Hi Friends,

Even as I launch this today ( my 80th Birthday ), I realize that there is yet so much to say and do.

There is just no time to look back, no time to wonder,"Will anyone read these pages?"

With regards,
Hemen Parekh
27 June 2013

Friday, 24 June 2016

In defense of FDI in Defense



Yesterday , Government announced 100 % FDI in manufacture of defense equipment

Better late than never  !

But some politicians / economists / industrialists are upset

They thinks ,this is some kind of a " Sell Out " to the western imperialists / capitalists  !

On the other hand , the government says 100 % FDI  will create more jobs in India

Before taking sides , let us look at the current scenario in defense equipment :

#  India's Military expenditure in 2015............... $ 51.3 Billion ( 2.3% of GDP )

#  India was No 1 importer of major weapons ( world-wide ) in 2010-14 period

#  India accounts for 14 % of global arms import

#  India imports nearly 60 % of its defense equipment

#  Cost of ex-import defense products is 3 to 5 times the indigenous  equipment

#  In next 7/8 years, India will buy defense equipment worth $ 130 Billion

#  With current FDI level of 49 % , only Rs 6 crore have come in during past 2 years !


Now , when we import a defense equipment for an import value of Rs 100 / - , what is its break up ?


My guess is :

*  Material cost ( incl Bought out Components )..... .... Rs      45

*  Labour cost  ( salaries + wages )....................... ....Rs     15

*  Finance cost ( interest on fixed + working capital )....Rs     10

*  Overheads ( Sale / Mgmt / Depreciation   etc )......... Rs     20

*  Distribution / Commissions  / Freight / local taxes  ....Rs     10

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TOTAL...................................................................... Rs  100

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All of these costs are incurred by Foreign Suppliers in their OWN countries

For India , All of these costs , are foreign exchange out-go , enabling those Foreign Suppliers to keep their ,

*   OWN factories in their OWN countries , humming

*   OWN workers employed
 
*   OWN local suppliers of components / raw materials busy

*   OWN bankers earning bonuses

*   OWN labour leaders demanding higher wages

*   OWN politicians hanging on to power

*   OWN retail shops crowded with customers.... etc


But what will happen when these ( so far ) imported equipments start getting manufactured in India ?


Here is a partial list :

#   Foreign Companies will readily bring their latest technologies without worrying about " giving away " secrets !

#   Whatever they produce locally but fail to " sell " to GOI , they will be forced to export - a big boost  to export
     earnings . With cost arbitrage , they might even make India , their Global Export Hub

#   Indian Armed Forces dependence on critical imported " Spares " will go down and supply reliability will improve

#   Most of the " Costs " mentioned above , will get incurred locally - boosting Indian economy,  not foreign !

#   Government will get same products much cheaper , enabling our Defense Budget to buy more

#   Thousands of local Component manufacturers will spring up in MSME sector of our economy

#   Thousands of Indians will get jobs

#   Our negative trade balance will reduce

#   Given our current DPP ( Defense Procurement Policy ), cheaper , locally manufactured defense equipment will
     stand a better chance of competing with the imported equipment . This will motivate many more of the current

     Foreign Suppliers to set up manufacturing bases in India , in order to remain price-competitive

#   There will be positive fall out effects on DRDO / ISRO / Govt Research Laboratories

#    Last - but not the least - this will make Indian Defense equipment manufacturers " Efficient / Competitive " !



But replacement of the term , " State-of-the-art " technology with " Modern " technology , may not suffice  !


No doubt Commerce Minister , Madam Nirmala Sitharaman is aware of this since she was quoted ( Business Line / 21 June ) to say :


"  The thought process behind this was that we are spending too much time in defining things and understanding what exactly is state-of-the-art.

So, instead of keeping it verbose and making too many things binding us down, by using this one word  'Modern', we hope to bring in technology that we require "


Let detractors cry hoarse


There is no need to defend 100 % FDI in Defense !

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22  June   2016


www.hemenparekh.in / blogs 

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