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India's defence industry open to private investors
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| 31 May 2001 |
RAHUL BEDI JDW Correspondent
New Delhi
The
Indian government has opened its monopolistic state-owned defence industry
to private participation through licensing, with a foreign direct investment
limit of 26%, in a bid to reduce the increasing dependency on imports, facilitate
technology transfers and meet challenges posed by the digitisation of military
hardware. However, officials said, details of privatising India's vast and inefficient defence sector are still being worked out and licences would be issued by the Ministry of Defence (MoD) to companies with a minimum capitalisation of Rs1 billion ($21.7 million).
"We buy everything from ships to artillery pieces from overseas private companies, but so far we have not allowed our indigenous private sector to make military equipment nor have we reposed faith in them," Parliamentary Affairs Minister Pramod Mahajan said.
Private manufacturers, he added, would now also be allowed to import defence equipment technical know-how as part of India's shift towards dismantling its enormous, loss-making public sector and moving towards a market economy.
The government's decision to privatise defence contractors comes after nearly a decade of lobbying by the Confederation of Indian Industries (CII) as well as calls by successive service chiefs of staff for decreased dependency on India's 39 ordnance factories and eight defence public sector units.
"The military has for [a] long [time] been looking for a second, competitive source for equipment and spares other than state-run establishments, but has been consistently thwarted in its demands," said a CII official.
Shortly after sanctions were imposed on India three years ago following its multiple nuclear tests, the Indian MoD announced it would open several laboratories run by the Defence Research and Development Organisation to the private sector to develop, produce and market military equipment.
Private industry, however, has remained sceptical about involvement with the defence sector, fearing that order quantities would be insufficient to justify the high research and development costs that weapons production entails. Industry has also asked the government to amend the Industrial Policy Resolution Act of 1956, without which no private participation was possible in the defence sector. Officials said under the revised policy changes to the law are under way. Private industry also sought a consortium approach to developing military technology that would involve the designer/developer, the end user and the manufacturer, a demand they now feel might bear fruit under the new proposals.
Nonetheless, private defence manufacturers remain circumspect about how far vested MoD interests will permit their involvement in building completed weapon systems and ordnance. They are concerned that they could be confined to making components and subsystems, in which scores of manufacturers are already involved.
"Much will depend on whether the government is inviting private industry to fill in the existing gaps in defence production or is sincere about making them a part of the continuing restructuring of India's colonial military establishment," said a senior military officer who declined to be identified.
Two years ago the All-Party Parliamentary Standing Committee on Defence severely criticised the ordnance factory board (OFB) for operating its 39 units in a "sub- standard environment" and under-utilising their capacity. The committee recommended increased privatisation and cost-cutting measures to improve efficiency. The committee's report declared that the OFB should "intensify the interface" between the private sector and ordnance factories to promote "commonality" and avoid investing in duplicating technologies freely available in the civilian sector, particularly in information technology.
The committee also asked the OFB to shut down all "low-end and obsolete technologies" and explore avenues to lease the ordnance factories' excess capacity to the private sector to cover costs. From 1993-98 around 35% to 40% of the ordnance factories declared capacity had remained unused, and the MoD refused to hand this over to private industry despite repeated demands.
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| The Indian government's move to privatise the defence sector will improve the management of projects like the troubled Arjun main battle tank project (Source: Indian Ministry of Defence) |