The union cabinet at its meeting on Wednesday approved proposals to open up railway infrastructure, including the high-speed trains segment, for 100-per cent foreign investment and to raise FDI limit in defence industries to 49 per cent.
The decisions, taken at the cabinet meeting headed by Prime Minister Narendra Modi, barely two weeks after decision to raise the cap of FDI in insurance sector from 26 per cent to 49 per cent, are intended to instill confidence in investors that the NDA government is moving ahead with the economic reforms.
The liberalisation of rail infrastructure investment would help the cash-strapped railways in its modernisation and expansion programmes.
FDI, however, will not be allowed in train operations and safety.
The proposal provides for 100 per cent FDI in areas such as high-speed train systems, freight terminals, building of rail links, electrification and signalling systems, suburban corridors and dedicated freight line projects implemented in PPP mode.
Indian Railways has estimated a fund shortfall of Rs29,000 crore, which could at least be partly made up with FDI support, according to the railway ministry.
The move to relax FDI in railways, which comes ahead of Narendra Modi's visit to the US, will help American companies such as GE and EMD whose proposals to build diesel locomotive plants in Bihar are under the government's consideration.
Once the proposal is cleared by Parliament, FDI can be brought into all railway projects, including special purpose vehicles, companies and joint ventures as an equity infusion, except for Indian Railways' operations.
The existing Department of Industrial Policy & Promotion (DIPP) rules do not permit FDI in the railways.
Railway minister Sadananda Gowda is likely to introduce a bill in Parliament to amend the Railways Act, today.
Meanwhile, the home ministry has expressed concern over the security implications of railway projects in strategic border areas. For such projects, prior permission of the Foreign Investment Promotion Board and clearance from the home ministry may be required, an official said.
The home ministry, however, has assured the DIPP that it will take a decision on strategic clearance for specific FDI proposals within three months.
The government had made it clear that while the FDI ceiling in sensitive defence sector has been hiked to 49 per cent, the Indian partner would maintain control over such joint ventures.
The move will help boost domestic production in country where 70 per cent of the military hardware is imported. Also, according to the government, a hike in the FDI limit would also help expand the domestic industrial base in the sector.