Why government has failed to encourage private sector in defence production


AK Antony has for years said he wants to encourage the Indian private sector in defence production. Everything on the ground does the exact opposite.

Since early-February, when the Indian defenceestablishment was shaken by the arrest ofFinmeccanica chairman in Italy for graft in selling helicopters to India, defence minister AK Antony has repeatedly said that his ministry will strive for greater indigenisation. At a seminar on February 20, in a statement he has repeated at least thrice since, Antony said the government intends to change two key policies to allow the private sector a greater role.

This line is of some vintage. At least since 2002, it has been the stated policy of the government to encourage private sector participation in 
defence production. But companies say the ministry's actions run contrary to this claimed ideal. Large engineering companies that invested crores of rupees into what they hoped would be a new stream of business are today staring at an uncertain future for their investment.

Tata PowerBSE -0.36 % SED, Larsen & Toubro, Mahindra & Mahindra, Bharat ForgeBSE -0.07 %,Ashok LeylandBSE 1.75 % and many others have invested in developing defence capabilities and are prepared to invest much more. But they face an uncertain policy environment, and staunch opposition from a powerful union of defence public sector employees that opposes any move the government makes to allow the private sector a leg in.

The government made its most significant move in 2006, when it added a new category in the Defence Procurement Procedure, a key policy document governing purchases. Under this 'make' category, for the first time, the private sector was allowed to wholly design and develop complex systems, with the government funding 80% of the development cost.

Further, the government announced two projects, with a combined value of Rs 60,000 crore, under the 'make' category: the 
TCSBSE -1.11 % (Tactical Communication System) and the FICV (Future Infantary Combat Vehicle) projects. "A year and a half ago, it seemed as if at least the announced programmes in the 'make' category were moving forward," says Madhukar Kotwal, president (heavy engineering) at L&T. "Although the pace was slow, the direction gave us some hope." Kotwal says these programmes are showing little progress. "So somehow, the government's oft-stated position of encouraging participation of the private sector and the reality on the ground don't point in the same direction," he adds. "This has created disappointment and uncertainty."

For 2012-13, the 
union budget allocated Rs 89 crore for the 'make' project. For 2013-14, this amount was slashed to Rs 1 crore, even as India was confirmed as the world's largest importer of defence systems for the third year running and the Italian helicopter deal threw up old questions about the greasy nature of defence imports.

In Rollback Mode

Most advanced nations are neither dependent on defence imports nor do they have their governments doing all the work in the purchase chain, to the exclusion of the private sector. Those governments outline what they want from, say, a fighter jet and provide financial support to private companies to develop prototypes; the winning model (sometimes a combination of multiple prototypes) gets a massive contract.