The policy was approved by the Union Cabinet on Tuesday

The new policy raising the cap of foreign direct investment through automatic approval in the defence sector from 49 per cent to 74 per cent now has a ‘National Security’ clause as a condition. The policy was approved by the Union Cabinet on Tuesday. According to sources, the new condition has been proposed by the Ministry of Commerce and Industry.

“Foreign investment in the Defence Sector shall be subject to scrutiny on ground of National Security and the Government reserves the right to review any foreign investment in the Defence Sector that may affect national security,” says the new condition.

Under the existing policy, the defence industry can bring FDI up to 49 per cent under the automatic route, and above it “under government route, wherever it is likely to result in access to modern technology or for other reasons to be recorded”.

The national security clause is in addition to the existing four conditions specific to FDI in the defence manufacturing sector, including security clearance and some guidelines of the Ministry of Defence.

While no reason has been cited for the introduction of the national security clause, sources say it has been explicitly mentioned as defence is a sensitive sector.

The government has been focusing on the defence sector to act as an engine for boosting manufacturing in the country, and is aiming to achieve a turnover of Rs 1.75 lakh crore, including exports worth Rs 35,000 crore, by 2025. As of last year, the defence industry, along with the aerospace and shipbuilding industry, was estimated to be worth Rs 80,000 crore, of which the share of PSUs was nearly 80%, or Rs 63,000 crore.

Through a more liberalised FDI policy, the government wants foreign original equipment manufacturers to shift operations to India, and also encourage private players to play a larger role.

Prime Minister Narendra Modi recently said the government was making efforts to boost defence production. Addressing an online seminar on “Aatmanirbhar Bharat in defence manufacturing”, Modi said: “Our commitment to self-sufficiency in defence production is not limited to talks or papers. The effort, in the last few years, has been to break all the shackles associated with the defence sector. Our aim is to increase production in India, develop new technology in India, and maximise expansion of the private sector.”

The raising of the FDI cap in the defence sector through the automatic route to 74% was announced by Finance Minister Nirmala Sitharaman in May. Sitharaman had mentioned it along with a slew of other measures for the sector, including a negative imports list and a dedicated budget for capital acquisition from the domestic industry.

A draft Defence Production and Export Promotion Policy released a month ago mentioned the efforts made to liberalise FDI in the sector, for attracting firms to open manufacturing facilities and expanding India’s presence in international supply chains.