Industry ministry alleges Department of Defence Production deliberately holding up approvals for private players

NEW DELHI: The commerce and industry ministry has accused the defence ministry's production arm of holding up the private sector's participation in manufacture of defence equipment. The ministry has alleged that in its zeal to protect the interest of public sector enterprises under its administrative control, the Department of Defence Production is discouraging localization and, in the process, imposing the burden of large-scale defence imports on the national exchequer.

The Department of Industrial Policy & Promotion (DIPP), under the commerce and industry ministry, issues industrial licenses for manufacture of defence equipment, but only after the proposals have been cleared by the Department of Defence Production.

DIPP has now approached the Cabinet Secretariat asking it to take away the department's power to clear the proposals.

"A letter has been sent to the Cabinet Secretariat by the DIPP underlining the conflict of interest in the approval process for the licenses and proposing that the responsibility be given to the Department of Defence," a senior official told ET.

The Department of Defence Production overseas 39 ordinance factories and nine defence PSUs. The Department of Defence deals with the three services and various inter-service organisations.

The official said the Department of Defence Production has been sitting on close to 50 applications for industrial licenses, some of which date back to March 2008.

"Over the last few years, the department has been refusing to recommend cases for industrial licenses," the official said. "In some cases, they have been refusing on the ground that the investments are meagre and the defence PSUs should be allowed to manufacture the equipments," the official said.

DIPP has argued that the department's reluctance to recommend licenses was preventing private firms from securing defence procurement orders. As a result, they are not able to invest in capacity creation and pitch for larger orders, it said.

The defence ministry refused an official comment for this story. But a senior official said the government had allowed the private sector in defence production as it wanted to attract high-end investments in the sector.

"There is no point in allowing them to invest in low-end products that could be easily catered to by the PSUs," the official said on condition of anonymity.

The government had opened up defence production for private participation in 2001. Localisation to reduce imports was cited as one of the key reasons behind the move. At present, up to 26% FDI is allowed in the sector.

The extent of localization was 60% in 2008-09, the year for which data is available. India had imported defence equipment worth 10,157 core in that year.

DIPP has issued 155 letters of intent, or licenses, to Indian companies for setting up defence industrial units since 2001. A number of joint ventures have also been formed between Indian and foreign companies.

Some of India's leading companies, such as L&T, Mahindra & Mahindra and Nelco Limited, are now engaged in the manufacture of defence equipment.