NDA (I) 2018 General Ability Test · Question 146 of 150

Correct — A, 49 per cent through the automatic route. Under the policy in force in 2017 a foreign investor could take up to 49 per cent in an Indian defence manufacturing company without seeking prior approval, the government route being needed only for a stake above that level, and then only where the investment was likely to bring access to modern technology. The clearest confirmation of the 49 per cent automatic ceiling is what replaced it: in May 2020 the government raised FDI in defence manufacturing under the automatic route from 49 per cent to 74 per cent, which is only intelligible if 49 was the automatic figure before that change. The stem itself supplies the date, 2017, and the answer has to be read against that year rather than against today's policy.

• (b)26 per cent through the government route — 26 per cent is the older ceiling that applied to defence FDI for many years before the policy was liberalised in the middle of the last decade. It had already been superseded well before 2017, and it is offered here to catch a candidate working from dated notes.
• (c)26 per cent through the automatic route and beyond that up to 49 per cent through the government route — This mixes the old ceiling with the new one and puts the routes the wrong way round. In 2017 the automatic route itself ran to 49 per cent; the government route was for going above 49, not for getting there.
• (d)75 per cent through the automatic route — No such figure has ever been the defence FDI cap. It is close enough to the 74 per cent adopted in 2020 to look plausible today, but it was neither the number then nor the number now, and in 2017 it was far above anything permitted.

Foreign direct investment into India comes through one of two routes. Under the automatic route no prior approval is needed and the investor only reports the transaction to the Reserve Bank afterwards. Under the government route the proposal must be cleared in advance by the administrative ministry concerned. Sectors are then classified by a cap and a route, and defence has been among the most closely held because of the security interest in who controls the manufacture of weapons. A handful of sectors are prohibited outright, including lottery, gambling, chit funds and atomic energy.

Anchor to the exam and then state the change, because this is a number that has moved twice. The stem says 'as per the policy applicable in 2017', and the answer for that year is 49 per cent automatic. In May 2020 the automatic ceiling was raised to 74 per cent for defence manufacturing, with investment beyond that level still requiring government clearance on national-security grounds. The policy direction has been consistently towards liberalisation, as part of the wider push to build a domestic defence industrial base, so any figure quoted in an answer should carry the year it belonged to. The examiner's own phrasing — pinning the question to 2017 — is a warning that this is exactly the sort of number that dates.

• In 2017 FDI in defence was permitted up to 49 per cent under the automatic route.
• Investment above 49 per cent required government approval, and then only where it was likely to bring access to modern technology.
• In May 2020 the automatic-route ceiling for defence manufacturing was raised from 49 per cent to 74 per cent.
• The automatic route needs no prior approval, only post-facto reporting to the Reserve Bank; the government route needs prior clearance.
• 26 per cent is the older defence ceiling, superseded before this exam was set.

• Answering from the current cap when the stem names a specific year.
• Reversing the routes — the automatic route is the higher-freedom one, and the government route is what a bigger stake needs.
• Reading 75 as a rounding of 74 and treating a wrong figure as close enough.

NDA asks for a sectoral cap with the year attached, or asks which sector has a stated cap and route.

• practice — not a real PYQ

  Under the automatic route for foreign direct investment in India, an investor

  • (a)must obtain prior approval from the administrative ministry
  • (b)needs no prior approval and reports the investment to the Reserve Bank afterwards
  • (c)must obtain clearance from the Cabinet Committee on Security
  • (d)may invest only through a joint venture with a public sector undertaking

  Answer(b) needs no prior approval and reports the investment to the Reserve Bank afterwards.

• practice — not a real PYQ

  The FDI ceiling for defence manufacturing under the automatic route was raised in 2020 to

  • (a)51 per cent
  • (b)74 per cent
  • (c)75 per cent
  • (d)100 per cent

  Answer(b) 74 per cent — with anything above that still requiring government approval.