Day 33 – Q 3. Is liberalisation of the defence manufacturing sector a good move? Critically comment.
3. Is liberalisation of the defence manufacturing sector a good move? Critically comment.
क्या रक्षा विनिर्माण क्षेत्र का उदारीकरण एक अच्छा कदम है? समालोचनात्मक टिप्पणी करें।
Introduction
- Self-reliance is a major corner-stone on which the military capability of any nation rests.
- The Government has taken several measures such as liberalization of the licensing regime and FDI policy by raising the cap on FDI in the defence sector, simplification of export procedure, streamlining of defence offset guidelines etc. to strengthen the defence sector in India.
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Background
- Until the year 2000, foreign direct investment (FDI) was not permitted in the Indian defence sector.
- The year 2001 marked the advent of privatization in the defence industry and the Government permitted FDI in the defence sector up to an equity stake of 26% through the Government approval route.
- In 2014, it was increased up to 49% FDI under the automatic route and beyond 49% under the Government approval route, subject to certain conditionality.
- Recently, FDI in the defence sector was further liberalised to allow up to 49% under the automatic route, and beyond 49% to 100% under the Government approval route on a case to case basis.
- Draft New Defence Production Policy is further a step ahead to strengthen defence production industry in India.
EFFECTIVENESS OF LIBERALISATION
Gains for Defence sector:
- It will build a robust defence production industry and make India one of the top five manufacturers of military equipment and platforms in the next 10 year.
- The policy provides for creation of a tiered defence industrial ecosystem in the country and it aims to reduce current dependence on imports and strive to achieve self-reliance in development and manufacture of weapon systems / platforms.
- Liberalised Defence Offsets Policy will help in raising domestic procurement, generating exports, bringing FDI into related services and building local supply chains, transferring technology/equipment to Indian entities, etc
- It will improve the domestic defence R&D base; develop an internationally competitive defence industry, and an industrial base.
Challenges remain
- The various reforms of the Government at liberalising FDI in the Indian defence sector have not yielded the desired results.
- There was neither a boost to the domestic defence manufacturing or services sector, nor did India receive significant FDI or technology transfers.
- India has spent approximately USD 63 billion on goods and services in the defence sector in 2017, and is amongst the top 10 defence importers in the world.
- However, the value of Indian defence exports in the past three years has been in the range of USD 150 million to USD 320 million per year.
- FDI in India’s defence production remains significantly low.
- The defence sector is governed by varied policies including industrial licensing, import, export, security manuals, tax regulation and procurement policies. Superfluous controls and restrictions imposed on the players severely affect their efficiency and productivity.
- R&D in defence and negligible role of SMEs are other challenges which remains to be addressed.
What needs to be done?
- Draft Defence Production Policy 2018 proposes to further liberalise the extant FDI regime in the defence sector by permitting FDI up to 74% under the automatic route, ‘in niche technology areas’.
- There is a need to embrace FDI, while simultaneously having the right checks and balances in place to regulate the environment and end use of the outputs.
- All the policies should be harmonised and synchronised to work towards a single window clearance mechanism. This would boost the ease of doing business campaign of the government for the defence sector.
- The Government may consider extending benefits to the defence manufacturers giving the sector an infrastructure status wherein they could enjoy 100 per cent of profits for a stipulated number of years.
- Further cutting down the duties on import of capital equipment would help in strengthening the base of the manufacturing industry.
- There is need of more inclusive approach by helping SMEs and highlighting the lucrativeness of the sector making it an opportunity for the angel investors to explore.
Conclusion
India’s future in defence manufacturing is very promising and in sync with the Make in India initiative. It is just a matter of proactive management of the current and potential resources and a supportive push from financial and regulatory stand point. Membership to Wassenaar arrangement gives another opportunity for India to take a leap in Defence sector.
Best Answer: Mugiwara
