A study titled ‘Self-reliance in defence production: The unfinished agenda,' the Associated Chambers of Commerce and Industry of India (ASSOCHAM) and global advisory firm PricewaterhouseCoopers (PwC) advises the government of India to initiate bold decisions such as increasing the foreign direct investment (FDI) cap to 74 per cent, or better still, to 100 per cent for India to realise the dream of self-reliance in the defence sector.
The defence segment has immense possibilities for attracting investments, setting up manufacturing facilities, obtaining technologies and capabilities, and generating high skilled employment, the study notes.
The study reads: Though the FDI cap has been recently increased, 49 per cent may not succeed in bringing investment and advanced technology into defence sector; thus in order to facilitate inflow of capital and setting up of entities of original equipment manufacturers (OEMs), and their suppliers with transfer of technology, it may be desirable to allow either 100 per cent or, in case that is not possible, at least a 74 per cent FDI in the sector.
It further suggests that increasing the FDI limit will also facilitate better compliance of offset obligations. To truly leverage the combined potential of one of the largest defence acquisition programmes of the world, a liberal offset policy and India's advantage in low-cost manufacturing and skilled manpower, it is essential that government policies create synergies rather than contradictions, noted the study.
"Defence production needs long-term and large investment, cutting-edge technology with low economies of scale," said DS Rawat, secretary general of ASSOCHAM while releasing the findings of the study.
"Government of India, therefore, has to support building a private industrial base with proactive policies: in funding research and development, creating a low-interest regime to bring down capital costs, addressing the disadvantages of exchange rate fluctuations, providing stability and assurance in policy and orders and encouraging exports to achieve economies of scale and become globally competitive," said Rawat.
Highlighting the shortage of skilled workforce available to the defence sector in India, the ASSOCHAM-PwC study further noted that skill development is critical for achieving self-reliance in defence production.
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