The commerce ministry is reported to have cleared a cabinet note from the department of industrial policy and promotion (DIPP) to hike foreign direct investment (FDI) in the defence sector to 100 per cent from the current 26 per cent.
FDI in the defence sector will be automatic to the level of 49 per cent equity stake and for the foreign company to have any controlling stake with investments beyond that and up to 100 per cent, approval from the Foreign Investment Promotion Board (FIPB) and the Cabinet Committee on Security (CCs) will be needed.
The DIPP draft proposal to allow up to 100 per cent foreign direct investment in defence is part of its plan to boost domestic manufacturing.
The move comes a day after Nirmala Sitharaman, who took charge as the new commerce and industry minister, said on Wednesday said the country could do without FDI in multi-brand retail trade.
Defence minister Arun Jaitley had indicated on Tuesday after taking charge of the ministry that he would consider the issue of FDI in the defence sector. And, with Jaitley handling both defence and finance portfolios for now, approval by the finance ministry will also be not an issue.
AK Antony, who earlier handled the defence ministry during the United Progressive Alliance - II (UPA) regime was against hiking FDI in defence sector.
The DIPP draft, which is being circulated among the various ministries, is seen as a major move by the NDA government to revive manufacturing output that had fallen 0.2 per cent in the fiscal year ended on 31 March 2014.
DIPP has proposed three different caps for FDI in defence - 49 per cent, 75 per cent and 100 per cent - which propose to incentivise technology transfer.
It has proposed allowing 49 per cent FDI in case of no technology transfer and 74 per cent where there is a technology transfer.
The no-cap policy should be reserved strictly for cases which bring in state-of-the-art technology, it has suggested. However, entry though the automatic route may still be barred on account of security-related concerns.
Currently, only 26 per cent FDI is allowed in defence manufacturing, though the government can clear more foreign investments on a case-to-case basis.
However, specific details on the policy have to be worked out before the government goes ahead and clears 100 per cent FDI in defence.
Last year, as part of the FDI liberalisation drive, former commerce minister Anand Sharma had tried to push for 74 per cent FDI in the defence sector but had to drop it due to opposition from the defence ministry.
The BJP manifesto had spoken about allowing FDI in all sectors for asset and job creation and giving thrust to manufacturing to pull up economic growth.