Where does India stand on defence manufacturing and how have the government’s recent moves on easing FDI norms and ease of doing business helped the sector?
The reality on the ground, according to several senior analysts is that little has come in by way of tangible large investments and for now India is still reliant on importing military equipment to fulfil its short term needs.
Why is this still the case?
Following on the heels of its heavy defeat in the Bihar elections, the NDA government moved quickly to ease FDI regulations for several key sectors including defence. The government allowed foreign investment up to 49 per cent under the automatic route, from the earlier government approval route. It also stipulated that investments exceeding 49 per cent would now be cleared by the Foreign Investment Promotion Board rather than going through the more circuitous route of the Cabinet Committee on Security.
Jayant Sriram Yet, more than a year after the NDA government first announced that it would increase the FDI cap in the defence sector to 49 per cent, from 26 per cent, there is still a reluctance on the part of most global majors to come in with a significant project. Part of this problem is linked to an ongoing debate about whether 49 per cent is actually enough given that the limit is designed to ensure that control of the venture remains with the Indian companies.
From an industry perspective it's long been the opinion of several analysts that unless the FDI cap is increased to at least 74 percent things are unlikely to move on the ground.
Most other developed countries have recognised the fact that defence production necessarily involves a series of international collaborations. However, as India gradually opens up the sector there remains a lingering sense of mistrust among Indian companies who don't want to lose control of the venture. Conversely, foreign firms are unwilling to transfer high-end technology unless the cap is increased to a level above 50 per cent (and perhaps significantly more), because it simply doesn't make business sense.
But is the debate about investment caps merely a superficial one that covers up some deeper issues with policy planning in defence?
Amit Cowshish, a former financial advisor to the Ministry of Defence, explained that in reality there has always been a provision to raise the cap over 49 per cent if it involved a significant transfer of high-tech technology. In September this year, a U.S. official noted that when there was 'industry anxiety over control of technology' then the FDI limit would be increased on a case-to-case basis.
Yet despite this clause there has not been a single big ticket proposal for investment. Figures tabled in parliament in March showed that the government has got just six FDI proposals worth a paltry Rs 96 crore ($15.3 million) in the defence production sector, with only two of them being for 49 percent. This was for a period of seven months and the situation hasn't really improved since. In the meantime, India's defence expenditure is expected to accelerate heavily over the next three decades, with the country expected to spend another $120 billion on arms acquisition over the next 10 years.
Given such a large domestic need, why have Indian companies continued to be such poor suppliers and why are foreign companies still unwilling to invest given the potentially huge market.
“Design and Development projects usually entail a long gestation period and there is an inherent risk of failure,” Mr. Cowshish observed. “Therefore no one would run the risk of making heavy investments in such projects unless there is a guarantee of orders coming in and clarity on the exact nature of the domestic market,” he said.
There is therefore a catch 22 situation where local manufacturers like Bharat Forge, L&T and Tata require high-end technology to scale up manufacturing but there is no clarity from the MoD on what exactly its requirements are. “On the MoD website there is a document called the Technology Prospectus and Capability Roadmap but the targets mentioned here are vague with no idea even of what the requirements are over the next five or even fifteen years,” Mr. Cowshish pointed out. “And it is difficult to make out a business case from this document.” Another senior industry analysts points out that India has a history of dragging its feet on defence deals. Added to this is the fact now that the Make in India campaign sends out mixed signals with regards to foreign investment. “There is a hesitation on the part of foreign companies because they don't know where they are going to fit in. It's clear that the MoD will now prioritise Indian manufacturing,” he explained. The central government is now cognizant of the fact that the majority of technology, at least for the short term, has to come in the form of off-the-shelf purchases like the Rafale deal. In the long term, the plan may be to have Indian companies scale up to the level of a Lockheed or a Boeing.
But can this be done without properly addressing the issue of creating an ecosystem for the same?
According to Rear Admiral (Retd.) Vijai S Chaudhari, Additional Director of the Centre for Joint Warfare Studies, a few policy correctives to improve the ease of doing business are imperative.
“To start with if a company is going to spend so much money on a project there is not even now the guarantee of export even to a benign country. It will be dealt with on a case to case basis,” he explained.
The other major stumbling block is India's Defence Procurement Policy (DPP) that keeps getting updated every few years. “There was a proposal sometime back to allow someone who has signed under the old policy to migrate easily to the new one but that was rejected,” Mr. Chaudhari said. The reason the DPP goes through periodic revisions, he said, is that India has always remained cautious about big bang reforms in the sector and so change is always piecemeal. This FDI phobia, he pointed out, has to change.
“The final nail on the coffin is that there is a clause in the DPP which says that in case of a foreign collaboration the department will nominate the production agency,” Mr. Chaudhari said. “This would stack the odds very much in favour of a PSU. The better alternative would be to let a potential bidder reach his own agreement with a private agency.”
