India's military eyes private
options By Siddharth Srivastava
NEW DELHI - It looks as if the
defense-modernization exercise of neighbors India
and China may be increasingly driven by private
enterprise.
Reports this week say that
China has allowed its private entrepreneurs to
invest in defense industries, including weapons
production, in a move that considerably expands
the range of such involvement. China has been
slowly unshackling the historical monopoly of the
state on its military industry since
2005,
when private firms were allowed to produce
non-strategic military equipment.
In India
too, the government is looking at private
enterprise to provide the necessary impetus for
state-of-the-art military products.
With
India heavily dependent on imports to meet
domestic defense production deficiencies, strong
private players are a necessity. State-owned
factories have failed to keep up with the
cutting-edge requirements of today's military. In
addition, Indian Defense Minister A K Antony
recently said imported arms often do not meet
local conditions, such as extreme weather.
He said the government's aim is to
replicate the South Korean model in which the
industrial arms base was developed by the private
and the public sectors, foreign investments and
technology transfers.
India's import of
military hardware and software will reach US$30
billion within the next five years, the Associated
Chambers of Commerce and Industry recently said.
Sunil Bharti Mittal, president of the
Confederation of Indian Industry, recently said,
"Indian companies should rise to qualify for the
requirements of Indian defense." A
government-appointed committee too has recommended
"entry points for the private sector in the
acquisition process" of the Ministry of Defense,
and "accreditation and fostering of champions"
among such private entities.
Over the
years, private firms have developed some amount of
expertise, but need to scale up to the next level
of competition.
Mahindra Defense Systems
(MDS) is working on the production of 8,000 light
specialist vehicles and mine-proof vehicles for
the Indian Army. It is also manufacturing 300
lightweight mines for the navy.
MDS is
competing with the government Ordnance Factory
Board, which has linked up with General Motors to
produce the US Army's Hummer, and Bharat Earth
Movers Ltd, which will produce the British Range
Rover.
Engineering and construction giant
Larsen & Toubro (L&T) is looking to win
portions of the $15 billion production contract
for a submarine fleet for the Indian Navy. L&T
is also working on the hull fabrication of India's
first indigenous nuclear submarine and Pinaka
rocket launchers. The company has also received a
Rs4.5 billion (US$111 million) order to make four
ships for Rotterdam-based Zadeko and is planning
to de-merge its defense division into a separate
entity
Godrej, looking at aerospace
contracts, is working on assembling airframe parts
for Brahmos cruise missiles and is also supplying
launchers to the Indian Space Research
Organization and equipment for civil and military
nuclear reactors.
Foreign defense
companies have been looking to tap India's
low-cost skilled manpower and manufacturing
capabilities.
European Aeronautics Defense
and Space Co (EADS) has reportedly been in talks
with L&T, MDS and the Tata group to float
joint ventures in India. US giant Boeing is also
reported to be working on similar plans. Russian
and South Korean companies are scouting for Indian
partners.
According to a report this week,
L&T is looking to tap international defense
and aerospace markets in partnership with Boeing
and EADS. L&T is setting up two defense and
aerospace manufacturing units in Tamil Nadu and
Maharashtra states with an investment of Rs5
billion. The report says that both Boeing and EADS
have agreed to source components from L&T.
The existing policy for foreign direct
investment in defense caps it at 26%, while a
so-called offset clause requires 30-50% of the
defense deal's value to be reinvested in India. It
is estimated that the offset policy will bring
aviation offshoring deals worth more than $10
billion to India in the near future.
Boeing, which manufactures the F/A-18
fighter jets, hopes to leverage "bankable offsets"
to increase its engagement with India Inc. The
company has a tremendous track record on offsets,
investing close to $30 billion in 35 countries.
The government has also ruled out allowing
multinational arms companies to go in for indirect
offsets (investments in non-defense sectors) in
defense deals and has been trying to play its part
in encouraging private investment.
An
agreement has been signed between India's main
software-industry body the National Association of
Software and Services Industry and the
government-managed Defense Research and
Development Organization (DRDO) that oversees all
state defense production. The DRDO has been
severely criticized for its lumbering pace and for
in-built inefficiencies.
However, it is
felt that the Indian private firms can only play a
big role if the government, which will be one of
the main customers, begins to hand out more
contracts and involve them in the bidding process,
instead of relying on foreign vendors or
state-owned defense factories.
Observers
say that the trust factor in the
government-private interface is still lacking,
with most Indian private firms actually looking at
the export option for the immediate future.
New Delhi has short-listed 12 private
firms to be accorded special Raksha Udyog Ratnas
status (RUR, or defense-industry status), based on
turnover and past performance. Potential
candidates are Tata Motors, Godrej and Boyce,
Bharat Forge, Mahindra and Mahindra, Tata Power
Co, L&T, HCL, Infosys and Wipro.
The
RUR status will also enable them to get
substantial government support as well allowing
them to be involved in the bids.
However,
because of resistance by left-wing political
parties, a formal notification has not been
issued. The left-wing parties represent powerful
trade unions that oppose such privatization. The
unions represent more than half of the nearly
200,000 workers in 39 ordnance factories and eight
defense public-sector units.
This is an
ironical situation given that China, with which
the leftists claim affinity, is moving toward
privatizing defense.
As the momentum
toward privatizing China's military production
grows, it is important that New Delhi stays
abreast of the trend, and in this India Inc will
have to play an important part.
Siddharth Srivastava is a New
Delhi-based journalist.
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2007 Asia Times Online Ltd. All rights reserved.
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