By Ajai Shukla
Business Standard, 26th May 17
The cabinet’s nod to the defence ministry’s strategic partner (SP) policy sets the stage for selecting six Indian firms to partner foreign original equipment manufacturers (OEMs) in building single-engine aircraft, helicopters, submarines and armoured vehicles in India. While the details of the SP policy are still to be made public and incorporated into the Defence Procurement Policy of 2016, the defence ministry had indicated its contours to private industry executives earlier this month. Broadly, the ministry intends to follow most of the recommendations of the Dhirendra Singh Committee (2015) and the VK Aatre Task Force (2016) in choosing Indian SPs. These will form joint ventures (JVs) with selected global OEMs and respond to defence ministry tenders for building defence equipment in the four chosen categories. With Manohar Parrikar having done the spadework, an optimistic Defence Minister Arun Jaitley has declared his intention to implement the SP policy at the earliest. This will please the air force, which has already approached global OEMs for building single-engine fighters in India; the navy, whose building of six conventional submarines can now proceed; and the army, which is in dire need of armoured vehicles and helicopters.
Yet, there is uncertainty whether the policy, pushed through hurriedly by Mr Jaitley, will indeed transfer defence manufacture to India. A key problem for Indian SPs, as well as for overseas OEMs, is the 49 per cent foreign direct investment (FDI) cap imposed on the JVs that must manufacture defence kit in India. The OEMs complain the cap leaves them with insufficient control over the technology they provide to the JV. This would lead to the manufacture of relatively low-tech equipment in India, with OEMs preferring to supply the high-technology components, sub-systems and systems from abroad. The Indian SPs are aggrieved for a different reason: they complain their minimum stake of 51 per cent leaves them with all the risk even though their foreign OEM partners hold all the big cards --- the technology knowhow.
There are also worries that the new SP policy is too narrowly focused. Its aim cannot be just to create “systems integrators” that assemble foreign-built sub-systems and systems into a military platform in India. Rather, the policy must ensure India develops the entire eco-system for manufacturing the defence platforms in question, including Tier-1, Tier-2 and Tier-3 suppliers, the component and materials manufacturers – not to forget the capability to subsequently maintain, repair, overhaul and upgrade the platform through its service life. The SP policy, as communicated to industry so far, does not cater for this. Nor does it acknowledge the complex manufacturing chains of global OEMs, which involve multiple tiers of independent vendors that feed into a complex weapons platform. Many Indian defence firm executives believe there is a strong case for giving the lead to the OEM, rather than the Indian SP, along with a majority stake and the responsibility to negotiate with its sub-vendors to ensure a specified percentage of manufacture is transferred to India. The ministry can ensure strategic control over the JV, even one where the foreign partner has a majority stake, by mandating that it be located on Indian soil, have only Indian employees and be run by Indian executives. The SP policy must be in touch with the realities of the global defence industry.