The Indian defence space is set for a wave of change. One of the sector’s frontrunners, Larsen & Toubro, is looking at a defence order book size of ₹50,000 crore in three years, bolstered by the Make in India programme. Bloomberg TV India spoke to L&T Group Executive Chairman AM Naik.
Make in India is luring foreign firms to set up manufacturing units in India. Are foreign defence firms willing to share their technology in joint ventures where they don’t have a majority stake?
I think there is a lot of myth in it. If you think foreign companies are going to come and put up an aircraft plant, hardly anyone will come here. They are not going to do so. This is where you need money. That is where you need lots of investment. If you look at shipyards, where a lot of investment is required, it is all done. I think India has more than necessary capability and capacity in the Navy and its manufacturing. So what you need is stechnology, programme-by-programme. And when the government really comes out with a policy of Make in India, what you do is you tie up with the best firms in the world you want in that programme. You take an example of the six submarines, the tenders of which are likely to be floated sometime before June. What is happening now is the qualification is going on once again. And I would say we will be selected in any case in terms of qualified companies. Maybe others too will get selected, but we will be selected. Similarly, there are three or four foreign companies which are showing a great deal of interest and they are willing to tie up with Indian companies. And, therefore, two or three different companies will tie up with two or three different shipyards if there is a competitive bidding. So where is technology? Technology is coming with the programme. There is no point of having a technology if there is no spend on it or there is no programme for it.
All the technology tie-ups are now programme-oriented. Though we have increased FDI limit to 49 per cent in defence offset, I have not seen anybody wanting to come. Even if tomorrow you raise the FDI limit to more than 50 per cent and make a huge investment, they (foreign firms) will use Indian engineers as they are using them now in outsourcing centres — as a low-cost engineering centre. They do it already. They have their own captive centre with several thousand people who are working in Bangalore, Hyderabad and different parts of India. And they source them. But they do not pass on the technology to them.
If you are to suggest a better policy for defence procurement, what is it that you are looking at as the main change that should come to facilitate investment in defence, make it more transparent and ensure a level playing field?
In my view, already the new government has made it as transparent as one wanted it to be. And I think more and more fine-tuning is being done. So, I think there will be fair play for everyone. The second thing is that some of these programmes are taking a little longer time. They have to shorten the time. For example, the gun contract was approved nine months ago and is still taking a year before it can be finalised in the contract. Procurement policies and procedures have to be such that it can get done within three months after the gun or any military equipment is accepted.
Where there is a great deal of pain in the private sector is the foreign exchange variation, which has been there for some years. We have been representing with the government on this. If you import any defence equipment, you pay 100 per cent in foreign exchange. So you are going to pay at the rate at which the equipment will be finally shipped. The moment it is given to Indian private sector and if you have 50 per cent import such as raw materials and other components, something not made in India initially, it is paid in rupees. So two years from now, when the component comes, if rupee is at 67 or 68 to a dollar instead of 65 when the agreement was signed, the company has to pay an extra ₹3 (for the exchange rate variation). Now there is a big disparity.
What if it is the other way round, when you end up gaining in forex?
Well then you have to see the history and if it is the other way round then we don’t mind and we have to reduce the price.
Has the Centre given any assurance that it is looking at this point?
The government has said that they are looking into it but it has not happened so far and that is something which is a big pain today. Also, there was a time when government-owned companies were getting exchange rate variation but not private companies. So the disparity is there and PSUs are fully protected anyway. Private sector was the only sufferer. So I hope it gets resolved faster.
Do you agree with the government nominating the OFB in the FICV programme?
I don’t even know whether it is really done as far as we are concerned. We are still ready and will participate in FICV unless the programme is called out from tendering or we will only give it on nomination. But to my knowledge so far it doesn’t matter.
But do you think the government is not being biased to the private or to the public sector — which used to be the case — and treat the private and public sectors alike?
Slight difference…earlier the government was only supporting the public sector and not the private sector. Now there is a fair play between both public sector and private sector, but at the same time they have to make sure that the factories which they have put up are also kept running. Even this government has given ₹35,000 crore worth of ships on nomination to Hindustan Shipyard, which is virtually absolutely sick. Whether finally the ships will come out or not time will tell. So to that extent I would say it could have been put up for a competitive bidding.
When we were talking about your defence plans, what kind of orders are you looking at bagging?
First let’s take the Navy side — we are all geared up to manufacturer submarines because we do nuclear submarines anyway. So we are ready for the manufacture of warships. We have a design centre for the warships, so we are far more competent and ready to serve the Navy. There are landing platforms bid over the next two-three months. These are where all the helicopter will be landing. We will think we will be one of the beneficiaries or we will possibly have a good chance to win. So the whole range of Navy we can do.
If you have to build in future a big aircraft carrier — which is what the plan is — it will take five to 10 years. By that time we will build a facility but other than that everything else is covered.
What is the total investment that you have made already? What is the minimum amount that you are going to spend over the next few years?
I think we have spent for the next few years maybe more than ₹5,000 crore already and what we may have to spend may be around ₹500 crore over some time now.