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India needs to accelerate domestic manufacturing and reduce its dependence on foreign capital, defence equipment, energy and technology amid rising geopolitical tensions and growing global protectionism, according to a report by Kotak Securities.
In its report, Kotak Securities said the country's external vulnerabilities have increased over the past few years, necessitating stronger policy interventions aimed at self-reliance. "We examine measures to reduce India's external dependencies, given the sharp increase in geopolitical tensions, resource nationalism and technology 'control' in the past 2-3 years," the report said. According to the brokerage, India continues to have a "high degree of external dependency across four areas; capital, defence, energy and technology." The report argued that "a greater thrust on domestic manufacturing could be the only option" for addressing many of these vulnerabilities. On capital flows, Kotak highlighted India's structural trade imbalance and warned that future challenges to services exports could worsen external financing needs. The report said that India's large and ongoing trade deficit, averaging 6.4% of GDP between FY2016 and FY2026, along with possible pressures on services exports and overseas income inflows, could widen the current account deficit and make the country more dependent on foreign capital unless it takes further steps to reduce goods imports. The brokerage noted that India's manufacturing sector accounts for only about 13 per cent of GDP, significantly below levels seen in several major emerging economies. It recommended expanding domestic manufacturing capabilities and increasing value addition across sectors to reduce import dependence. On defence, Kotak warned that India's reliance on foreign military systems remains elevated. The report said that India still depends heavily on imported defense equipment, with imports making up an average of 38% of procurement between FY2016 and FY2024. It also noted that the adoption of domestically developed defense systems has been slow. To address this, the report recommended speeding up approvals for locally made defense products, increasing incentives for private-sector defense manufacturers, and gradually reducing defense imports. It also called for a larger role for private-sector defence companies and greater technology transfer from foreign suppliers. Energy security emerged as another major concern. Kotak pointed out that India remains heavily dependent on imported fossil fuels, making it vulnerable to both price shocks and supply disruptions. In the medium term it can only be reduced through a greater thrust on renewable energy. The report added that it is "unlikely India can increase domestic production of crude oil and gas, given the resource constraints," while climate-related considerations also limit greater reliance on coal. Referring to recent geopolitical developments, Kotak said the conflict-related disruption risks in the Middle East underscore India's energy vulnerability. The report noted that the recent blockade of the Straits of Hormuz by Iran in the conflict with Israel and the US demonstrates India's vulnerability to supply disruptions, not just price shocks. On technology, the brokerage said India faces increasing challenges because of its dependence on imported technologies and the growing strategic competition between the United States and China. To bridge the technology gap, Kotak recommended government-to-government partnerships with countries such as Japan, South Korea and European nations, deeper collaboration between domestic and foreign companies, and stronger incentives for Indian firms to build global technological capabilities. The report also stressed the need for greater competition and innovation within India's private sector. "We believe greater competition would be extremely critical for Indian companies to be globally competitive and stay relevant," it said. (ANI)
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