India to increase the foreign direct investment cap on defense

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India to increase the FDI cap on defense

The maiden Union Budget for the Modi government for the 2014–2015 financial year was presented by Indian Finance Minister Arun Jaitley on July 10. It has been lauded by American experts and corporate America as a step in the right direction to generate employment and foster growth. It has opened the door to a much wider level of U.S. involvement in India’s development plans in the coming years.

The budget announcement included certain key measures that could act as a catalyst for growth in U.S. investments in India. These included:

  1. Increase in the foreign direct investment (or FDI) cap in the defense sector from 26% to 49%
  2. Increase in the FDI cap in the insurance sector from 26% to 49%
  3. The relaxation of conditions necessary for foreign investment in construction

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On defense

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As highlighted by Jaitley in his budget speech, India is one of the largest buyers of defense equipment in the world today, although its domestic manufacturing capabilities are still at a nascent stage. The increase in the FDI limit to 49% could help deepen India-U.S. collaboration in the defense sector. It could also open the doors for several foreign players.

Until now, defense has attracted less than $5 million in foreign investment. Foreign firms have said they need higher investment caps and greater management control if they’re going to develop a bigger industrial base in India.

The Indian government is already in the midst of finalizing an estimated $15 billion contract with Dassault Aviation for the sale of 126 Rafale fighter jets. U.S. government officials are separately pushing hard for $2.8 billion in delayed sales of Boeing’s Apache attack and Chinook military transport helicopters.

A deeper India-U.S. collaboration in the defense sector

With India looking to the U.S. for new artillery and helicopters, transport aircraft, guided missile technology, and specialty radar to strengthen its homeland security capability, companies like Boeing (BA), United Technologies Corp (UTX), Raytheon (RTN), and Lockheed-Martin Corporation (LMT) could stand to gain. These companies are currently working closely to establish domestic manufacturing capacity with India’s vital private sector and capable defense public sector undertakings (or DPSUs).

For investors seeking exposure to these companies, the iShares Dow Jones U.S. Aerospace & Defense Index Fund (ITA) is a U.S. exchange-traded fund (or ETF) that has invested heavily in these companies. It has around 30% of its exposure concentrated among these four companies.

We have discussed how the budget announcement regarding the increase in FDI cap in the defense sector could act as a catalyst for growth in U.S. investments in India. Let’s move on to discussing how announcements in the insurance and construction sector favor U.S. investments in India.

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