The Hindu Business Line : Defence spin-offs

Of late, policymakers are willing to open the doors of hitherto jealously guarded sectors to the winds of change. While those to the nuclear energy sector still remain somewhat shut, the government appears keen to open the gates to the Defence industry wider to the private sector than it has done earlier. The International Land and Naval Defence Expo in Delhi is evidence of some dividends. More auspicious are tie-ups between Indian and foreign firms. Not too long ago, the US’ Northrop Grumann Corp. teamed up with Satyam Computer Services to provide high-end engineering services to the global aerospace and Defence industry. Now, the Tatas have planned a joint venture set up with Israel Aerospace Industries to cater to the IAL’s Indian customers.

Credit for this development must go to the policymakers, who have shown a willingness to rope in the domestic private sector for supplies previously outsourced globally or from the country’s Ordnance Factories and Defence Public Sector Undertakings (DPSUs). Till less than a decade ago, the private sector’s role was restricted to ancillary products; indigenisation, an oft-repeated mantra meant the public sector. In 2001 some windows opened in the rules for foreign investments, with a cap of 26 per cent in local firms but it was the Kelkar Committee’s recommendations on greater private participation that really threw open the doors. The high costs of R&D had discouraged the private sector from the monopoly space occupied by the fully-funded DPSUs. The Kelkar Committee’s suggestion that the government share the R&D costs with the Raksha Utpadan Ratnas (RURs), those private firms to be selected on financial and technical merits, has been accepted in principle just as the placement of “Minimum Quantity” orders is now under consideration.

Fortified by the 2001 rules, foreign investments should now enable private sector firms to fund R&D costs given the current interest in outsourcing to India. True, some issues are still to be sorted out, but the private sector must view with enlightened self-interest the policymaker’s cordial overtures. Budget outlays on Defence have been modest in terms of GDP, forming just 2 per cent of it compared with 5 per cent in Pakistan and 7 per cent for China. But, in absolute terms, they are increasing with the latest allocation at Rs 96,000 crore — up ten per cent from the previous year. However muted, modernisation is the buzzword and the gains for local firms can be immense. Defence needs have been crucibles for the greatest innovations over the decades, with spillover effects evident in everyday life long after. That is the twin-edged opportunity the private sector must pursue vigorously.

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