NEW DELHI, MAY 25, 2010: THE Department of Industrial Policy and Promotion has released discussion papers on Foreign Direct Investment (FDI) in the Defence sector and invited suggestions by July 31, 2010, on the various observations made in the papers on issues facing the defence sector.

It is suggested that it is time for India to become a new manufacturing hub for the defence sector, in association with global defence majors. For India to become attractive for foreign investors, it would be necessary to increase the FDI cap from the present 26 per cent to above 50 per cent. It is hence suggested that like the telecom sector, FDI limits in the defence sector too, should be increased to 74 per cent while retaining the licensing provision that allows the right of refusal where the background of the company is suspect. This can help getting the best technology partners to invest in India.

It has been suggested that the established players in the Defence industry should be encouraged to set up manufacturing facilities and integration of systems in India with FDI up to 74 per cent under the Government route. There need not be any commitment on procurement and these players will have to participate in the request for proposal (RFP) to technically qualify and also compete in the financial bid.

For future RFP's by MoD, a condition may be imposed that the successful bidder would have to set up the system integration facility in India with a certain minimum percentage of value addition in India. The successful bidder should be allowed to bring equity up to the proposed sectoral cap.

According to estimates, nearly 70 per cent of our defence requirements are met through imports, with only 30 per cent being met through domestic production. Defence products that are manufactured domestically through the Ordnance factories or the defence PSUs need a large component of imported sub-systems.

Government's stated aim, as enunciated in Finance Budget 2009-10, is to reverse this trend and manufacture 70 per cent or more of its defence needs indigenously.