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India is the third largest importer of defense hardware in the
world, and is one of the top ten countries in terms of defense
expenditure.
During 2004-2007, India spent $10.5 billion on
importing defense equipment, which made it the largest arms
importer in the developing world.
It is estimated that the
country's imports of defense equipment will reach $30 billion by
the year 2012.
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The growing importance of the defense sector in India is evident
from the fact that the budget estimate for this sector for the
year 2006-2007 was US$ 20 billion, which was 5% more than that
in the previous year's budget.
Defense expenditure is expected to grow at a rate of
7% annually between 2008 and 2013. In 2006-2007, India's military
expenditure amounted to roughly two percent of its GDP, even after
excluding the expenses on defense pensions, paramilitary forces, and the
defense ministry's own spending.
In 1991, the Defense Research and Development Organization (DRDO) of
India had targeted achieving 70% indigenization in defense production by
2005. Toward this end, greater participation of the private sector in
defense production was sought. The process of private participation
started with the defense ministry outsourcing the production of
components and sub-assemblies to private sector firms in the early
2000s.
Defense Public Sector Units (DPSUs) and Ordnance Factories (OFs) also
outsourced their requirements to the tune of US$ 700 million to the
private sector between 2001 and early 2007. For instance, companies like
Hindustan Aeronautics Limited (HAL) outsourced small components for
their various projects extensively from private sector companies.
HAL has also embarked on a long-term program to outsource low and medium
tech items/services from private companies in future. As per industry
estimates, HAL's outsourcing exercise was worth approximately US$150
million in 2007. This figure is expected to reach US$ 1 billion by
2011-2012.
In 2001, the Indian government opened up the defense production industry
by allowing 100% investment by private sector firms in the industry. In
the same year, the Department of Industrial Policy & Promotion, under
the Ministry of Commerce & Industry, allowed an FDI of 26% in select
areas in the defense production industry.
In the early 2000s, the private sector (which had previously only been a
supplier of raw materials, semi-finished products, and parts and
components to DPSUs, OFs, Base Workshops of the Army, Base Repair Depots
of the Air Force, and Dockyards of the Navy) started becoming engaged in
the development and production of several hi-tech defense items.
Public-private partnerships also started emerging in the manufacture of
complete advanced equipment/systems. Mahindra & Mahindra, the Tata
Group, Kirloskar Bros., Larsen & Toubro, Ashok Leyland, Jindal, Max
Aerospace & Aviation, and Ramoss India were some of the key private
sector participants who supplied defense equipment and services.
A committee headed by Dr. Vijay L. Kelkar, former Economic Advisor to
the Finance Minister, was constituted in 2004 to examine and recommend
modalities for the integration of the User (Armed Forces), the Defense
Ministry, and the Indian Industry.
The recommendations made by the
Committee revolved around major policy issues and initiatives, which
were thought to be critical for the future growth and development of a
strong defense industrial base in the country.
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