On July 25,2001,replying to a question in the Lok Sabha,then-Defence Minister Jaswant Singh stated that the defence industry sector is opened up for participation by the Indian private sector up to 100 per cent of equity,with a foreign direct investment component of it being permissible up to 26 per cent. One decade down the road as,foreign defence majors line up at the Defence-Expo 2010 to display their wares,it is time to take stock of the efficacy of this initiative and to the contribution of Indian industry to our defence effort.
The defence ministry did take an interest in promoting the private sector to increase self-reliance in defence production. Myriad reform measures the offset policy of 2006,the recent Buy and Make (Indian) provision,sharing a public version of the long-term plan of the armed forces with industry were initiated. The results,unfortunately,have been disappointing.
Over the past decade India has bought equipment worth $50 billion from foreign suppliers,and will likely spend more than $100 billion on weapons systems in coming decade. The contribution of Indian private industry to this figure is miniscule,contrary to the claims of most industry associations. FDI is a mere $0.15 million,a fraction of the inflows into,say,the timber products sector. Even today only 30 per cent of Indias defence needs are indigenously met.
Efforts at augmenting the private sectors contributions have only been incremental. Some were recommended by the Vijay Kelkar and the Prabir Sengupta committees; others resulted from offset provisions in foreign contracts with a value of Rs 300 crore and above. There have been policy roll-backs also such as not nominating private Indian companies as Raksha Udyog Ratnas on the specious premise that it would discriminate against small and medium enterprises in defence production .
If theres one word to succinctly characterise the entire approach of the Indian establishment over the past decade in this sector,that word is conservative. But caution must now give way to reforms that are visionary in scope,bold in character and sweeping in intent.
Government needs to leverage Indian corporate energy to create indigenous military-industrial complexes over the next two decades. This would have varied benefits: notably the incubation of a strategic culture which,as the PM rightly lamented four years ago,India sorely lacks. It would also invariably lead to the creation of privately-funded strategic think tanks which can engage in creative and independent thinking on a host of issues where India sorely lacks domain knowledge
But,fundamentally,government must make up its mind that Indian private industry be trusted in the true sense of the word. Oddly,while we trust foreign suppliers (essentially because there are few alternatives) governed as they are by their respective national laws that have in-built sanction mechanisms to restrict supplies in various situations,we have not extended the same trust quotient to Indian Industry.
Even now the private sector is at a distinct disadvantage vis-à-vis established defence public sector enterprises the eight public sector units and 40 ordnance factories. IT struggles to push its interests through industry associations: the public sector has a non-competitive edge,because of its close proximity to the MoD. The role of the Department of Defence Production thus needs to be drastically retooled to evaluate Indias requirements not in a public sector context but a larger India paradigm.
The private sector is also inhibited by technical limitations primarily due to its late entry into the industry (a consequence of the policy regime and the governments years of investment,with questionable productivity,in its own companies). To catch up the private sector needs to institutionalise joint ventures with established foreign defence majors but the existing FDI cap,26 per cent,doesnt help.
Essentially a four-pronged initiative is needed. The licensing system needs to be liberalised: except for very critical products,all other manufacturing needs to be put on the automatic approval route or approval should be simply done away with. Second,FDI limits must be enhanced to 49 per cent across the board; and,in non-sensitive areas raised to 76 or even 100 per cent. This would obviate the need for government to defray 80 per cent of the R&D costs,the centrepiece of its latest policy initiative,by positioning India,with its inherent cost advantages,as a manufacturing destination. Then,a level playing field must be provided to private industry in terms of the excise and custom regime. Finally,the government must seriously consider private equity participation in the defence-related public sector to unlock their potential and maximise returns on sovereign investment over the decades
In its second term the UPA government must lay solid foundations so that in the decades to come a rising India is not scouring the world for military hardware. This trend needs to be reversed.
The writer serves on the Parliamentary Consultative Committee for Defence. The views are his own
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