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

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