The seeds for a strong defence economy have been sown by the new government through a series of reforms in procurement to facilitate participation of the private sector. Recognising the urgent need to modernise our armed forces with the latest technology, the MoD has cleared a number of large programmes.

To boost these programmes and spur the economy, a sustained increase in the defence capital budget allocation is necessary. With 85-90 per cent of the capital allocation spent to fulfil past commitments, only a sizeable increase (at least 15-20 per cent) in capital allocation can give a fillip to modernisation. As the MoD pays just 15 per cent in advance on contract signing, such increased allocation can significantly increase the potential for new acquisition towards targeted modernisation.

Besides increasing the capital budget allocation, the Finance Minister needs to address the removal of anomalies in direct and indirect taxes to establish a level playing-field for private sector companies with defence PSUs. The industry expects the Finance Minister to either abolish all exemptions or grant these for select sectors like defence to the private sector. The Minister should also discontinue grants and fund capital for modernising or upgrading DPSUs’ assets. corporates. .

With uncertainty over incentives, corporates will shy away from investing in R&D. The industry expects the Minister to incentivise R&D on a long-term basis and enhance weighted tax deduction in targeted segments like defence, to bring them on par with government funded programmes.

Capital intensive

Defence is a capital intensive sector and the industry looks up to the Finance Minister to incentivise capital asset creation by extending Section 80(IA) benefits. The industry also expects the Finance Minister to extend service tax exemptions on par with the infrastructure sector for specific investments.

The MoD has a scheme for disbursing the Technology Development Fund to SME/MSMEs as grant in aid for R&D/indigenous technology development. The Centre could provide liberal allocation to the Technology Development Fund. A study of global companies operating in defence indicates that the domestic market alone would not make large investments viable. This calls for the Finance Minister to announce export facilitation through incentives in the form of tax exemptions for defence exports, besides providing specific allocation for low-cost line of credit to friendly countries for procuring Indian defence products.

The writer is Senior Vice-President, Head of Defence & Aerospace, Board Member, L&T Heavy Engineering and L&T Shipbuilding

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