The analysis of Stockholm International Peace Research Institute states that India tops the charts on defence imports just marching ahead of Saudi Arabia accumulating a 15pc share of global imports. On quite a few occasions, Prime Minister Narendra Modi and defence minister Manohar Parrikar have shown uneasiness over the country’s import of well over 60pc of its arms procurement. For helm the border and homeland security and modernisation of the army, still carrying the baggage of the Soviet Union era, India will perforce stay a big buyer of arms. Military hardware and software procurement will, therefore, be a big enticement for the arms establishment in the US, Europe, Israel and Russia. New Delhi wants to take advantage of this to make the best of offset policy, first introduced in 2005 and then revised on a few occasions to support the growth of indigenous defence manufacturing. Offset, as it is now, requires procurement from domestic sources of at least 30% of the capital acquisition cost of defence orders worth Rs 300 crore or more. The Defence Acquisition Council, however, retains the right to either raise the offset obligation to more than 30% or give waivers, depending on the nature of procurement. The obligation applies equitably to foreign and Indian vendors.
It’s distilled on why the government is giving a push to reforming defence procurement policies, as borne out by raising the limit of foreign direct investment in the defence sector to 49pc and dispensing with licensing requirements for most items. Modi is targeting lifting the share of defence procurement from domestic sources to 70pc because it would limit the outgo of foreign exchange and create hundreds of skilled jobs. If the defence and aerospace industries grow in the next 10 years on expected lines, about 200,000 skilled jobs would be created. But worryingly, large gaps remain in the country’s technical education system for building sector-specific skills.
A number of Indian business groups, including Tata, Reliance Industries, Mahindra, L&T and Reliance ADAG, have not lost time in identifying areas of defence production they want to be in and foreign companies they must tie up with for technology and investment. But for products with considerable amounts of intellectual property resulting from years of R&D and investments of billions of dollars, foreign companies are found shy in becoming partners in joint ventures with 49pc ownership. The challenge for the government is to address their concern of not losing ‘prized intellectual property’ to joint venture partners in the case of fallouts. Are we to barter away anything if we allow foreign arms groups to be majority partners with 51pc ownership in JVs in which ‘very closely held’ technologies are involved? Certainly not. In fact, attempts by local private and public sector enterprises to leverage the nation’s big arms procurement budget for building a strong defence industry with foreign technology and money needs all possible support. Selectively granting majority ownership to foreign firms will do the defence sector good.
Modi wants foreign companies to make things here for both the local and world markets. This applies as much to the ones engaged in producing automobiles as to defence equipment and components. But India is hardly counted as an arms exporter whereas China has emerged as the world’s largest seller of arms in the world market after the US and Russia. Success in exports will depend largely on how defence JVs prosper. JVs hold the possibilities of breakthrough in exports of components to countries from where India buys arms. Commissioning recently a plate mill at the Rourkela steel plant, Modi said stepped-up local defence production, including tanks and warships, would generate “good demand for plates and other steel products”. Metal producers are betting on the fact that unlike sectors like infrastructure and construction, defence procurement remains immune to the performance of the economy.
A report by Arthur D Little says by 2020 demand for Indian electronics and home appliances will rise to $400Bn when domestic supply will be $100Bn, underlining the indigenisation challenge. Industry official B Thiagarajan points out an aspirational level of more than the 400Mn middle-class Indians and low penetration of appliances in all our markets will keep their demand growing at high double-digit levels for many years. But will much of incremental demand be met by imports or will the Modi magic work here?