New Delhi: The foreign direct investment (FDI) cap in India's defence industry should be raised to 49 percent from the current 26 percent to make it self-reliant, taking much of the pressure off the state exchequer, says a business body.

India's expenditure on importing arms since the Kargil war in 1999 has soared to $25 billion (Rs.1,000 billion) and it is estimated to reach $30 billion by 2012, says the Associated Chambers of Commerce and Industry of India (Assocham).

Indian forces are also the world's largest importer of defence equipment, with their hardware arm importing goods worth $6 billion.

The defence sector spending is expected to increase from 2.8 percent to 3 percent of the gross domestic product (GDP), which could be utilised to finance additional capital outlays for modern equipment.

"The Indian government opened up the defence production industry by allowing 100 percent investment by private sector firms and at the same time allowed 26 percent FDI in select areas," said Assocham president Venugopal Dhoot.

"This needs to be further accelerated to 49 percent, as it would help procurement of latest technologies as per provisions of latest defence offset policy," he added.

The defence offset policy is expected to bring in $10 billion during the 11th Five-Year Plan (2007-12) period as every foreign firm involved in India's defence deals is required to spend 30 percent of the value on offset goods or services purchased from Indian defence companies, Assocham said.

"The government has set a 70 percent target for procuring its defence requirements from indigenous sources by 2010. For achieving this target the government is mainly relying on private players," it added.

"The current defence market for private sector firms in India, which includes outsourcing from defence public sector units and ordnance factories, is estimated to be $700 million. This spending will further increase since the Indian defence industry is determined to increase the participation of private players," the chamber said.