Budget 2017: Privatise defence PSUs to fire gains

India needs a modern armed force with deep-strike capability on land, sea and air; and the ability to withstand and repulse unconventional attacks involving cyber, space, urban and nuclear-biological-chemical weapons.

Nearly 70% of India's defence equipment is imported. The balance 30% produced locally uses imported components. Given that nearly 50% of our defence equipment is nearly obsolete, large-scale imports is not a viable solution. The focus has to be 'Make in India' and not just as a lofty slogan.

The defence Budget needs to be enhanced from Rs 2.49 lakh crore in FY16 to Rs 3-3.25 lakh crore in FY18, to reflect India's security environment. Nearly 65% of the defence Budget is spent on operational expenses. This needs to be gradually reduced to free more funds for capital investments, which requires a mindset change, a planned reduction in conventional forces and increased focus on technology-oriented warfare.

Domestic production of defence equipment should be accorded the status of 'deemed exports'. All applicable taxes (customs, excise, VAT, service tax, octroi, etc) and corporate tax on production of defence products should be zero-rated for a period of ten years. Exports should be facilitated with monetary incentives and faster clearances.

Defence PSUs like HAL, BEL, HSL, GRSE, etc, need to be privatised and made to compete for defence orders. This would bring in greater hunger, efficiency and competition for taxpayers' funds.

FDI limit in defence should be raised to a 100% and subjective conditions like 'modern technology' should be dropped. Even not-so-modern technology related to say firearms, ammunition or body armour that can find buyers in the Indian or global market should be welcomed. We can become selective say, ten years down the line.

While the Defence Acquisition Council (DAC) has been proactive in approving many long-pending procurement programs, not all have converted into actual orders, hurting industry sentiments and the forces' morale. Many technologies get obsolete or costly by the time the Ministry of Defence (MoD) is ready to sign on the dotted line. The government should announce its resolve to cut short the traditional 7-8 year procurement cycle to four years or less.

This may require dropping long-held prejudices and engaging private sector consulting firms with requisite knowledge in defence, manufacturing, supply chain, procurement and contract negotiations, etc, to assist MoD in procurement. Leading countries like UK, Australia, Canada, Germany, etc, have done this for decades, with significant benefits.

Allocation to R&D needs to be increased to 8% of the defence Budget, from 5% currently. Defence Research and Development Organisation should be made to compete with the private sector for funds. Around Rs 100 crore should be allocated to support defence-related start-ups under the Startup India programme.

The concept of 'strategic partner' will encourage large private sector players to commit to long-term investments in defence manufacturing against an assured order book. It's the same in the case of large-scale infrastructure projects like power, highways, ports and airports where contracts run from 40 to 99 years. Budget 2017 should announce 2-3 large procurement programs for strategic partners.

India's defence preparedness and technological level need a significant makeover. The time to start is now.

The writer is partner and India head of aerospace and defence at KPMG.
(He was assisted by Ujwal Deole, manager, aerospace and defence, KPMG in India)