The Modi government has nullified a strategic duty advantage with defence PSUs, which has long enabled them to keep competition at bay and thwarted the country’s efforts to cut arms import. Stating that the finance ministry has recently notified withdrawal of the excise and customs duty exemptions enjoyed by the Ordnance Factory Board (OFB) and defence PSUs (DPSUs), the department of industrial policy and promotion said the move would provide a definitive message to foreign original equipment manufacturers (OEMs) that India wants them to manufacture items in India.
Along with the likes of Boeing, Airbus, Lockheed Martin and BAE Systems, domestic private companies in the sector would also benefit from the move, analysts said, but some warned that since the OFB and DPSUs enjoy the patronage of the department of defence production, in a good number of cases they might continue to be the nominated as the production agencies. The Modi government, which places defence at the centre of its Make in India campaign, had opened up the sector for private investment by increasing FDI cap to 49% and rationalising conditions.
The basic customs duty on import of defence equipment in most cases are either 15% or above.
Adviser to FICCI (aerospace task group) and senior adviser, Franklin Global Group, Air Marshal (retd) M Matheswaran told FE the withdrawal of the duty relief that used to give the OFB and DPSUs an undue advantage was an “an extremely important policy reform”. He added this would improve the prospects of FDI and energise the private sector. The policy change, which was long overdue, was not effected due to the clout enjoyed by the DPSUs with the defence ministry, he noted.
Amit Cowshish, former financial adviser (acquisition), defence ministry, said the new notification removes the advantage that the foreign investors (OEMs) saw in tying up with the OFB/DPSUs rather than the private sector. He, however, added that the benefits of the move could be limited thanks to the DDP’s patronage of PSUs. “The defence budget could come under greater strain as the ministry of defence will have to shell out higher prices (inclusive of the excise and customs) for the products it buys from the DPSUs and OFB. About 90% of ammunition is sourced by the services from OFB (which imports and supplies), mostly from the revenue budget,” Cowshish said. However, sources said this could be a short-term issue. In the long term, domestic defence manufacturing would grow and import would come down, they added.
Matheswaran said the the wrong policies pursued by successive governments encouraged DPSUs to import raw materials, components, accessories and spares excessively. For example, Hindustan Aeronautics found it cheaper to import aircraft material than substitute them with indigenously developed aircraft material from Hyderabad-based specialised metals and metal alloys maker MIDHANI. “So it hurt the indigenisation efforts even though the government was paying lip service to indigenisation. HAL’s import bill went up from 80% of its total expenditure in 2001 to 96% in 2012, a fact pointed out by Ravindra Gupta committee report as well as the report by my committee in 2014,” said Matheswaran.
Despite having 41 ordnance factories, nine DPSUs and a fledgling private sector, the Indian defence industry has not managed to attain self reliance or even self sufficiency to meet the needs of the armed forces. Exports, therefore, become secondary in the list of priorities. India’s exports in the defence sector are around 4% of the hardware that is imported.
Many consultations have been held across ministries following a push from the Prime Minister’s Office for simplification of rules and procedures to promote private participation under defence manufacturing and exports and in turn attract big-ticket investments.
With India being the world’s highest defence items importer, the country’s aerospace and defence market is among the most attractive globally. Almost 60% of items required for industrial licence have now been de-reserved. Business re-engineering process has been effected across departments and ministries for a favourable manufacturing and export platform for private sector companies.
(With inputs from Arun S)