Though India is slated to become the world’s third-largest defence spender after the US and China next year—an overall spend of $80-100 billion is projected over the next five years—the fledgling private sector defence industry hasn’t been able to get even a tiny share of this pie. The bulk of India’s R40,000 crore of defence production in FY11 was, for instance, largely restricted to public sector units in the defence sector. A BCG-CII report points out that while India and the UK have a similar number of people employed in defence production—1.8 lakh—India exports nothing while the UK is both a major exporter and meets around 70% of its domestic requirements. While the government in India has introduced an offsets policy—all exporters of arms need to have a certain proportion of what they sell produced locally—to encourage local production, the take off has been slow, possibly due to low FDI levels of 26%. Why would a big global defence supplier want to transfer critical technology to an Indian JV in which it controls just 26% of the equity?
But a far more important development, as FE reported Monday, is the new Defence Production Policy that allows private sector Indian defence companies to get access to the long-term equipment plans of the defence forces. This is available right now to defence PSUs but not private companies—as a result, private defence suppliers don’t have a road map for collaboration so that they can develop or buy the necessary expertise to meet what will be required over the next 10-20 years. As part of the new defence procurement policy announced last week, while making new acquisition, an exercise will have to be undertaken to see if the equipment can be made in India. Only if it cannot be made locally, under the new policy, will the order be placed on overseas suppliers. This is a process that needs delicate handling. Since no defence industry has come up anywhere in the world without massive government support for R&D and technology purchases, the government needs to be generous on this front. Equally, it cannot allow the make-or-buy exercise to deteriorate to a situation where, as used to happen in the 1970s and the 1980s, companies were not allowed to go for civilian imports if a local firm said it could supply the same. If the government were to now complement this move by hiking FDI levels, it would give a boost to genuine technology transfers. While the target of meeting 70% of India’s defence needs locally within the next five years is just pie in the sky, this would move India towards it much faster.