FDI in the Defence Sector has been hiked from erstwhile 26 percent to 49 percent when the Finance-cum-Defence Minister recently announced the Defence Budget amounting to 2.29 Lakh Crores ($38.5 billion) for Financial Year 2014-2015.
...analyzed why the 26 percent FDI limit until now barely attracted less than $5 million foreign investment; just 4.94 percent in last 14 years.
The defence spending boosted by 12 percent over the previous year (defence expenditure for 2013/14 was kept at Rupees 2.04 trillion) and a Rupee 5000 croes (50 billion rupees) increase over what the previous government had announced as part of the interim budget earlier this year.
The increase in FDI was definitely warranted considering that we are importing over 70 percent of our defence needs. But, hiking the FDI in the Defence Sector is not even half the story. Going by the way we work, the bureaucracy and red tape, it is doubtful if we methodically analyzed why the 26 percent FDI limit until now barely attracted less than $5 million foreign investment; just 4.94 percent in last 14 years. Without going into these reasons and addressing those critical issues, nothing much is likely to be achieved with the hiked limit of FDI.
On a parallel level a simile would be the establishment of a Facilitation Cell by the Defence Offsets Management Wing (DOMW) is a welcome step but it needs to be remembered that the DOMW was preceded by the Defence Offset Facilitation Agency (DOFA) that was established in 2006 but had to be shut down as it could not deliver upon what was expected.
The DRDO had identified some 15 critical technologies that it seeks to import through offsets, such technologies would require special approvals by the foreign vendor’s government. Till 2012, 16 offset contracts, worth $4.3 billion, were signed and this is expected to cross $25 billion by 2020.
The 49 percent limit was kept perhaps to retain control but the question is whose control?
Why the DOFA failed was because we could not streamline the procedures, cut the red tape and did not integrate all stakeholders when reviewing our policies. The Facilitation Cell may not achieve the desired objectives unless the reasons for failure of DOFA are eliminated.
What is the reason that while the FDI Confidence Index of the country is very high, that in the Defence Sector is extremely low? The explanation is actually very simple. This cannot be rectified by the MoD by themselves, which they have failed to do over the years.
Take the annual fanfare with which the Defence Procurement Policy (DPP) is trumpeted for having been ‘simplified’. How come despite years of in-house ‘simplification’ of the DPP by MoD, It has failed to sufficiently attract even the indigenous private sector? Isn’t it imperative that all stake holders are integrated in reforming defence related policies and procedures, without which raising the FDI limit is unlikely to provide significant dividends. Then a large cross-section feels that in case of transfer of technology (ToT), the FDI limit could well have been raised to 70 to 80 percent.
The 49 percent limit was kept perhaps to retain control but the question is whose control? Is it the MoD-DRDO-PSUs control, the combination of which over decades has brought the defence-industrial complex to such sorry state?
Can anyone refute the reality of the vested interests and corruption in the set up described in the 2011 letter addressed to the then Prime Minister by Manibhai Naik, CEO of L&T that said, “Defence Production (MoD) Joint Secretaries and Secretaries of Defence Ministry are on the Boards of all PSUs -- sickest of sick units you can think of who cannot take out one conventional submarine in 15 years now with the result that the gap is widening between us and China and bulk of the time we resort to imports out of no choice. The defence industry which could have really flowered around very high technological development and taken India to the next and next level of technological achievement and excellence is not happening.”
...CAG reports of recent years indicating crores of rupees and efforts have simply gone down the drain without accountability.
And this is unlikely to change with MoD continuing to be ruled by generalist bureaucrats, no sign of its reorganization bringing in military professionals despite change in government, and DRDO putting up notes for its own reorganization that can hardly go beyond consolidation of its vice-like grip to the detriment of defence. Without the users inducted at all levels in DRDO to control and manage this white elephant, nothing much is likely to change.
It is pathetic that after decades, DRDO officials themselves acknowledge that the organization can boast of only ‘patches of excellence’. To add to this are the startling facts in CAG reports of recent years indicating crores of rupees and efforts have simply gone down the drain without accountability.
Next is the question of whether we have streamlined our procedures to facilitate and absorb foreign technology. The visit by US Deputy Secretary of Defense Ashton B Carter last September evoked much interest when he stated that US technology and exports control areas were being looked at so that India has the same status as the closest allies of US; for the US system to operate on a timescale consistent with the needs for the Indian side to make decisions, aim being to take the Indo-US defence relationship to the next level and help India raise the indigenization of its defence systems.
So we can feel happy visioning future Indo-US joint ventures (JVs); sharing technology and co-production but are we geared to facilitate all this? Take the ‘Buy and Make’ projects, which are the correct way to go about developing systems in order to leapfrog technology. We would float a Request for Information (RFI) giving the usual response time of three months or so. A US firm has to obtain permission from the US government every time for exports to the concerned country.
...the US firm cannot export the said items directly to the Indian firm of the JV.
Then, If the equipment or system is itself a JV within the US (items, parts taken from different firms), then each of these firms too have to obtain US government approval for export of specific technology or item to the concerned country. This process requires anything up to 12 months or more. Next comes the more difficult part in a US firm teaming up with the Indian firm in a ‘Buy and Make Project’. Before such a JV is established, the Indian firm needs to put down on paper what items and in what specific quantities would form part of the ‘Buy’ from the US firm. More importantly, the US firm cannot export the said items directly to the Indian firm of the JV.
As per current rules, these items can only be exported under the FMS route on a Government-to-Government basis. The implications are that first the Indian firm lists out the items specifying quantities and obtains GoI approval, which itself is liable to numerous queries, file pushing and consequent loss of time. Thereafter, GoI would need to take up a separate case with the US government to obtain these items through the FMS route, import them and then provide these to the concerned Indian firm to kick off the ‘Buy and Make’ project. On balance, it can be safely assumed that unless these serious bottlenecks are removed, Indo-US JVs in any ‘Buy and Make’ project will remain a distant dream.
Read the book ‘Wings of Fire’ by Dr APJ Abdul Kalam, authored much before he became President, indicating our major technology voids but then have we progressed on these voids and in what measure? Under his chairmanship in 1995, a Review Committee had also set the goal of 70 percent self reliance by year 2005 but today in 2014 are we not still just about 30 percent self reliant?
Just hiking FDI is not enough, we need to make the Indian Defence Sector unambiguously lucrative for investors.
A novice could deduce that there is something drastically wrong and until a complete overhaul is undertaken to rectify the underlying structural and procedural hindrances, cosmetics will take us nowhere. Now that the 70 percent self sufficiency target has been pushed to year 2020, the indigenous defence industry has to play a major role, as would the FDI since the total estimated products required would be to the tune of $ 80 to $ 100 billion, since by the end of the 14th Five Year Plan, the cumulative capital expenditures over 2012–27 are projected to exceed $235 billion.
So far, the various measures and incentives announced by the MoD have failed to interest the indigenous industry and foreign vendors. These are issues that must be addressed urgently and seriously, and the monopoly of DRDO, DPSUs and OFB must be given the much delayed burial. The capacity of our indigenous industry must be fully harnessed.
As a country we are under no embargos and we have the advantage of friendship and cooperation with multiple technologically advanced countries, which we must capitalize upon. Just hiking FDI is not enough, we need to make the Indian Defence Sector unambiguously lucrative for investors. The added advantage would be further strengthening of bonds with the investor’s country.