July 8 (Bloomberg) -- India’s aim to procure 75 percent of its defense supplies locally in a decade is in jeopardy as companies struggle to navigate rules on manufacturing and selling weapons.
Billionaire Baba Kalyani’s group, which plans a prototype of India’s first privately-built Howitzer gun next year, will be unable to test it as regulations prohibit firms from using military facilities, said Amit Kalyani, executive director at Bharat Forge Ltd., the flagship firm of the group. Mahindra & Mahindra Ltd.’s proposal for a venture with Rafael Advanced Defense Systems Ltd. was denied by the government, which didn’t give a reason for the rejection.
“This is not rocket science,” Kalyani said in an interview. “We need to just study what other countries have done. There are examples of a strong partnership between the defense establishment and the private industry.”
The world’s largest importer of arms last year may miss its target to boost local supplies as nebulous regulations threaten to derail Kalyani, Larsen & Toubro Ltd. and Mahindra’s plan to tap the annual 867.4 billion rupee ($14 billion) market. Rules don’t specify the type of weapons companies can build or the restriction on partnerships.
“There is a lot of talk about encouraging private industry in defense,” said Deba Ranjan Mohanty, chairman of Indicia Research & Advisory, a New Delhi-based defense researcher. “When a state decides to open up its defense production, it needs to devise a strategy to see it through. Otherwise, it’ll all be empty talk.”
India in 2001 allowed local companies with up to 26 percent foreign ownership, to bid for arms contracts. A decade later the country revised its policy on military production to reserve certain manufacturing for Indian companies.
Still, rules to preclude private manufacturers from using defense testing facilities means Kalyani won’t be able to use amenities such as the Pokhran range, the country’s largest field firing area. Without testing products, companies won’t be able to bid for contracts, said Mohanty.
A venture between Larsen and Cassidian Ltd. formed in 2011 to make avionics, radars and electronic warfare equipment is still awaiting industrial license. Larsen spokesman Deepak Morada declined to comment. Mahindra in an e-mail declined to comment on the government’s rejection of the company’s partnership with Rafael.
“We’re looking at this issue,” said Satish B. Agnihotri, director general of acquisition in the Ministry of Defence. “It’s not just Kalyani, there may be others too who are developing products and we may not have a method of taking that into the procedure.”
In February, V.K. Saraswat, then adviser to the Indian defense minister, said the government will restrain private ventures pertaining to highly security sensitive areas. He didn’t elaborate.
Any change in rules may be slowed by officials’ sensitivities over corruption scandals in previous purchases, including one that helped drive the ruling Congress party to defeat in 1989 elections.
India ordered a federal investigation into allegations of graft in the purchase of 12 helicopters from Italy’s Finmeccanica SpA, claims that led to the Feb. 12 arrest of the Italian company’s chief executive officer and which could further slow future deals.
The Kalyani Group has invested 1 billion rupees in its defense venture that’s building artillery guns, armored vehicles and unmanned ground vehicles. Bharat Forge has separately formed a venture with a unit of Elbit Systems Ltd. to bid for Indian Army’s contracts including for towed guns, mounted guns and upgrade of 130 millimeter artillery guns.
Profit at Bharat Forge, India’s third-largest auto components maker by market value, fell 40 percent in the year ended March 31. The company’s shares, which have fallen 13.4 percent this year, rose for the first time in five days to 218.30 rupees, or up 1.3 percent, at the close in Mumbai.
Local private companies account for 10 percent of India’s defense spending, mostly as sub-contractors to state-owned firms that contribute about 20 percent, according to a 2012 report by Boston Consulting Group Inc. Foreign suppliers control the remaining 70 percent of the supplies.
“It’s been 12 years since the sector was opened up, first for foreign direct investment and then to domestic manufacturing,” said Nidhi Goyal, director of the aerospace and defense team at Deloitte Touche Tohmatsu Ltd. in India. “But there’s been no major contract awarded to the private sector. Then what’s the benefit for the private investor?”
India targets to raise the proportion of defense equipment produced at home to 75 percent from about 30 percent in the next 10 years. Asia’s third-largest economy plans to spend 2.04 trillion rupees in the year that started April 1, from a revised 1.78 trillion rupees last year on defense. Of the total expenditure, 867.4 billion rupees will be used to modernize its forces, up 25 percent from a year earlier.
“A textbook case of how things should be done is joint ownership of programs,” said Kalyani, who’s building the Howitzer gun under the code name Operation Sunshine.
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