help the defense industry. “With most items not needing license, entry for industrialists, including foreign investors, will be easy. As a matter of fact, it is another way of allowing 100 percent FDI in such items.”

Amit Cowshish, retired MoD finance adviser and defense analyst, said “As per my understanding, it does not automatically mean that anyone can bring in 100 percent FDI, or even 49 percent, and start manufacturing items not on the list.

“As per the FDI policy, the cap in the defense sector continues to be 26 percent,” he added. “I am of the view that government will have to amend the FDI policy to say that FDI up to whatever limit it wants to stipulate will be allowed for manufacturing items not on the list of defense items now notified.”

Rajinder Bhatia, CEO of private sector defense major company Bharat Forge, is also not clear about the percent of FDI to be allowed and said the MoD must clarify the issue.

A senior executive from the private sector defense major Larsen & Toubro, who requested not to be quoted by name, agreed. “However, theoretically speaking, the de-licensing would mean that the de-licensed products can be manufactured without the any further MoD or DIPP approval,” the executive added.

The domestic defense industries have welcomed the move to de-license several defense products. “This move will also help foreign OEMs harness frugal manufacturing by medium and small manufacturing enterprises working in niche technology and products to also expand offset relationships erstwhile restricted for participation due to cumbersome licensing procedure and requirements,” said the Federation of Indian Chambers of Commerce and Industry, a lobbying agency.

“The move [to de-license some defense items] would also help to maintain a fair balance between addressing genuine security concerns and promoting India’s defense industry,” Haridas said. “Given the opportunity, this industry has the potential to become a huge foreign exchange earner for the country and also lead India to its professed goal of self-reliance.” ■


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