Industry body seeks 100 percent FDI in defence

New Delhi -  With India edging past China as the world's largest arms importer, an industry body has sought increase in Foreign Direct Investment (FDI) in the defence sector to 100 percent from the existing 26 percent to attract advance military technology to India and for curbing large-scale imports.

India currently imports 70 percent of its military equipment and system needs from abroad, with Russia, Israel and the US emerging as the three largest weapons and platforms suppliers to New Delhi in the last decade.

Coming just after the government presented a defence budget for 2012-13 worth Rs.193,407 crore ($38.6 billion) earlier this month, the Associated Chamber of Commerce and Industry of India (Assocham) called for allowing 100 percent FDI in the defence sector "to develop a domestic industrial base, encourage technology transfers and curb large-scale imports."

"We must be realistic and recognise that defence production is a capital- and technology-intensive sector. To develop a strong industrial base in the country, we need both foreign capital and technology," it said.

Assocham secretary general D.S. Rawat said the 26 percent cap on FDI "has kept away both."

"We must reconsider the cap. There is no reason why we should have one at all and not allow 100 percent FDI," Rawat said.

"Nascent industry protection comes from high tariff barriers and investment incentives - not the other way, as India has. Manufacturing within the country through foreign capital with full transfer of modern technology is a far better option than importing the equipment from abroad," he said.

The defence sector is like no other - it has a single buyer that invariably buys through competitive bidding and very long product development and procurement cycles.

"Both viability and competitiveness will be achieved if exports are allowed and encouraged," Rawat said.

India has an excellent law on special economic zones which should be leveraged to make it an important hub in the global supply chain on aerospace and defence production, he said.

Assocham also called for the government to also reconcile contradictions and align all relevant policies. "Clarity is needed on what a defence product is and this definition should cover the final product (not components) and have a direct link with lethality or high-end technology," the industry body said.

Moreover, if a product or service is allowed foreign investment under FDI policy, it should not be disallowed or have a different cap imposed on it under the offset policy.

"We need to introduce greater transparency in - as well as simplify - the offset approval process. The offset approval process should be centralised in one permanent committee of the Defence Offset Facilitation Agency," it added.