The government has withdrawn a critical preference given to state-run companies and government entities that manufacture defence goods, a measure that will help attract private capital to the sector and boost job creation by creating a level playing field.
The government has issued a notification to withdraw the excise and customs duty exemptions enjoyed by the Ordnance Factory Board and public sector units in defence sector. “This will provide a level playing field … by taking away the strategic advantage with PSUs for quoting lower rates in open bids,” a commerce and industry ministry statement said on Monday.
The move addresses a key demand of private sector and foreign original equipment manufacturers (OEMs) such as Boeing, Airbus, Lockheed Martin and BAE Systems, which are actively exploring the scope of future investments in India, the statement said.
It will also send a definitive message to foreign OEMs that India is open to business for defence manufacturing, the notification said.
Foreign firms tying up Indian private players have long complained that the excise and customs exemption gives an unfair cost advantage to state-run enterprises. It is partly due to this preference that foreign firms preferred to tie up with a public sector unit for a defence ministry contract even when it was more feasible to involve a private partner that could deliver faster and would be more efficient.
The withdrawal of exemption will open up possibilities for smaller Indian private players who can be sub suppliers and contractors for larger military contracts. “This is a welcome move to put the Indian private sector and PSUs at par. However, the MoD (ministry of defence) also needs to consider the advantage that foreign companies enjoy as it does not have to pay any import levies for equipment it brings in,” said Ankur Gupta of EY India. The Indian aerospace and defence market is among the most attractive globally as the country is the highest importer of defence items in the world, the ministry stated.
The government has systematically opened up the sector for private investment by raising the cap on foreign direct investment to 49% and rationalising certain conditions.
Almost 60 per cent items required for industrial licence have now been dereserved.