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Make ‘ARMS’ in India — New agenda of Modinomics :”Make in India”

Make ‘ARMS’ in India — New agenda of Modinomics :”Make in India”

TOKYO — Prime Minister Narendra Modi’s efforts to turn the country into a major industrial powerhouse under the slogan “Make in India” have taken a new twist, with the launch of an initiative to increase domestic production of military equipment.

Currently the country manufactures a certain number of fighter jets, submarines and helicopters, but relies on imports for 70% of its weapons and other military equipment. The country has now moved to substantially increase the issuance of manufacturing licenses to domestic private companies and relax regulatory controls on direct foreign investment in India’s defense industries.Modi’s government hopes that increased domestic production will lead to more exports and help to increase the country’s foreign exchanges.

Deploying more destroyers, helicopters

According to a report released in September by financial services company Credit Suisse, India ranks fifth in the world in terms of military strength, after the U.S., Russia, China and Japan. The country’s military has been working on the development of the Indian-designed Tejas combat aircraft. It has also concluded a deal to buy Rafale fighter jets from French manufacturer Dassault Aviation, in the hope this will lead to licensed production of the warplanes in India in the future.

In September, the INS Kalvari — the first Indian-built unit of the Scorpene-class submarine jointly developed by a French company and its Spanish partner — started her sea trials. In September, the INS Kochi was commissioned to the Indian Navy at the naval dockyard in Mumbai. She is the second of the Kolkata-class destroyers built for the Indian Navy, and is equipped with a multi-function radar and a long-range surface-to-air missile system. In addition, the Indian government has approved a $2.5 billion deal to purchase 22 Apache attack helicopters and 15 Chinook heavy-lift helicopters from the U.S.

The need to replace outdated weapons and other military equipment has taken India to the top of the list of the world’s largest arms importers, and industry watchers expect demand for $100 billion will be generated in India over the next 10 years.

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However, India is a country suffering from chronic current-account deficits stemming from imports of oil, mineral resources and semiconductors. This situation has made substantially increasing domestically produced military equipment a long-held ambition, as it would eliminate large amounts of foreign currency expenditure.

The Modi administration issued a total of 93 licenses for defense manufacturing to the private sector during the 12 months through July this year. This figure is slightly over 40% of the number granted by the previous government in the 10 years it was in power.

In September, Indian Defense Minister Manohar Parrikar said at a function in Delhi, “There is potential for $1 billion worth of exports of technology products developed by the Defence Research & Development Organization in two to three years,” displaying his hopes for the defense industry to become a key foreign exchange earner.

With Indian arms exports remaining sluggish at around $100 million annually for the past few years, the government has moved to ease regulatory controls on exports of such goods as weapon parts and military vehicle engines.

Raising foreign investment caps

The Modi administration has taken an array of measures to facilitate the shift from imports to domestic production and bring in foreign technology and capital to its defense industries. In August 2014, regulatory authorities raised the foreign ownership limit in the defense sector to 49% from 26%. Further relaxation was implemented in November this year, allowing foreign investment of up to 49% capital stake under the “automatic route,” which does not require examination by the authorities. The new rule even permits foreign ownership of over 49% if approved by the Foreign Investment Promotion Board.

Using these steps as leverage, the administration hopes to see a rapid increase in foreign direct investment in the defense sector, which has totaled only $3.7 million over the past 15 years.

Anticipating the shift in government policy, Mahindra Defence Systems (MDS), part of Indian conglomerate Mahindra group, agreed to set up a joint venture with European manufacturer Airbus Helicopters in July. Through a subsidiary, MDS has also established a tie-up with Ultra Electronics of the U.K. to produce naval equipment.

Also in July, Tata Advanced Systems, which operates under India’s largest conglomerate Tata group, forged a production and technology partnership with U.S. aerospace giant Boeing in the fields of aerospace and military equipment. Tata Motors is also seeking to bolster its military vehicle sector by entering into a technological partnership with a U.K. business.

Reliance ADA group, led by Anil Ambani, the younger brother of Mukesh Ambani, acquired a major stake in Pipavav Defence and Offshore Engineering — formerly Pipavav Shipyard — with the aim of breaking into the market for building frigates and other warships for the Indian Navy.

Changes in the Indian defense industry have not gone unnoticed in other parts of the world, with particular attention coming from Israel. According to local reports, , Elbit Systems and Rafael Advanced Defense Systems are all considering joint ventures, business tie-ups and other deals with Indian companies for the manufacture of military equipment such as unmanned aerial vehicles, missiles and radars.

“We want to establish JVs. We are in the process of locating partners in the areas of UAVs, missile systems and loitering weapons and radars and communication,” said Israel Aerospace Industries Vice President Joseph Betsalel, at an international conference held in Delhi in early September.

In a set of recommendations released in September, a government expert committee led by Dhirendra Singh, former home secretary, said: “What is significant is the strategic partnership model with the Indian private sector.”

There are, however, a number of challenges that need to be tackled if New Delhi wants to draw more foreign direct investment into its defense industries. They come in the form of taxation reforms, corporate efforts to reinforce research and development, and reforms of the authorization and licensing system. Reportedly Dassault has been reluctant to allow licensed production of Rafale fighters in India because the French company has doubts about India’s arms manufacturing technology and the quality of locally procured parts.

Modi’s “Make in India” productivity reform initiative may well bear fruit in a number of industries, but a great deal of work remains to be done before a “Make arms in India” initiative can be equally productive.

Sunday, December 06, 2015
By: Asian Review

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