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.
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.
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.
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