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New Delhi, May 17 (IANS) In what reads more like an indictment of the Indian defence establishment, a government working paper Monday suggested the foreign investment cap in the military manufacturing sector be raised to 74 percent from the present 26 percent to attract established players to the area, save tremendous foreign exchange and revive the country's industry at large.'The established players in the defence industry should be encouraged to set up manufacturing facilities and integration of systems in India with FDI (foreign direct investment) up to 74 percent under the government route,' says the paper, circulated by the commerce and industry minister among different stakeholders in the field for their views and suggestions by July 31.The paper is particularly harsh on the defence R&D sector, saying that it had failed to keep up with the times and that the defence public sector units and the ordnance factories were turning out products that were obsolete.The paper also has a caveat: 'The views expressed in this discussion paper should not be construed as the views of the government. The department (of industrial policy and promotion that has generated it) hopes to generate informed discussion on the subject, so as to enable the government to take an appropriate policy decision at an appropriate time.'Noting that the 'general perception' is that the present FDI cap of 26 percent discourages original equipment manufacturers (OEMs) from bringing in proprietary technology, resulting in India 'not being able to access the latest high-end technologies available', the paper lists a series of benefits that would accrue by raising the level to 74 percent.This could provide a significant incentive for transfer of knowhow/technology, leading to higher levels of technological expertise. 'International experience suggests that this would lead to significant spin-offs, in terms of absorption of such technologies, into related areas of civilian use', the paper says.This, in turn, would assist in achieving the government's objective of 70 percent indigenization through encouraging transfer of new and state-of-the-art technologies to the Indian defence industry, as also through the absorption of latest technologies, thereby promoting the government's objective of self-reliance.It would also encourage OEMs to bring in proprietary technology and lead to corresponding modernization of our defence equipment and help promote private R&D by complementing the efforts of the public sector.As the defence industry is highly capital intensive it would be difficult for India's indigenous defence industry to develop without the supplemental funds made available through FDI.'Higher levels of foreign investment would reduce the corresponding fund requirements of the Indian partners. At the same time, this would promote growth and expansion of Indian companies in the defence sector, over which the government can exercise higher control, as compared to overseas firms/entities.Since a large share of Indian foreign exchange goes towards defence purchases, allowing more FDI in defence 'would result in significant savings in foreign exchange, as more foreign companies will establish defence industries in India', the paper says.Liberalisation of the FDI regime would strengthen India's export potential by way of exports of defence products to other countries.In this context, the paper notes that India's defence exports have ranged between 1.5 to 2.4 percent of the total production, with an import:export ratio of 194:1, compared to 1.3:1 for Israel, 8.8:1 for South Korea and 19.7:1 for Singapore.India's defence exports in 2005 were a mere $15 million, against $1,026 million of Britain, $382 million of China, $402 million of Israel and $86 million of South Africa.Then, in spite of emerging as a large economy, India has a very low manufacturing base. 'The production of military equipment within the country will provide immediate impetus to the manufacturing sector in the shape of large scale ancillarization as has happened in the case of major industrialized nations like the US, France and Germany,' the paper notes.Also, large numbers of manufacturers of defence and dual-use products find it difficult to manage their production in western countries due to increasing costs of labour and other inputs.'This is the right time for India to project itself as a new hub for manufacturing. A number of global defence majors are waiting to set up an alternative/additional manufacturing base in India. 'It is, therefore, not at all necessary for us to underwrite production,' the paper says.While the defence ministry has often said that the cap could be selectively raised to 49 percent, the paper said this would only be cosmetic.Therefore, 'in case we really want to have the state of the art technology, we have to permit anything above 50 percent if not 100 percent. It may, therefore, be desirable to allow either 100 percent or 74 percent as in the case of the telecom sector', the paper says, pegging its recommendation at the latter figure.It notes in this context that indigenous R&D 'has not kept pace with the requirements of present day warfare and manufacture through transfer of technology to public sector units (PSUs)/ordnance factories (OFs) has proved to be an ineffective and slow process'.In most cases, the transfer of technology itself 'was not complete, as the suppliers were more keen to push their own product, rather than indigenizing the production in India'.'Also, in the absence of any incremental technology, the OFs could not modernize or upgrade their platforms' and were 'getting more and more marginalized and becoming irrelevant as far as the goal of modernization of the armed forces is concerned. This is bound to result in more and more dependence on imports', the paper notes.'There is, therefore, an urgent need to enhance the deterrent and operational capability of the armed forces through upgradation/modernization of existing equipment, as well as acquisition of state-of-the-art equipment,' the paper says.
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