NEW DELHI - India has put on hold a proposal to increase foreign direct investment in the defense sector, but it is looking favorably at allowing foreigners full ownership in the country's single-brand retail sector.
India strictly regulates investments in retail and defense and stiff political resistance continues to stymie efforts to relax foreign ownership rules in these sectors.
India presently allows 26% foreign direct investment in the defense sector.
It allows 26% foreign direct investment in the defense sector and the proposal was to raise the limit to 74%.
"The defense ministry is not willing to raise the FDI [foreign direct investment] limit. It seems the chapter is over as of now," a senior government official with direct knowledge of the matter, who didn't want to be named, said Monday.
He added that the defense ministry isn't in favor of overseas players taking control of manufacturing activities.
India will spend, by some estimates, more than $100 billion by 2016 upgrading aging military equipment and to procure advanced new technologies. Indian companies such as Mahindra & Mahindra Ltd. and Larsen & Toubro Ltd. have previously urged the Indian government to ease FDI in defence so that companies can access sensitive technologies from overseas partners.
The official said the government is, however, considering another proposal to allow 100% FDI in single-brand retail.
Single-brand retailers such as Marks & Spencer Group PLC and Nike Inc. are currently allowed to bring in up to 51% FDI into India.
He said while "files are moving" on the proposal to remove the FDI cap in single-brand retail, he couldn't say if the government would decide on allowing 51% FDI into India's multi-brand retail sector this year.
Foreign multi-brand retailers such as Wal-Mart Stores Inc. and Carrefour S.A. are prohibited from directly investing in retailers selling to consumers. They are only allowed 100% ownership of cash-and-carry stores that supply to small retailers, restaurants, hotels and other business outlets.
There were hopes that these rules will be relaxed soon after a panel of senior bureaucrats in July approved a proposal to allow overseas funds in local multi-brand retail operations. However, the government has recently indicated that differences among various ministries over the issue are holding up a decision.
A recent barrage of graft charges and vocal political opposition are being seen as factors that have also weakened the Congress party-led United Progressive Alliance's resolve to push through much-required but politically sensitive policy reforms.
Saloni Nangia, senior vice president of consulting firm Technopak Advisors, said easier FDI rules for single-brand retail might not be as "politically volatile" as that for multi-brand retail, thus allowing the government some headroom.
