Prime minister urges defence firms to lead “Make in India” charge

 By Ajai Shukla

Yelahanka, Bengaluru

Business Standard, 19th Feb 15

“We have the reputation as the largest importer of defence equipment in the world. That may be music to the ears of some of you [foreign defence vendors] here. But, this is one area where we would not like to be Number One!” quipped Prime Minister Narendra Modi in Bengaluru on Wednesday, while inaugurating Aero India 2015, India’s premier aerospace exhibition.

In a major policy speech that placed defence manufacture at “the heart of our Make in India programme”, the PM said he was “developing India’s defence industry with a sense of mission.”

Repeating the familiar lament that 60 per cent of India’s defence requirements are still imported, Modi stated, “There are studies that show that even a 20 to 25% reduction in imports could directly create an additional 100,000 to 120,000 highly skilled jobs in India. If we could raise the percentage of domestic procurement from 40 per cent to 70 per cent in the next five years, we would double the output in our defence industry.”

The PM then delivered a brutally honest appraisal of what would allow the private sector to play a major role in defence manufacture.

While claiming credit for raised the permitted level of Foreign Direct Investment (FDI) in defence from 26 to 49 per cent (with up to 100 per cent permissible in cases where a vendor is bringing in state-of-the art technology); permitting investments up to 24% by Foreign Institutional Investors (FIIs); and drastically pruning down the list of products for which defence licences are required, Modi declared that much more needed to be done.

The measures the PM listed have been repeatedly projected by industry bodies to the defence ministry. Now there was visible satisfaction and delight amongst private industry CEOs on hearing their recommendations being played back to them by the PM.

“We have introduced significant reforms in our offsets policy. I am acutely aware that it still needs a lot of improvements. We will pursue them in consultation with domestic industry and our foreign partners”, said Modi.

Defence industry has repeatedly argued that the offsets policy --- which requires foreign vendors to plough back into Indian industry at least 30 per cent of the value of all contracts over Rs 300 crore --- lacks clear direction. Now here was the PM enunciating a clear aim: “I want our offsets policy not as a means to export low-end products, but to acquire state-of-the art technology and skills in core areas of priority”.

In an industry-friendly laundry list of measures, Modi said the government urgently needed to support research & development (R&D), including by “scientists, soldiers, academia, industry and independent experts”; to launch a technology development fund from which technology entrepreneurs could be funded; give assurances to vendors that equipment they developed would be bought by the military; and formulate export policies that are “clearer, simpler and predictable”.

Stressing on the need to reform defence acquisition, the PM endorsed the private sector’s repeated pleas for “a clear roadmap of our future [defence] needs.” Private firms have argued that knowing what equipment the military would require fifteen years ahead would provide the lead time needed for developing technologically complex equipment.

After years of requests from the private sector for access to cheap finance (western vendors enjoy finance at three to four per cent, while Indian industry pays 13-14 per cent), the PM called for “a financing system suited to the special needs of this industry. It is a market where buyers are mainly governments, the capital investments are large and the risks are high.”

Calling for a reform of the current system of taxes and duties that make it cheaper to import than to manufacture in India, Mr Modi summed up, “We need great infrastructure, sound business climate, clear investment policies, ease of doing business, stable and predictable tax regime, and easy access to inputs.”

“This was music to our ears, because we have been saying exactly this for years”, said the CEO of a private defence company, speaking anonymously. “But the proof of the pudding is in the eating. We are waiting for implementation.”

That will be the responsibility of Defence Minister Manohar Parrikar, who told a press conference later on Wednesday that a revamped and simplified defence production policy (DPP) was currently being formulated and would be promulgated by April or May.

Answering a question from Business Standard, Parrikar declared his intention to have a separate “Make in India” policy, in addition to the DPP, which already governs apparently similar procurement categories like “Make Indian”, “Make” and “Buy & Make (India)”.

Adding that the defence ministry was working on a new policy framework that would benefit micro, small and medium enterprises (MSMEs) in defence production, Parrikar said, “I have got the gist of the problem. We are working on it and will come out with a policy in a couple of months.”