There is an urgent need to have a vibrant defence industry within India to produce state-of-the-art defence equipment

Pursuing an unprecedented and innovative approach, the Department of Industrial Policy and Promotion (DIPP) in the Commerce Ministry of the Indian government while releasing a series of discussion papers on various aspects related to foreign direct investment (FDI), has also prepared one on FDI in the defence sector. While clarifying that the views of the DIPP should not be constructed as the views of the government, the department has come out with recommendations which can have far-reaching effects on the way the defence sector operates in India.

India is one of the largest importers of conventional defence equipment and is among the top ten countries in the world in terms of military expenditure. Growing at an average of 13 per cent since financial year 2006-07, India’s cumulative defence budget in 2010-11 has been pegged at Rs 1,47,344 crore ($32 billion), of which 40 per cent is reserved for capital expenditure. Contrary to the government’s long-stated aim of reversing the trend, the Indian defence industry contributes only 30 per cent in meeting the requirements of defence equipment, while nearly 70 per cent continues to be imported. The bulk of the domestic production is met either through the ordnance factories (OFs) or the defence public sector units (DPSUs). Even where the defence products are manufactured domestically, there are large components of imported sub-systems. As a result, 15 per cent of equipment can be described as state-ofthe-art and nearly 50 per cent is suffering from obsolescence.

Indigenous research and development has not kept pace with the requirements of present-day warfare. Manufacture through the route of transfer of technology (ToT) to DPSUs/OFs, has proved to be a slow and ineffective/incomplete process due to the reluctance on the part of the suppliers and indifference on the part of the recipient indigenous manufacturing units. The result is that Indian DPSUs and OFs are getting more and more marginalised/irrelevant as far as the goal of supplying modern defence equipment is concerned; causing a catch-22 like situation with more and more dependence on imports.

There is an urgent need for India to have a defence industry within the country, which can produce state-ofthe-art defence equipment to meet the varied requirements of modernday warfare. The defence industry is highly technology driven and capital intensive. The DIPP paper argues that since it may take considerable time for domestic companies to acquire the technical edge on their own, the time may have come to consider the vital question of accessing the technology through the modality of allowing foreign companies to set up bases within the country. Manufacturing within the country, through foreign capital, with full ToT will in the long run be a better option.