Indias Big Defence Juggle: Great progress, more to be done

I recently met a well-known financier in London who has invested over $500 million in India. When I met him last year, he was feeling apprehensive about his investments, feeling that his "Modi-bet" may not be coming off. His investments were stagnating, the bureaucracy was still finding its feet with the new political masters, and the outlook was patchy. This time, the mood had changed. He said he had just sold two companies in India, earning a staggering 55 per cent rate of return. Both companies had overflowing order books, especially for exports. India was back in vogue.

The upbeat mood is being reflected across sectors of the Indian economy. Perhaps none more so than in the defence sector, where new rules to ease foreign direct investment (FDI) flows, including allowing 100 per cent foreign ownership on a case-by-case basis and other big policy initiatives are totally reshaping India's engagement and outlook for foreign investment.

Manohar Parrikar, India's highly regarded defence minister, has had to play a fine juggling act. He has had to deal with a series of legacy issues that had held up billions of dollars of weapons purchases, seriously affecting India's defence preparedness. Happily, Parrikar has resolved most of the issues he inherited, revamped India's outmoded and bureaucratic defence acquisition procedures, encouraged private sector participation and even drawn up plans for exports of offensive weapons by the private sector.

But disappointingly, despite several promises, the final policy on 'blacklisting' is yet to be announced. It is hoped the policy with codify and rationalise the hitherto arbitrary nature of blacklisting companies who fall foul of India's defence procurement laws.

That, however, is one of the few areas in which one can quibble with the government. Happily, Parrikar's initiatives are not ivory tower formulations, as many previous initiatives to build a private sector defence-industrial base were. As Baba Kalyani, chairman and managing director of Bharat Forge, which is hoping to emerge as one of India's major defence contractors, tells ′India Investment Journal′: “There are many foreign companies that are willing to/are in the process of establishing defence units in India... Two major foreign OEMs Elbit and Rafael have formed defence units (in the form of JVs) with the Kalyani Group... I am sure similar discussions are going on with many other companies in the country.”

But creating an integrated supply chain from the level of MSMEs all the way up to the final system integrators and the big boys who will design and build complete and complex weapons systems such as fighter jets, warships, missile systems etc will take time. The optimistic estimates are two decades. But the most important issue - and this is likely to be Parrikar's lasting legacy - is that he has laid a solid foundation on which his successors can build a potent defence-industry edifice.

The states, too, have jumped onto the bandwagon. Gujarat, Tamil Nadu, Punjab, Maharashtra, Andhra Pradesh and Telangana are competing with each other to attract the big and small domestic and foreign defence sector companies to set up units in their states.

But that is not the only good news coming out of India. The long awaited goods and services tax (GST), which will replace a welter of central and state levies with one unified tax and integrate India's 29 states and seven Union Territories into a common market is now well on its way to reality.

I would also like to draw attention to our report on Invest India, India's new investment facilitation agency, which guides foreign investors in India from “conceptualisation to cash flow”. What makes it unique is the fact that it is manned by a group of young women and men, almost all of them from Ivy League schools or their equivalents, who voluntarily gave up six-figure dollar salaries in response to Prime Minister Narendra Modi's call to build a new and transformed India. I'm certain their passion, drive and can-do approach has played a role in the record FDI inflows in 2015-16 amid a gloomy global scenario.