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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