Guest Column | Focus on the Real Issues

The new defence production policy should focus on technology for it to be effective

J.P. Dash and T.K. Damodaran

The new production policy is very clear in its objectives — to achieve self-reliance in defence production. It aims to ‘create an environment that encourages a dynamic, robust and competitive defence industry, as an important part of the ‘Make in India’ initiative’. It also aims to ‘facilitate faster absorption of technology and create a tiered defence industrial ecosystem in the country’, besides reducing the ‘dependence on imports’ to ‘achieve self-reliance’. There cannot be any second opinion about the same. However, in reading the fine lines of the policy, one finds that for the policy to be effective there has to be more articulation of strategy; rather making statements of some of the actions taken by the government.

Defence minister Nirmala Sitharaman at her press conference at DefExpo 2018

According to the policy, India hopes to achieve a turnover of Rs 1.7 trillion in defence goods and services by 2025. It has a goal of becoming an exporter to the tune of Rs 35,000 crore of defence goods and services by 2025. Hope, the actual policy would give break-up between the sectors and time-line for better appreciation and action by industry.

The policy seeks to simplify procedures for private firms to enter defence production, i.e., liberalise the regime by issuing licenses in 30 days and pruning no-go areas to a small ‘negative list’ for licensing. The government intends to do away with capacity assessment, except for critical projects. It proposes to introduce earnest money deposits and performance guarantees as safeguards for others.

With regard to offsets, the government has proposed to set up an ombudsman for resolving all such claims. In the area of taxation, the government has proposed rationalisation of taxes on import of capital goods for services and inputs for defence and aims to prevent inversion of taxes.

At present, the FDI cap for the defence sector is 49 per cent under the automatic route for all categories. The new policy proposes to increase the Foreign Direct Investment (FDI) cap in niche technology areas to 74 per cent under the automatic route, in a bid to boost local manufacturing and catapult India into top defence and aerospace industries by making investment more attractive.

The policy intends to capitalise on India’s information technology strengths to ‘make India a global leader in cyberspace and Artificial Intelligence (AI) technologies’.



Old Wine in New Bottle: The various components of the policy are: Ease of doing business in defence production; Simplifying licensing process; Promoting open competition; Promoting FDI & offsets; Rationalisation of tax regime for no tax inversion; Market creation by aggregation; Vendor development and outsourcing; Infrastructure development; Boosting OFB and public sector; Standardisation and quality assurance; Export promotion, Innovation and R&D; Supporting start-ups; Building capability in aerospace & electronics and cyber space and Setting up a governance mechanism for implementation of the policy. While the only three elements appearing in the policy are market creation by aggregation and defence corridors, building capability in aerospace & electronics and cyber space, the instrument of Strategic Partnership (SP) model finds distant footnote mention.

The industry was looking for a fresh thinking and strategy that would rekindle hopes for the stagnant sector. The policy is high on aspirations and action plan without appropriate risk management strategy. The policy continues its faith on continuation of existing reforms in FDI, Offsets, and Defence Production Policy (DPP) for higher indigenous categorisation and puts its trust on the private sector, hoping that if the eco-system is set right, then the things would start rolling. Only future can tell, how correct the defence mandarins were in their hopes and aspirations.

 

Missing Clarity in Signals: Although allowing 74 per cent FDI in defence would certainly attract more investment, the critical technologies would continue to evade us.

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