By Ananya Upadhyay
Public sector undertakings (PSUs) in the defence sector have a cumulative turnover of about ?50, 000 crores. The public sector shipyards have been given orders worth ?1.24 lakh crores in the last two years. In the same period, the private sector has received orders worth barely ?2,000 crores. Further, barely 67 private firms in the country namely, Tata, Mahindra, Hero, Reliance group, Hinduja group and Bharat Forge, have the technological know-how and the financial strength to be able to invest in defence. So, where does the problem lie?
Disincentive to entry
[su_pullquote align=”right”]Private sector continues to be merely an outsourcing base for the public sector. [/su_pullquote]
A major problem in the sector for the entry of private players is the forced dependenc
e on purchases by the government and the forces. Public sector players are not outsourcing received orders to private players. Industry representatives pointed out that over the past two years, not a single ?100 crores-plus order was placed by PSUs to any private defence manufacturer. Private sector supplies to Defence PSU and Ordnance Factories grossed over ?1200 crores and ?1900 crores respectively last year. These figures highlight the fact that the private sector continues to be merely an outsourcing base for the public sector.
With the coming of 100% FDI, foreign manufacturers will prefer coming in on their own rather than going in for a joint venture and share their profits. This will make it even more difficult for the private sector in the domestic market.
Indian has opened 100% FDI in Defence sector | Photo Courtesy: DawnNeed for private investment
Defence manufacturing, for years, has been exclusively under the government for security reasons. However, since we lag behind in the area of technology, our defence requirements had to be imported. As a result, India is one of the largest arms importers in the world. An increased domestic private investment will serve as import substitution, leading to cost savings, self-reliance, quality enhancement and in future, even help bolster exports of defence equipment.
Reasons for fluctuating private investment
A number of licences have been granted to private parties but only around 35 have started actual production.
Requirements of the armed forces are not made known to the private sector sufficiently in advance. This results in the fact that they do not get adequate time, either to scout for foreign tie-ups or to establish the necessary facilities. The time given for the submission of technical and commercial proposals is grossly inadequate for a new entrant in the field.
Further, the current sources of supply of talent are largely from the defence PSUs and user services. Neither are they adequate in quantity nor in terms of skills and quality when evaluated from a perspective of the magnitude of demand arising from the need to build a robust home-grown industry.
Electronics, technology lifecycles are today down to 57 years and hence are incompatible with a procurement model that evolves from a 20-year vision. It is usually seen that the definition of system needs (qualitative requirements), changes many times over, often even before the procurement process can be effectively concluded. Thus, a dedicated differentiated focus is needed from the centre.
The governments role
There is a lack of a sustained focus on R&D in the materials sciences space. Encouraging private institutes or even firms to come up with latest R&D in defence, funding of independent research or providing incentives for research will engage more firms in the sector.
[su_pullquote]A good sign is that the ministry has already de-licensed 6070% of the production.[/su_pullquote]
The government needs to be commercially sensitive. Around 25% of the defence PSU (public sector undertaking) turnover can be off-loaded to the private sector. A good sign is that the ministry has already de-licensed 6070% of the production. The Centre should create categories of private investments in defence manufacturing with varying caveats of concessions and guaranteed purchases, along with hedging investments. It must also try to take into account the small industries in this field to give them a level-playing field.
A fruitful engagement in the future
Defence manufacturing in India is undergoing a step function change. There have been substantial measures taken to boost local manufacturing in India and to ensure that this capability is built in both the public and the private sector. This aim is being addressed at one level through tweaking of the policies that are redundant and at another by supporting defence manufacturing industry through orders, investments and technology. The government has displayed a very clear focus and a mindset to tackle the issue. It must continue its reformist policies and start providing the technological know-how to the private sector. Further, if it controls how the local sourcing clauses of FDI are regulated, we can expect a fruitful engagement of private sector in the defence sector in the coming years.