INTERVIEW: "Hopeful of more defence reforms in future"

In an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Deba Mohanty, Vice President of the Society for the Study of Peace and Conflict, said he hoped for more reforms beyond the hike in FDI. Below is the edited transcript of the interview on CNBC-TV18.

Latha Venkatesh: The move to allow 49 per cent of FDI for manufacturing defence equipment received considerable publicity. Have you noticed any other reform measures and procedures that the new government has initiated?

Deba Mohanty: Before I come to that, I must point you to a significant statement that Defence Minister Arun Jaitley made within 15 days of assuming charge when speaking to reporters at the Western Naval Command in Mumbai. He called for ‘more procurement and faster procurement’. We have already seen more procurement. In the last three Defence Acquisition Council meetings, the government has already cleared more than Rs 120,000 crore of purchases. Faster procurement would also mean that the procedural bottlenecks, which have been hampering the country's defence procurement and negatively impacting the military’s modernisation programme, are out on their way.

Apart from FDI, which the government has raised to 49 per cent and even more on a case-to-case basis, they have simplified the licensing and security clearance procedures. They are looking into a whole set of issues, like refinement in the next defence procurement procedure and the defence offsets obligation issues. So, a lot of homework has been done. Therefore, we should be hopeful of further reforms in the future.

Sonia Shenoy: To speed up the modernisation of the armed forces, the Defence Acquisition Council has cleared Rs 80,000 crore worth of projects. What kind of realistic opportunity do you see for private sector players in this chunk, and which companies could benefit from this?

Deba Mohanty: If you look at the last three years, we had three kinds of procurements: buy global, where the technology is not available, so you make outright purchases; you have buy-and-make, you buy something, and then you make it through licence production; or you make products, where procurement is given to private sector to indigenously manufactured. The number of made products has been very low -- less than half a dozen in the last three years, but in the last four to five months, the government has given a thrust to the private sector. For instance, it has indicated two major projects may be awarded to the private sector: the military transport aircraft and the submarine projects. These are huge projects, and I am sure that the existing companies who have been there as component suppliers or as bigger suppliers to the Indian defence sector would certainly benefit.

As far as the companies are concerned, we have half a dozen major companies that have been established players in defence. Although they may not have done any system manufacturing, they have manufactured critical components of major defence items. Godrej Industries has been there, Tata has been an established player, and Mahindra, Larsen & Toubro are major players. As far as this Rs 80,000 crore in which the submarine project has been – will a portion be awarded to the private sector? L&T has a good amount of expertise in submarine and related ship-building components.

So, L&T could be looked at but apart from that, we must remember the other private companies are not defence-dependent companies; and only a portion of their activities are related to defence. So, it will take a while for us, we need not be overtly optimistic, but we can certainly be optimistic for the private sector, which could get some orders in time to come, and these projects have just been announced. Now, the nitty-gritty will start. So, we must wait a while to see where the water flows.

 Latha Venkatesh: You said the defence minister announced that procurement will be faster. Has there been any actual change on the ground, or are you only going by that pronouncement? You said Tata Group—is there any specific company that you will point out as benefiting?

Deba Mohanty: As far as Tata Group is concerned, they have two good subsidiaries: Tata Power Strategic Electronic Division (SED), which is under Tata Power, and Tata Advance Systems and Tata Advance Materials, which are part of the Tata Group. They are not independently listed companies. Regarding your first point, the number of projects cleared - the fact that so many projects have been cleared in the last five months -- worth more than Rs 120,000 crore – is unprecedented in Indian procurement history. So, one can hope that speedy procurement will lead to faster implementation.

Sonia Shenoy: For many years, the key issue in the defence sector has been the strong preference for defence public sector undertakings (PSUs). Do you get a sense that things will be different this time, that a lot more preference will be given to the private sector as well, and which defence PSUs would you back as the frontrunners?

Deba Mohanty: There are only two listed defence PSUs: BEML   and BEL. Both are likely to do exceptionally well because they have good order books. Most of the defence electronic projects are awarded to BEL. At the same time, BEML—which was controversial for some time, though the CBI has made a closure report on that particular truck case—will hopefully again bounce back to get more orders.

 The Indian defence industry has been dominated exclusively by the defence public sector units, so most orders would naturally flow to them. However, if you look at the last ten years of government effort, be it the previous or current government, the essential effort has been to encourage the private sector.

 In 2004-2005, this euphoria was created once the government opened it up to the private sector. The private sector became overtly enthusiastic but needed to examine the complexity of the defence procurement mechanisms and the universe. The defence procurement ecosystem of the country used to be more complex, but now, with many small changes that have occurred in the past few years, things are improving a bit. One need not be overtly pessimistic or overtly optimistic about things that are likely to come. But I think small changes will make a big impact in time to come.

Source: Hopeful of more defence reforms in future: Deba Mohanty, MoneyControl, October 28, 2014.