Rais­ing FDI in De­fence – Not lucrative by it­self

The De­fence Re­search and Devel­op­ment Or­gan­i­sa­tion had iden­ti­fied some 15 crit­i­cal tech­nolo­gies that it seeks to im­port through off­sets, such tech­nolo­gies would re­quire spe­cial ap­provals by the for­eign ven­dor’s gov­ern­ment

SP's LandForces - - FRONT PAGE - Lt Gen­eral P.C. Ka­toch (Retd)

FDI IN THE DE­FENCE sec­tor has been hiked from erst­while 26 per cent to 49 per cent. The in­crease in FDI was def­i­nitely war­ranted con­sid­er­ing that we are im­port­ing over 70 per cent of our de­fence needs. What needs to be ex­am­ined is whether such a mea­sure by it­self will ad­e­quately ad­dress our lack of self-suf­fi­ciency in de­fence. Why is it that while the FDI Con­fi­dence In­dex of the coun­try per se is very high, that in the de­fence sec­tor it is ex­tremely low? Why is it that de­spite having 26 per cent FDI in de­fence sec­tor for the past so many years, this barely at­tracted less than $5 mil­lion for­eign in­vest­ment; just 4.94 per cent in last 14 years. Anal­y­sis of th­ese rea­sons would in­di­cate that un­less th­ese is­sues are ad­dressed, fur­ther hike of FDI to 49 per cent may just be utopia to­wards self suf­fi­ciency.

Sim­i­larly while the es­tab­lish­ment of a Fa­cil­i­ta­tion Cell by the De­fence Off­sets Man­age­ment Wing (DOMW) is a wel­come devel­op­ment, it needs to be re­mem­bered that the DOMW was pre­ceded by the De­fence Off­set Fa­cil­i­ta­tion Agency (DOFA) that was es­tab­lished in 2006 but had to be shut down as it could not de­liver upon what was ex­pected. The De­fence Re­search and Devel­op­ment Or­gan­i­sa­tion (DRDO) had iden­ti­fied some 15 crit­i­cal tech­nolo­gies that it seeks to im­port through off­sets, such tech­nolo­gies would re­quire spe­cial ap­provals by the for­eign ven­dor’s gov­ern­ment. Till 2012, 16 off­set con­tracts, worth $4.3 bil­lion, were signed and this is ex­pected to cross $25 bil­lion by 2020. Why the DOFA failed was be­cause we could not stream­line pro­ce­dures - cut the red tape and did not in­te­grate all stake­hold­ers when re­view­ing our poli­cies. The Fa­cil­i­ta­tion Cell may not achieve the de­sired ob­jec­tives un­less the rea­sons for fail­ure of DOFA are elim­i­nated. The same is ap­pli­ca­ble to FDI in de­fence sec­tor. Take the an­nual fan­fare with which the De­fence Pro­cure­ment Pol­icy (DPP) is trum­peted for having been ‘sim­pli­fied’. How come de­spite years of in-house ‘sim­pli­fi­ca­tion’ of the DPP by the Min­istry of De­fence (MoD), It has failed to suf­fi­ciently at­tract even the in­dige­nous pri­vate sec­tor? The ex­pla­na­tion is ac­tu­ally very sim­ple. This can­not be rec­ti­fied by the MoD by them­selves, which they have failed to do over the years. Isn’t it im­per­a­tive that all stake hold­ers are in­te­grated in re­form­ing de­fence re­lated poli­cies and pro­ce­dures, with­out which rais­ing the FDI limit is un­likely to pro­vide sig­nif­i­cant div­i­dends.

A large cross-sec­tion feels that in case of trans­fer of tech­nol­ogy (ToT), the FDI limit could well have been raised to 70 to 80 per cent. The hike of 49 per cent FDI has hardly seen for­eign in­vestors mak­ing a bee­line to In­dia. Then, this does not re­ally af­fect sale of whole weapon sys­tems to In­dia by US, Rus­sia, EU etc, which will likely con­tinue if the hiked FDI would not at­tract for­eign in­vestors. Take the case of de­vel­op­ing the medium-lift mil­i­tary air­craft. With HAL not al­lowed to par­tic­i­pate, which for­eign com­pany would like ToT to an In­dian firm that has no ex­per­tise in air­craft man­u­fac­ture, when not even per­mit­ted to re­tain con­trol? So, the hike to 49 per cent falls very much short of ex­pec­ta­tions of for­eign com­pa­nies who would like to un­der­take a JV on In­dian soil but would like to re­tain con­trol and pro­tect their com­mer­cial in­ter­ests be­yond ful­fill­ing needs of the In­dian mil­i­a­try. With the poor state of our de­fence-in­dus­trial com­plex, the need of the hour is to make the In­dian de­fence sec­tor un­am­bigu­ously lucrative for in­vestors. This will un­likely hap­pen with the 49 per cent hike. The dan­ger is that if for­eign in­vestors are not at­tracted to in­vest in In­dia and share de­fence tech­nol­ogy, we will con­tinue to take re­course to im­port whole weapon sys­tems, which suits the arms mafia with at­ten­u­ated mas­sive fi­nan­cial gains. Un­der his chair­man­ship of Dr (later Pres­i­dent) APJ Ab­dul Kalam in 1995, a Re­view Com­mit­tee had set the goal of 70 per cent self-re­liance in de­fence sec­tor by year 2005 but to­day in 2014 are we not still just about 30 per cent self-re­liant? Have we ex­am­ined why this equa­tion has not changed in last 19 years (1995 to 2014)? Ob­vi­ously, this has hap­pened be­cause the pow­ers that be, in con­cert with the arms mafia, did not want it to change be­cause of high level cor­rup­tion and fi­nan­cial gains.

Our DPP is still not con­ducive enough to fa­cil­i­tate and ab­sorb for­eign tech­nol­ogy be­cause it has ig­nored time required by for­eign firms, ac­com­mo­date pro­ce­dure of con­cerned coun­try for ex­ports, re­quire­ment of gov­ern­ment-to-gov­ern­ment ne­go­ti­a­tions, as required and the like. Then, achiev­ing self­suf­fi­ciency can­not be looked at by open­ing up to pri­vate sec­tor while ig­nor­ing the dire need to re­struc­ture the MoD and the DRDODPSUs-OF etc. De­fence Pro­duc­tion (MoD) Joint Sec­re­taries and Sec­re­taries of MoD be­ing on the Boards of all PSUs has not helped. To add to this are the star­tling facts in CAG re­ports of re­cent years in­di­cat­ing crores of ru­pees and ef­forts have sim­ply gone down the drain with­out ac­count­abil­ity. The DRDO hi­er­ar­chy them­selves ad­mit that de­spite the fact many years and lakhs and crores of ru­pees in­vested, they only have ‘patches of ex­cel­lence’ to show. The hard fact is that un­less pro­fes­sional mil­i­tary ex­per­tise is in­jected at all lev­els in MoD and sim­i­larly with­out users (mil­i­tary) in­ducted at all lev­els of con­trol and man­age­ment in DRDO-DPSUs-OF, not much im­prove­ment are pos­si­ble.

Is­sue of re­cent reg­u­la­tions re­lax­ing re­quire­ment of li­cence to pro­duce a large num­ber of com­po­nents and sub-sys­tems required in fight­ing equip­ment other than heav­ier bat­tle field sys­tems like tanks, ar­moured ve­hi­cle, air­craft and war­ships, and re­lax­ing con­trol on the dual use items with both de­fence and civil­ian ap­pli­ca­tions are wel­come steps. There is en­cour­age­ment in R&D too, ex­am­ple be­ing that for de­vel­op­ing pro­to­types for a BMS for the Army, gov­ern­ment will foot 80 per cent of the costs. How­ever, the bot­tom­line is that In­dian firms do need for­eign in­vest­ments and for­eign tech­nol­ogy, but 49 per cent FDI is un­likely to at­tract for­eign in­vestors. The Depart­ment of In­dus­trial Pol­icy and Pro­mo­tion (DIPP) has been bat­ting for 100 per cent FDI in case of the in­vest­ing for­eign part­ner will­ing to make avail­able state of the art tech­nol- ogy and 74 per cent in case of the trans­fer of tech­nol­ogy that is not cut­ting edge. Now that the 70 per cent self suf­fi­ciency tar­get has been pushed to year 2020, the in­dige­nous de­fence in­dus­try has to play a ma­jor role, as would the FDI since the to­tal es­ti­mated prod­ucts required would be to the tune of $80-$100 bil­lion, since by the end of the Four­teenth Five Year Plan, the cu­mu­la­tive cap­i­tal ex­pen­di­tures over 2012–27 are pro­jected to ex­ceed $235 bil­lion. In ab­sence of at­tract­ing de­sired level of FDI, gov­ern­ment may even­tu­ally need to go by the DIPP rec­om­men­da­tions.

Fir­ing of the M777 A2 how­itzer

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