In June 2014, the Ministry of Commerce and Industry curtailed the list of defence items for industrial licensing and uplifted many defence items at components and assemblies level from licensing requirement. Subsequently, the guidelines were issued for extending the industrial licence to five years. These measures were taken as a step towards boosting the manufacturing segment, which places an important role for economic growth of the country.
FULL COVERAGE:Union Budget
The aforementioned changes in industrial licensing were indicating positive developments to the industry. However, with today's announcements by the Finance Minister Arun Jaitley in the Budget 2014-15 on increase in Foreign Direct Investment (FDI) limit to just 49 per cent, the industry appears to be discouraged.
The government has increased the limit from 26 per cent to 49 per cent under the government approval with continuity of control in Indian hands.
BUDGET 2014:Full Speech
It has not left any hopes of considering an increase in the FDI limit in the near future. Perhaps, finance ministry wants some more time to deliberate on the overall FDI framework for the defence sector along with the defence ministry team. Till then, no major foreign investment appears to be forthcoming in the country and the pace of forming joint ventures will remain status-quo.
This may be the first step towards building up indigenous industrial base in India but a lot has to be done by the government from the industry's perspective, viz. further increasing FDI limit, speedier process of approvals, procurement processes, taxes rationalization and tax incentives.
While the government has made out an encouraging statement of making defence equipment procurement process more faster and efficient than earlier languid approach, it still needs to be seen in fine print of the next updated Defence Procurement Procedure version.
With today's move, at least the new government seems to be heading towards making India self-reliant in defence production. This appears to follow a phased approach of growing manufacturing in defence but industry needs to be continuously advocating various itching issues for this growth.
(The author is, Director, Deloitte Haskins & Sells LLP)
UNION BUDGET 2014:#budgetbt Tweets