Posted by: John Elliott | June 7, 2007

Doors to open for India’s defense industry jewels

The Indian government will soon make defense production history by naming a small number of leading Indian private sector companies as raksha udyog ratnas – literally defense industry jewels – that will be allowed to compete for big research, development and production projects on equal terms with the public sector.

A Ministry of Defence (MoD) committee headed by Prabir Sengupta, a former secretary for defense production, yesterday (June 6) presented its report on the subject to A.K. Antony, the minister of defense. The names will be published soon, when they have been cleared by a co-ordination committee. They will include parts of the Tata group, Larsen & Toubro (L&T), Godrej, and Mahindra & Mahindra, plus a handful of others. A few are already involved in very limited sub-assembly work ranging from parts for rockets to a nuclear submarine hull.

The ratnas will be allowed to design and manufacture major weapons platforms and systems including equipment developed by the DRDO, the country’s leading but unproductive research establishment which has previously worked with the public sector. They will also be allowed to manufacture foreign defense systems and to carry out government-funded research and development. This is a big step forward, though it remains to be seen how quickly and effectively India’s massive and powerful public sector defense establishment mobilizes to obstruct progress and protect its jobs and booty.

The country has a huge defense budget, including an allocation of $10.5 billion this year for capital expenditure on military equipment – $4 billion for the air force, $2.8 billion for the army and $2.5 billion for the navy. About 70% of the budget is spent abroad because the Indian public sector cannot deliver in terms of quality or speed on either research or production. And only about 30% of the orders placed in India – or 9% of the total – goes to the private sector. Indian companies have consequently been wary of undertaking large-scale investment programs because they have been uncertain about what the MoD would actually let them do.

Only two primary contracts have been awarded so far. They went last year to Tata Power and L&T, when each company won a $20 million rocket launcher order for the army’s Pinaka defense missile system. Till then, primary integration work had been done by the public sector with some components supplied by the private sector. Russia is India’s biggest foreign supplier followed by Israel, then other European countries, with the U.S. having only a tiny role because of restrictions on what it can sell. A major effort is now being mounted by the U.S. to replace Russia as the lead supplier, especially if current talks between the U.S. and India on a nuclear pact lead to restrictions being relaxed. More than 20 U.S. companies exhibited four months ago at the biennial Aero India air show in Bangalore. Names such as Boeing (BA), Lockheed (LMT), Honeywell (HON), General Electric (GE), Raytheon (RTN), Northrop Grumman (NOC), Pratt & Whitney, United Technologies, Bell Helicopter Textron, and General Dynamics are among the most active. Some have already tied up with Indian companies such as Tata and L&T, or are talking about doing so – and the new ratnas will be prime targets, because of their privileged roles.

India’s defense private sector has been left behind by the wave of liberalization and deregulation that has affected virtually every other area of manufacturing in the past 15 years. Moves to change that began in 2002, when it was announced that the private sector would be allowed to do more work, and that foreign investment stakes of up to 26% would be allowed in joint ventures.

But only about 30 private-sector manufacturing licenses have been issued to around 20 companies and little work has been awarded. And only a handful of small foreign joint ventures have been signed. Foreign companies are not prepared to hand over new technology when they are only allowed 26% stakes – though one joint venture for aero engine components, between Snecma of France and government-owned Hindustan Aeronautics (HAL), has been allowed as a 50-50 split. The MoD now has a chance to introduce real reforms, though opposition from trade unions and leftist political parties is beginning to appear. Whatever happens, those vested interests will have to be appeased, and that will slow the pace of reform – as always.


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