Investments Are Slow In Defence As There Is No Predictability: Rajib Kumar Sen

Economic Adviser in the Ministry of Defence, Rajib Kumar Sen is credited with formulating policies on defence offsets. He is also closely associated with the budgeting plan for the Indian armed forces. In an exclusive chat with Manish Kumar Jha, Sen talks about the Draft Defence Production Policy and offsets and how changes in it will enable domestic manufacturers to meet high quality military hardware requirements.

Excerpts:

The Draft Defence Production (DDP) Policy 2018 aims to make India one of the world’s top five defence manufacturing hubs by 2025 with self-reliance in 13 areas and achieve exports of Rs 35,000 crore ($5 billion). How realistic is the vision?
This has been drafted keeping the future in mind. It is not yet approved, but the process is on. I think it is a very good document to follow. It is a bit ambitious but I think we have to be ambitious if we have to achieve something, specially the export target of Rs 35,000 crore, which may look very high but there his potential. I think it makes a lot of sense to try achieving these goals.

Assuming the economy grows at 7 per cent on an average, in order to achieve the export target stated in the draft policy, the defence sector will have to grow at 15-20 per cent on a consistent basis. Is the target unrealistic? 
It has nothing to do with percentages. As you know, the defence sector has lots of negative areas. For instance, we cannot buy from certain countries, we cannot sell to certain countries. It is not as if we are factoring in only economic growth. For instance, we are buying so many things from Russia, and we are also opening up to the US – the US has technology and sharing has started. So, we are looking at countries that are friendly towards us, especially the Asean and African countries.  There is a lot of scope for export as many of the exportable items already exist with us. Some of these items have yet to be fully indigenised but we are in the process of doing so. So, given these capabilities I don’t’ think that the export target will be dependent only on high economic growth. We are in a position to exploit and increase our exports within the current rate of economic growth.

How do you think it’s possible? We would like to understand why we have not attracted enough FDI in defence? 
Yes, it is possible and not overambitious. As for FDI, the figure is low but not as abysmal as it looks. There are some technical issues involved. Earlier, 100 per cent of defence goods were licensed and whatever FDI came had to be mandatorily disclosed. Today, many goods do not require licensing, and even if these goods are defence related, we would not know if any or how much FDI is coming into them. As I said earlier, some of these goods may not have been fully indigenised but we are in the process of doing so. And their export does not depend only on economic factors.

Second, as per the DIPP classification there are certain heads which are categorised under defence. But there are many other items which are used in defence and although they may get FDI, it is not captured in the defence sector. We are doing our studies and we are trying to get the figures, from all the business houses and others. We are in the process of doing it. However, I will tell you that the figures are much higher than this low figure of 1.25 billion.

You are saying that such investments have gone into other areas and not been captured under Defence?
Yes, they have not been captured as per the DIPP classification, are in the process of being corrected.

Foreign investment and technological knowhow have proved to be game changers for various sectors and it is better to have foreign OEMs manufacture defence products on Indian soil than in their own country. Keeping that in mind, why not allow 100 per cent FDI in defence production for foreign OEMs?
Defence is a critical sector for any country, and you cannot throw it open to foreign investors like you do for other sectors. But having said that, even today 49 per cent FDI is allowed in the Defence sector through the automatic route. However, for anything higher than that, as of today you have to take the government’s permission. It’s not a difficult thing even today. It is not as if 100 per cent FDI is not allowed. But it requires government permission. Having said that, I really don’t foresee the defence sector getting thrown open to 100 per cent FDI without any barriers. I don’t think it is possible in the near future even in strategic areas. But yes, we are in the process of opening up.

When the draft production policy gets approved there may then may be corresponding changes in other policies. I can tell you that in offset policies certain changes are being contemplated, and these are already under discussion and might come very soon. In FDI also, we might make changes. So, with the new Defence production policy many other things will change.

What do you think of the L1 criterion in the policy framework, which is skewed in favour of the lowest bidder? Does it work in defence acquisition where quality matters over quantity? 
Let me first tell you that this is not within my domain, not even within the domain of DDP, but I will try to answer your question as an observer. This is actually in the domain of acquisition. I can say that L1 is indeed an issue. However, L1 is granted after technical qualification. As you know, technical qualifications in defence products are very stringent. The question of L1 only comes after this stage. Having said that, in the latest DIPP there are some instances where the non-L1 element is built in. And, even within L1 various elements have been brought in to make the process more competent.

Offset is your official domain as an economic adviser to the MoD. Let me ask you that offset is a standard international practice. In our case, what are we trying to achieve through offsets?
The basic idea of offset is that if you are procuring something from a global agency, you ensure that a part of that activity, whatever it may be, is also brought back to your country. So that you can gain through this activity — whether employment generation or economic gains. That is the overarching aim of offset, which is prevalent in many countries. In some places it is called industrial partnership and so on.

The procurement policy says if there is any procurement above Rs 2,000 crore, you have to have 30 per cent offset. And there are six ways in the foreign OEMs can discharge their offset obligation. It has made some impact but not as expected. There are some drawbacks. It  was found that 90 per cent of the offsets are discharged through one avenue that is through buying of goods and services. There are limitations to offsets as they are happening now. However, we are trying to address that.

Despite doing some commendable work, defence PSUs are still looked upon as laggards for their slow pace of delivery and turnaround time. Is disinvestment on the card?
Disinvestment as a process is happening. I was earlier in the disinvestment department. But the counter-argument against disinvestment is that the government still has a majority share, because you (government) will not disinvest beyond 49 per cent. So, disinvestment is one of the instrument to bring about change through reforms. DPSUs are dependent on orders from the armed forces and this is another dimension. One of the reasons the investment process is slow in defence is that there is no predictability.

How do you see the defence ecosystem taking shape with the two defence corridors? What is being done by the government to attract private firms to set up base in these two corridors? Have you come up with any workable model?
No, not yet. It is still work in progress. In Uttar Pradesh, there are six nodal points and Tamil Nadu has five. We have already initiated an interaction with the entrepreneurs and taken  note of what they require. In UP, for example, HAL is present in Lucknow and there is economic activity happening.  There will a mix of both brown field and green field activity. Brown field are where you already have existing industries. There you need to help them to become more productive,  rise up to the international standard and also be a part of the global supply chain. We have received very good responses from Trichi and Coimbatore.

Then, you have other places like Aligarh where you can bring investment and allow foreign OEMs to set up base. We are in the process of appointing consultants through which we will know what other help the industry requires, whether financial help or in terms of IT infrastructure. Thereafter, through the Cabinet we will take policy decisions and then implement them.