Defence Notes

New Delhi, 1 July 2014

Private Sector In Defence Sector

CAN MODI MAKE INDIA BIG PLAYER?

By Col (Dr) PK Vasudeva (Retd)

The BJP-led NDA Government seems to be serious about encouraging private investment in defence, as elucidated in the Party’s election campaign and underscored by President Pranab Mukherjee in his joint address to both Houses of Parliament. Notably, not only would this give a chance to many companies to participate in the defence spectrum but also more competition.

Towards that end, an industrial licence would not be needed to manufacture items for defence purposes other than those mentioned in a specific negative list along. Also allowed are dual-use items, having military as well as civilian applications, other than those specially mentioned in the compact negative list.

Further, instead of the long list of licensed defence goods, the Department of Industrial Policy and Promotion in its negative list has stated that industrial licenses would now be required only to make items such as defence aircraft, space aircraft and parts, helicopters, UAVs and warships.

Along-with tanks and other armoured fighting vehicles, warships of all kinds, vehicles fitted with military mountings of arms and ammunition or with equipment for mine-laying and allied items of defence equipment, parts and accessories.

Importantly, the Government's decision to deregulate would give private companies the right to manufacture a number of defence goods. Recall, pre-economic reforms in 1991, the Central Government licensed a bulk of industrial products, including automobiles and white goods.

But, over the years, the list has been pruned, and now only a handful of industries such as defence, cigarettes, explosives, distillation and brewing of alcoholic drinks and hazardous chemicals require licences. In all other sectors, companies can freely enter and manufacture whatever they want without any restriction on quantity.

Until now, all defence items required licences which were tough to come by and the Defence Ministry accused of sitting on applications for years. Shockingly, often it took up to five years to get a licence. Happily, those days are over as 55 per cent of the items have been removed from the licence list. Now, companies would not need a licence to manufacture components, castings and sub-assembly.

In fact, the Modi Sarkar plans to allow 100% foreign direct investment (FDI) in defence, a significant step from the erstwhile UPA regime where FDI was generally limited at 26 per cent since 2000 post the Kargil war.

This is not all. Foreign direct investment above 26 per cent in modern and state-of-the-art technology which the UPA allowed with the approval of the Cabinet Committee on Security from April has not been invoked yet.

Undoubtedly, the move to allow FDI in the defence is aimed at boosting self-reliance in defence production, encouraging more private sector manufacturers to enter the sector, cutting expensive imports, bringing more clarity on guidelines and curbing corruption.

Pertinently, so far there has been no single list that specifies what constitutes a “defence” product or component-level items and dual-use technology. To define a defence product, companies have had to refer to at least four lists, depending on the purpose of defining their product. But not any more.

Welcoming the move, the Chairman, Confederation of Indian Industry (CII) National Committee on Defence Baba Kalyani asserted, “We are happy to see that the Defence Ministry has taken cognisance of CII’s recommendations to prune the list and keep it to the bare minimum.”

Given that the CII’s recommendations were guided by only one objective --- simplification of current policy and procedures. Added Kalyani, “This is an important step as it would bring more clarity to the procedures and will encourage new entrants into the defence sector.”

True, some Indian companies are opposing the Modi Government’s move to allow 100 per cent FDI in the defence sector, stating they should get reciprocal access to foreign markets and the administration should make it mandatory for foreign companies to transfer technology. As FDI in defence during 2000-2014 has been a meagre $4.94 billion of the overall $322 billion inflow. Presently, the existing policy allows FDI over 49 per cent only if there is no transfer of technology.

Said a senior executive of one of India's biggest private defence firms which produces critical components for missile systems, “There is no reason why we should allow 100 per cent FDI in defence unless Indian companies get similar access in other markets. Foreign equity should be conditional on transfer of technology, he added for good measure.

Significantly, the draft Cabinet note has proposed allowing 74 per cent FDI where there is a technology transfer. There is also a suggestion that the no-cap policy should be limited to cases where there is transfer of state-of-the-art technology. Also, foreign conglomerates should be willing to transfer technology to India which would include adequate training of Indian employees.

Till date, this seems to be kite flying as nobody is aware of the precise contours of the Government policy on FDI in defence. Yet large private companies are not sitting still. Already, the Tata group with defence revenues totaling Rs 1700 crores and Rs 8,000 crore orders last year has nominated former Defence Secretary Vijay Singh on its Board.

While Reliance Industries has signed an agreement with France’s Dassault Systems to produce wings for the Rafael aircraft in India, after the Indian Government agreed to buy 127 fighter aircrafts from the French company.

Undeniably, western Governments are rushing to visit India and meet with Prime Minister Modi, drawn by the prospect of striking multi-billion-dollar deals as his administration prepares to open the nascent defence industry to foreign investment.

The Prime Minister has made plain that he intends to build up India's military capabilities and gradually turn the world's largest arms importer into a heavyweight manufacturer, a goal that has eluded every Prime Minister since Independence. ---- INFA

(Copyright, India News and Feature Alliance)