The Indian Navy's first Scorpene submarine being undocked
at Mumbai's Mazagon Docks, a military shipyard, on April 6.
The recent foray by tycoon Anil Ambani into
India's defense industry underscores the private sector's swift expansion in
this hitherto strictly government-only sector.
On March 5, Reliance Infrastructure
paid $132 million for an initial stake of 18% in Pipavav Defence and Offshore
Engineering, the country's largest shipbuilding and heavy industry company. It
wants to increase its share to at least 25.1% in order to take control, with the
intention of becoming "the country's biggest defense manufacturer."
The Reliance group subsidiary is also
in talks with Eurocopter of France, Kamov of Russia, and Sikorsky of the U.S.
about technological tie-ups. Company sources said that the company plans to bid
for upcoming tenders to make hundreds of military helicopters valued at about
$4 billion. If it wins the contracts, the helicopters will likely be made in a
proposed 5,000-acre defense and aerospace infrastructure facility called
Dhirubhai Ambani Defence Park -- named after the billionaire's father.
Ambani is facing competition from a
slew of other domestic companies also eyeing a larger share of a sector
estimated to generate $100 billion in revenue over the next 10 years. Not least
from his older brother Mukesh, who helms Reliance Aerospace Technologies and
has a tie-up with France's Dassault Aviation. He harbors ambitions to become
one of the country's largest manufacturers of combat jets.
Beefing up
defense
Tata
group, Mahindra & Mahindra, Larsen &
Toubro, Punj Lloyd and Bharat Forge are also fighting for a bigger
slice of an industry expected to generate $100 billion in revenue over the next
decade.
Such frenetic activities by private
players in a secretive industry would have been inconceivable a few years ago
when the landscape was dominated by public sector behemoths like Bharat Earth
Movers, Bharat Electronics, Electronics Corporation of India, Hindustan Aeronautics
and Mazagon Dock.
But the right-wing Bharatiya Janata
Party, which assumed power last May, promised in its election manifesto to beef
up the country's defense industrial base and has shown signs of being receptive
to the private sector. It has also allocated 12% more of its budget to the
military compared with the interim budget tabled by the previous government in
February 2014.
Prime Minister Narendra Modi
generated a lot of excitement by announcing on Apr. 10 that India would buy 36
fighter jets from France's Dassault Aviation, but his government had earlier
shortlisted Larsen & Toubro and Pipavav Defence for a $10 billion contract
to build six submarines -- thought to be a far bigger order.
According to a 2013 McKinsey study, "Bright
Future for India's Defense Industry?," there is huge potential in
India's military manufacturing sector in the long term. Growth in domestic
demand should continue to be robust, the government has a clear vision for an
indigenous defense industry and the country is an attractive manufacturing base
for defense companies worldwide due to shrinking budgets globally. There is
tremendous export potential in engineering services and component sourcing as
well, states the report.
Until now, the Indian defense sector
looked weak due to lack of competition, said professor Seeram Chaulia, dean of
the Jindal School of International Affairs. "Lack of competition in the
field had created an undesirable monopoly for the public sector undertakings
who were selling only to the armed forces. Their complacency led to cost and
time overruns and low quality products. Worse, the [public sector companies]
were hand-in-glove with foreign sellers who were pushing billions of dollars
worth of merchandise upon us," he said.
This could all change with more
private players in the field and the government pushing for a larger indigenous
defense sector, he added.
Transparency
Another desirable fallout of this development, add
experts, is that the transparency of participants -- most of which are publicly
listed -- could help end the endemic corruption in defense procurement
processes. Suppliers are known to pay kickbacks to corrupt officials, they say,
and that has slowed the modernization of India's armed forces, which often
still relies on archaic Soviet-era equipment.
Though the industry started to change
and modernize under the previous Congress-led government, the bulk of the
country's military equipment is still imported.
India is the world's largest importer
of defense equipment, spending $40 billion annually on military purchases. An
IHS Jane's report notes that Asia's third-largest economy is poised to become
the fourth-largest military spender in the world by 2020, surpassed only
by the U.S., Russia and China.
India's dependence on imports will be
whittled down by Modi's "Make in India" campaign. Eventually, Modi
hopes that India will also become an exporter of defense equipment.
The French fighter jet deal has left
many wondering why India would make such a big overseas order when it is
emphasising the development of an indigenous defense industry. A defense
ministry official who requested anonymity said that the government may insist
on having an Indian partner in the manufacturing of the fighter jets. "The
deal offers us an honorable exit from the original exorbitantly-priced 126
aircraft deal [with Dassault] which would have drained the
exchequer," said the official. But detractors say the decision has damaged
Modi's "Make in India" campaign. Bharat Karnad, a professor at the
Centre for Policy Research in New Delhi, told Reuters the Rafale deal was an
"unmitigated disaster" that would not solve the needs of the air
force, offers India nothing in the way of technology transfer and diverts
funding from building an Indian-made fighter jet.
Prashant Mogre, a defense consultant,
said a bigger domestic industry for military machinery could help foreign
exchange reserves and bolster the technological capacity for civil
manufacturing.
The industry already employs
thousands of people, according to Modi when he spoke at the opening of Aero
India 2015 in February. "This is despite the fact that nearly 60% of our
defense equipment continues to be imported. And, we are spending tens of
billions of dollars on acquisitions from abroad. There are studies that show
that even a 20-25% reduction in imports could directly create an additional
100,000 to 120,000 highly skilled jobs in India," he said.
To facilitate foreign and private
participation, the Modi administration last year said it would allow foreign
investors to own up to 49% of the equity in Indian defense companies. Other
regulatory changes include removal of restrictions on the issuance of annual
industrial licences, and those on the sale of controlled products by publicly
owned companies to private ones, as well as the decision for the military to
order $250 billion of equipment.
This may come as a breath of fresh
air for disenchanted foreign suppliers who often express frustration while doing
business with the public sector in India. Last month, Textron, an American
industrial conglomerate planning to bid for contracts to make two kinds of
military helicopter in India, admitted that it would only partner with a
private company.
To build a cohesive defense
infrastructure, Modi urgently needs to focus on the research sector, which has
stifled innovation and the infusion of fresh ideas, say analysts. The country's
premier research organization -- the Defense Research and Development Organization
-- and state-owned Hindustan Aeronautics are often criticized for delays and
cost overruns in military programs. The Comptroller and Auditor General last
December chided Bharat Earth Movers over its failure to make India's own
version of the missile-carrying Tatra trucks, a target that should have been
achieved a quarter of a century year ago.
A recent report by the Confederation
of Indian Industry and Boston Consulting Group states that if India is to
achieve its target of lifting its manufacturing sector to account for 25% of
gross domestic product, the defense sector has to take the lead.
"The continuing dysfunctional
nature of our defense research and development setup, our public sector defense
industry and our purchase procedures require a revolutionary overhaul,"
said defense analyst and columnist Manoj Joshi.
"The entry of private players is
just the beginning. We require a clear policy and a strong focus on
implementation to build a world-class defense industry ecosystem that could
cater to both the local and export demand," he said. NEETA LAL, Contributing writer
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