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FDI in Defence Sector

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Background

Government of India has taken a number of measures to increase the participation of Indian companies in the Defence Sector. From liberalizing the licencing regime to making remarkable changes in the Defence Procurement Procedures, according AONs on the Make in India platform provided by the Buy Indian, Buy and Make Indian and Make provisions of the DPP, the government has done all that it could to energize the Indian Defence Industry. Easing of provisions of NOC for exports through timebound online processes has been accomplished and Populating the SCOMET chapter on Defence products, which hitherto has been vacant for a long time, is a work in progress as is the membership to various control regimes. In consonance with all of this the government has also revisited the extant FDI policy and brought it in sync with the other policies and procedures, by taking a bold step of inviting FDI in the Defence Sector upto 100% with a 49% through the automatic route. FIPB is also being eased out to simplify processes.

The formal thrust of the DPP 2016 has been incorporated in the “Buy IDDM(indian designed and manufactured)”,”Buy Indian” and  “Buy and Make Indian” with simplified procedures for effective implementation. The  “Make” acquisition strategy has been completely redesigned to include the small industry segment(MSMEs) with great incentives and purchase guarantees.

As outlined by the DPP 2016, “Buy” would mean an outright purchase of equipment and could be “Buy (Indian)” or “Buy” (Global)’. “Indian” would mean Indian vendors only and “Global” would mean foreign as well as Indian vendors. “Buy” Indian’ must have minimum 30 per cent indigenous content if the systems are being integrated by an Indian vendor. Buy IDDM is the key for creating an ecosystem in the country with emphasis on Indian design or with a caveat Indigenous manufacture.

“Buy & Make” would mean purchase from a foreign vendor followed by licensed production/indigenous manufacture in the country. “Buy & Make (Indian)” would mean purchase from an Indian vendor including an Indian company forming joint venture/establishing production arrangement with an original equipment manufacturer (OEM) followed by licensed production in the country. “Buy & Make (Indian)” must have minimum 50 per cent indigenous content on a cost basis.

Included in the DPP 2016 is a liberal offsets guidelines of 30-50 per cent for any arms imports above a a threshold of INR 2000 crs to promote transfer of technology amongst other avenues such as direct purchase and FDI in terms of equity and transfer of technology as well as investment in kind in terms of assembly lines, jigs and fixtures.

So what

These measures were incentives for foreign OEMs to bring in technology into the country, however, this has not happened, we are still grappling with screw-driver technology. In the prevailing global geo-political-economic order, it would be difficult for foreign OEMs and their  countries that control these technologies, to part critical technologies. Control regimes are very strong and technologies are well guarded. War-machines and arms-industry lead the global technology innovation and applications. We as a nation are at a cusp of technology breakthrough and proliferation in manufacturing sector. We have established a niche space in the IT sector but are we there in engineering design and high-end critical design element?

This is a serious question we must ponder on.

There is a time in history of nations when the revolution is forced upon the state to come up to what is expected of the state. While the Armed Forces are at nerves-end in combating terror and busy protecting the strategic interests of the nation, it is the nation’s call to respond. We have tried the organic route of the DRDOs and the DPSUs for too long, they have delivered to the Forces in time of need and continue to do so. Is that enough?

Are we still satisfied with the 70% or more imports that we make even in the Buy Indian categories of procurement? Is the MoD in sync with the “Make in India” initiative of the nation? Do we have to do more?

Where is FDI in all of this?

FDI is not a magic wand with all the solutions for the Defence Industry. However, it is also a fact that very little has happened in this space. Is this because of the lack of confidence of the foreign OEMs and their governments in the ease of doing business in India? Is this because of the bureaucratic lethargy in extra-ordinary delays in decision making to push programs through? Or is this because the nation cannot fund the programs for the Forces and hence a deliberate delay is caused sometimes tending to infinity. All of this causes uncertainty in the minds of the industry, both, domestic and foreign.

One of the key defence industry reforms initiated by the Manohar Parrikar led Defence Ministry, mooted by the Dhirendra Singh Committee, the Strategic Partnerships, has seen the light of the day. Will the programs listed therein be signed off before October 2018? Any delays in execution could once again put the policies and programs associated , in jeopardy.

One of the major causes for delays in most programs has been attributed to the Finance wing of the Defence ministry as also the Ministry of Finance. Most objections on procedures and processes and often-times, fundamental issues have been raised at late stages in the procurement time-cycle. Is this because we as a nation are unable to fund the programs and therefore we use the bureaucracy to do the honours to cause delays, through effective use of English language? It could be only an apprehension or may be true too.

Do we need to go only the organic route and hold the Forces on, till such development takes place indigenously, could be infinity, or the DRDO or the other organs of the government come up with a development when the Forces no more require the system, or even the other world has gone far ahead fighting our Armed Forces with superior weapon system?

In the situation that we are in, the latent potential energy in the industry is overwhelming. The government has done well to support the domestic industry, has opened up the private sector in more ways than one to support the Forces. What then is holding up FDI in the sector?

There is a definite requirement to infuse money into the sector. This could be done by external borrowings, foreign line of credit, and even through banks, that lend to governments to support their programs. This however, may not be the best of options. Therefore, FDI with its instruments of support is considered essential. FDI could typically include, equity, technology, investment in kind, institutional investors, NRIs(who of late are in the news for sending back home huge sums of money) and others.

Technology is critical to development of the sector, however, foreign OEMs are more comfortable in transfer of technology, if they have management control over the JV/Indian company so formed for this purpose. Management control, however does not mean total control, and hence checks and balances are necessary. In all such ventures, it may be pertinent for the government or one of the organs of the government to hold a golden share, with representation on the Board, that will help monitor the progress and health of these companies.

Thus, it is essential, that we embark on both, organic and inorganic growth. While the government may approve a JV or a fully owned subsidiary with 100% FDI, it may also parallelly launch a indigenous program for home-grown technology. This will enable our DRDO to compete, a timeline would be set for the same. In course of time, we could witness collaboration between our government institutions and industry both domestic and foreign.

Where do we go from here?

There have been a number of debates since the time of complete protectionism prior to the 1991 industrial policy to the changes affected in the PN 4  of 2001 and PN 4 of 2002, inviting 100% participation of private industry in the Defence Sector with a 26% cap. Then it was argued that a 49% will make a difference. It took more than a decade and a new government with a dynamic outlook to implement that. It now seems this is not enough. After all, between 26 and 49 nothing has changed, in so far as the industry structures are concerned. Of course, some restrictions have been removed, and the process eased, well that is not enough.

The call of the hour is to take bolder steps like permitting 100 per cent FDI in defence industry, and incentivise the OEMs to set up plants in India. Just 100%  FDI may not be enough, this will need to be dovetailed into progressive A&D policies of states in sync with the federal reforms. This way you can ensure that key technology will not be denied and Indian vendors would have the opportunity to get into the global supply chains of world leaders, till such time we become one.

While the industry is opened up with unrestricted FDI, following must be mandated :-

  • Outsourcing with clear norms of upto 50% or above
  • Development of supply chain : this has to be a demonstrated for furthering business.
  • Integration of Development partners, in consonance with above.
  • Integration into global supply chain, demonstrated capability.
  • Buy India : Buy raw material from India where available; this has to be done with scant respect to lowest bidder(else, China would take away this business). Quality assurance will be the norm, while adhering to such policy. Also, in the first instance even iof the raw material is sourced at say a 90% quality, the Indian company can be encouraged to exceed expectations in the next order and so on. A systematic encouragement to industry is called for.
  • Develop, raw material suppliers, where this is not available indigenously.
  • Focus on exports from such subsidiaries.

What happens to my DRDO/OFB/DPSUs

The new steps taken by the MoD indicate that it is reluctantly moving in the right direction, but as of now it remains much too protective towards the government companies. There would be a few large corporates who also advocate this type of protectionist tendencies to maintain their monopoly of what little they hold. This fear holds us back.

Can the government companies be let free and compete? How long will the government hold on to them and how long will they be made more inefficient with government breathing down their necks. Can an ill experienced bureaucrat, with a generalist intellect dictate and run high-technology companies? Can we learn something from the ISRO? Let them free, disinvest and make them more efficient, must be the mantra, they must learn to compete in this highly efficiency driven, technologically supreme, and skill oriented sector.

There is one more fear, what if the OEMs run away after making the investment? Well, the investment is made in kind in the geography of our country and there can be no occasion that they will be allowed to slip away, some personnel may make the grade, well the reminder of the IP and skill remains in the country and hence can be strengthened with little effort. A parallel can be drawn from Australia, where the global majors have made 100% subsidiaries, and are flourishing well. The dictat in Oz, is that the complete work-force must be Australian, the technology developed and transferred will reside in Oz, and they are mandated to develop an eco-system of small industry.

Concept of Cost to Country

It is not necessary to always follow the finance department for determination of L-1 bidder. There is a concept of cost to country that needs to be advocated. Even if the cost of an indigenous supply is costlier by 50% or so, let us be aware that this money spent is rotating within the country, in rupees, amongst the tax payers who have contributed to the national exchequer. A simple analysis would reveal this is a cheaper option, also saving precious FE.

Recommendations

  • FDI could be free-flowing with no limits
  • Limits and mandates on work-force and skill, 100% Indian
  • IP to reside in India
  • Concept of IDDM be dove-tailed into FDI oriented industries with mandated outsourcing and demonstrated development of MSMEs.
  • Raw material if available in India will be procured from India only. Buy from India is an essential pre-requisite for “Make in India” and “Made in India”.

Jai Hind

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One Response to FDI in Defence Sector

  1. huaming.com says:

    The decision to allow 100 per cent FDI in defence marks a major push to defence manufacturing under the ‘Make in India’ initiative.

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