India reportedly has signed very recently an $5 billion deal to purchase the S-400 air defence system from Russia. A Russian news agency TASS has confirmed that the deal was signed. India is one of the biggest importers of defence items of the world. Huge imports involve outflow of foreign currency. Hence the government has decided to make a significant portion of our defence products in India. But it is not possible to produce all the sophisticated, high-tech defence products at home. Therefore India is inviting reputable companies to come to India and make defence products in joint ventures. It is actually a part of the NDA government’s Make in India programme. If it is successful, the cost of production will be lower and there will be a scope to create employment generation in the country. In that case the producers will get a ready market in India and as in India labour is compatably cheap, the products will be produced at a competitive rate. So these units can export their products from India to different countries.
On Defence Policy 2018
From the 1960s self reliance in defence production has been a goal in India. India’s defence production amounted to Rs 55,894 in 2016-17. There is a considerable defence production base in India. There are defence PSUs like HAL in aero MDL, GRSE, GSL, and HSL in naval, BDL, BEML, MIDHANI and OFBs in land systems and BEL in electronics. These have gradually emerged as noted defence production centres of India. In about all sectors there have been achievements. In spite of that India is yet to be a significant producer of sophisticated and high-tech defence products.
For a vibrant defence industry, as the Defence Policy suggests, India needs strategic independence, sovereign capability in selected items, cost effective equipment and collateral benefits. But the most important thing for a country to achieve vibrant defence production is its ability for R&D and innovation. It is known that a well developed Artificial Intelligence and Robotics technology is the most important determinant of a vibrant defence producing centre.
The Policy targets to be one of the 5 top countries of the world. for this India is trying to score high in the ‘ease of doing business’ parameter, a conducive tax policy, suitable labour laws, land availability for industry, etc. which will help pave the way for MSME units to come forward to be integrated with vibrant defence production. The FDI restriction has been liberalized and now in this sector upto 49% is under the through automatic route and above 49% through government route has been allowed.
The ordnance factories will be professionalized to make them competitive. As many as 250 items of defence products have been denotified and in any of these items both private and PSU units can produce and supply to the defence department. Actually there are three layers: 1) The original equipment manufacturers (OEM), mostly noted foreign companies 2) Joint Venture (JV) parties, that are Indian companies with OEMs 3) The new offset policy lays down that at least 30% of defence products will be manufactured in India through JV.
Public-private-partnership (PPP) in defence production
India is said to have the third largest armed forces in the world. Military modernization as high as $130 billion has been estimated to be spent in the next 5 years. The ministry of defence has launched a plan of indigenous development of equipment and systems over the next 15 years by opening up defence investment in defence production by private sector and PPP investment in defence production by the private sector and PPP. The government of India has been sticking to a policy of self reliance in defence production.
The policy aims at positioning India as one of the top five aerospace and defence hubs by 2025. FDI has been allowed which has been mentioned above. The initial validity period of industrial licences for defence has been increased to 15 years from 3 years. The lock-in period of three years for equity transfer has been done away with for FDI in defence. Manufacturers could use the PPP route to build critical defence equipment for the country unloading both public and private entrepreneurship and innovation.
Areas of confusion
The offset policy: in the defence sector it means how a buyer is to benefited over and above the procurements of the defence product from a defence supplier. Almost every country willing to purchase defence products has a separate offset policy. This was first introduced in 2005. then it was revised several times, in 2016, 2011, 2016. It is felt that Indian defence manufacturers lack the technological ability to reap the benefit from offset policy. They do not effectively use transfer of technology in their own manufacturing process. Even some raise doubts over transfer of low end technology to the Indian manufacturers. The main areas of offset policy are civil aerospace, internal security, etc. In these areas the offset limit has been revised upwards to Rs 2000 crore from Rs 300 crore. How far this will pave the way for increasing competitiveness and efficiency of defence production only time can tell. 12 offset contracts have been signed in between 2005 and 2012 with a value of $1.5 billion. Also 10 other contracts were done in between 2013-2016 of value $1.5 billion.
Another important question is why the flow of FDI in defence is not high even after the introduction of several offset policies at different times. It is reported that as many as 130 countries have offset policies but those are very different from India’. in is also reported that the government of India is going to propose another offset policy shortly.
Secondly, the New Defence Policy is believed to benefit the OEMS which are foreign producers and major private sector companies of India.
Thirdly, Sitaram Sharma, President, Bharat Chamber of Commerce, told BE that although the Policy to support MSMEs, there is a possibility that MSMEs would continue to depend on intends Indian Joint Venture partners.
Fourthly, Sharma also pointed out that there are 41 Factory Boards, and other government producing units and 250 items have been denotified, that is both PSUs and private sector will compete to supply the defence department. In this situation there is a high possibility of fall in employment in the government sector producing units of defence sectors.
A view on policy of Make in India in general
It is already discussed in some places that quite a number of countries have tried over several decades to achieve global integration of manufacturing value chains as a way to export-led industrial growth. In most of the cases they had to depend on foreign capital. So they had to go for cross border movements of technology, capital goods, raw materials, process inputs and final products. To do this they had also to liberalize trade and investment regulations. Most of them invited foreign investors of developed countries to builds required infrastructure. But very few were successful in achieving their target to make their country a favoured low manufacturing country.
Additionally, keeping labour discipline according to the requirements of industry and low wage-cost needs would also be a different task. ‘Appropriate’ labour laws, making suitable land policy to supply suitable land for industry, framing suitable environmental regulations are also necessary pre-requisites for the programme in India to be successful.