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Modi Eases Defense Investment Rules as India to Rebuild Forces

India will ease rules for foreign investment in the nation’s defense sector and boost spending by 12 percent as Prime Minister Narendra Modi seeks to modernize the armed forces to counter China’s rising power.

Overseas investors can buy as much as 49 percent of Indian defense companies without government approval, up from 26 percent currently, Finance Minister Arun Jaitley told parliament as he delivered Modi’s first budget. Total spending will rise to 2.29 trillion rupees ($38 billion) in the year through March from 2.04 trillion rupees in the previous 12 months.

“India today is the largest buyer of defense equipment in the world and our domestic manufacturing capabilities are still at a nascent stage,” Jaitley said. The government’s policy “is to promote foreign direct investments selectively in sectors where it helps the interest of the Indian economy,” he added.

Prime Minister Narendra Modi has vowed to bolster the country’s defense industry and reduce India’s reliance on foreign weapons as he grapples with internal security threats and border disputes with nuclear-armed neighbors Pakistan and China. India’s defense spending is near a half-century low as a percentage of the economy and many weapons are obsolete.

“They have taken a cautious approach -- they want to go step by step,” said S. Chandrasekharan, director of the South Asia Analysis Group in New Delhi. “They are hoping that foreign companies will invest in at that level, and if they don’t they will raise it further. I think this will be enough for some companies to come in.”

Management Control

Indian companies will continue to hold management control if an overseas company invests, Jaitley said. He set aside 946 billion rupees for weapons programs compared with 789 billion in the previous year.

India is negotiating with Dassault Aviation SA to buy 126 warplanes, which would be the world’s biggest fighter-jet purchase in about two decades. A shortage of funds is holding up the deal.

In the last financial year, defense spending was estimated at 1.8 percent of gross domestic product, the lowest since 1963, the Institute for Defence Studies and Analyses, a government funded research group, said last year. Per person India’s military spending is about three times less than China and among the lowest in Asia, according to the Stockholm International Peace Research Institute.

To contact the reporter on this story: Andrew MacAskill in New Delhi at amacaskill@bloomberg.net

To contact the editors responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net Jeanette Rodrigues

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