NEW DELHI — The Indian Ministry of Defence has been authorized to begin approving foreign direct investment proposals in the defense sector after the Foreign Investment Promotion Board was dismantled, according to a top MoD official.

The dismantling of FIPB, which was previously responsible for approving FDI licenses, paved the way for the MoD to handle the liscense for the defense sector. The dismantling was part of a series of government efforts taken since 2014 to attract FDI in India's defense sector. 

But despite increasing the FDI limit in 2014 from 26 percent to 49 percent and later in 2016 to 100 percent on a case-by-case basis, only $1 million in FDI has entered India's defense sector in the last three to four years, compared to about $60 billion in FDI, which the country gets each year.

An application from Naval Group (formerly known as DCNS) that sought 100 percent FDI for the development of air-independent propulsion systems, or AIP, for submarines was rejected by FIPB in July last year, said a second source in the MoD.

"One hundred percent FDI proposals will require Cabinet Committee on Economic Affairs (CCEA) approval after inter-ministerial consultation. The time required for such proposals will not be impacted by abolition of FIPB," said Vivek Rae, a former MoD director general for defense acquisition.

Bernard Buisson, managing director of Naval Group in India, said: "The purpose of our FDI proposal was to locate in India all the proprietary know-how and expertise required to integrate the local developed AIP system into the P75-I submarines."

The MoD has plans for private sector defense companies to partner with foreign defense companies to build six new AIP-enabled, diesel-electric, conventional submarines for $10 billion.

The second MoD official said the Strategic Partners policy has "an embedded FDI" component.

But Rae noted that "FDI flows are impacted more by FDI policy than by the SP policy."

"FDI inflow is slow, essentially due to lack of firm orders," another MoD official offered.

Ankur Gupta, a defense analyst with Ernst & Young India, was critical of the defense industry here.

"The Indian defense sector has not [yet] managed to attract FDI in a meaningful manner," he said. "There may have been several reasons behind this. But now with the MoD insisting on domestic production/sourcing, foreign original equipment manufacturers will have to join hands with Indian companies, and this will automatically bring in FDI."

Vivek Raghuvanshi is the India correspondent for Defense News.

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