It is early days, but if the Times of India story on Airbus tying up with the Tata Group to produce military transport planes is correct, the government’s strategy of allowing 49% FDI in defence has just got a big boost. So far, most commentators have argued—and this newspaper has supported them—that few foreign manufacturers will be interested in coming to India to produce equipment if they are not given at least a 51% stake in the firm. That probably remains true of IPR-sensitive state-of-the-art technology, but for more routine equipment, the government probably got it right when it said that investors would be satisfied if they saw a steady order flow coming in—as for the state-of-the-art equipment, the government had allowed fully-owned units to come up through the FIPB route. While there is still no good reason why foreign investors should not be allowed a 51% stake in joint ventures, the past few months has seen more than R1 lakh crore worth of orders being cleared by the Defence Acquisition Council, and of this R80,000 crore worth of orders were cleared over the weekend.
This is good news at various levels. For the defence forces, starved of equipment during the UPA years, this means a desperate attempt to play catch up when it comes to equipment supplies. In the case of submarines, where six stealth submarines were cleared for production on Sunday, India has added just one submarine in the last 14 years which means the navy will be desperately short of its original targets. Much the same kind of shortages apply to most other capital equipment, even supplies of vital ammunition.For the Make in India programme, this implies a big step forward; the submarine project means that several Indian shipyards, both public sector and private, will now be in the running. It helps that, along with the hike in FDI levels, the NDA government also lifted many of the pointless restrictions of the past that made it difficult for even Indian companies to participate in this growing sector—deciding not to allow FII holdings at any level meant, for instance, that large Indian manufacturers like Reliance Industries Limited could not participate; even Tata Advanced Materials could not develop bullet-proof vehicles for the army as it had a small FII stake. Given how India’s defence procurement industry is projected to grow from around $16 billion right now to over $80 billion annually by 2025, this represents a big thrust area for manufacturing. Indeed, given how other large drivers of the past decade —IT and infrastructure—have either settled down to a more sedate growth appropriate for mature industries or are in trouble, Indian industry desperately needs another big driver, and defence production is ideally suited to play this role. Which is why a CII-BCG study had projected 1 million jobs getting created in it over the next five years.
The Defence Acquisition Council clearing projects, and them getting off the ground are, of course, two different things. The orders need to be cleared by Cabinet and effort has to be put in to ensure the defence forces cooperate with private players in terms of both current production as well as perspective planning/R&D—there are enough stories of how locally produced equipment is not even being tested while imports continue. At the end of the day, what will work is a process which allows the defence forces to import the equipment they need quickly while working on a medium-term plan to produce this indigenously.