The unprecedented country-wide landslide victory for Narendra Modi's Bharatiya Janata Party (BJP)-led coalition was positively received by many foreign firms looking to invest in the Indian market, with its promise of empowering the bureaucracy by making it smaller and more efficient. Six months on, was it hype or reality?
The overwhelming theme in defence is captured by the launch of the “MAKE IN INDIA” campaign and an increase in FDI to 49% for foreign firms investing in the defence market. The PM refers to FDI as “First Develop India” which captures the overall intent build it first in India and when this is not possible to do so, then go overseas. In fact this has been Indian Government policy for the past decade, but to date no government has been able to affect any significant impact in this area.
For those foreign firms looking to benefit from India's future defence spend, the strategy has never been clearer; partner with a local Indian company, establish a partnership or joint-venture, and qualify under the “MAKE INDIA” procurement category. To make this strategy successful there are two fundamental requirements:
- Suitable Indian partners willing to establish themselves in the defence sector and make the investments required over the long-haul. The choice of Indian partner in theory is between the government owned DPSUs and the emerging private sector. The emergence of the private sector in defence, although a stated goal of the previous government has failed to take off due to the strength of DPSUs' lobbying power. The reality for foreign firms is that if you want to partner with an Indian firm to make a “fully formed bullet”, the only choice is the Ordnance Factory Board (OFB) and, where the private sector is allowed to participate they are the preferred choice. The choice is simple; where allowed, find a suitable Indian private sector partner. The private sector understands the commercial realities of establishing a joint relationship and can move ahead with plans in a timely fashion. TATAs have to date the lion's share of foreign JVs, being seen by foreign firms as the most suitable partner due to their nationwide presence and ability to invest in JVs. Behind the TATAs come the Mahindra, L&T, Bharat Forge, etc. Although Indian industry was against the raising of the FDI cap in defence to 49%, the commercial reality of making a 74% investment vs. a 51% investment will show that many more foreign firms will be willing to partner and establish with Indian firms and vice-versa. More Indian firms will, therefore, see their risks reduced by having a foreign firm invest more in the country.
- Business i.e. an opportunity pipeline and contracts awarded in a timely manner. This is not just confined to Indian opportunities, but also international opportunities. To an extent this is a bit of a “chicken and egg” situation since foreign firms want Indian opportunities and Indian firms want export/international opportunities. The new government can alleviate this dilemma by delivering on the promises it made with respect to defence. These were to tackle the crippling defence procurement bureaucracy and to free up the back-log of defence orders and progress new procurements. The continued delay over the issue of the MAKE FICV Expression of Interest (EoI), which is under the Ministry of Defence's full control, will only erode the new government's credibility if it is not gripped.
One of the key measures of success in defence is how efficient the procurement process is. The last six months have not seen a single defence contract signed. If there is no movement on this and some contracts signed soon the impression will be that it is business as usual and nothing has changed at all. We look forward to seeing some positive change in the next six months.
So what next for foreign firms act now or wait? It is believed that the next 2-3 years will be the most favourable for defence firms in India and that the new government will address the issues which are holding back procurements etc. The strategy for foreign firms is no longer a mystery; it is very clear what has to be done - partner with Indian industry and present your solution as Indian. The challenge will be internal to get your company's executive team to believe it. The new government has started off well with some positive changes and actions, but its performance over the next six months will determine if foreign firms should act now or continue to sit on the side-lines and watch as TATAs announce yet another JV/partnership.
In order to succeed it is time for action from all quarter's, the new government, Indian private sector and foreign firms, which have technology to share with India.