Increase FDI cap in aerospace & defence manufacturing to 74% to achieve self-reliance: ASSOCHAM-PwC study

Long-term & large investment, cutting-edge technology and low economies of scale are imperative to boost defence production in India

The Government needs to take some bold decisions like increasing the foreign direct investment (FDI) cap to 74 per cent or even 100 per cent for India to realise the dream of self-reliance in the defence sector which has immense possibilities for attracting investments, setting up manufacturing facilities, obtaining technologies and capabilities and generating high skilled employment, according to a recent ASSOCHAM-PwC joint study.

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, noted a study titled 'Self-reliance in defence production: The unfinished agenda,' jointly conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and global advisory firm PwC (PricewaterhouseCoopers).

Increasing the FDI limit will also facilitate better compliance of offset obligations, it added.

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 Mr D.S. 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 Mr Rawat.

Providing a multiplier of say five for FDI in the offset policy will be a good way to encourage OEMs to bring in investments into the country, suggested the ASSOCHAM-PwC study.

There is no lack of investment appetite within the private sector, with large business houses entering the defence sector, and with micro, small and medium enterprises (MSMEs) that are already playing a critical part within the value chain, it noted.

However, the uncertainty related to defence procurement, long gestation periods, and lack of assured market seriously skews the risk-return profile, and induces a cautious approach on the part of the private sector which is focused on shareholder returns.

Highlighting the shortage of skilled workforce being faced by the defence sector in India, the ASSOCHAM-PwC study further noted that skill development is critical for achieving self-reliance in defence production.

Rationalisation of taxes and duties, extending special support to MSMEs, building capabilities of private industry are certain key suggestions that can go a long way in achieving self-reliance of the Indian defence industry.

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