Friday, 27 June 2014

Govt lists defence products that require production licences

By Ajai Shukla
Business Standard, 27th June 14

As a step towards galvanising defence manufacture, the government on Thursday published a concise list of defence equipment that requires a licence to manufacture in India.

The Department of Industrial Policy & Promotion (DIPP), which functions under the Ministry of Commerce and Industry (MoCI), has issued a list that was drawn up by the Ministry of Defence. It includes four categories of defence equipment that require compulsory production licences: (a) Tanks and other armoured fighting vehicles; (b) Defence aircraft, space craft and parts thereof; (c) Warships of all kinds; and (d) Arms and ammunition and allied items of defence equipment; parts and accessories thereof.

The policy, promulgated in DIPP’s Press Note No 3 of 2014, states: “Items not included in the list would not require industrial license (sic) for defence purposes. Further, it is clarified that dual use items, having military as well as civilian applications, other than those specifically mentioned in the list, would also not require Industrial License from Defence angle.”

This seeks to provide policy clarity in a field complicated by issues like dual-use products. A spanner, for example, can be used on both tanks and private cars; there is ambiguity about whether it is a defence product.

Welcoming the announcement, the Confederation of Indian Industry (CII) says it would streamline the issuance of industrial licences for defence manufacture, and encourage new entrepreneurs in the sector.

“We are happy to see that Ministry of Defence has taken cognizance of CII’s recommendations to prune the list and keep it to the bare minimum” said Baba N Kalyani, Chairman, CII National Committee on Defence.

Some defence software engineering companies believe that defence/embedded software should also require production licences. Says Rahul Chaudhary, the co-chairman of Ficci’s defence committee: “These are highly classified and security sensitive products that cannot be treated like just any piece of software.”

The government move to designate defence products is for licensing purposes, but this is as essential for export control. New Delhi expects membership of the Wassenaar Arrangement --- a multilateral export control regime between 41 states that regulates the international transfer of conventional weapons and dual-use technologies. This would require clearly designating defence products.

In 2004, MoCI’s Directorate General of Foreign Trade (DGFT) promulgated a so-called SCOMET List (List of Special Chemicals, Organisms, Materials, Equipment and Technologies), which identified sensitive items relating to nuclear, biological and chemical (NBC) warfare; special materials; stealth technologies; aeronautics and rocket materials. Yet Category 6 --- earmarked for defence equipment --- has not yet been filled. The SCOMET List merely states that it is “Reserved”.

Even though an export control list is separate from a licensing list, there is speculation that the new list will eventually flesh out SCOMET’s Category 6. For now there is little pressure on the government to draw up Category 6, since the ministry of external affairs is holding back on joining the Wassenaar Arrangement. New Delhi is demanding simultaneous membership in all four global non-proliferation agreements: Nuclear Suppliers’ Group; Wassenaar Arrangement; Australia Group and the Missile Technology Control Regime.

Over the years, the SCOMET List has been populated more due to domestic and bilateral imperatives than the need to join non-proliferation regimes. Category 0 of the SCOMET List, which designates nuclear materials, was updated in July 2005 after parliament passed the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities Act), 2005, to address US concerns over the danger of nuclear proliferation. This was one of Washington’s pre-conditions for taking forward negotiations on the US-India nuclear deal.

Analysts point out that today’s list of defence products is clearly modelled on the Wassenaar Arrangement munitions list, but is far less detailed. For example, the list only generically mentions, “energetic materials, and related substances includes all explosives like primers, boosters, initiators, igniters, detonators, etc”, which covers a large number of commercial, non-military-grade products.

In contrast, the Wassenaar Arrangement specifies the “total impulse capacity”, the “specific impulse”, “stage mass fractions”, of a propellant. The US “Munitions List” has a detailed listing of the explosives it considers military grade; specifying that it must have “detonation velocity exceeding 8,700 metres/second at maximum density or detonation pressure exceeding 340 kilobars”. All this would require to be worked into the SCOMET List.

The Industrial Development and Regulation Act, 1951 (IDR Act) requires a licence for producing any defence product in India, a requirement that continued after defence production was opened to the private sector through Press Note No 4 of 2001. This states: “The defence industry sector is opened up to 100% for Indian private sector participation with FDI permissible up to 26%, both subject to licensing.”

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