Industry wants 49 percent foreign investment in defence sector

December 14th, 2008 - 4:09 pm ICT by IANS  

New Delhi, Dec 14 (IANS) Industry body Associated Chambers of Commerce and Industry (Assocham) has called for a hike in existing foreign direct investment (FDI) ceiling for defence from 26 percent to 49 percent. In a paper submitted to the defence ministry, the chamber said India’s spending on arms imports since the 1999 Kargil conflict has gone up to $25 billion and would further rise to $30 billion by 2012.

Maintaining that it was “necessary to move towards acquiring self-reliance in defence production,” Assocham said this could be possible if the FDI limit was raised to 49 percent.

Assocham secretary general D.S. Rawat said the Indian defence sector was estimated to be worth $5-8 billion annually. “If the Indian economy continues to grow at current momentum, Indian defence spending is projected to increase from 2.8 to 3 percent of the GDP (gross domestic product) in the future and this increase would be used to finance additional capital outlays for modern equipment,” he added.

The current defence market for private sector firms in India, which includes outsourcing from public sector units and ordinance factories is estimated to be $700 million.

India imports over $6 billion worth of military hardware annually. Saudi Arabia and China, the next two large armament buyers in the developing world, have notched defence deals valued between $2-3 billion each in 2006.

The paper highlights the fact that in 2001, the Indian government opened up the defence production industry by allowing 100 percent investment by private firms and at the same time, also allowed the FDI of 26 percent in select areas.

Rawat said this needed to be further accelerated to 49 percent, as it would help procurement of latest technologies as per the provisions of the latest defence offset policy.

Defence offsets policy is expected to bring in $10 billion during the 11th Five-Year Plan period as every foreign company is required to spend 30 percent of the value on offsets goods or services purchased from Indian defence companies.

India has a large industrial base, and offsets are expected to further develop its technical and manufacturing potential, and also help increase investments in domestic research and development.

The policy is also expected to hugely benefit small and medium enterprises. There are more than 5,000 companies supplying around 20 percent to 25 percent of components and sub-assemblies to state-owned companies.

Currently, about 70 percent of the procurement in value terms is from foreign sources because the Indian public sector cannot deliver in terms of quality or speed on either research or production.

And only about 30 percent of the orders placed in India - or 9 percent of the total - go to the private sector.

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