MM Pallam Raju with former Chief of Integrated Defence Staff, Lt Gen HS Lidder
by Ajai Shukla
Business Standard, 15th Feb 2010
On Foreign Direct Investment
Q. There is a long-standing demand, from within the Indian defence industry as well as from global arms corporations, for the Foreign Direct Investment cap of 26% in defence to be raised to at least 49%. Is the MoD addressing that request?
I think in allowing foreign participation [into defence], we have made a beginning. Recently we have amended the Defence Procurement Policy [of 2008], creating a new category in which a private company can enter into a partnership with a foreign vendor… and start manufacturing within the country. So we are trying to facilitate industry and corporate India in a big way.
We can understand the concerns of foreign vendors about percentage of ownership. But we are in an evolution; it (increasing FDI limits) may take some time.
Q. Is the FDI cap of 26% in defence only notional? Press Note No 2 of 2009 effectively permits higher FDI through multi-layered structures in which foreign entities have a cascading holding?
At the end of it all, the discretion lies with our ministry (i.e. the MoD) about whom we allow in joint venture collaboration. If we feel that security is getting compromised through higher-than-evident FDI, we might not permit that JV.
Private versus Public sector
Q. The private sector complains about discrimination. Whenever the MoD has to choose between giving business to a private company and a Defence Public Sector Undertaking (DPSU), it opts for the DPSU.
We are all for facilitating the entry of the private sector [into defence production], but I think the private sector is taking short cuts in many cases. They should seriously look at bringing value addition into the country and at complementing what the public sector does. They should play a complementary role, not try to compete in those areas where the public sector is already present. That does not mean that we will let our DPSUs be inefficient. We are driving them towards better efficiency and delivery. But the private sector should look at bringing in value addition into our defence manufacturing.
Q. Wouldn’t you say that competition from the private sector would bring in efficiencies of its own?
I agree. They can gradually get into this area [of defence production]. But they should look at what the country needs. We don’t need low-tech; we need high-tech. That is the whole idea of the offset policy also. And that is where I feel that the private sector should focus.
Q. Is there disappointment within the government on the way the private sector has approached defence production?
They have to look at it with a long-term perspective… and they should work towards the nation’s objective of bringing in greater value addition and greater self-reliance.
Q. Are you saying that the private sector is not putting in enough money?
I wouldn’t know. But I do know that larger companies like the Tatas and L&T have gotten in with a lot of commitment. But they have to look at ways of making things happen.
Q. But major defence producing countries all fund their private corporations in defence production.
At this stage the government may not commit anything. But as we see greater involvement from the private sector, the policy will evolve. This is not to say that we will stick to today’s policy [forever]. We will treat (review) policy as and when response comes from the private sector.
The whole idea is to enable private sector participation and to increase self-reliance. It doesn’t matter whether [a military product] comes from the DPSUs or from the private sector. The buzzword is “self-reliance”; and, of course, greater value addition. If we see that coming, definitely the ministry would respond.
Q. There is disillusionment about what the DPSUs, despite their MoD support, have achieved. The private sector feels it would deliver much more with some support…
The DPSUs manufacture products that the DRDO has developed…. That responsibility was given to the public sector; it was to be the integrator, with some vertical components being given to the private sector. Now, if some large private company comes and says, “we can do it better”, we will say, “you are welcome, go ahead and do it.”
Q. But you are also saying that they should not enter into the same area as the DPSUs, then they are being counterproductive.
Maybe they can make a beginning with it; but they have to move on. Otherwise we will end up supporting the public sector, and also supporting the private sector… of course we want greater efficiency; but we have a responsibility towards the public sector also. Otherwise, in a downturn, the private sector will walk away, saying there is not enough business. But these guys (the public sector) will stand by us.
Q. Wouldn’t you say that the private sector is inherently more efficient than the public sector? It has taken 60 years of public expenditure to set up the DPSUs…
What I’m saying is that if someone wants to manufacture guns, they should not start manufacturing what the Ordnance Factories are manufacturing. They should manufacture the next generation of guns. They may be able to do the existing product better… but they will be killing the DPSU. The Ordnance Factories will not be able to respond so fast (as the private sector).
Q. Have you considered that there might be a conflict of interest for the bureaucrats who decide on whether a particular contract should be given to the private or the public sector? The bureaucrats who decide are on the boards of many of the DPSUs?
I think that we have a responsibility to the DPSUs since [their] ownership rests with the Government of India… I have observed the capabilities and capacities built up in the DPSUs, and it will be very difficult to replicate them today. So having built up these capabilities and capacities, it is important to utilise these assets in the service of the nation.
I am not saying we will let them be inefficient. But there is a necessity to support them to some extent. And the role of the Joint Secretaries, when they are on the boards of DPSUs, it is to exercise the control of the government and to drive them to greater efficiency and to ensure that they survive well. They (the bureaucrats) should be on the boards, there are no two ways about that.
But when it comes to purchasing, it is a different bureaucrat who is articulating the needs of the concerned service: the army, air force, or navy. It is not the same JS [who is on the board of the DPSU]; The procurement official would be looking for the best price and delivery. There is no conflict of interest… it is a different individual.
Raksha Udyog Ratnas (RuRs)
Q. The delay in Raksha Udyog Ratnas (RuRs) is blamed for slowing the entry of the private sector into defence production.
I will not comment because my minister (AK Antony) has not said anything yet on the subject. The spirit of the RuR recommendation by the Kelkar Committee was to allow the larger player into defence manufacture. And because defence orders are not a regular flow, it would be prudent to identify companies with deep pockets who can survive the troughs [and nominate them as RuRs]. This idea, however, was opposed by small companies who don’t have such a high turnover, but who have certain [technology] capabilities. They protested and said why should we be discriminated against when we have better capabilities.
Taking their views into consideration, better wisdom prevailed. We said, why should we discriminate? We should let everybody have an equal opportunity; why should we give preferential treatment to the big players.
Q. A big reason for nominating RuRs was to provide a forum for the MoD to fund R&D, to the extent of 80% of development costs.
Now that option is open to every company, not just RuRs. That offer is open whether it is a small company or a large company. We are waiting for people to come forward. We will fund 80% of the development cost, but the project must make sense to us.… we must believe that there is a future in the proposal that they are bringing to the table.
Q. But you are saying, and it is an important point, that if a private sector company has a viable project, the MoD will fund 80% of the development cost.
We will, we will! The whole idea of the offset programme; of the “buy and make” category; of the 26% FDI, is to bring in greater value addition into the country. I know the private sector is trying to do its bit… and I know that they are looking for a certain kind of assurance from the armed forces. But I can assure you that if they produce a good product, the armed forces will just grab it.
So the initial risk of putting money into a product and developing it… they have to take that risk. (repeats that).