| #1114 |  | 2228 |  |
November 27, 2013 |  | By Karanpreet Kaur | ||
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Self-reliance in defence is one of the major determinants of a country’s superiority and power status.United States, United Kingdom, France and Germany are some of the relevant examples, which harnessed the strength of indigenous manufacturing to give an impetus to their ambitions of rapid industrialisation and accelerated economic growth. The Kelkar Committee report realised the need to fast track the setting up of a self-sufficient indigenous defence industrial base and provided a cogent roadmap to achieve the results. However, India’s military-industrialcomplex of about 40 Ordnance Factories (OFs) and eight Defence Public Sector Undertakings (DPSUs) have been unable toachieve the set targets of self-reliance and the much needed degree of self-sufficiency.
The Government of India’s keenness for optimum levels of indigenisation in defence can been seen throughits recent policy decisions - Defence Procurement Procedure (DPP) 2013, Defence Offset Guidelines 2012 and Defence Production Policy 2011.A multitude of reforms in the defence sector in the last decade are witness to theseriousness of intent to craft anindependent and stable defence manufacturing base. However, the legacy of high dependence on imports and licensed production, low technology absorption capability and limited manufacturing expertise are responsible for the homegrowndefence industry’s current state of affairs.Capital acquisitions have been streamlined by the recent amendments to the DPP to a considerable extent,although there are bottlenecks thatrequire discreet attention of the policy makers.A critical issue that has stymied theprivate industry’s participation in the defenceproduction sector relates to the austere taxation and exports policy.The financial regulations imposed by the government on the private defence players make the business environment unfavourable to a viable business model.There are numerous regulatory barriers to entry including the stringent Foreign Direct Investment (FDI)norms, the advantageous position of the public sector enterprises vis-à-vis taxes and exporting norms, industrial licensing etc.
A level playing field in the defence sector for private players is paramount to the success of achieving indigenous self-sufficiency. The private industry faces myriad challenges pertaining to taxes and export regulations. The present tax and duty structure is not synchronised to the objective of indigenisation making the domestic manufacturers uncompetitive. Several imported defence and aerospace goods are exempt from customs duty, but coreinput materials/ components imported for use by Indian defenceoffset partners are not tax exempt. Sometimes,Value Added Tax (VAT) and Central Sales Tax (CST) applicable to inter-state and intra-state sale of goodsresults in the value of goods being greater than their imported value. This contradictory tax regime needs to be re-examined and a pragmatic VAT legislation needs to be enforced. Several other taxes like service tax, state entry tax, octroi and local body tax need to be meticulously scrutinised, simplified and streamlined to facilitate indigenous manufacturing. Historically, the Indian defence industry (i.e. the DPSUs and OFs) has operated in an environment of monopoly, protectionist policies and complacency. As a result, not much effort was taken to improve the defence imports to exports ratio and competitiveness suffered as compared to global standards. According to SIPRI reports, India was the world’s largest importer of major conventional weapons from 2008–12. Its arms imports, accounting for 12 per cent of global imports, were 109 per cent higher than those of China, the second largest arms importer. Even when defence products are manufactured domestically, theyhave a large component of imported sub-systems.This leads to mere assembling capability of critical defence equipment rather than core manufacturing expertise. India’s defence exports are about two per cent of the total global production of weapons and equipment (see figure 1.1 & 1.2). According to ASSOCHAM, the issuance of customs and excise duty exemption certificates to DPSUs by the government is making the exports by private sector uncompetitive by about eight per cent. Such unfair practices will only distance the private firms from being a crucial component of national power.
Figure 1.1 (Volume of arms exports from India, 2007-2012)
Note: Figures are millions of SIPRI trend indicator values (TIVs) and cover deliveries of major conventional weapons, as defined by SIPRI. Figure 1.2 (Trend in arms exports from India, 2007-2012)
Source: SIPRI Arms Transfers Database
State control over the import/export of defence items is a crucial part of the national security and foreign policy paradigm, although some transparency and streamlining of export procedures is necessary. The President of United States is authorised to promulgate regulations for the import/export of defence articles and services, called the US Munitions List.Decisions on issuing export licenses need to take into account factors like arms race, weapons of mass destruction, international terrorism, arms control and nonproliferationagreements. India needs to balance its commitments to international agreements,and at the same time encourage domestic defenceproduction and exportsto sustain its nascent arms industry, improve its balance of tradeand develop defence cooperation with friendly foreign nations. There is a need to liberalise the export policies based on agreements such as the Wassenaar Arrangement and Missile Technology Control Regimes without compromising our national interests. DefExpo, NamExpo and Aero India shows are some platforms to showcase indigenous military capability, establish relations with buyer countries and facilitate in increasing the military exports.
In terms of defence industrial performance and exports, South Korea could prove to be a beneficial model for India to learn from. South Korea, from being wholly dependent on the US for supply of military equipment in the sixties has been able to satisfy most of its critical weapons needs within a decade after the launch of its in-house defence industry. It has shown two noticeable trends - export of big-ticket items such as aircraft and naval vessels and a trend towards Koreanisationof defence equipment. Its military exports rose from $147 million in 1998 to $253 million in 2006 and to $1.03 billion in 2008. South Korea's Ministry of National Defense (MND) announced that the country's defence industry secured military exports worth $2.35 billion in 2012 in tune with its growing stature in international defence markets.
Research and development, production and exports have been the driversof rapid growth for many emerging economies.India has been slow in this regard but has the opportunity to rapidly improve its languishing defenceexport figures through application of best standards and stringent enforcement of policy guidelines.The adoption of liberalised FDI policy, low cost of manufacturing by utilising economies of scale, transparent business environment, fair competition, maximum utilisation of private sector and facilitative export policies are essential in creating a vibrant defence industry.
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