Economic Highlights

New Delhi, 10 October 2014

Hi-Tech Producer

INDIA TAKES FIRST STEP

By Shivaji Sarkar

The Narendra Modi government is getting into action mode. It has set the defence industry free from controls of the socialist era and mulls over Production Price Index (PPI) to replace Wholesale Price Index (WPI). The decision to allow higher foreign equity investment in the defence industry has set it rolling. So far, 33 deals at different levels have been allowed to go into production. In 14 cases, the Government has told the industry that licence was no longer required.

The past five years of UPA had seen a policy paralysis. Even the simplest decision such as this was put off. Bureaucratic and leftist fears of keeping the industry in shackles for reasons of “safety and security” had led many to convolutions. A major reservation all along was whether the private sector would be able to keep the necessary wraps over many critical productions. In fact, during UPA’s term, the Commerce and Industry Ministry’s plea to increase the FDI cap for the sector was repeatedly blocked by the then Defence Minister AK Antony, who had to contend his leftist political rivals in home State of Kerala.

Defence production since Independence has been the preserve of public sector companies and much of it by ordnance factories. These factories have been doing well. However, a major constraint plaguing them was investment, followed by technology, and inexperience in marketing practices.

The critics of production in the private sector had distrust for private corporate. The distrust has not been removed totally but some level of confidence has increased. It is now being realized that the State sector for all its limitations cannot fulfill the aspirations of the nation to become a defence production hub.

Previously too, whenever the Government defence units sought assistance and technology to produce some defence equipment from Soviet Union, Japan and France, the going was not absolutely smooth. Even in the heydays of socialism in the 1960s, the realization was that the country alone could neither produce nor develop technology for all critical needs.

The Government has thus taken a pragmatic decision. However, critics would still have an option to say some of the largest corporates such as Reliance Aerospace and Punj Lloyd have cornered the deals to produce weapon launchers, torpedoes, rocket launchers and combat vehicles. So far, 19 such proposals of different groups including Tatas, Mahindra and Bharat Forge have been cleared.

Tata Advanced Systems would produce parts of aircraft and spacecraft, so far the preserve of ISRO, ECIL, EIL and related organizations. Mahindra would produce aircraft parts and sophisticated communication. Bharat Forge would make guns, howitzer, armoured vehicles and electronic surveillance system. These were either acquired from foreign sources or produced partially in different ordnance factories.

While the decision would give wings to the private sector industries to produce critical productions, security remains an issue. But in a market of intense international competition and with investments by foreign partners up to 45 per cent in the case of Reliance Aerospace and 37 per cent foreign stake in Bharat Forge and at various other levels with the other defence manufactures, it should be realized that the industry would like to keep most of it under wraps to withstand competition. The Government in the meantime is working on easing other norms to pave way for larger sales of the products.

Importantly, all these companies are exposed to heavy foreign investments. It is expected that the Government’s move would turn the country into a defence manufacturing hub in Asia. As of now, the US remains the biggest arms related producer. Hopefully, in the next few decades, the initiative would make India an international manufacturer in arms, rocket launchers and aircraft building.

Additionally, it is a highly skill-oriented industry. It would open up jobs for highly qualified technical and marketing persons. If the industry manages itself well, it can usher in a brain gain as critical manufacturing takes off in the country.

This apart, the Government also needs to correct an aspect of marketing. Lobbying is an essential part of defence sales. It involves major cuts. Steps have to be taken to rationalize the system of giving commissions to agents lest the country is accused of unethical and unacceptable practices. These would make marketing of such expensive products easier.

Another aspect that would have to be taken care of is creating linkages with universities and IITs to develop the necessary human resources for this hi-tech industry. Presently, the Indian education system is not oriented fully to this aspect of critical technological production of varying arms and related system.

The creation of the HR synergy would also require large investments. The fall-out would be of immense importance to the future generation. The Government would need to ensure that technical and university degrees have less duration and are less expensive so that optimum results could be obtained for the burgeoning populace.

As the country sets on to become a manufacturing hub, it also needs to look at the price index afresh. The present wholesale price index does not at all include the services along with some other items. The Government is looking into it and has decided to introduce PPI on a trial basis.

The PPI is already in vogue in many countries including the UK, Australia, Germany and Chile. The Government would initially release it on a quarterly basis as Australia does. All other countries release it on a monthly basis unlike the WPI, which is released every week.

The PPI would have an impact on fixing prices and wages. Presently wages are linked to WPI despite the fact the Consumer Price Index (CPI) is much more volatile. This not only keeps the increase in wages under check but also gives a large cushion to the industry in keeping the wages low. The details of PPI are yet to be known. It is presumed it would help check the wage rise more effectively and rake in industry margins.

However, the workers’ trade unions so far have not accepted the PPI. Some trade unions such as the Bharatiya Mazdoor Sangh (BMS) have expressed their apprehensions and want elaborate discussion before its introduction. At its end, the Government may accept some modification. But its priority is to bring the country into a mode of action. It views industrial and manufacturing growth as an essential to turn around the economy. The workers may have to suffer a bit for this ambitious approach, which is for keeps. ---INFA