Budget should consider providing sufficient incentives to the defence sector, says Richard Rekhy, Head of Advisory, KPMG.
Formulation of national industrialisation policy, extension of validity of offset banking, increased FDI (foreign direct investment), introduction of the use of multipliers, well-defined SQRs (service quantitative requirements) are some measures that can enhance the chances of the industry to absorb the benefit of offset, adds Rekhy, in the course of a recent pre-Budget email interaction with Business Line.
Also, “Easing out the aggressive and complex tax regime could lure the new domestic and foreign entrants on the Indian soil and provide the much required fillip to this sector.”
While an enormous potential in the defence sector has infused enthusiasm amongst both global and Indian firms, there still exists a reluctance to take the next big step, observes Rekhy. The world is looking at India as a great opportunity but there are big deterrents for the global companies, he feels.
Excerpts from the interview.
On the adequacy of Budget allocation.
The year 2009-10 saw a remarkable 34 per cent growth in the outlay for defence that went up from Rs 1,05,600 crore to Rs 1,41,703 crore. This was one of the highest allocations in the history of Indian defence spending.
The question that comes in our mind is – “Is this enough?” Do we need to relook at the current situation and see whether the allocation is in line with the new India that we want to build and be proud of? Or do we continue to have the armed forces with weapon inventory that is considered inadequate, outdated and in need of urgent upgrade?
Enhanced budget needs be complemented with policies on ground to provide thrust to a variety of business projects that are mutually beneficial to the stakeholders that in this case are Indian Government, foreign OEMs and private/ public industry. Lest unspent budget, cancelled contracts and prolonged procurement process will continue to play a drag on the sector.
On the offset policy.
The Government has moved in the right direction by introducing offset policy. Now, we also have in place a much-needed procurement process. These policies display Government’s keenness to reduce over dependence on foreign suppliers that is currently at about 70 per cent of the total procurement plan.
On a number of occasions, we have heard the Defence Minister expressing a desire to create an environment to encourage the technology transfer. There is a strong realisation that this can be brought in by foreign manufacturers collaborating with Indian industry. Indian players need to play a more active role in building up this industry.
On FDI.
We need to seriously look at enhancing the current limit of 26 per cent FDI in this sector to ensure that it attracts the foreign collaborators to come into the country and be willing to part with their cutting-edge technology. Else India will be dumped with old technology and end up paying high price as replacement and maintenance costs.
On defence manufacturing.
Global aerospace and defence companies are facing huge recessionary trends in the market today and are looking for setting up alternate manufacturing base in India.
India has already made its mark in the automotive component sector with a large number of auto giants around the world sourcing from India. Domestic heavy/ light engineering and IT sectors have come a long way with high-end innovations and capabilities.
There is no reason why Indian companies cannot stand up to the requirements of the defence sector. Once established through offset obligations, Indian companies will need to become highly competitive to prompt the global prime contractors to maintain long-term supplier relationship.
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