In a Paper brought out by ASSOCHAM on Indian Defence Industry, it has been pointed out that India’s spending on arms imports since 1999 Kargil conflict have risen to $ 25 billion and would further rise to $ 30 billion by 2012.

It is therefore necessary to move towards acquiring self reliance in defence production, which could be possible if foreign equity in FDI’s is raised to 49% which would help India acquire defence technology for its increased arms production and thus shed its imports dependence.

Releasing the findings of the Paper, the ASSOCHAM President, Mr. Venugopal N. Dhoot said that the Indian defence sector is established to be worth US$ 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% of the GDP in the future and this increase would be used to finance additional capital outlays for modern equipment.

India  is the world’s largest importer of defence articles as its services buy over US$ 6 bn worth of military hardware.  As compared to India, Saudi Arabia and China; the next two large armament buyers in the developing world, notched up defence deals valued between just USD 2-3 bn each in 2006.

The paper highlights the fact that in 2001, the Indian government opened up the defence production industry by allowing 100% investment by private sector firms and at the same time, also allowed FDI of 26% in select areas in the defence production.  This needs to be further accelerated to 49%, says Mr. Dhoot as it would help procurement of latest technologies as per provisions of latest Defence Offset policy.

Defence offsets policy is expected to bring in USD10 billion during the 11th five-year plan period as every foreign company is required to spend 30% of the value on offsets goods or services purchased from Indian defence companies,

It has been stated that as India has a large industrial base, offsets will further develop its technical and manufacturing potential and they will also help to increase investments in domestic research and development.  The policy is also expected to hugely benefit the Small and Medium Enterprises and is conducive for the private companies to have a larger presence in the defence set up.

Mr. Dhoot said that host of Indian companies can get the benefit of offset policy and such a scenario will further boost country’s economy in the near future. The offset policy is expected to generate market-entry opportunities for private companies, to invest in research and development and manufacturing of defence goods.

Currently about 70% 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% of the orders placed in India - or 9% of the total - goes to the private sector.

The government has set a 70% target for procuring its defence requirements from indigenous sources by 2010. For achieving this target the government is mainly relying on private players.

The public sector is facilitating greater private sector participation in the area of defence goods production which will also contribute to the growth of domestic industries. There are more than 5,000 companies supplying around 20% to 25% of components and Sub-assemblies to state owned companies. The current defence market for private sector firms in India, which includes outsourcing from Defence Public Sector Units and Ordnance Factories is estimated to be USD700 million.  This spend will further increase since the Indian Defence Industry is determined to increase the participation of private players.