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India's military eyes private options Print
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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