When the latest Defence Production and Export Promotion Policy talks of doubling the size of the domestic industry to Rs 175,000 crore in five years—of this, the export target is Rs 35,000 crore—it seems more than a bit of a stretch.
When prime minister Narendra Modi first talked of Make-in-India, it seemed quite possible since a big component of this was to be equipment for the armed forces; so with the demand completely in the government’s control, it was just the supply side that needed to be fixed and, for that, the government was liberalising FDI rules to allow more strategic partnerships with top global suppliers. In reality, however, little changed and defence orders for private Indian firms have been few and far between. Some months ago, L&T chairman AM Naik gave an interview where he talked of shutting down a gun factory they had opened to meet a 100-field-gun order; L&T supplied the guns, but the order was curtailed as there was no more money.
Part of this has to do with the economy slowing, and, within this, the share for capital expenditure has been dwindling. While defence expenditure rose from Rs 285,005 crore in FY15 to a budgeted Rs 471,378 crore in FY21, capex rose at a slower pace, from Rs 73,531 crore to Rs 113,602 crore in FY21. Within this, the bulk is for previous arms purchases from abroad—India is the world’s second-largest arms importer—and, of the balance, defence PSUs get the lion’s share.
So when the latest Defence Production and Export Promotion Policy talks of doubling the size of the domestic industry to Rs 175,000 crore in five years—of this, the export target is Rs 35,000 crore—it seems more than a bit of a stretch. While Arun Jaitley cleared several large-ticket purchases when he was defence minister, but the actual placement of orders can take decades. So while there is talk, as there is now, of increasing FDI limits to make India a more friendly investment destination, this is missing the point. What foreign as well as local firms want is for orders to be placed quickly; if the defence budget grows along with the economy, then that is an added bonus. While some defence firms are confident of being able to boost exports since they are vendors to top global suppliers, a real push can come only if the government is able to clear purchase orders fast; this will require the armed forces to be more accepting of local suppliers.
While a ban on certain imports, as is contemplated, will help, nothing can work till the forces are brought on board. The government then needs to ensure defence PSUs don’t muscle in on orders that are to be placed on private suppliers; the ‘strategic partner’ concept was seen as a way to build reliable private sector suppliers, but there are reports of PSUs trying to muscle in on that as well.