The evolving geopolitical scenarios on India’s borders and the strong underlying economic growth will require and result in increased spending on defence in the coming years. New procurement will be required to replace obsolete equipment and keep the forces in a state of combat readiness. Internal security requirements are also increasing and will drive demand for homeland security equipment.

Traditionally, most capital spending by India on defence was done through inter-governmental purchases that often include a significant role for the defence public sector undertakings (DPSUs) which are licensed to produce the contracted equipment. The DPSUs dominate the Indian market while the private sector manufacturing base is fragmented. In terms of existing capability, there is severe gap in the ‘Design to Production’ capability, and with our domestic industry not in a position to develop and supply the range of required equipment, the dependence on imports is only set to increase, unless the Government of India takes measures to develop an ecosystem for defence manufacturing in the country.

While good manufacturing infrastructure, research and development capability, talent, domain experts in the field, and an enabling tax regime are essential components of this ‘ecosystem’, we must incentivise global OEMs to share their technological expertise which will help India realise our vision of self-reliance in defence production. The current cap of 26 per cent on foreign direct investment (FDI) in defence production does not provide comfort to global OEMs to share their proprietary technology and this is proven by the abysmal FDI inflows in the sector since it was opened up 13 years back.

When we speak of self-reliance in this increasing globalised world, we mean the ability to ensure defence preparedness with platforms that we can develop and their life-cycle support. This can be achieved when we have some control over its production and supply. There have been instances in the past when India faced disruption of its supplies due to either geopolitical reasons or simply because the OEMs had stopped production of the particular system. It would only serve our interest if global OEMs can be made to set up manufacturing facilities in the country. From the security perspective, it is much more preferable to encourage global OEMs to produce the systems in India than to rely on imports.

The defence manufacturing industry is a multi-technology sector. Defence products are complex systems that encompass knowledge from many scientific disciplines and technological fields. An increase in FDI would bring in core and critical technologies in defence. We need to get over the mindset that we can develop these range of technologies on our own, and take pragmatic measures to develop on the existing defence industrial base.

There are apprehensions that increasing FDI limit will result in stunting the growth of the domestic industry. However, if one were to do an assessment of the capability and achievements of the domestic industry, the gaps will become very evident: while there is expertise in assembly, development is a missing link.

Raising the FDI cap will lead to joint ventures between the Indian industry, particularly private sector, which must play a much bigger role in defence production. Collaborations between OEMs that generate technology consistent with international standards and the private sector must be actively encouraged. The Government must keep a vision of encouraging OEMs to share technology that is consistent with India’s defence objectives as outlined in the 15-year ‘Indian Armed Forces Long-Term Integrated Perspective Plan’.

Having outlined the compelling reasons that justify and increase in FDI, it is also worth noting that the Department of Industrial Policy and Promotion (DIPP), on June 26, 2014, issued its Press Note No. 3, giving list of defence items that require industrial licence. Per this list, which is based on ITC (HS) Code, only full weapon systems, defence aircraft, warship, etc. require an industrial licence. It is understood that the Government’s intent is to permit 100 per cent FDI under the automatic route in items that are not covered in this list. An explicit clarification to this effect from the Government will remove ambiguities and provide clarity and assurance to investors.

As we develop the other components of the defence manufacturing ‘ecosystem’ in the country, let us take decisive steps to open the sector to FDI that will bring in advanced technologies and enable India to become a part of the supply chain of the global OEMs.

—The writer is President and CEO (New Venture), Reliance Industries