When Finance Minister Arun Jaitley kept the FDI cap in defence at 49 per cent, he said: “Our assessment of the market is that the 49 per cent FDI limit in the sector would be a significant step in establishing domestic defence market. The public opinion and Parliament’s opinion in India is ready to accept the proposal that I have made.”
Mr. Jaitley was also in consonance with the policy sentiment that has evolved within the government over many years. As far back as in 2004, key economists argued before the Planning Commission that 100 per cent FDI in high technology would enable India to reduce or limit its technology imports; in 2008, the National Manufacturing Competitiveness Council constituted by former Prime Minister Manmohan Singh had recommended FDI to facilitate technology transfer and enhance manufacturing in strategic sectors like aerospace; four years back, the Commerce Ministry had recommended 74 per cent FDI (a recommendation that remains despite the exit of the United Progressive Alliance government). But former Defence Minister A.K. Antony had vetoed this, deeming it “politically unwise.”
With elections in key States set to take place later this year, it would appear that Mr. Jaitley also preferred to play cautious. The chorus of opposition from key industry bodies like Confederation of Indian Industry (which supported a liberal FDI cap only to back down later), and Federation of Indian Chambers of Commerce and Industry would have helped Mr. Jaitley in his decision. FICCI, seen as the “embodiment of the 1960s era state protection”, warned that Indian industry would lose out, foreign companies would dominate the sensitive and highly strategic defence market, and no significant technology transfer would take place. It even brought out a laundry list detailing its views on defence FDI. It said a higher FDI should lead to full platforms being produced with minimum capitalisation of $100 million; the proprietary technology can be indigenised and further developed; the foreign partner will undertake to source 50 per cent to 70 per cent of components/subsystems by value from Indian vendors; the technology received should come without restrictions on its global exploitation and; no retrospective law should be applicable to restrict technology exploitation.
The list underscored the sad fact that when it comes to defence, India’s private and public sector industries lack technology, expertise and skills. India lags far behind the West, Japan, South Korea and Taiwan in the Technology Standing Index. A 2011 global study by the Martin Prosperity Institute of the University of Toronto measured 82 nations on technology, innovation, human capital and other measures of economic competitiveness, with the focus on Research and Development, scientific and research talent and innovation. Israel topped the list followed by Sweden, Finland, Japan and Switzerland. The U.S. figured sixth; India was 38. India placed 36 in terms of scientific and engineering researchers per capita and 26 in terms of patents per capita.
But the report card is not all that poor. Technologies such as composites or fly by wire have been painfully built up (owing to U.S. sanctions) over many years, entirely through indigenous effort in places like the Defence Research and Development Organisation.
Some technologies flowing from the Kaveri engine programme have been transferred to the private sector and these are being exported in the form of aerospace components. But the Kaveri engine itself failed to deliver the required thrust for the LCA Tejas fighter and had to be dropped, its place taken by the General Electric engine.
India is a world leader in ship design and building but is poor in electronics, sensors and naval weapons. To date, the Army lacks a carbine considered essential for close quarter battle. Trials are on to select, from among five foreign vendors, a suitable assault rifle. The Ordnance Factory Board is working on a “improved variant” of the three-decade-old Bofors howitzer. The list goes on.
Foreign vendors are more than willing to sell or collaborate. But a straight sale means India resorts to another import 20 years down the line when the equipment in question has become obsolete. Collaboration does not necessarily result in state-of-the-art technology coming to India. Foreign MNCs that have joint ventures in India are clear that the 49 per cent cap on FDI is “not unattractive.” Helicopter maker Sikorsky’s India head Air Vice Marshal (retd.) Arvind Walia said: “Forty nine per cent FDI is a welcome step but if it goes to 51 per cent and beyond, it will help build technologies here, train local talent and skills. Foreign vendors will bring in new business practices. Higher FDI limits will give us the flexibility to take a call and provide the best solution.”
Others admit it could bring in foreign firms that wish to take advantage of India’s lower cost labour base and of course, 49 per cent equity translates into a larger share of profits. Small and medium enterprises could benefit here as they are all looking to get into the global supply chain but lack capital and technology. The only point is this technology may not be of the high-end variety.
As a senior executive in a multinational defence major in India described it: “Foreign firms need to be in control since it is their technology, developed often at considerable cost, and therefore the need to protect their intellectual property. This is non-negotiable.”
The result is that the movement toward FDI has been slow and halting, with the Defence Ministry blamed for being reluctant to shake off old mindsets and attitudes. Security considerations also seemed to have weighed heavily on the government. Domestic private industry was allowed into defence only in 2001 when the realisation (finally) dawned on the government that the public sector, with its low levels of productivity and virtually no Research and Development vision, would not be able to deliver a self-sustaining military industrial base. There followed a slew of other measures.
In 2003, the Defence Procurement Procedure was amended to include the ‘Buy and Make’ category to allow Indian industry to build equipment through technology transfer; in 2006, an offsets policy was introduced in projects of Rs. 300 crore and above; in 2008, Indian industry was given first preference in licensed production contracts; in 2011, private shipyards were allowed to enter naval shipbuilding; in 2012, foreign vendors were encouraged to tie up with Indian small and medium enterprises.
Other steps followed. In 2013, Indian companies were given first preference in various categories of defence production. A Technology Perspective and Capability Road map was also unveiled to give Indian industry advance intimation of the military’s future requirements. Small and Medium Enterprises were targeted for financial help. Indigenisation directorates were set up by each of the three services to indigenise spare parts and small equipment.
But results fell far short of expectations. Amit Cowshish, former Financial Adviser (Acquisitions) in the Defence Ministry, wrote recently: “The policy for providing assistance to the small and medium enterprises was drafted by the Department of Defence Production sometime in 2006 or 2007, but it was never promulgated. Consequently, no allocation was ever made under the aforesaid budget head since it was created. The Directorates of Indigenisation continue to function independent of each other and without linkage with the overall indigenisation effort. Suggestions to introduce outcome budgeting for these directorates were treated within the MoD with total indifference.”
The end result was confusion, and, of course, no progress in procurement. It has led some industry insiders to suggest that India scrap the DPP and return to the “good old days” when all deals were government-to-government. At least it ensured the services got the equipment they wanted in the desired time frame. That would be wishful thinking but the last word on FDI in defence is still awaited. Mr. Jaitley said “If I can get technology, capital and manufacturing at 51 per cent Indian ownership.” That’s the challenge.
(Source: Hindu July 24, 2014)
HIGH COSTS LEAVE LITTLE FOR DEFENCE EQUIPMENT
New Delhi: The Rs 2,29,000 crore that Finance Minister Arun Jaitley allocated for defence in the Bharatiya Janata Party (BJP)-led government’s first Budget on July 10, a mere two per cent rise over the last government’s interim allocation in February, would have disappointed those who were reading too literally the BJP’s manifesto and nationalist rhetoric in the run-up to the general elections in May.
This would also have disappointed the military, which was allocated just 80 per cent of its projected requirement of Rs 2,85,202 crore.
The modest allocation would suggest that the government anticipates a benign security environment in the region, notwithstanding the US and the North Atlantic Treaty Organization troop drawdown in Afghanistan by end-2014.
Instead of placing defence allocations on a trajectory towards 2.5-3 per cent of gross domestic product (GDP) which national security hardliners have argued for, Jaitley allocated just 1.78 per cent of GDP, only marginally higher than the interim Budget’s 52-year low of 1.74 per cent. This will amount to 12.75 per cent of the central government spending this year. (MILITARY ALLOCATION AND SPENDING)
In fact, the defence spending actually amounts to 2.55 per cent of GDP if one takes into account several expenditures that are not included in the defence budget, but which most countries count as defence spending.
These hidden expenditures include (see chart 1) Rs 3,639 crore allocated to the defence ministry itself (Demand no. 20), and Rs 51,000 crore earmarked for defence pensions (Demand no. 21). It includes Rs 8,737 crore allocated to the department of atomic energy (Demand no. 4), which develops, builds and stores India’s nuclear weapons. It includes Rs 37,322 crore spent on border forces and counter-insurgency forces like the Border Security Force, Indo-Tibetan Border Police and the Assam Rifles (Demand no. 55). Finally, it includes Rs 6,673 crore allocated to the Border Defence Management Board that builds strategic roads for the military (Demand no. 83).
Counting these allocations, defence expenditure is actually Rs 3,36,371 crore, a full Rs 1,07,371 crore higher than the stated allocation. This amounts to 2.55 per cent of GDP.
Of the stated budget (see chart 2), the army gets roughly half (49.5 per cent); the air force almost a quarter (23 per cent); while the remaining quarter is shared between the navy (16 per cent), the Defence Research &D evelopment Organisation (DRDO), the Ordnance Factory Board (OFB) and others.
The big gainer this year is DRDO, which has seen funding rise from about five per cent to 6.5 per cent of the defence budget. Its capital budget has been raised by almost 60 per cent to Rs 9,298 crore. This signals strong ministry support to indigenisation projects under way, such as the Tejas Mark II fighter; the Arjun Mark II tank; the Sagarika submarine launched ballistic missile and a major new project to develop a 155 millimetre/52 calibre towed howitzer.
Worryingly, the modernisation budget (Rs 94,588 crore) remains significantly lower than the revenue budget (Rs 1,34,412 crore), with a capital-to-revenue ratio of just 41:59. The army spends just 18 per cent of its budget on equipment. In contrast, the navy and air force spend a healthy 61-62 per cent of their budget on capital expenditure, i.e. new warships, aircraft, weapons and ammunition.
The army’s massive manpower accounts for its high revenue spend, and this is set to grow. Defying the global trend of army downsizing, two recently raised mountain divisions and a planned mountain strike corps will raise the army’s numbers from 1.2 million to almost 1.3 million.
The Parliamentary Standing Committee on Defence figures’ reveal that the army’s equipment modernisation is steadily falling. In 2008-09, the army spent 27 paisa of each rupee on capital expenditure. This fell to 24p in 2009-10; 23p in 2010-11; 20p in 2012-13 and just 18p in the last two years.
This army’s payroll of Rs 65,808 crore this year (see chart 3) will consume almost 60 per cent of its entire budget, leaving just one-third that amount for new equipment. This is so even after doubling the army’s capital allocation from Rs 10,749 crore last year to Rs 20,665 crore this year (see chart 4). As the cost-of-living index rises, so too will military salaries; the seventh pay commission will raise them even higher.
Aircraft acquisitions are also lagging, due to the air force’s dependence on expensive foreign purchases. Its capital budget is down from Rs 36,017 crore in 2013-14 to Rs 31,818 crore this year. With most of this pre-allocated for equipment bought in preceding years, little is left for buying the Rafale fighter, which the defence ministry is negotiating with French vendor, Dassault. With the Rafale’s contract value estimated at Rs 80-1,00,000 crore, the signing advance would be Rs 10-15,000 crore. Additional allocations would be needed for the contract to be signed this year.
The navy’s capital allocation has been raised from Rs 19,600 crore in 2013-14 to Rs 22,312 crore this year. A major capital procurement this year will be the Rs 45,000-crore contract for seven Project 17A stealth frigates that two public sector shipyards will build – Mazagon Dock Ltd, Mumbai, and Garden Reach Shipbuilders and Engineers, Kolkata.
In his Budget speech, Jaitley also announced that the foreign direct investment cap in defence would be raised from 26 per cent to 49 per cent. While adding a reformist patina to an otherwise unremarkable defence budget, this was really a policy announcement, unconnected with defence allocations.
(Source: Business Standard July 24, 2014)
JAPAN TO JOIN U.S.-INDIA MILITARY EXERCISES
NEW DELHI—Warships from India, Japan and the U.S. will participate in joint exercises in the Pacific Ocean near Japan starting Thursday—a sign of greater maritime cooperation among nations in Asia as they face a more assertive China.
Ties between New Delhi and Tokyo have strengthened as geopolitical tensions in the region have mounted, and Japan was invited in January to join the so-called Malabar exercise, an annual event that has been primarily a bilateral U.S.-Indian operation.
Beijing, fearing a U.S.-led effort to contain China’s rise, reacted angrily when Japan, Australia and Singapore joined the maneuvers in 2007. Japan also participated in 2009, after which until this year, no third party was invited again.
India and Japan are both embroiled in territorial disputes with China and share worries about Beijing’s military ambitions. Analysts in India say New Delhi’s decision to invite Japan this year signals a more confident and forceful maritime policy.
“It is a reflection of the new strategic environment where there is a degree of unease in India and elsewhere over Chinese activities,” said Uday Bhaskar, a former Indian naval officer who is now at the New Delhi-based Society for Policy Studies. “To deal with the rise of China, India is now seeking to shape the environment by building collective capability.”
Mr. Bhaskar, who had criticized India’s decision to back down from multilateral exercises after 2007, said India seeks a multipolar Asia and maritime cooperation is a smart way to achieve its goal.
India and Japan started conducting bilateral exercises in 2012. In January this year, the countries’ coast guards staged joint maneuvers in the Arabian Sea. And ties between the Asian democracies are poised to strengthen further under new Indian Prime Minister Narendra Modi, who has close relations with his Japanese counterpart, Shinzo Abe.
Chinese officials couldn’t be reached to comment on Japan’s participation in the training this year.
Japan, backed by the U.S., has launched a diplomatic offensive to draw other Asian countries into a more united front against China, which has been butting heads with its neighbors in the East China Sea and South China Sea.
India, likewise, has accused Chinese troops of making repeated incursions into Indian-controlled parts of the Himalayas. The two countries fought a 1962 war over their Himalayan border.
Indian officials have also grown concerned about China’s presence in the Indian Ocean, which India sees as within its sphere of influence and which encompasses critical transit routes for shipments of Mideast oil to India as well as to China, Japan and the rest of East Asia. Beijing has bankrolled port construction in Pakistan and Sri Lanka, and its navy has been more active in the region.
China, for its part, has sought to improve economic relations with India. Chinese officials have reached out to Mr. Modi and the two countries, along with other Brics nations, recently signed a deal for a new development bank to challenge the Western-dominated World Bank and International Monetary Fund.
“India is hedging its bets by taking its relations with both China and Japan forward,” said K. Raja Menon, a former assistant chief of India’s naval staff who is now an analyst at the Institute of Peace and Conflict Studies. “This is smart diplomacy.”
A spokesman for the Indian navy said a frigate, a destroyer, a supply vessel and 800 personnel from India will participate in the weeklong joint exercises, which will include antipiracy and antiterrorism drills. Spokesman D.K. Sharma said the exercises will prepare the countries “for situations when their navies have to work together tactically.”
As part of the U.S.’s strategic pivot to Asia, the U.S. has announced plans to shift a bulk of its naval assets to the region within the next decade and increase the number of military exercises it conducts. Mr. Bhaskar said India should seek to make China “a stakeholder in the goal of created collective capabilities rather than an adversary.”
Despite tensions between China and the U.S., the Chinese navy is participating in monthlong U.S.-led naval drills that are being viewed by officials on both sides as evidence of an improving military relationship. But the U.S. Pacific Fleet says China has sent an uninvited surveillance ship to international waters off Hawaii to monitor the drills, underlining the wariness in the relationship.
(Source: The Wall Street Journal July 24, 2014)
TERRORISTS DON’T HAVE THE AIR POWER TO COUNTER THE IAF
‘We have not got into a one-on-one with the terrorists. But there is no assurance they won’t resort to launching a shoulder or vehicle fired missile. The probability is very low, but the threat exists,’ Air Marshal P K Barbora (retd) tells Vicky Nanjappa.
India has been putting together a missile defence system for the past decade-and-a-half, but it will be a while before it is complete, says Air Marshal P K Barbora (retd), who feels the shooting down of Malaysia Airlines flight MH17 was a case of mistaken identity.
Your thoughts on the shooting down of flight MH17…
Shooting down an aircraft flying at that altitude (33,000 feet) needs a missile system with a lot of boost to reach the height and guide it to its target.
The target is acquired on a search radar, which transfers it to the toll radar along with a missile guidance radar as the target comes closer. The missile guidance radar will search and pick up the aircraft.
This looks like a very sophisticated missile. Who do you think shot the plane?
The Russians have very good equipment. There could be pieces of it remaining with Ukraine. It is not hard for countries to identify from where the missile was launched. The United States was able to identify every Scud missile fired from Iraq. There are track charts to find out who shot down the plane.
In my personal opinion, whoever fired the missile did not have all the information, like the aircraft identification number and he may not have monitored all the channels.
How do civilian aircraft cope since there are so many conflict zones?
Unless a country you are flying over issues a NOTAM (Notice to Airmen) to say that the air space is closed to civilian traffic, there should be no problem. There are many conflict zones in the world.
Take Afghanistan, for instance. The enemy has no air effort and hence there is no problem flying over the country. But countries need to upgrade their radar if they are using older ones that do not have system identification. We need more sophisticated systems to identify aircraft.
Could Russia or Ukraine have shot down the aircraft to make each other look bad?
Shooting down a civilian aircraft has a lot of repercussions. World politics will not accept that. Of whatever little I am able to gather, it appears to be a mistake. I really doubt if any of these countries would have done it intentionally to make the other look bad. It was a case of mistaken identity.
Does any group in India have the capability to shoot down an aircraft?
Let us look at Kashmir. The militants have avoided targeting the air force. Once they do that, the problem escalates and the entire conflict turns bad for them. The air force has not been used as a weapon in Kashmir and we have not got into a one-on-one with the terrorists.
But there is no assurance they will not resort to launching a shoulder or vehicle fired missile. The probability is very low, but the threat exists. We have some safeguards in place. Like in Delhi we have developed systems to ensure that this is countered.
How secure are the Indian skies?
There are two kinds of attacks — aerial attack by a missile system and aerial drone attack.
The terrorists do not have the airborne power to counter an air force strike. They only have shoulder fire missiles. They can hit only aircraft flying very low.
What about our missile defence system?
We have been working on it for a long time, almost a decade-and-a-half. We are putting together something specific to certain pockets. I say certain pockets because if we decide to put a missile defence system to cover the entire country, then the people of this country will have nothing left with them. The cost involved is astronomical.
To have a missile defence system in place, we need to have long range radars, satellites, anti-missile systems to pick up data. The list is endless.
There has to be a system in place where the missile needs to be intercepted before it comes into the danger zone. All this involves a lot of mechanism and money.
We are doing our best in setting up the system and we are growing slowly. It will take a long time before we cover all these select pockets.
(Source: Rediff July 24, 2014)
KARGIL SPECIAL: WHEN “THE GREAT WALL OF INDIA” SAVED INDIAN SOLDIERS’ LIVES!
Kargil: During the 1999 Kargil War, the Indian soldiers had built a huge wall with more than the height of a truck, overnight. It is said that the Pakistani intruders had not only targetted the Indian army soldiers, but they had also targeted the army trucks, passing through the National Highway-1.
That is why, the brave Indian soldiers built the wall, greater than the height of trucks, to save them from attack from Pakistan.
The wall was so strong that even the bombs hurled by Pakistan could not have any effect on the army trucks. After the wall was constructed, the Army trucks were able to supply logistics and other equipment to the soldiers safely.
‘The Great wall of India’ not only helped Indian soldiers in fighting against Pakistani intruders but also saved lives of lots of soldiers and army officers.
(Source: One India July 24, 2014)
INDIAN ARMY COMPLETES SELF-PROPELLED HOWITZER TRIALS
The Indian Army has completed trials for two 155 mm/52 calibre howitzer systems and is preparing a report for the Ministry of Defence.
Official sources said two competing 155 mm/52 cal towed gun systems and two 155 mm/52 cal self-propelled tracked howitzers recently completed maintainability acceptance trials and secured Directorate General of Quality Assurance clearance.
These processes followed summer and winter trials involving all four howitzers in Rajasthan in mid-2013 and Sikkim state in the Himalayas late last year and in January.
France’s Nexter Systems modified its Trajan 155 mm/52 calibre for the Indian tender and Elbit submitted its ATHOS 2052 for the towed gun tender.
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(Source: Defence News July 24, 2014)
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