3/12/2015 Radicalinpromise,notinpracticeTheHindu

http://www.thehindu.com/todayspaper/tpopinion/radicalinpromisenotinpractice/article6983861.ece 1/2

Today'sPaperOPINION

Radicalinpromise,notinpractice

SrinathRaghavanThedefenceBudgetforthenextfiscalyearconformstotheoverallpatternoftheBudgetpresentedbytheFinanceMinister.Itisradicalinpromisebutincrementalinpractice.Therewasamodestraiseindefenceallocationofjustabout11percent.Thenagain,theproportionofcapitalexpenditureinthedefenceBudgethasshrunkabit.Wemaywellwonderhowthearmedforceswillshopfortheirlongwishlistthatincludeshowitzersandhelicopters,fighteraircraftandattacksubmarines.Mr.ArunJaitleysclaimthathehasprovidedadequatelyfortheneedsofthemilitarysurelyturnsonagenerousinterpretationoftheoperativeword.Moreimportant,however,washisassurancethatthegovernmentsMakeinIndiapolicywouldhelpachievegreaterselfsufficiencyindefenceequipment,includingaircraft.ThiswasentirelyinkeepingwiththePrimeMinistersremarksattheAeroIndiashowinBengaluruafewdaysearlier.Speakingonthatoccasion,Mr.NarendraModiemphasisedthatthedefenceindustrywasattheheartoftheMakeinIndiaprogramme.Byincreasingtheshareofdomesticprocurementofmilitaryequipmentfrom40percentto70percentinfiveyears,headded,Indiacoulddoubletheoutputofitsdefenceindustry.Moresignificantly,henotedthattheIndianprivatesectorwouldhavetoplayamuchlargerroleinthistransformationofourdefenceindustrialbase.ThecaseofHALThePrimeMinisterscallwasatonceaptandironic.Bengaluruis,ofcourse,thehomeofHindustanAeronauticsLimited(HAL)thelargestdefencePublicSectorUndertaking(PSU).Fewrecall,though,thattheHALhasitsoriginsinprivateenterprise.ItbeganduringtheSecondWorldWarasthebrainchildofWalchandHirachand,aleadingbusinessmanandnationalistsympathiser.WalchandcontrolledtheScindiaSteamNavigationCompanyandhadlongdreamtofrevivingshipbuildinginIndiaanindustrythathadbeenmonopolisedbyBritishfirms.HisattempttobuildashipyardinVisakhapatnamprovedabortiveasdidhisplantosetupanautomobilefactorytocaterforthewareffort.WalchandsmostambitiousundertakingwastomanufactureaircraftinIndia.SoonafterthewarbeganinSeptember1939,WalchandenteredintodiscussionswithanAmericanaircraftconglomerateandofferedtobuildmilitaryaircraftfortheIndiangovernmentaccordingtospecifications.NewDelhisresponsewasshotthroughwithscepticism.Onlyayearlater,whenimportswerenolongerreliable,didtheIndiangovernmenttakeupWalchandsoffer.Thentoo,thegovernmentsunwillingnesstosupporttheventureledWalchandtoturntotheprincelystateofMysore,whichagreedtoprovidelandnearBengaluruaswellasconcessionaryloans.OnDecember23,1940,theHindustanAircraftCompanycameintoexistence.Thegovernmentplacedordersfor74longrangebombers,48fighterplanesand30trainers.BytheendofAugust1941,thefirsttrainerwashandedovertothemilitary.Otheraircrafttoobegantobeturnedoutonschedule.Inearly1942,followingJapansentryintothewar,theIndiangovernmentdecidedtotakedirectcontrolofthecompany.Muchagainsthiswishes,Walchandwasarmtwistedintodivestinghisstake.TheplantwashandedovertotheU.S.ArmyAirForces,whichuseditasarepairandoverhaulfacilityfortheremainderofthewar.Thereafter,itrevertedtothecontroloftheIndiangovernment.LongroadaheadTheHALhasnowcometosymbolisethestrangleholdthatthePSUshaveonourdefenceindustrialbase.ThePrimeMinistersdecisiontogiveafilliptotheprivatesectorislaudableandoverdue.Someinitialmoveshavealreadybeenmade.Thecaponforeigndirectinvestment(FDI)indefencehasbeenraisedfrom26percentto49percent.Investmentfromforeigninstitutionalinvestors(FIIs)hasbeenallowedupto24percent.ItisnolongermandatorytohaveasingleIndianinvestorwithatleast51percentstake.Industriallicenceshavebeendispensedwithforsomeitems.Yet,muchmoreneedstobedoneifourdomesticproductionandprivatesectorparticipationaretoapproachanythingclosetothelevelsenvisagedbythegovernment.Forastart,thecategorisationundertheDefenceProcurementProcedureneedstobeconsideredafresh.WhileincreasingfocusonMakeandBuy&Make(Indian)isimportant,itwillnotautomaticallyharnessprivatesectorparticipation.Inthelattercategory,forinstance,RequestsforProposal(RFP)havebeencirculatedtoforeignmanufacturerswiththeconditionthattheychooseanIndianpartner.Yet,Indiancompanies,includingtheprivatesector,thathavetherequisitecapabilityhavenotbeenconsideredfortheRFPsapparentlyowingtotheirlackofexperienceindelivery.ThisbegsthequestionofhowtheIndianprivatesectorisexpectedtoacquireexperienceinthefirstinstance.ArelatedproblemistheuseofdirectorindirectnominationofdefencePSUsorordnancefactories.Thistooloadsthediceagainsttheprivatesector.Thegovernmentshoulddoawaywiththispractice:allcontractsshouldbeopenedupforbidding.ThegovernmentshouldalsotakeonboardasuggestionmadebytheKelkarCommitteealmost10yearsago.Thisistoidentifycertainfirmsbasedontheirtechnical,managerialandfinancialstrengthaschampions(RakshaUdyogRatna)andcirculateRFPsformajorsystemstothesefirms.Thismodelhasworkedwellinothercountries.Infact,acommitteeconstitutedbythegovernmentidentified13Indianfirmsthatcouldbedesignatedalongtheselines.Buteventuallythegovernmentbaulkedattheideaofbeingseenasfavouringsomeprivatecompaniesoverothers.Thisisamisapprehension,foronlyafewcompanieswillinfactbe

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3/12/2015 Radicalinpromise,notinpracticeTheHindu

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capableofproducingmajorsystems.Tocreatealevelplayingfield,thegovernmentwillhavetoprovideotherincentivesfortheprivatesectorespeciallysmallandmediumenterprisestoparticipateinothersegmentsofthedefenceindustrialbasesuchasassembles,sparepartsandcomponents.Morebroadly,theregulatoryregimeforprivatesectorparticipationindefenceproductionneedsahostofchanges:totaleliminationoflicensingremovalofthedifferentialandregressivetaxanddutiestreatmentforIndianprivateindustryvisvisthedefencePSUsandforeignmanufacturerseasingtheavailabilityofcapital,landandinfrastructureandensuringbetterplanningandstrictimplementationofoffsets.Thesemeasures(andmore)havebeenunderscoredbythevariouscommitteesthathavegoneintothesequestions.Thegovernmentisevidentlyseizedoftheirimportance.Itshouldnowworksystematicallytobringaboutthesechanges.FormeaningfulFDIThelargerchallengeistoattractFDIwithtechnologytransfer.IncreasingtheFDIlimitto49percentisunlikelytobesufficienttoensurethis.Forastart,NewDelhimaywanttoconsidercreativeoptionstocircumventtheproblemofforeignproducersbeingmajoritystakeholders.ThiscouldbedonebyensuringthatthecontroloftheentitycannotbetransferredwithouttheconcurrenceoftheIndiangovernment.Moreimportantly,thegovernmentmustrecognisethatFDIindefencedoesnotworkasinmostothersectors.Thekeydifferenceisthatmostcountrieshaveexportcontrollawsthatregulatetheparticipationofdefencemanufacturersinventuresabroad.StrategicpartnershipsarethereforecrucialtounlockingthedoorsformeaningfulFDIindefence.NewDelhiwillhavetotakesometoughmindedcallsonwhichrelationshipsitwantstoemphasiseasfarasdefenceproductionisconcerned.Forinstance,theUnitedStateshasthemostadvanceddefencetechnology,yetiscageyaboutdealsthatinvolvesubstantialtransferoftechnology.TheIndiaU.S.DefenseTradeandTechnologyInitiativehasbeentalkedupquiteabit.ButconsiderthefourpathfinderprojectsforjointdevelopmentandproductionannouncedduringU.S.PresidentBarackObamasrecentvisit:nextgenerationRavenUnmannedAerialVehiclesintelligenceandreconnaissancemodulesforC130Jaircraftmobileelectrichybridpowersourcesandchemicalbiologicalwarfarekitforsoldiers.TheAmericansevidentlyfeelthatIndiancompaniesdonothavethecapacitytoabsorbhigherlevelsoftechnology.Inanyevent,theseprojectsaretrivialwhencomparedtothejointdevelopmentprojectsundertakenbyIndiawithRussia:asupersoniccruisemissileandafifthgenerationfighteraircraft.Themanagementofstrategicpartnershipsabroadisasimportantasrecastingtheregulatoryframeworkathome.IfdefenceproductionisindeedattheheartofMakeinIndiaapolicythatinturniscentraltoMr.Modisplansfortheeconomythenthegovernmenthastofocusonintegratingitseffortsatbothends.Facilehopesoneitherfrontwillbearecipeforfrustration.(SrinathRaghavanisSeniorFellowatCentreforPolicyResearch,NewDelhi.)Tocreatealevelplayingfield,thegovernmentwillhavetoprovideotherincentivesfortheprivatesectortoparticipateinothersectorsofthedefenceindustrialbasesuchasassembles,sparepartsandcomponents.NarendraModisemphasisontheIndianprivatesectorhavingtoplayamuchlargerroleinthetransformationofthedefenceindustrialbaseislaudableandoverdue.Thoughtherehavebeensomemoves,moreneedstobedoneifdomesticproductionandprivatesectorparticipationaretoapproachanythingclosetothelevelsenvisaged

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