Defence indigenisation under Budget squeeze - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Wednesday 6 March 2013

Defence indigenisation under Budget squeeze

Indigenous defence projects allocated just Rs 1 crore, down from Rs 89 crore last year

By Ajai Shukla
Business Standard, 7th Mar 13

The Defence Budget for 2013-14 starkly underlines the gap between the minister's proclamations about the need to indigenise defence equipment on the one hand, and the money his ministry allocates for developing equipment on the other.

On February 20, buffeted by allegations of wrongdoing in the Ministry of Defence (MoD)'s Rs 4,000-crore purchase of VVIP helicopters, Minister A K Antony declared the indigenisation was essential to eliminate corruption in arms procurement.

Just eight days after, it was clear this would not be pursued seriously, at least during the coming financial year. In the Defence Budget for 2013-14, the 'Prototype Development' head, from which indigenous projects are funded, was allocated just Rs 1 crore, down from Rs 89 crore in the previous year.

The allocations for 'Prototype Development' are made under Major Head 4076 of MoD Demand No 27, Capital Outlay on Defence Services.

This allocation is intended to fund 'Make' category projects, i.e. defence systems developed by consortiums led by Indian companies, with the MoD financing 80 per cent of the cost. Currently, the MoD is processing two 'Make' category projects: a Tactical Communications System (TCS), a mobile communications backbone network for the field army; and the Future Infantry Combat Vehicle (FICV), an armoured, tracked vehicle that carries infantry into battle.

Last year, the Rs 89 crore allocated for 'Prototype Development' exactly matched the payout to be made for the TCS project. But MoD has not disbursed a single paisa of this. The amount will be surrendered on March 31.

"The non-utilisation of last year's allocation, and the allocation of just Rs 1 crore for this year, makes it clear the MoD is paying lip service to indigenisation. Clearly no 'Make' category projects will see any progress in the coming year," says a chief executive officer (CEO) of a company engaged in the defence business, speaking anonymously.

Business Standard has learnt the MoD's acquisition wing has handed the national security advisor a list of 100 defence items that can be pursued indigenously as the 'Make' category projects. But there has been no movement on these projects, either in the MoD or the National Security Council.

Further, the Ministry of Finance (MoF) has ignored the recommendations of the Federation of Indian Chambers of Commerce and Industry (Ficci) and Confederation of Indian Industry (CII) that defence manufacturing be given tax benefits under Section 80-IA of the Income Tax Act, which is provided to long-gestation, capital-intensive industries such as power.

This compensates domestic industry for the high cost of capital in these long-gestation industries. Under Section 80-IA, the profits that eventually accrue are allowed a five-year tax holiday. Ficci and CII have argued that defence manufacture, a highly capital-intensive industry, should be allowed this incentive. The Budget has entirely ignored this recommendation.

"It is disheartening that the government has again ignored the important issue of extending Section 80-IA benefits to investments in defence manufacturing. I hope this omission and the cut in the Prototype Development allocation is an aberration that will be corrected before the budget is approved," says Rahul Chaudhry, CEO of Tata Power (strategic electronics division).

The MoF and MoD have also ignored a Ficci recommendation that companies doing defence research and development (R&D) be allowed tax incentives under Section 35AB. This provides 200 per cent tax benefit for money spent on defence R&D.

The industry argues that defence R&D uses the same people and infrastructure that earn tax-exempt dollar income when deployed in streams such as design engineering services. With no tax exemption under Section 35AB for defence R&D, domestic industry would prefer to deploy personnel in fields where tax incentives exist.

Despite urging indigenisation, Antony apparently believes private companies themselves should invest the enormous sums that go into defence R&D. On January 31, speaking to an industry gathering here, Antony called upon the Indian defence industry to forsake its "miserly attitude" towards R&D spending.


  1. A shameful MOD and a shameful Minister. I wonder what sins India has done to deserve such leaders including those currently ruling this country.

  2. classic case of... right hand... doesn't know... what the left... is doing... have an itch... on your back... scratching somewhere else...

  3. Defense indigenization under such budget squeeze can be a hoax at the maximum.


  4. Defence indigenisation is a fetish that doesn't make any sense for anyone other than paranoid rogue regimes. The rest of the world can benefit from something called 'comparative advantage'. The fact is that America dedicates vast sums of money to developing the most sophisticated and lethal weapon systems in the galaxy. Rs1 crore or 89 won't make a difference in bridging that technological gulf that separates India's and America's defence industries. India and her Jawans have has well served simply buying arms from established reputable Western defence companies than throwing money down a well trying to duplicate Western technology.

  5. @ Anonymous 8 March 2013 06:36

    How stupid an argument can be?
    Basically You are saying because we can not catch up with America easily, we should give up and not spend anything on R&D at all. By that means when India started its space program (America was well ahead of us and still is) that was stupid. Well, you have been proved wrong by ISRO. m0r0n.

  6. 1 Crore, one cant even buy decent EMP shelter required for TCS with this amount , leave alone technologies required. And MoD expects this project to be role model for all others. Such an tragedy for the teams working on this project from xx years. Companies should take call to scrap this project and quit support in protest.

  7. @Int64

    I did not say that India should not spend on R&D. India indeed should spend on R&D but efficiently, and that means not duplicating technology that is already on sale to India. There is no need to re-invent the wheel unless you are a pariah communist/terrorist rogue state that the West won't sell modern weapons to. India on the other hand is a democracy in good standing with the West. India can buy any weapon the West is willing to sell. Indeed, Western countries are falling over themselves to beat a path to your door, to ingratiate themselves with India because India buys huge quantities of foreign weapons! The MMRCA alone gained India soft power as well as hard power!


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