FM’s reforms package for defence awaits implementation roadmap

Updated: Jun 17, 2020 5:15 PM

This is also true of the announcement about indigenisation of imported spares, formulation of realistic services qualitative requirements (SQRs) of weapons/platforms and overhauling of trial and testing procedures.

It is no secret that the gap between the requirement of funds projected by the armed forces and the budgetary allocation has increased from around Rs 23,000 crore in 2010-11 to more than Rs 1,30,000 crore in 2020-21.It is no secret that the gap between the requirement of funds projected by the armed forces and the budgetary allocation has increased from around Rs 23,000 crore in 2010-11 to more than Rs 1,30,000 crore in 2020-21. (Representative image)

By Amit Cowshish

More than a month after several measures were announced by the Finance Minister Nirmala Sitharaman on May 16 to rejuvenate defence production in the country, the implementation roadmap is still awaited. This would not have been unusual under the normal circumstances but considering that these measures were announced as a part of a larger reforms package for several sectors in the face of insidious economic crisis, one month is an atypically long time.

It may not really matter much, though, as none of the measures announced last month can produce an immediate result. How effective they prove to be in the long-run in boosting defence production and promoting self-reliance would also depend on several other factors, the most important of them being the defence ministry’s ability to buy locally manufactured defence materiel.

A section of the Indian industry has hailed the reforms as propitious, but an objective assessment will have to wait till the fine print of the reform measures are known. Meanwhile, one can only parse the package to see if it holds promise for achieving self-reliance in defence more quickly – a goal that has eluded the country for several decades.

Of the several measures announced by the finance minister, only two are big ones: the corporatisation of the ordnance factory board (OFB) which manages 41ordnance factories across the country and raising of the cap on foreign direct investment (FDI) in the defence sector from 49 to 74 per cent. Neither of these is a new idea, though.

The idea of corporatizing OFB has been around for more than fifteen years since it was put forward by the Kelkar committee. It was not be acted upon earlier primarily because of the opposition from 80,000 plus employees of the OFB. The May 16 announcement has again evoked the same response from them, putting a question mark on implementability of the decision.

The case for corporatisation is built on the premise that it will improve autonomy, accountability and efficiency in ordnance supplies and its eventual listing on the bourses will bring in transparency in operations. In the face of incessant criticism of the existing public sector entitles (statutory corporations and government companies) this premise is questionable.

This is also the case with the decision to raise FDI cap to 74 per cent. When proposed by the commerce ministry in 2013, it was rejected by the defence ministry on the plea that allowing foreign companies to set up base here would stymie the growth of indigenous design and development capabilities, thus perpetuating our dependence on them. That argument continues to be valid even today. Striking a balance between higher FDI cap and the need to ensure that it does not undermine the local industry’s growth will be a challenge.

The present FDI cap of 49 per cent, which provides a limited management control to the foreign investor, is not the only reason why investment in defence has been low – it does not add up to even 0.01 per cent of the total FDI in India. One important reason for low investment has been the limited prospects of selling the locally manufactured equipment to the defence ministry. In the face of persistent resource crunch, this consideration will continue to weigh heavily with the foreign investors.

The view that the prospect of exporting Made-in-India defence materiel makes for a strong case for foreign investment is also questionable as it overlooks the fact that there is little chance of major arms importing countries – Saudi Arabia, UAE, China, Australia, Algeria, Turkey and Iraq – abandoning their existing suppliers and opting for imports from India. This view also disregards the fact that developing other markets for export of major equipment and platforms from India is fraught with uncertainties.

It is no secret that the gap between the requirement of funds projected by the armed forces and the budgetary allocation has increased from around Rs 23,000 crore in 2010-11 to more than Rs 1,30,000 crore in 2020-21. Seen in this backdrop, the announcement that a separate budget will be provisioned for domestic capital procurement will make sense only if it is in addition to the normal average annual increase in the capital budget and not if it is carved out of the existing capital outlay.

Moving on, it was announced on May 16 that self-reliance in defence production will be promoted by notifying a negative list of importable weapons/platforms and indigenisation of imported spares. Considering that the exiting procedure does not permit import of any item which can be procured from the local sources, notification of a negative list may not make much of a difference.

This is also true of the announcement about indigenisation of imported spares, formulation of realistic services qualitative requirements (SQRs) of weapons/platforms and overhauling of trial and testing procedures. None of this is new. The directorates of indigenisation and the services equipment policy committees at the three services headquarters are already performing these functions. As for test and trial procedure, the draft defence procurement procedure 2020 released in March 2020 shows that considerable thinking has already gone into it.

To be fair, promotion of defence manufacturing in India will always face challenges which can be overcome only with pragmatic and quick decision-making. The finance minister hit the nail on its head when she said that there will be a ‘time-bound defence procurement process and faster decision making will be ushered in by setting up of a Project Management Unit (PMU) to support contract management’. This may prove to be more effective and have a lasting impact on the defence industry in India than other measures which are clearly designed for a long haul.

(The author is former Financial Advisor (Acquisition), Ministry of Defence. Views expressed are personal.)

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