The Defence Procurement Policy regulations have been amended to
encourage private sector participation in defence production and to
ensure that foreign vendors offset a specific percentage of their
production to India, according to Chief of Air Staff Fali Homi Major.
So far as procurement is concerned, "the government desires greater
private participation in defence production," said the Air Chief
Marshal. He added that "all our overseas contracts have an offset
clause which implies that the companies we contract with have to ensure
an offset of production by a specific percentage to India." This means
that a foreign company winning a Rs. 50,000 crore contract would have
to invest 50 per cent of that sum in India, he said.
The DPP 2008, approved early this month, will come into effect from
1 August and carries about 40 amendments on the provisions of the
earlier DPP 2006.
Pointing out that India was yet to be
self-reliant in defence production, ACM Major asked for increased
private participation in this area. 
The
Indian government has launched a USD 100 billion capital investment
plan over the 2007-12 period, with the objective of upgrading the old
defense equipment of the Indian armed forces.
Military
expenditure in India has grown steadily over the last few years with
the annual budget for the year 2008-09 set at USD 26.4 billion. DPP
thus presents a great opportunity to kick start the transfer of
sophisticated technology and manufacturing in the defense sector in
India.
The existing FDI policy allows up to 26% foreign equity stake in the manufacture of defense equipment and as per this restriction if
one is to assume approximately USD 10 billion of the offset obligation
would be discharged through investment in manufacturing, the existing
policy would require a domestic equity contribution of almost about USD
30 billion.