Will it be a level playfield in Modi’s India for both Indian and foreign defence industries?

By Sangeeta Saxena

New Delhi. When  Arun Jaitely India’s new defence Minister who also holds the dual charge of Finance Minister in Narendra Modi’s government, stated, India’s military, one of the world’s largest arms importers, aims to speed up defence procurement in the interests of national security, just days after announcing a tentative 100 percent FDI in defence, the Indian indigenous industry is skeptic whether these decisions will turn out to be a boon or a bane. The Nation has very clearly voted for development and  policy regimes that facilitate building a strong defence Industry in India are the need of the hour. But will 100 % FDI over the board help the indigenous defence industry? And this means both public and private defence sectors.

While the public sector firms are still trying their best to protect their turf, the biggest push to get more private players involved came when the Planning Commission called for Indian companies to be prime contractors for all major contracts. For private sector companies, which currently account for just 20% of India’s defense spending, this hand holding seems to have come at just the right time. The new procedures have a “buy and make Indian” provision — which means only local companies, including joint ventures with overseas companies, can enter bids for contracts.

India’s military expenditure accounts for 80% of South Asia’s total military expenditure and its defence industrial base is currently the second-largest industry after its railways. India has promulgated a new Defence Procurement Procedure 2013 with effect from June 1, 2013. While the policy is aimed at laying a strong emphasis on promoting indigenisation and creating a level playing field for the Indian Industry the government has sent a clear signal to major stakeholders in its defence industry to go for defence imports only as the very last route.

The new guidelines make it clear that while seeking the approval for Accord of Necessity (AoN) in a particular category, say, Buy (Global), it will now be necessary to give justification for not considering the other higher preference categories. This is expected to give a stronger impetus to indigenization and inevitably reduced imports from abroad. Foreign vendors can derive solace from the fact that under the new policy, the validity period of an AoN has been reduced from two years to one year. This will bring down the processing time of individual cases significantly.

Another point of interest is that the new Indian policy aims at speeding up the procurement cases. Service chiefs, heads of important defence bodies like Indian Coast Guards and other key functionaries have been given more freedom and their fiscal powers have been raised from the existing Rs 50 crore (US$8.85 million) to Rs 150 crore (US$26 million).

Stipulations related to the indigenous content have been clarified and made more stringent. Indigenous content requirements will now extend all the way to the lowest tier of the sub-vendor. Hence, import content in the products supplied by the sub-vendors will not qualify towards indigenous content.

The basic equipment must have minimum 30 percent indigenous content at all stages including the one offered at the trial stage. It has further been stipulated that an indigenisation plan will be provided by the vendor. These stipulations will ensure more meaningful efforts towards indigenisation. While a penalty has been stipulated for not achieving the required indigenous content at a given stage, a scope to make up the deficiency at later stages has been provided.

Likewise, in the Buy and Make (Indian) cases, there is no stipulation regarding the minimum indigenous content in the Buy component and the Indian vendor is given the elbow room to achieve the prescribed indigenous content in the overall delivery. This enables the Indian vendor the time to absorb Transfer of Technology (ToT), set up manufacturing facility while concurrently meeting the service requirements.

But this summer sees a new government and one which has it’s strong views on indigenization and FDI. Expecting a further change in the DPP post budget will not be thinking aloud. India has been the world’s largest arms importer every year since 2010, as its defence industry struggles to keep up with its international ambitions. The volume of major weapons imports more than doubled between 2004-08 and 2009-13 and India’s share of the volume of international arms imports increased from 7% to 14%, according to the latest report released by Stockholm International Peace Research Institute (SIPRI).

So does this mean the governments in the past never found the indigenous industry capable enough and hence bought either off the shelf or contracted from foreign OEMs? When it comes to requirements of the Indian Airforce the indigenous aircraft manufacturer HAL found it hard to chew and hence the pace has been very slow. Had the manufacturing opened up to the private industry big Indian names which have been creditably producing for army, navy and homeland security requirements could have come ahead with a plan for aircraft manufacturing too. If small European countries could have their indigenous production, would India have lacked the will power, investment and technical knowhow in it’s own industry?

“This government is committed to national security and we feel the red tape involved in purchase of defence equipments must be cut down . Balancing the resource constraint and making available all the resources that are required for national security is going to be the approach of the government,”  Jaitley said on the sidelines of a ceremony to commission two coastguard ships. Which very categorically means that the bureaucracy and babus have had their field days and it’s time now for hassle free purchase of defence equipment. A reason of happiness for both private players and foreign OEMs.

100% FDI might be a welcome step as far as the foreign OEMs are concerned but the Indian indigenous industry is looking at it skeptically. Even the big ones feel it will be giving too much on the platter to the global big wigs. So why not follow the age old dictum of slow and steady wins the race? This could be  a win-win situation for both the parties.