Union Budget 2017: Why India should follow China’s example for defence allocation
Asked about the defence industry’s expectations from Finance Minister Arun Jaitley, Mehndiratta says that investors would like that the government allows at least 51% FDI in the sector.
India should follow China's example and shift a greater share of defence allocation to capital and investment in technology, says Gaurav Mehndiratta, Partner, Tax at KPMG in India.
Budget 2017: India should follow China’s example and shift a greater share of defence allocation to capital and investment in technology, says Gaurav Mehndiratta, Partner, Tax at KPMG in India. Mehndiratta advocates introduction of tax holiday for defence manufacturing in Budget 2017 to increase private investment. He believes that defence allocation will see an increase this year. “Historically in the last few years defence allocation has been going up at a compounded growth rate of 10%. I expect that is the way the Budget will be this year as well,” he tells FE Online in an exclusive chat.
Pointing to China’s case, Mehndiratta says, “…but where we (India) need to look at differently is take the Chinese example. Today, India’s defence budget is 40% capital and 60% is revenue budget. China is going the other way. China is reducing its revenue budget because as everyone knows in the future warfare is not going to be on land, it is going to be fought with technology and that’s the difference that the Chinese are bringing about.” “India needs to look at things in that context and increase that percentage of capital allocation to beyond 40% and focus on technology,” he advises.
Asked about the defence industry’s expectations from Finance Minister Arun Jaitley, Mehndiratta says that investors would like that the government allows at least 51% FDI in the sector. “This government has increased FDI in defence limit to 49% from 26% and also brought in automatic approvals, but even that hasn’t helped bring in much investment on board. Most countries have restrictions on exports of defence equipment, particularly transfer of technology. Why would a firm then transfer technology if it doesn’t even hold the controlling stake,” he asks. “Foreign investors need majority control. If you see the last few Budgets there have been announcements on FDI, so from the industry standpoint, particularly the foreign investors there is an expectation that some things may be announced.”
Elaborating further on the need to promote foreign investment, he says, “India is the largest importer of defence equipment in the world. Modi government has been talking of ‘Make in India’ especially from the perspective of defence. It is one of the key areas, and rightfully so. So, in the last few years the policy has also moved in that direction. Last year the revised DPP (Defence Procurement Policy) was announced at the Defence Expo. They (government) gave an impetus to the ‘Make in India’ project. Out of the 6 schemes under which the government can procure, ‘Buy and Make in Indian’ was given the first priority. But, what the government will have to see is that it is okay to give preference to Indian, but Indian companies don’t really have the technology or the commitment to investment.” “From a defence manufacturing standpoint, getting investment and technology are the two important stand points,” he adds.
But what about those who say that defence manufacturing is also about national security and hence foreign investors cannot be given a controlling stake? “I think it is a simple argument. Today you are procuring from overseas. If India goes for war then we would be better of having some production facility here owned by a foreign company than having it abroad. Today telecommunications is more sensitive than having a defence manufacturer here because the former controls a lot of data transfer,” Mehndiratta says.
And finally, how far are we from PM Narendra Modi’s dream of India being an exporter of defence equipment? Mehndiratta breaks this up into two buckets – technology and manufacturing. “I think on the technology front we are very good otherwise and if some of our larger IT companies were to get into this fray by partnering well with the global organisations – that can easily be done,” he opines. “But on the manufacturing side, I think it is going to take much longer than the 7-8 year horizon that PM Modi is looking at. The gestation period is huge and the challenges are huge,” he says. “We have not even started seeing 1% of what is required from ‘Make in India’ to cater even domestically. That dream of exporting will take some more time,” he concludes.
(Source : financialexpress.com)
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