Welcome step: FDI cap is loosening
The bottom line is that Indian firms do need foreign investments and foreign technology, which will not come till we address the FDI and DPP conjointly.
In a second major boost to fill up the defence forces voids the government has cleared
80,000-crore worth defence projects, which includes the decision to indigenously build six submarines and purchase of over 8,000 Israeli anti-tank guided missiles and 12 upgraded Dornier surveillance aircraft. The six submarines will be built in India at a cost of about 50,000 crore rather than import them from abroad.
Import of 8,356 anti-tank guided missile from Israel worth 3,200 crore has been approved over the other contender – the American Javelin missile for the Indian Army. The Army will also purchase 321 launchers for the missile. 12 Dornier surveillance aircraft with enhanced sensors will also be bought from HAL at a cost of 1,850 crore. Government has also decided to purchase 362 infantry fighting vehicle from the Ordnance Factory Board (OFB) at a cost of 662 crore. The Defence Acquisition Council (DAC) also approved the purchase of equipment for special operations for the Navy which remained classified.
The long-term integrated perspective plan (LTIPP) was also approved and additionally it was also decided to buy 1,761 units of five spoke 7.5tonne radio containers at the cost of 662 crore besides acquiring 1,768 critical rolling stock — open and closed wagons for transport of military equipment at a cost of 740 crore.
What is most significant in all this is the decision
to manufacture the submarines in India in line with Prime Minister Narendra Modi’s ‘Make in India’ pitch. A committee is being formed to study both public and private shipyards over the next six to eight weeks following which the Ministry of Defence (MoD) will issue request for proposal (RFP) to specific ports identified on the basis of the study. The submarines are to be air-independent propulsion (AIP) capable enabling them to stay underwater for longer than conventional submarines and are to have enhanced stealth features. These submarines will have the capacity to be equipped with land attack cruise missiles. Though six Scorpene submarines are being built in India under licence and the first is likely to be delivered sometime in 2016, the irony is that India has added just one submarine in the last 14 years which means the Navy will be desperately short of its original targets.
Much the same kind of shortages applies to most other capital equipment of the Army, Navy and Air Force including vital supplies of ammunition. This noteworthy decision of building six submarines indigenously is in addition to the government earlier approving indigenous development of mid-sized military transport aircraft and light utility helicopters, latter for the Navy and the Army.
Post the Prime Minister’s call for ‘Make in India, Sell Anywhere’ and hiking of the FDI in defence sector limit from 26 per cent to 49 per cent, doubts persisted that the FDI capped at 49 per cent is not going to be lucrative enough for foreign firms, some of them even having voiced such concerns. Ulrich Grillo, President, Federation of German Industries having met our Defence Minister, had told reporters that German Industries would not like to invest in India since with 49 per cent FDI they would not have control over selling the products. It is for this reason that the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry had been recommending 74 per cent FDI in case of transfer of technology (ToT) in cutting-edge and 100 per cent FDI in case of state-of-the-art technology recommendations obviously made after thorough study and analysis.
Though no formal government announcement was made post raising FDI in defence from 26 per cent to 49 per cent, apparently government has realised this cannot be lucrative enough for investments and in bridging technological voids. The media in last week of October has reported that in August, the Cabinet had also decided that FDI beyond 49 per cent would be allowed in state-of-the-art defence equipment manufacturing, with ToT under Indian control and management. This is a welcome step and perhaps was kept under wraps in interest of bargaining - 51 per cent and beyond.
Airbus Defence and Space and Tata Advanced Systems (TASL) have already submitted (also see page 20 of this issue) a joint bid to replace IAF’s ageing fleet of Avro aircraft with the market-leading Airbus C295 medium transport. A total of 56 Avro aircraft are to be replaced. In the event of contract award, Airbus Defence and Space propose to supply the first 16 aircraft in ‘fly-away’ condition from its own final assembly lines. The subsequent 40 aircraft will be manufactured and assembled by TASL in India. This will include undertaking structural assembly, final aircraft assembly, systems integration and testing, and management of the indigenous supply chain. The C295 has proved itself in difficult operating conditions globally and is flying/has been ordered by 19 countries. This is just one example of how the defence sector in India has opened up and the tremendous boost in indigenisation under initiative of the Prime Minister.
The decision to permit FDI in defence beyond 49 per cent is most sensible. It would not only help bridge the defence technology deficit in an early time frame, as per a recent study it would create up to one million jobs in the next five years itself. 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 vehicles, 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 also, one example being development of prototypes for a battlefield management system (BMS) for the Army, where government will foot 80 per cent of the costs. In case of the six submarines to be built indigenously, this implies a big step with several Indian shipyards both public sector and private now come into the running.
However, another major hurdle is the Defence Procurement Procedure (DPP) which in its present shape is not attractive enough for private industry and more importantly 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.
The bottom line is that Indian firms do need foreign investments and foreign technology, which will not come till we address the FDI and DPP conjointly. Indigenous defence industry in conjunction with foreign companies has to play a major role, as would the FDI since the total estimated defence products required are assessed to be to the tune of $80 billion to $100 billion annually, since by the end of the Fourteenth Five Year Plan, the cumulative capital expenditures over 2012–27 are projected to exceed $235 billion. Future of the defence-industrial sector in India sure looks bright with steps being taken in the right directions. What government needs to ensure is speedy and effective implementation.
Airbus Military’s C295
Airbus Military C295 is a new generation, very robust and reliable, highly versatile tactical airlifter
Scorpene class submarine built by state-owned Mazagon Docks