Investments Are Slow In Defence As There Is No Predictability

The Draft Defence Production(DDP) Policy 2018 envisions India to be one of the world’s top five defence producers by 2025 with self-reliance in 13 areas and achieve exports of Rs 35,000 crore ($5 billion). How realistic is the vision? 

This has been drafted keeping the futuristic view. As on date, it is not approved, but the process is on. I think it is a very good document to follow. It’s a bit ambitious but I think we have to be ambitious if we have to achieve something, especially the export target of Rs 35000 crore, which may look  very high but there is potential. I think it makes lot of sense to try achieving these goals which has been incorporated in the draft defense production policy.

Keeping the average economic growth is at 7% on average, to achieve the defence target- as mentioned above, we require the exponential growth more that 15-20% in the defence sector on consistent basis. Is it an utopian objective? 

 It has little to do really with percentages. As you know, in the defense sector, there are lots of negative areas for instance- we cannot buy from certain countries and we cannot sell to certain other countries.  It’s not as if we are factoring in only economic growth. For instance, we are buying so many things from Russia and we are also opening up to the US- the US has technology sharing has started. So, it’s more of an outreach countries who are friendly towards us especially the ASEAN and African countries.  There are lots of scope for exports and those items already exist with us. Some of them which we still are not fully indigenized but we are in the process, so given the capabilities, I don’t’ think it depends only on the economic factors. We are in a position to exploit and increase our export within the given economic growth or existing parameters.  

How do you think it’s possible? We would like to understand why did not FDI take place in defense? 

 Yes, it’s possible and not overambitious. I think for FDI, figure is low but not as abysmal as it looks. There are some technical issues involved. Earlier 100 % of defense goods were licensed and, so, FDI could come after disclosing. Today many items are out of the worthy of licensing, those areas even if it is defense related we would not know.  Already some of them may not fully indigenize but we are in the process, so given the capabilities I don’t think it depends only on the economic factors as I have already suggested. We are in a position to exploit and increase our exports within the given economic growth or the existing parameters that exist today. 

Secondly, technically as per the DIPP classification there are certain heads which are considered under the defense. However there are many items which are used in defense for which FDI comes in but it is not captured in the defense sector. We are doing our studies and we are trying to get the figures from all the business houses and others. We are in the process of doing it. However, I will tell you that the figures are much higher than this low figure of whatever 1.25.

You are saying that such investments have gone into other areas and not been captured as part of FDI under defence?

Yes, it has not been captured as per the DIPP classification in the FDI inflow into the defence sector. 

Foreign investment and technological expertise have proved to be game-changers in India for various sectors and it is better to have foreign OEMs manufacture defence products on Indian soil than in their own country where India has zero control.  Keeping that in mind, why not allow 100% FDI in defence production for foreign OEMs?

Defence is a critical sector for any country, and you cannot throw it open to foreign investors like you do for other sectors. But, having said that even today 49% FDI is allowed in the defence sector through the automatic route. However, for anything higher than that as of today you have to take the government permission. It’s not a difficult thing even today. Only this is it has to come to the government, government will give the permission within that 100% is allowed. It’s not that 100% is not allowed. Only thing is that it requires government permission. Having said that I really don’t foresee total opening up of 100 % without any barriers in the defense sector. I don’t think it is possible in the near future even in the strategic areas but yes, we are in the process and we will open up.  When the draft production policy is approved there may  be corresponding changes in other policies. I can tell you that in offset policies there are certain changes are being contemplated, and these are already under discussion and might come very soon. In FDI also, we might make changes. So, with the production policies many other things will change.

What do you think of L 1 criterion in the policy framework as it is designed on the lowest bidder? Does it work in defence acquisition where quality matters over quantity? 

 Let me first tell you that this is not within my domain not even within the domain of DDP, but I will try to answer your question as an observer. This is actually in the domain of acquisition. I can say that L-1 is indeed an issue. However,  L1 is granted after the technical qualification. As you know, the technical qualification in defense products are very stringent. The question of L1 only comes after this stage. Having said that in the latest DIPP you see, there are some elements where the non L1 element is built in. And, even within L1 there are various element brought in to make the process more competent. 

Offset is your official domain as an economic adviser to the MoD. Let me ask you that Offset is standard international practices. In our case, what we want to achieve through?

The basic idea of offset is that if you are procuring something from a global agency, you ensure that part of that whatever of that activity is also brought back to your country. So that you can gain through this activity – whether employment generation or economic gains. That is the overarching aim of offset which is prevalent in many countries. Somewhere it is called industrial partnership and so. Procurement policy says if there is any procurement is above 2000 Crore is done, you have 30% offset.  And, there are 6 avenues through which the foreign OEMs can discharge their offsets. It has made some impacts but not as expected.   There are some drawbacks as it was found that 90 % of the offsets discharge are through one avenue that is through buying of good and services.  With limitations offsets are happening however we are trying to address that.

Despite some of the commendable performance, defence public sectors are still looked at being laggards for their slow pace of delivery and turnaround time. Is disinvestment on the card? 

Disinvestment as a process is happening. I was earlier in the disinvestment department. But, the counter argument against disinvestment is that government still has still a majority share, because you (government) would not disinvest beyond 49%. So, disinvestment is one of the instrument to bring about change under reforms. DPSUs are dependent on the orders from thermed forces and this is another dimension. One of the reason that investment takes slow process in defence is that there is no predictability.

How do you see the defence ecosystem taking shape with two defence corridors? What are the measures government is taking to attract private firms to set up base in these two corridors? Have you come up with any workable model?

No, not yet. It is the work in the progress. In Uttar Pradesh, there six nodal points and Tamil Nadu has five. We have already initiated interaction with the actual industrial entrepreneurs and we have taken notes of what they require. In UP, for example, HAL is present in Lucknow and there are many economic activity happening.  There will a mix of both brown field and green field. Brown field are those areas where you already have existing industries. There you need to help them to make more productive and rise upto the international standard and also be part of global supply chain. We have received very good response from Trichi and Coimbatore. Then you other places like Aligarh where you can bring investment and foreign OEMs can set up their base. We are in the process of appointing consultants through which we would know what other help the industries require in terms of finance or IT. Thereafter, through the Cabinet, we will take the policy decisions and then implement them.