Untangling regulations: Defence on Make in India drive; FDI cap hiked

Measures include negative import list, corporatisation of ordnance factories

Announcing a series of measures to galvanise indigenous defence industry and reduce imports, Finance Minister Nirmala Sitharaman announced on Saturday a negative list for the import of defence equipment that could be built in India, a separate capital budget for indigenous weapons procurement, corporatisation of the Ordnance Factory Board (OFB), raising the cap on foreign direct investment (FDI) in defence production from 49 per cent to 74 per cent, and the reform of defence procurement.
 

While conceding that “some high-tech equipment” would continue to be imported, Sitharaman stated there would be no import of weaponry already being produced in India. “In consultation with the department of military affairs (DMA), we shall notify a list of weapons and platforms which shall be not allowed for import, but we shall have them bought from India. So the import of this listed set of equipment shall not be allowed,” she said.
 

“Every year this [negative import] list will be increased because more capacities which meet the defence standards will be obtained from India,” said Sitharaman. Similar intentions have been asserted earlier. The Defence Production Policy of 2018 (DPrP-2018) stipulates that by 2025, India must achieve self-reliance in producing helicopters, fighters, warships, tanks and missiles. These platforms currently constitute the bulk of weapons imports.

In what could become an important new incentive for indigenisation, Sitharaman said a separate defence budget provision would be made for the capital procurement of Indian-built weaponry, as opposed to procurement from the global market. “This will be done in consultation with the DMA and will be an important step towards making sure that Indian producers of defence equipment that are meeting the standards the armed forces want will (see their products being) purchased.”
 

Sitharaman flagged the military’s insistence that their combat weaponry must not fall short of standards that are drawn up in a document called “general staff qualitative requirements” (GSQRs). She said the “GSQRs would be honoured but the notified list of items can only be purchased from India.”
 

Recognising the large annual outflow of money on spare parts for foreign weaponry in service with the military, Sitharaman stated that indigenising the production of imported spares would be given priority.
 

The finance minister announced another measure that has long been in the decision pipeline: Corporatisation of the defence ministry-owned Ordnance Factory Board (OFB). This would “improve the autonomy, accountability and efficiency of ordnance supplies,” she said. In a nod to the powerful workers’ unions in the OFB’s 41 factories, Sitharaman emphasised that “corporatisation is not privatisation. It doesn’t mean that the OFs are going to be privatised.”

Apparently contradicting herself on privatisation, Sitharaman went on: “We want [OFs] to be better managed. We also eventually hope that they will get listed in the stock market. Ordinary Indian citizens can also buy shares in them. And through that we expect that the OFB and their processes, decision making, output and performance will be transparent for Indian citizens.”
 

Another long-discussed liberalisation announced by Sitharaman is the raising of the defence FDI cap from the current 49 per cent to 74 per cent, through the automatic route. This has long been demanded by foreign defence vendors as a measure to promote the transfer of high technology to subsidiaries in India.  “The increase in FDI limits to 74 per cent is very welcome as it will attract foreign funds into this sector, along with technology infusion,” said the Confederation of Indian Industry (CII) on Saturday.
 

To reduce the long delays in purchasing weaponry for the military, Sitharaman said a mechanism would be established to ensure “time bound defence procurement.” A “project management unit” would be set up for this and “support would be given for contract management purposes”
 

Tamping down on the military’s expectations of world class weaponry, Sitharaman stated that GSQRs would henceforth be drawn up realistically because “Sometimes unrealistic quality requirements are established and quite a lot of time is spent in searching for suppliers who will meet all those requirements. You end up with just one supplier and just buying from one supplier is not permitted and so then you do the entire circle all over again.

Sitharaman also flagged the need to curtail lengthy user trials, in multiple terrains, that the military currently carries out before clearing equipment for procurement. “Yes, we understand India is a country with different climatic and geo-spatial conditions but we still need to be more efficient in trial and testing procedures,” she stated.
 

Industry experts say that it is clear the government will miss the DPrP-2018’s stated goals. They include making India (currently the largest importer of weaponry) one of the world’s top five defence manufacturers and a global leader in artificial intelligence and cyberspace; and in raising defence exports to $5 billion annually by 2025, and producing defence goods and services worth $26 billion by that year to create employment for two-three million people.
 

“However, some ground can be gained, provided the government strictly implements the reforms announced today,” said the chief of a major defence company, speaking anonymously.