Expose

Even as the country faces an increasingly hostile neighbourhood, the United Progressive Alliance (UPA) government continues to falter on defence preparedness. Inter-ministerial wrangling, policy paralysis, and across-the-board confusion mar military procurement. The Ministry of Defence (MoD) is unable to take decision on purchasing fire-fighting equipment and ambulances, let alone arms and armaments.

The result: 49 applications from private companies for industrial licences in the defence sector are pending since 2008, as the MoD remains wedded to the discredited socialist dogmas.

“There is an urgent need to strengthen the indigenous defence industry, in order to reduce our dependence on imports of defence equipment, facilitate technology absorption in defence and allied areas, generate employment and facilitate achieving the government’s objective of higher level of indigenisation,” the DIPP letter said. “The production of defence equipment by the private sector in the country will provide immediate impetus to the manufacturing sector in the shape of largescale ancilliarisation, as has happened in major industrialised nations like the US, France and Germany.”

Unsurprisingly, India Inc is dismayed at the proposed revision of defence offset policy. A delegation from the Federation of Indian Chambers of Commerce & Industry, representing home-grown defence companies, reportedly informed Defence Minister AK Antony on July 23 that the policy change would make offsets a scandal more damaging than 2G spectrum allocation.

Then there is also the issue of Nehruvian socialism; Antony continues to stick to the shibboleths of the ancient regime. The Department of Industrial Policy and Promotion (DIPP), which is under the Ministry of Commerce and Industry, has also accused the MoD of hurting the interests of Indian companies defence procurement.

In a letter to Cabinet Secretary Ajit Kumar Seth on September 8, the DIPP wrote, “It has been noticed that, of late, the department of defence production (under the MoD) has been refusing to recommend cases for industrial licence, citing reasons which prima facie do not seem justifiable.”

The MoD’s distrust of the private sector seems to be doctrinaire; either if finds the investments proposed by Indian companies as “meagre” or it says that the items “should be manufactured by defence public sector undertakings (DPSUs) only.”

To begin with, the MoD is unable or unwilling to pursue its own offsets programme. Business Standard reported on September 6 that the ministry’s professed “resolve to jump-start indigenous defence production through offsets has been broken by a cartel of foreign arms merchants. The vendors’ specious argument, which the MoD has inexplicably swallowed, is that Indian defence companies cannot absorb the billions in offsets that will arise from our weapons purchases over the coming decade, the biggest overseas arms buying spree in history.”

According to the offset policy, an overseas firm that gets a defence contract of Rs 300 crore or more is stipulated to invest 30 per cent of the contract in the domestic industry. As many as 130 countries have defence offsets, so there is nothing exceptional about them. Quite apart from boosting indigenisation of defence production, the policy, if implemented properly, can be a stimulus to domestic industry, especially manufacturing, which is doing badly these days. Manufacturing, with more than 75 per cent weight in the index of industrial production, grew by just 2.3 per cent in July, its worst performance since October 2009 when the economy was impacted by the global financial meltdown.

According to the DIPP, the MoD’s obstinacy “has led to an anomalous situation, where, on the one hand, Indian private sector players are not able to get defence procurement orders in the absence of a licence, and on the other, they are not able to make investments for creation of capacity, so that they may get the orders.”

The DIPP also pointed out another absurdity in defence production. It said that there is “an inherent conflict of interest in the matter of consideration of private sector licence applications by the department of defence production since the defence PSUs which manufacture defence equipment come under the administrative control of this department.”

Expert opinion also favours private sector involvement in defence production and end of direct and indirect subsidies to PSUs. Venu Gopal, Research Fellow at the Institute for Defence Studies and Analyses, recently wrote in a paper: “Price preference to PSUs should be discouraged… The private industry inducted into defence R&D and production with due incentives like tax rebates can give rise to a fruitful environment.”

He concluded the paper with the comment: “Over the last couple of decades, the Indian private sector has evolved steadily, comparable with the best in the world and turning truly globally competitive. It has shown potential to reach the top with its capacity to innovate and adjust. All that is required is a level-playing field and a thrust for greater involvement…”

Unfortunately, “a level-playing field” is what India Inc is not getting. It is the worst of all possible worlds for private Indian companies. Their prospects are hit by the machinations of foreign companies on the one hand and the MoD’s dogmatism on the other. Prime Minister Manmohan Singh, as usual, is not bothered.