Saturday, 30 April 2016

MoD starts process to further liberalise FDI in defence

By Ajai Shukla
Business Standard, 30th April 16

Just five months after the government liberalised foreign direct investment (FDI) in defence, by permitting global vendors 49 per cent stake in Indian joint ventures (JVs) without the need for further permissions (i.e. “under the automatic route”), the doors for foreign vendors are being opened wider.

So far, incremental liberalisation has failed to attract significant foreign investment. On Friday, Defence Minister Manohar Parrikar told parliament: “From August 2014 to February 2016, a total amount of Rs 112.35 lakhs has come into the country as FDI in defence sector.”

In a fresh bid to create a more liberal FDI environment, the ministry of defence (MoD) last week invited defence industry representatives to discuss a briefing note it had prepared on liberalisation.  Business Standard has reviewed the note.

The current FDI policy, promulgated in November 2015, permits 49 per cent foreign investment through the automatic route. For FDI above 49 per cent, up to 100 per cent, the Foreign Investment Promotion Board (FIPB) must grant permission on a “case-to-case basis”.  However, lack of clarity on what conditions apply has created uncertainty.

Now, to bring in clarity on what “case-to-case” actually means, and thereby facilitate decision-making on the grant of higher FDI, the MoD note stipulates four conditions.

First, it mandates that proposals for FDI above 49 per cent must be examined “on case-to-case basis by a Standing Committee headed by Secretary (Defence Production), with all stakeholders as members.”

Second, the foreign original equipment manufacturer (OEM) is required to “ensure a minimum level of indigenous content as its value addition in India.” This is intended to ensure that the joint venture (JV) does not serve as a front for simply importing foreign-built equipment.

Third, the MoD regulations for licensed defence industries, i.e. appointing resident Indian citizens as chief security officer (CSO) and cyber information security officer (CISO) “may also be put in for the proposals beyond 49% FDI from national security imperatives (sic).”

Finally, the new guidelines stipulate that the foreign OEM’s home country regulations, which may continue to operate even for its units in India, do not prevent the sale of its output in India. It says “to avoid such possibility, a clause of usage of products manufactured by them in India by Indian Industry/Organisation (sic) may also be retained.”

Foreign OEMs, most recently Airbus Industries, have been demanding higher FDI limits that would give them greater control over joint ventures that they establish in India. They remain uncomfortable with the minority position that is imposed by a 49 per cent cap.

Parrikar has viewed foreign OEMs’ demands sympathetically. At the India Today Conclave in New Delhi on March 13, he said: “If there is a company that has the technology and wants to make, for example, fighter planes in India without any obligation on the part of the government, I am willing to give them approval for 100 per cent investment in the venture.”

Business Standard learns from three persons who attended the discussion in the MoD that Indian private industry had reservations, but eventually came around to agree on the benefits of more liberal FDI clearances.

However, there were exceptions. Innovative Indian defence companies that develop new systems have always opposed increasing FDI limits. In an op-ed article last month, Ashok Atluri, who heads simulator design company, Zen Technologies, argues that FDI limits need not be raised since the Indian defence market is anyway too large for foreign vendors to ignore. He fears foreign OEMs will use higher FDI limits to enter the market and then “kill” Indian competitors by underpricing products until they establish a monopoly.

“The MoD officials did not specifically say FDI limits would be raised to 74 per cent, or to 100 per cent. But it seemed quite clear that more liberal conditions will soon be announced”, said a defence industry chief executive.

The government of India has traditionally been cautious on FDI in defence. In May 2001, FDI up to 26 per cent was first allowed, subject to licensing. In August 2014, that was raised to 49 per cent, subject to government clearance, with cabinet clearance needed for FDI above 49 per cent, on a case-to-case basis. This also permitted foreign portfolio investment up to 24 per cent.

The policy imposed conditions on the JV. First, its management had to remain in Indian hands, with an Indian chief executive and CSO. The company had to be self-sufficient in product design and development, and be able to support the defence equipment it manufactured all through its service life.

Business Standard learns that several large investments are currently waiting for FDI liberalisation. French warship and submarine builder, DCNS, is reportedly keen to set up a fully owned venture to which high-end submarine technologies could be transferred.

Separately, Israeli company, Rafael, is reportedly keen on a joint venture with Pune-based Kalyani Group. But Rafael wants 74 per cent holding in the JV.

Book review: India's War, by Srinath Raghavan

Title       :   India’s War: The Making of Modern South Asia 1939-1945
Author    :   Srinath Raghavan
Publisher :  Penguin 
Pages:    :   553
Price       :   Rs 699

“History will be kind to me”, famously declared Winston Churchill, Britain’s prime minister through much of World War II (hereafter WW II), “for I intend to write it myself.”

Churchill, it turns out, meant precisely what he said. An entire post-WW-II generation in the Anglophone world grew up with the wartime narrative of a heroic, embattled Britain thwarting a rapacious Germany, until a reluctant United States entered the conflict and delivered the coup de grace. This entirely fictional account was first revised by the realisation that Russia, not the western allies, suffered the heaviest casualties by far, fought the most horrific battles and won the most crucial victories. Without Stalin, historians realised, Hitler would have handily prevailed in Europe.

A more contemporary wave of revisionism has centred on India’s role. Last year Oxford University historian, Yasmin Khan, published her book, “The Raj at War: A People's History of India's Second World War”, which highlighted how central India was to Britain’s war effort. India contributed 2.5 million soldiers, the largest volunteer army in world history. British taxes and levies, such as the eponymous “War Fund”, imposed a crushing burden on India’s poverty-stricken peasantry, essentially financing Britain’s war in Asia. Khan summed up: “Britain did not fight the Second World War, the British Empire did.”

Also last year, journalist Raghu Karnad published another people-based account: “Farthest Field: An Indian Story of the Second World War”, which captivatingly recounts the personal dimensions of the war through the documented accounts of three close comrades who served in different theatres.

Now we have Srinath Raghavan’s riveting account of India’s WW II, in which he juxtaposes a detailed campaign history with the backdrop of India’s independence struggle that was running its penultimate lap through the war. Raghavan notes that earlier accounts have not recounted the military saga in sufficient detail. He writes: “Almost all [earlier accounts] treat the Second World War as little more than mood music in the drama of India’s advance towards independence and partition.”

Setting out to write a “single volume that presents a rounded narrative, bringing in the manifold dimensions of the war”, Raghavan has burnished his credentials as an accomplished historiographer. His impeccable research into the events of that period is enhanced by his years of military service, the experience adding texture and feel to his military narrative. He describes campaigns and key battles in enough detail to satisfy a military history enthusiast, but without going into a blow-by-blow account that is already available in “pure” military histories, such as Field Marshal Viscount Slim’s classic account of the Burma Campaign --- “Defeat into Victory.” In addition, Raghavan skilfully weaves together the unfolding political, military, economic and social developments during that tumultuous period to tell the holistic story that he set out to.

For example, 1942 was a low point in the war for Britain, with military reverses in North Africa and Burma, the Japanese advancing towards India, the abortive Cripps Mission, the launch of the Quit India movement, and Subhas Chandra Bose’s mission to Berlin, during which he proposed that Germany and Japan intercede as benefactors of India. Raghavan deploys figures to describe the disheartened public mood. Of Calcutta’s 2.1 million people, 700,000 to 800,000 fled after just five minor air raids on the city, in which Japanese bombers dropped 160 bombs. As foreboding spread across India, workers in Bombay, which “was not so much as grazed by a Japanese bomb”, began despatching women and children to their villages. The broadening pessimism between 1939 and 1943 was highlighted by withdrawals from Indian banks, which consistently exceeded deposits. The number of post office savings accounts fell from 4.2 million in 1938-39 to 2.8 million in 1943-44. It was almost inevitable that British resolve to hold onto India would diminish.

Adding pace, style and readability to the book are well-researched little cameos that seldom feature in military histories, like the description of the rigid segregation of white and coloured American soldiers, which was also mirrored in the Indian attitudes towards the “Negros”. Another section describes the training in Ramgarh, Bihar, of 10,000 Chinese Kuomintang troops, who had escaped the advancing Japanese by retreating through Burma into India. Overseeing this training was the famously acerbic American commander, General Joseph Stilwell, whose acid tongue earned him the sobriquet of “Vinegar Joe”. After the supercilious Kuomintang chief, Chiang Kai-Shek bestowed his approval on the already on-going training, Stilwell wrote in his diary: “Why shouldn’t he be [happy], the little jackass? We are doing our damndest to help him and he makes his approval look like a tremendous concession.”

Also described is the inevitable friction between British troops stationed in India and the lavishly paid Americans. Earlier histories recount British animosity for US soldiers in England during the war, who were disliked because: “they are overpaid, overfed, oversexed and over here.” Similar complaints, phrased only slightly less pithily, were prevalent in India.

One of the strongest features of the book is its emphasis on the cost of the war and its effects on India’s economy. Who would pay for the war was an important question, given that a colony was going to war on behalf of an imperial power, and the scale of India’s manpower mobilisation and diversion of its economy towards the war effort. It was decided in 1940 that India would bear only a fixed amount, representing the military’s peacetime cost, as well as a one-off payment of Rs 10 million (a substantial sum in those days) for maintaining troops abroad. Britain was to shoulder the cost of additional forces raised for the war, and of military stores supplied by India. But the collapse of Allied resistance in Europe and Japan’s entry into the war saw India taking up the burden. By 1942-43, India was paying more than Britain towards the war, transforming its relationship with Britain from a debtor to a creditor --- with Britain owing it a mind-boggling 1.3 billion pounds by the end of the war. As the author notes, “The economic rationale of the Indian empire, if ever there was one, evaporated in the white heat of war.”

The author points out in a short, but useful, epilogue to the book that WW-2 reinforced amongst leaders like Jawaharlal Nehru the realisation that India was a pivot of Asian security. Arguing in 1946 for a permanent seat on the UN Security Council, Nehru noted, “It is India that counts in the defence and security of these regions far more than any other country.” Yet the experience of WW-2 was not entirely positive, resulting in the militarisation of millions of men. In the bloody partition of India that unfolded after the war, these military skills were evident in the slaughter of up to a million innocents.

Friday, 29 April 2016

BJP, Congress trade charges over VVIP chopper deal

By Ajai Shukla
Business Standard, 30th April 16

The ministry of defence (MoD) has fired the latest shot in an escalating war of words between the Congress and the Bharatiya Janata Party (BJP) over corruption in the purchase of twelve AW-101 helicopters in February 2010 for top Indian political leaders, from Anglo-Italian firm, AgustaWestland International Limited (AWIL) for Euro 556 million (currently Rs 4,195 crore).

Although the purchase of these VVIP helicopters was initiated in 1999 by the previous BJP-led government, and concluded in 2010 by the previous Congress-led government, both parties are selectively highlighting the role of the other, while downplaying their own role.

On Thursday, the MoD stated: “The contract for supply of 12 helicopters signed with AWIL on 8th February 2010 was terminated with effect from 1st January 2014 (i.e. by the Congress-led government)… However, the company was not debarred by the said order. Various bonds and bank guarantees were invoked.”

The MoD further claims “It is the present Government which through its order dated 03 July 2014, put on hold all procurement/acquisition cases in the pipeline of six companies figuring in the FIR registered by the CBI, namely: M/s Agusta Westland International Ltd., UK, M/s Finmeccanica, Italy and its group of companies… No new capital procurement has been made thereafter from these companies in the tenure of the present Government.”

In fact, the current National Democratic Alliance (NDA) government has consistently tried to ease the de-facto ban on Finmeccanica companies imposed by United Progressive Alliance (UPA) defence minister, AK Antony, after Italian investigators arrested Finmeccanica chief, Giuseppe Orsi, on February 12, 2013 on charges of bribing Indian officials to seal the VVIP chopper contract.

On December 12, 2014, at a conclave in New Delhi organized by the Aaj Tak TV channel, Parrikar decried the notion of blacklisting foreign violators, instead recommending punitive monetary penalties.

Citing Finmeccanica, Parrikar pointed out that many of its 39 group companies were involved in crucial contracts with India. “Should we rule ourselves out of dealing with all of those 39 subsidiaries? There has to be a clear policy on that,” said the defence minister.

Parrikar’s predecessor as defence minister, Arun Jaitley, followed an identical approach to blacklisting. As Business Standard reported (“Ministry of Defence reconsidering blacklisting policy”, August 23, 2014), Jaitley said on blacklisting: “We have to balance between two competing public interests. One public interest is that contracts are meant to be abided with, and not violated, even by our suppliers. The other competing interest is the larger public interest in terms of our national security and defence preparedness. It is an issue that we are fully seized of and we are in the process of finding an answer to this and you will hear about this from us very soon”, said Jaitley.

The blacklisting norms that the government eventually promulgated in August 2015 did not blacklist Finmeccanica, instead taking a differentiated approach to its group companies --- which include marine specialist, WASS; Selex Electronics Systems; aircraft firm, Alenia Aeromacchi, and naval gun maker, Otomelara.

Also contested is the naming by an Italian court of former Indian Air Force (IAF) boss, Air Chief Marshal SP Tyagi, as the recipient of bribes to change the specifications of the VVIP helicopter. The initial IAF tender, floated in 2002, required the chopper to operate up to altitudes of 6,000 metres, which was higher than the service ceiling of the AgustaWestland helicopter. The Italian court alleges that Tyagi did AgustaWestland a favour by having the service ceiling lowered, making the AW-101 helicopter eligible for the IAF tender.

In fact, according to a detailed MoD release dated February 14, 2013, the decision to lower the service ceiling was taken on the orders of Brajesh Mishra, Principle Secretary to then prime minister, Atal Behari Vajpayee, at a meeting in November 2003. Mishra also directed that the prime minister’s office and the Special Protection Group (which is responsible for VVIP security) be brought into the decision making process.

Tyagi became a part of the decision making more than a year later, when he took over as IAF chief in December 2004.

Monday, 25 April 2016

The way forward in military command

By Ajai Shukla
Business Standard, 26th April 16

In a small amphibious training exercise called Jal Prahar that terminated last week, India’s military paid token obeisance to the notion of tri-service command, which serious, warfighting militaries have embraced decades ago. Jal Prahar was conducted by the Andaman & Nicobar Command (ANC), India’s only tri-service command --- which means it owns assets from the army, navy and air force and is commanded, in turn, by general officers from all three services. It involved a hundred soldiers, a handful of amphibious assault craft mostly borrowed from the navy’s eastern command, and three Jaguar strike aircraft that the Indian Air Force (IAF) kindly made available. The ANC, which military reformers established in 2001 in the forlorn hope that this might catalyse similar tri-service structures across the military, has failed spectacularly in achieving this aim.

While this sideshow played out in the Bay of Bengal, the army chief’s attention was focused on the high-profile Exercise Shatrujeet, involving tens of thousands of army soldiers, practising mechanised warfare and live fire tank drills in the Rajasthan desert. True, there was a substantial air power component to Exercise Shatrujeet, but it was primarily an army exercise in planning and conception.

Meanwhile, early this year, the People’s Liberation Army (PLA) of China adopted a tri-service credo in full, signalling its determination to undertake the deep systemic reforms needed to create an effective command structure that might someday credibly challenge the United States. In Beijing, on February 1st, the PLA’s seven “military regions”, traditionally led by the army, gave way to five geographic theatre commands (termed “battle zones”) that will now function on a tri-service basis, incorporating elements from the PLA Navy and PLA Air Force.

In India, the woeful debate over tri-service structures has focused mainly on appointing a tri-service commander --- a five-star “chief of defence staff (CDS)” recommended by a Group of Ministers (GoM) in 2001; or a four-star “permanent chairman chiefs of staff (PCCOS)”, a half-way house solution proposed in 2013 by the Naresh Chandra Committee. But there is little focus on the need to simultaneously restructure India’s single-service theatre commands, merging 17 army, navy and air force commands into five-six tri-service commands. Creating a CDS/PCCOS to oversee long-range force structuring and to deliver single-point military advice to political leaders would unquestionably make the military leaner and more effective. But creating tri-service theatre commands is crucial for enhancing battlefield performance.

Opposition to tri-service structures comes not just from bureaucrats and politicians as the generals like to lament, but equally from within the military. Neither the army, navy or air force chiefs want a military boss (CDS) or even another equal (PCCOS). And they certainly do not want to relinquish control over their theatre commands, with these cutting edge units placed under some commander who reports elsewhere. But what really strangles tri-service babies at birth are ill-founded, political-bureaucratic apprehensions about concentrating military power in one hand. The ANC and the IDS were spared this fate only because they were adjudged too weak to threaten either the three services or the political-bureaucratic class.

If the whispered (and to the military, deeply offensive) need to “coup proof” the command structure is standing in the way of this reform, it can be addressed structurally by creating tri-service theatre commanders, who report directly to the political leadership, like in the US. The three service chiefs, with their combat units distributed between the theatre commanders, would be freed from command responsibility and mandated to focus on their respective services’ manpower, equipping and training. These are currently given short shrift, with the chiefs weighed down by the time consuming daily responsibilities of operational command. The non-operational commands --- such as the three services’ “training commands” and the air force’s “maintenance command” could remain under the service chiefs. Operational commands like the Special Forces command, cyber command and the strategic forces command (the nuclear arsenal) could be hived off like the theatre commands.

Outside this command structure, the political leadership could select a five-star CDS, from any service, preferably on merit and trust rather than mere seniority, who would function as a “second opinion” military advisor. In many ways, this would mirror the US system, which has functioned admirably through inter-continental global challenges.

While distributing power between more commanders, this could be made palatable to the military by upgrading ranks --- which would also somewhat flatten the military’s unacceptably steep promotion pyramid. Each theatre commander, now handling independent, tri-service operational responsibilities, could be upgraded to four-star rank. The army, navy and air force chiefs would continue to be four-star generals, thus having a dozen four-star generals --- including the commanders of five geographical theatres, the ANC, and the Special Forces, strategic forces and cyber commands. The five-star CDS would be a respected figurehead.

This would allow Prime Minister Narendra Modi to credibly lay claim to genuine military reform. While making multiple promises in its April 2014 election manifesto and in numerous public statements since, the National Democratic Alliance government has delivered only on populist promises: like One Rank, One Pension, albeit in a diluted form; and sanctioning a national war memorial in New Delhi. On the promised structural reforms -- like implementing tri-service command, involving the military in defence ministry decision-making; establishing a National Marine Authority to oversee coastal security; boosting defence R&D; improving border management, and setting up a Veterans Commission to look after retired soldiers – there has been little delivery.

Addressing the military’s top commanders on December 15, Mr Modi declared: “We have been slow to reform the structures of our armed forces. We should shorten the tooth-to-tail ratio. And we should promote “jointness” across every level of our armed forces. We wear different colours, but we serve the same cause and bear the same flag. Jointness at the top is a need that is long overdue. We also need reforms in senior defence management. It is sad that many defence reform measures proposed in the past have not been implemented. This is an area of priority for me.

Mr Modi is right, promises of reform have never been implemented, particularly the move towards tri-service command structures. He should now implement this priority.