Defence indigenisation under Budget squeeze

[Daredevil]

Indigenous defence projects allocated just Rs 1 crore, down from Rs 89 crore last year

By Ajai Shukla

Business Standard, 7th Mar 13

The Defence Budget for 2013-14 starkly underlines the gap between the minister's proclamations about the need to indigenise defence equipment on the one hand, and the money his ministry allocates for developing equipment on the other.

On February 20, buffeted by allegations of wrongdoing in the Ministry of Defence (MoD)'s Rs 4,000-crore purchase of VVIP helicopters, Minister A K Antony declared the indigenisation was essential to eliminate corruption in arms procurement.

Just eight days after, it was clear this would not be pursued seriously, at least during the coming financial year. In the Defence Budget for 2013-14, the 'Prototype Development' head, from which indigenous projects are funded, was allocated just Rs 1 crore, down from Rs 89 crore in the previous year.

The allocations for 'Prototype Development' are made under Major Head 4076 of MoD Demand No 27, Capital Outlay on Defence Services.

This allocation is intended to fund 'Make' category projects, i.e. defence systems developed by consortiums led by Indian companies, with the MoD financing 80 per cent of the cost. Currently, the MoD is processing two 'Make' category projects: a Tactical Communications System (TCS), a mobile communications backbone network for the field army; and the Future Infantry Combat Vehicle (FICV), an armoured, tracked vehicle that carries infantry into battle.

Last year, the Rs 89 crore allocated for 'Prototype Development' exactly matched the payout to be made for the TCS project. But MoD has not disbursed a single paisa of this. The amount will be surrendered on March 31.

"The non-utilisation of last year's allocation, and the allocation of just Rs 1 crore for this year, makes it clear the MoD is paying lip service to indigenisation. Clearly no 'Make' category projects will see any progress in the coming year," says a chief executive officer (CEO) of a company engaged in the defence business, speaking anonymously.

Business Standard has learnt the MoD's acquisition wing has handed the national security advisor a list of 100 defence items that can be pursued indigenously as the 'Make' category projects. But there has been no movement on these projects, either in the MoD or the National Security Council.

Further, the Ministry of Finance (MoF) has ignored the recommendations of the Federation of Indian Chambers of Commerce and Industry (Ficci) and Confederation of Indian Industry (CII) that defence manufacturing be given tax benefits under Section 80-IA of the Income Tax Act, which is provided to long-gestation, capital-intensive industries such as power.

This compensates domestic industry for the high cost of capital in these long-gestation industries. Under Section 80-IA, the profits that eventually accrue are allowed a five-year tax holiday. Ficci and CII have argued that defence manufacture, a highly capital-intensive industry, should be allowed this incentive. The Budget has entirely ignored this recommendation.

"It is disheartening that the government has again ignored the important issue of extending Section 80-IA benefits to investments in defence manufacturing. I hope this omission and the cut in the Prototype Development allocation is an aberration that will be corrected before the budget is approved," says Rahul Chaudhry, CEO of Tata Power (strategic electronics division).

The MoF and MoD have also ignored a Ficci recommendation that companies doing defence research and development (R&D) be allowed tax incentives under Section 35AB. This provides 200 per cent tax benefit for money spent on defence R&D.

The industry argues that defence R&D uses the same people and infrastructure that earn tax-exempt dollar income when deployed in streams such as design engineering services. With no tax exemption under Section 35AB for defence R&D, domestic industry would prefer to deploy personnel in fields where tax incentives exist.

Despite urging indigenisation, Antony apparently believes private companies themselves should invest the enormous sums that go into defence R&D. On January 31, speaking to an industry gathering here, Antony called upon the Indian defence industry to forsake its "miserly attitude" towards R&D spending.

Broadsword: Defence indigenisation under Budget squeeze

 

[Daredevil]

Indigenising defence production: The necessary goal




Defence cuts in the prototype development budget have effectively bombed indigenisation

by Ajai Shukla
Business Standard, 8th Feb 13

The anaemic growth in India's defence capital budget this year, along with news that China is expanding its own more robustly, puts indigenisation to the forefront of the conversation again. As Defence Minister A K Antony has argued, it is essential for India to build its own defence equipment to avoid the skulduggery that is involved in buying arms. No country has ever become a great power without building its own arms. This is no longer just a question of strategic autonomy; today it is also a military-technical issue, in an era when the capabilities of defence equipment depend more on software than on hardware and when it is increasingly easy to compromise weaponry sold to another country through the introduction of malware and kill switches.

No defence industry can be built without careful nurturing from the government. If Russia builds some of the world's best fighter aircraft, while being unable to build a decent passenger car, it is because Moscow has spent decades on an aviation production eco-structure while leaving the automobile industry to develop itself. While the private sector has been allowed into defence production since 2001, entrepreneurs have been expected to build their own capabilities - with the ministry of defence (MoD) playing little role in co-ordinating, mentoring, funding or monitoring. Without any funding support for the risky and high-cost research and development, or R&D, that underpins defence systems, and without any assured orders for the weaponry that they develop, why would firms invest? Complicating matters even further is the maze of regulations. Companies cannot build or import ammunition without obtaining time-consuming permissions. No weaponry can be test-fired since the government controls all firing ranges. A range of tax benefits that have been extended to the moribund defence public sector units are denied to private companies.

The MoD must bring together the military, the Defence Research and Development Organisation and the defence industry to identify at least 100 R&D and production projects that will feed into weapon systems that India can realistically build. This will need the MoD to declassify a sanitised version of the military's Long-Term Integrated Perspective Plan, which identifies the capabilities that the military needs to build. The MoD had promised to release a public version of the plan a year ago, but even today the defence industry remains in the dark, with no indication of what systems or sub-systems it should develop and build. Finally, once these projects are identified, they must be allocated to public and private defence players following transparent and fair bidding. This is already provided for in the Defence Procurement Policy, which permits 80 per cent funding by the government, with the defence company paying up the balance. Astonishingly, while the MoD's Acquisition Wing has informally identified a hundred "Make" category projects, not a single one has actually entered development. A year ago, the MoD's Acquisition Wing head had announced that 150-180 "Make" category projects would be identified and put up on the MoD's website. But with nothing having been done towards this, and with the defence budget for the next year slashing funding for this, indigenisation is set to remain a slogan rather than a reality.

Broadsword: Indigenising defence production: The necessary goal

 

[Patriot]

If they go for indgenisation, there will not be need to cut the defense budget in the long run.Can't say,it may be an effort to delay the development of certain platforms? Arms dealers lobby is very strong in our country.

We have money for all socialistic defeated objectives, but not for necessary defense programmes.