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A joint study conducted by New Delhi-based industry association, Associated Chambers of Commerce & industry [ASSOCHAM ] and Ernst & Young has indicated that the Indian defence sector is being underutilized due to a lack of incentives, and the existing policy which has put a cap of 26 per cent on foreign direct investment (FDI).
The study feels that the existing FDI cap is a deterrent since it does not provide foreign investors incentives with respect to capacity expansion, buy-back guarantees and exports and it subjects them to purchase and price discriminations vis-à-vis public sector enterprises.
Hence, there is reluctance on the part of the foreign companies to invest in local firms where there stake and control is minimal.
In addition, the study suggests the FDI cap should be raised to 49 per cent in the defence sector since it will reduce the risk of Indian companies and provide them an opportunity to access technical and managerial skills of the foreign companies to rise up to the global demands.
While the opening of the defence sector for private firms was a move to enhance the contribution to the defence forces, the same policy must now be augmented for greater realization of investments in the defence sector.
The study has indicated that only returns from investment can guarantee survival of the private sector.
Since the defence industry is primarily single consumer-driven and highly capital-intensive, the private sector was at a greater risk. Added to this is the lack of technology and experience which is undermining the industrial capability of the private sector.
The study has also lamented the preferential treatment which defence public sector undertakings (DPSUs) continued to get over private players despite policy initiatives in Defence Procurement Procedure (DPP) 2008.
The private sector must be at par with the DPSUs and Ordnance Factory Board (OFB) since the competitiveness would provide Original Equipment Manufacturers (OEMs) and other vendors an opportunity to tap the potential of private firms in India.
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