3/12/2015

Radicalinpromise,notinpracticeTheHindu

Today'sPaperOPINION
Radicalinpromise,notinpractice
SrinathRaghavan

ThedefenceBudgetforthenextfiscalyearconformstotheoverallpatternoftheBudgetpresentedbytheFinance
Minister.Itisradicalinpromisebutincrementalinpractice.Therewasamodestraiseindefenceallocationofjust
about11percent.Thenagain,theproportionofcapitalexpenditureinthedefenceBudgethasshrunkabit.Wemay
wellwonderhowthearmedforceswillshopfortheirlongwishlistthatincludeshowitzersandhelicopters,fighter
aircraftandattacksubmarines.Mr.ArunJaitleysclaimthathehasprovidedadequatelyfortheneedsofthemilitary
surelyturnsonagenerousinterpretationoftheoperativeword.
Moreimportant,however,washisassurancethatthegovernmentsMakeinIndiapolicywouldhelpachievegreater
selfsufficiencyindefenceequipment,includingaircraft.ThiswasentirelyinkeepingwiththePrimeMinisters
remarksattheAeroIndiashowinBengaluruafewdaysearlier.Speakingonthatoccasion,Mr.NarendraModi
emphasisedthatthedefenceindustrywasattheheartoftheMakeinIndiaprogramme.Byincreasingtheshareof
domesticprocurementofmilitaryequipmentfrom40percentto70percentinfiveyears,headded,Indiacould
doubletheoutputofitsdefenceindustry.Moresignificantly,henotedthattheIndianprivatesectorwouldhavetoplay
amuchlargerroleinthistransformationofourdefenceindustrialbase.
ThecaseofHAL
ThePrimeMinisterscallwasatonceaptandironic.Bengaluruis,ofcourse,thehomeofHindustanAeronautics
Limited(HAL)thelargestdefencePublicSectorUndertaking(PSU).Fewrecall,though,thattheHALhasitsorigins
inprivateenterprise.ItbeganduringtheSecondWorldWarasthebrainchildofWalchandHirachand,aleading
businessmanandnationalistsympathiser.WalchandcontrolledtheScindiaSteamNavigationCompanyandhadlong
dreamtofrevivingshipbuildinginIndiaanindustrythathadbeenmonopolisedbyBritishfirms.Hisattemptto
buildashipyardinVisakhapatnamprovedabortiveasdidhisplantosetupanautomobilefactorytocaterforthewar
effort.WalchandsmostambitiousundertakingwastomanufactureaircraftinIndia.
SoonafterthewarbeganinSeptember1939,WalchandenteredintodiscussionswithanAmericanaircraft
conglomerateandofferedtobuildmilitaryaircraftfortheIndiangovernmentaccordingtospecifications.NewDelhis
responsewasshotthroughwithscepticism.Onlyayearlater,whenimportswerenolongerreliable,didtheIndian
governmenttakeupWalchandsoffer.Thentoo,thegovernmentsunwillingnesstosupporttheventureledWalchand
toturntotheprincelystateofMysore,whichagreedtoprovidelandnearBengaluruaswellasconcessionaryloans.On
December23,1940,theHindustanAircraftCompanycameintoexistence.Thegovernmentplacedordersfor74long
rangebombers,48fighterplanesand30trainers.BytheendofAugust1941,thefirsttrainerwashandedovertothe
military.Otheraircrafttoobegantobeturnedoutonschedule.Inearly1942,followingJapansentryintothewar,the
Indiangovernmentdecidedtotakedirectcontrolofthecompany.Muchagainsthiswishes,Walchandwasarmtwisted
intodivestinghisstake.TheplantwashandedovertotheU.S.ArmyAirForces,whichuseditasarepairandoverhaul
facilityfortheremainderofthewar.Thereafter,itrevertedtothecontroloftheIndiangovernment.
Longroadahead
TheHALhasnowcometosymbolisethestrangleholdthatthePSUshaveonourdefenceindustrialbase.ThePrime
Ministersdecisiontogiveafilliptotheprivatesectorislaudableandoverdue.Someinitialmoveshavealreadybeen
made.Thecaponforeigndirectinvestment(FDI)indefencehasbeenraisedfrom26percentto49percent.
Investmentfromforeigninstitutionalinvestors(FIIs)hasbeenallowedupto24percent.Itisnolongermandatoryto
haveasingleIndianinvestorwithatleast51percentstake.Industriallicenceshavebeendispensedwithforsome
items.Yet,muchmoreneedstobedoneifourdomesticproductionandprivatesectorparticipationaretoapproach
anythingclosetothelevelsenvisagedbythegovernment.
Forastart,thecategorisationundertheDefenceProcurementProcedureneedstobeconsideredafresh.While
increasingfocusonMakeandBuy&Make(Indian)isimportant,itwillnotautomaticallyharnessprivatesector
participation.Inthelattercategory,forinstance,RequestsforProposal(RFP)havebeencirculatedtoforeign
manufacturerswiththeconditionthattheychooseanIndianpartner.Yet,Indiancompanies,includingtheprivate
sector,thathavetherequisitecapabilityhavenotbeenconsideredfortheRFPsapparentlyowingtotheirlackof
experienceindelivery.ThisbegsthequestionofhowtheIndianprivatesectorisexpectedtoacquireexperienceinthe
firstinstance.
ArelatedproblemistheuseofdirectorindirectnominationofdefencePSUsorordnancefactories.Thistooloadsthe
diceagainsttheprivatesector.Thegovernmentshoulddoawaywiththispractice:allcontractsshouldbeopenedup
forbidding.ThegovernmentshouldalsotakeonboardasuggestionmadebytheKelkarCommitteealmost10years
ago.Thisistoidentifycertainfirmsbasedontheirtechnical,managerialandfinancialstrengthaschampions
(RakshaUdyogRatna)andcirculateRFPsformajorsystemstothesefirms.
Thismodelhasworkedwellinothercountries.Infact,acommitteeconstitutedbythegovernmentidentified13Indian
firmsthatcouldbedesignatedalongtheselines.Buteventuallythegovernmentbaulkedattheideaofbeingseenas
favouringsomeprivatecompaniesoverothers.Thisisamisapprehension,foronlyafewcompanieswillinfactbe
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3/12/2015

Radicalinpromise,notinpracticeTheHindu

capableofproducingmajorsystems.Tocreatealevelplayingfield,thegovernmentwillhavetoprovideother
incentivesfortheprivatesectorespeciallysmallandmediumenterprisestoparticipateinothersegmentsofthe
defenceindustrialbasesuchasassembles,sparepartsandcomponents.
Morebroadly,theregulatoryregimeforprivatesectorparticipationindefenceproductionneedsahostofchanges:
totaleliminationoflicensingremovalofthedifferentialandregressivetaxanddutiestreatmentforIndianprivate
industryvisvisthedefencePSUsandforeignmanufacturerseasingtheavailabilityofcapital,landand
infrastructureandensuringbetterplanningandstrictimplementationofoffsets.Thesemeasures(andmore)have
beenunderscoredbythevariouscommitteesthathavegoneintothesequestions.Thegovernmentisevidentlyseizedof
theirimportance.Itshouldnowworksystematicallytobringaboutthesechanges.
FormeaningfulFDI
ThelargerchallengeistoattractFDIwithtechnologytransfer.IncreasingtheFDIlimitto49percentisunlikelytobe
sufficienttoensurethis.Forastart,NewDelhimaywanttoconsidercreativeoptionstocircumventtheproblemof
foreignproducersbeingmajoritystakeholders.Thiscouldbedonebyensuringthatthecontroloftheentitycannotbe
transferredwithouttheconcurrenceoftheIndiangovernment.Moreimportantly,thegovernmentmustrecognisethat
FDIindefencedoesnotworkasinmostothersectors.Thekeydifferenceisthatmostcountrieshaveexportcontrol
lawsthatregulatetheparticipationofdefencemanufacturersinventuresabroad.Strategicpartnershipsaretherefore
crucialtounlockingthedoorsformeaningfulFDIindefence.
NewDelhiwillhavetotakesometoughmindedcallsonwhichrelationshipsitwantstoemphasiseasfarasdefence
productionisconcerned.Forinstance,theUnitedStateshasthemostadvanceddefencetechnology,yetiscageyabout
dealsthatinvolvesubstantialtransferoftechnology.TheIndiaU.S.DefenseTradeandTechnologyInitiativehasbeen
talkedupquiteabit.Butconsiderthefourpathfinderprojectsforjointdevelopmentandproductionannounced
duringU.S.PresidentBarackObamasrecentvisit:nextgenerationRavenUnmannedAerialVehiclesintelligenceand
reconnaissancemodulesforC130Jaircraftmobileelectrichybridpowersourcesandchemicalbiologicalwarfarekit
forsoldiers.TheAmericansevidentlyfeelthatIndiancompaniesdonothavethecapacitytoabsorbhigherlevelsof
technology.Inanyevent,theseprojectsaretrivialwhencomparedtothejointdevelopmentprojectsundertakenby
IndiawithRussia:asupersoniccruisemissileandafifthgenerationfighteraircraft.
Themanagementofstrategicpartnershipsabroadisasimportantasrecastingtheregulatoryframeworkathome.If
defenceproductionisindeedattheheartofMakeinIndiaapolicythatinturniscentraltoMr.Modisplansfor
theeconomythenthegovernmenthastofocusonintegratingitseffortsatbothends.Facilehopesoneitherfront
willbearecipeforfrustration.
(SrinathRaghavanisSeniorFellowatCentreforPolicyResearch,NewDelhi.)
Tocreatealevelplayingfield,thegovernmentwillhavetoprovideotherincentivesfortheprivate
sectortoparticipateinothersectorsofthedefenceindustrialbasesuchasassembles,spareparts
andcomponents.
NarendraModisemphasisontheIndianprivatesectorhavingtoplayamuchlargerroleinthe
transformationofthedefenceindustrialbaseislaudableandoverdue.Thoughtherehavebeensome
moves,moreneedstobedoneifdomesticproductionandprivatesectorparticipationareto
approachanythingclosetothelevelsenvisaged

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