The move must be seen against the backdrop of policy shifts over the past few years to push indigenisation of defence production.
On September 28, the Centre announced the winding up of the Ordnance Factory Board (OFB) and the transfer of all 41 manufacturing units under it to seven new CPSEs. The decision followed the government’s stated intent (from May 2020) to spur atmanirbharta in ammunition supply by “corporatising the OFB to improve autonomy, efficiency and accountability”. On Friday, PM Narendra Modi said the new CPSEs will have an R&D orientation. The move must be seen against the backdrop of policy shifts over the past few years to push indigenisation of defence production.
Apart from the shift in India’s geopolitical stance—especially in relation to Pakistan, Afghanistan and China—the Defence Acquisition Policy (DAP) 2020 and the Draft Defence Production & Export Policy (DDEP) 2020 should have enthused private players about domestic production. The DAP pushed up the indigenous content requirement for various procurement categories while the DDEP talks about growing the procurement from domestic players from `80,000 crore in FY20 (`63,000 crore PSUs and `17,000 crore private players) to `1,40,000 crore by 2025.
India’s import-dependence has been rising; foreign vendors made up 46% of the procurement bill in FY 20, up from 39% in FY15. To encourage domestic procurement, the Centre last year raised the FDI cap under the automatic route, to 74% from 49% (allowing more through the approval route if the FDI was linked to transfer of cutting-edge technology). The DDEP has also talked of a negative list, with embargoes on import of certain items kicking in over a specified timeline. Indeed, to many, the fact that 333 private firms have been given as many as 539 licences would seem early encouraging signs.
However, there may be many a slip between policy intent and the on-ground reality. The FDI numbers since the raising of the cap (September last year) would suggest investors are still unsure—between the December quarter of FY21 and the June quarter of FY22, FDI in defence industries (cumulative from April 2000) barely moved (`61.51 crore to `61.53 crore). This perhaps has a lot to do with how maladroit government defence procurement is—and the government is the only client. The case of L&T’s gun manufacturing concern best illustrates this—after delivering 100 Howitzers in a `4,500 crore deal before schedule, it has likely gone into hibernation (the L&T chief had warned of this early last year) because no government order has been forthcoming since.
The government is hamstrung—while the size of the defence budget has grown, its size relative to government expenditure has fallen over the past few years, from 17.73% in FY17 to 13.73 in FY22. While the share of capital outlay within the defence budget had dipped to 22% by FY19 before recovering to 27% this fiscal, it is still below FY12’s 30%. Against such a backdrop, the CPSEs, a new set of competitors, may not be too encouraging for investors, especially given procurement is beset by systemic and external delays; though the DDEP talks of tackling these, how soon this can be done is not clear.