The decks have been cleared for some leading Indian companies to pour billions of dollars into domestic defence production, with a designated panel over the past few months clearing a flurry of proposals involving the manufacture of highly capital-intensive equipment and integrated systems that have hitherto remained out of bounds for them.
India’s capital spending in the defence sector has risen one-and-a-half times over the last four years (see graphic), and is projected by CII-BCG to rise five times by 2025 — over 70% of India’s needs are met through imports.
Many of these proposals will be supported by the India-US Defence Trade and Technology Initiative and will pave the way for technology assimilation for Indian companies in high-tech areas like integrated defence systems, main battle tanks, unmanned aerial vehicles and sophisticated submarines, official sources told FE.
Defence production wings of leading domestic conglomerates like Reliance, various Tata firms, Mahindra & Mahindra and a host of others with interest in the sector like Larsen & Toubro, Bharat Forge, Pipavav Defence and Punj Lloyd secured clearances for one or more of defence production projects over the last two meetings of the licensing committee of the department of industrial policy and promotion.
A total of 35 projects were listed for consideration of the committee on Tuesday, and most are believed to have been cleared.
Among the big projects cleared are a 2010 proposal from Tata Motors to overhaul all armoured fighting vehicles as well as to make a battle tank. Tata Motors is not the only company wanting to make tanks. Pipavav Defence and Offshore Engineering also has a proposal pending since 2012 to manufacture tanks, armoured fighting vehicles and gun turrets.
Pipavav also got a clearance for manufacturing missiles and rockets, torpedoes and also structural parts for aircraft. A total of seven projects from Pipavav were considered by the licensing committee. Punj Lloyd Aviation had applied for permission to manufacture aircraft as well as drones. Piramal Systems & Technologies has also applied to make drones while Bharti Shipyard applied for a licence to produce warships and submarines.
As part of the process of expediting Make-in-India for defence, the Defence Acquisition Committee (DAC) has, since July 19, cleared over Rs 150,000 crore worth of projects for a combination of buying and make-in-India.
Among the big-ticket items are the purchase-cum-manufacture of replacements for Avro transport carriers at a cost of roughly Rs 15,000 crore, 814 mounted gun systems for the army at a cost of Rs 15,750 crore and six submarines for Rs 50,000 crore.
In the case of the guns, while the first 100 are to be bought off-the-shelf, the rest are to be manufactured in India. In the case of the replacement for the Avros, the DAC has decided to take some more time to clear the Airbus-Tata Advanced System bid for production — in this case, the first 16 aircraft are to be supplied by the foreign vendor while the rest will be manufactured locally within eight years.
Some of the projects that have now been cleared will require the Foreign Investment Promotion Board’s approval for the foreign direct investment part. The government in August notified a hike in foreign investment limit in defence production to 49% from 26% and said even beyond the new limit of 49%, foreign investment would be considered on a case to case basis by the Cabinet Committee on Security (CCS) provided it was prima facie felt that such investments would lead to technology transfers.
The biggest stumbling blocks for projects looking for industrial licences so far were the clause that no FII investments were to be allowed, and that the largest Indian shareholder had to have at least a 51% stake in the company.
As a result, Reliance Aerospace, which had submitted a proposal to produce rocket launchers as well as flight control systems, could never get a clearance — the FII ownership in the parent Reliance Industries was 17% and so, since Reliance Aerospace was a wholly-owned subsidiary of a wholly-owned subsidiary, it was treated as having FII holdings.
In the case of Tata Advanced Materials, similarly, a small FII stake proved to be the bottleneck. And in the case of Punj Lloyd, though it met the FDI criterion — at 26% before the NDA raised it to 49% — it could not make the cut as the largest Indian shareholder held just a 40% stake.