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Sensex 19508.89 Nifty 5857.35 Dollar 45.05 Gold 20435 Silver 43915 Crude Oil ($) 90.94
Investeurs Chronicles
INSIDE
• Current Chronicles
• Cover Story –
Development of
indigenous Defence
Industry in India
• Open Forum – Rupee
Appreciation
• Emerging Markets
• Outlook – Aluminium
• Financial Q
• In Focus – Chindia
e is only 15, 35 and 50 percent as against required equipment profile of 30, 40 and 30 percent
respectively. Currently the bulk of Indian military hardware is sourced from overseas and a
r handful of state firms, but by 2020 the Ministry of Defence hopes to acquire 70% of defence
equipment from indigenous sources. The drive comes as India is increasing its defence budget to
S modernize its armed forces. Defence spending totaled $19bn (£10.6bn) in the last financial year
and is expected to exceed $30bn by 2012. To achieve autonomy in defence supply through
t development of home market defence industry, Government will be required to make not only
serious efforts towards upgrading its defence resources either by developing or procuring defence
o equipment and systems but will also be required to realize that self reliance would remain a pipe
dream if it continued to bank on public sector alone. Even in the new defence procurement
r procedure, there is no mention of role of the private sector and no worthwhile initiatives have been
proposed to integrate private sector’s potential in India’s quest for self-reliance.
y Past Initiatives taken by the government to encourage private participation in defence sector:
Manufacture of components, assemblies and sub-assemblies was thrown open to the private sector
in 1991. With a view to promote defence-industry partnership, the Ministry of Defence (MoD)
constituted six Joint Task Forces in collaboration with Confederation of Indian Industry in 1998.
Consequent to their recommendations, the Government opened defence production to the private
sector in January 2002. It allowed 100 percent private equity with 26 percent Foreign Direct
Investment (FDI). It was a major policy change. Subsequently, the Department of Industrial Policy
and Promotion issued detailed guidelines for the issuance of licence for the production of arms
and ammunition.
The Kelkar Committee, constituted in 2004, made many radical recommendations. The
Government has accepted a majority of them but their implementation has lacked earnestness and
focus. The Department of Industrial Policy & Promotion (DIPP), in consultation with Ministry of
Defence, has so far issued 37 letters of intent for the manufacture of various types of defence
hardware which include armored and combat vehicles, radars, electronic warfare equipment,
Cover Story Development of Indigenous Defence Industry in India
warships, submarines, avionics, military aircraft, safety and ballistic products, armaments and ammunition.
Despite the above measures, there has been no discernible change in the ground situation. Only a handful of India’s top companies are involved in
small value defence contracts. The private sector has to remain content with the supply of some low-tech items to the public sector. Its supplies to
DPSU and Ordnance Factories grossed over Rs. 1200 crores and Rs. 1900 crores respectively last year. Whereas these figures signify the contribution
made by the private sector, they also highlight the fact that the private sector continues to be merely an outsourcing base for the public sector. Foreign
companies still account for the majority of procurement from the private sector in India, with approximately 70 percent of Indian defence
procurement coming from overseas sources. Of the 30 percent of orders placed in India, only an estimated 9 percent is attributed directly to the
private sector.
Reasons for Continued Non-Participation of the Private Sector & Way Forward
A number of defence-industry seminars, conferences and exhibitions have been held in the recent years. Given decades of insulation and prejudices,
this was no small achievement. But old mindsets, complexity of procurement procedures and clout wielded by the public sector have been acting as
major deterrents to any meaningful participation of the private sector. New aspirants, in particular, find the whole regime to be highly forbidding.
There are various policies, procedural and functional issues that need to be addressed. The present process of interaction between the Government,
public sector and private enterprises should be continued, albeit with renewed vigor and purpose. All joint committees should be represented at the
level of decision makers, so that follow up action can be taken in a time bound manner.
Structural Reforms
A representative of the designated industry association should be a permanent invitee to the Defence Acquisition Council, depending on the security
sensitivity of agenda points. His inputs as regards the technical prowess of the private sector will prove invaluable while deciding whether to import
technology or not. Similarly, selected agenda points of Defence Procurement Board, Defence Production Board and Defence Development Board should
be circulated to the industry association for advice. These steps will go a long way in integrating the private sector.
Policy on grant of waivers for deviations from parameters must make a distinction between an Indian and a foreign producer. Easier grant of waivers,
albeit within acceptable limits, to Indian companies will encourage them to commit resources more willingly. Even commercial terms should be made
more favorable to the local vendors as the lower life-cycle cost of indigenous equipment must also be factored in. Presently, the payment terms are
unfavorable to the Indian producers. Foreign vendors are released full payment of their dues on submission of proof of dispatch (against performance
and warranty bonds – each equivalent to 5 percent of contract value). However, Indian companies get payment only after the issuance of inspection
note by the designated inspectors. This may take a few months, thereby increasing the cost of the capital involved. This incongruity needs to be
addressed.
Facilitation Service
There is an urgent need to have a mechanism in place to facilitate the participation of Indian private sector in defence industry. Such a mechanism can
serve twin objectives. First, it could assist in the assessment of a company’s current technical/manufacturing prowess and its potential for the
development of defence products. A directory of credible defence manufacturers should be compiled with details of all assessed companies. This
directory should be made available to all the defence procurement agencies to assist them to identify companies for issuance of tenders. The directory
could also help foreign producers to locate potential Indian partners for collaboration.
Secondly, advisory service could be extended to companies as regards the availability of opportunities for the supply of their current products to the
defence. The service could also suggest defence products which a company can manufacture with marginal addition to its facilities. Related areas for
development/diversification could also be indicated. Thus, this service can acquaint a company with the prevailing business opportunities and guide it
as well.
Conclusion
During the last three years, a serious and concerted effort has been made by the Government to reform and streamline the entire acquisition process.
The Government has come to appreciate the potential of the private sector and wants it to complement the efforts of the public sector.
Cover Story
and joint task forces if their reports are going to gather dust proportions. The public sector cannot handle it by itself. The private
with no follow up action. Technological prowess of the private
sector has to be closely integrated and its potential fully harnessed
sector should be given due recognition and considered a
national asset. The objective of achieving self-reliance will for beneficial absorption of the projected offset business.
remain elusive unless the private sector is duly integrated and
its potential fully harnessed to build a viable indigenous
defence industrial base. The Government has to create an
environment where in the private sector feels assured of just
business opportunities, level playing ground and fair play.
Rupee Appreciation- Two faces of Rupee Open Forum
Inflows from FIIs has crossed the magical Rs. 1 lakh crore mark in
October, 2010 – an achievement by no means less than a gold medal for
the Indian stock market.
finance the higher level of current account deficit. up has to come down. Moreover, the higher the markets move northward,
steeper would be the fall on the downside.
Further, as emerging markets like, South Korea, Thailand and Brazil
impose curbs on overseas funds from developed nations and Korean A lot of Asian currency’s rally is dependent on global liquidity and risk
conflict and Ireland’s debt issue were driving overseas fund into the appetite, any weakening of global sentiment impacts foreign institutional
Indian market. investors who own around 14-15 percent of Indian markets. Global risk
appetite is more destabilizing for the rupee because, unlike other Asian
The rupee appreciated 4 percent this year as capital inflows poured a countries, India needs capital flows to fund the current–account deficit.
record $39 billion into Indian shares compared with last year’s $17.45
billion. Coal India Ltd. IPO pushed a major part of FII inflows in the India. Indian rupee was the worst performing currency among the 10 most-
Just about every part of the issue was oversubscribed, there was record traded currencies in Asia excluding Japan in the month of November.
participation from FII, who put in bids for nearly Rs 1.2 lakh crore worth China’s Yuan was little changed in the period at 6.667 a dollar, while
of shares.
Open Forum
European debt crisis will not be the only reason for the rupee to go down. A
surge in crude oil prices to the highest level in two years will widens current
account deficit and will also threaten
the rupee’s rally. It touched $90 a barrel on Dec 7, 2010, a level not seen since
Oct 2008.
Crude oil imports by Asia’s second fastest growing major economy surged 41
percent in the first 10 months of this year to $82.1 billion according to data
compiled by Bloomberg.
Whenever oil prices go up, the risk of the current account deficit widening
increases quite significantly. Rupee is expected to continue underperform as the
FII inflow shortfall is pretty much the main point and oil prices are definitely at
risk. Historical data supports this view. The rupee dropped to 8 percent in the
Taiwan’s currency slipped 0.2 percent to NT$30.85. Reason third quarter of 2008, when crude oil prices rose to a record $147 a barrel on
behind is, global funds pulled money from Indian shares in the July 11 of that year and in this quarter Indian currency is little changed.
last week of November since May because of the worsening debt
FII have reduced their exposure to India. India’s share of FII inflows to Asia
crisis in the Europe.
(excluding Japan) has declined from around 50 percent in the year till date to 35
When the external environment is bad, countries like India with percent in the week till date. South Korea, Taiwan and Thailand have gains at
low liquidity would get sold off first and threats the efforts to India’s expense. The share of FII inflows for the week-till date for these countries
offset Asia’s worst current-account deficit by attracting has increased to 34 percent, 20 percent and 11 percent from 29 percent, 12
investment. A rise in global risk aversion could lead to strong percent and 3 percent respectively. Given the global liquidity environment,
outflows from India. Reversal of flows remains one of the key
risks to Indian markets as the possibility of a double-dip
recession in developed markets cannot be ruled out.
The Indian currency slid 3.3% till November end, the most since
May.
Copper theft costs SA R5bn a year
Emerging Markets
Copper theft is costing the economy an Brazil Securities Commission Fines Credit The paper said the volume of the suspicious
estimated R5bn per year, the SA Chamber of Suisse For Insider Trading transactions was more than double the 57
Commerce and Industry (Sacci) said as it Brazil's Securities Commisssion CVM said it is trillion rouble figure reported for the same
released its first copper theft barometer in an fining Credit Suisse Group (CS, CSGN.VX) 26.4 period of last year and is over three times
attempt to reduce the costs of the crime on million Brazilian reais ($15.35 million) for Russia's nominal gross domestic
the economy. insider trading and influencing local markets. product. Russia's central bank expects a
The R5bn includes only the replacement value Fines were imposed on Credit Suisse capital outflow of $22 billon in 2010. In
and does not take into account security or International and on Credit Carteira Propria, a September, the central bank warned that the
labour costs, said Drodskie. It also has an local Credit Suisse investment fund, for their number of suspicious transactions to
adverse impact on the economy through loss involvement in sale in the control of energy accounts outside the country was on the rise.
of productivity, negative investor perceptions transmission company Terna Participacoes SA to Investment-grade status still some way off
and poor service delivery, among others. energy generator Companhia Energetica de for Indonesia
Minas Gerais SA (CMIG4.BR), or Cemi. The bank's Indonesia has made significant strides
SA's current account deficit widens
involvement in the transaction caused an towards building the political institutions
South Africa's current account deficit widened
unusual increase in Terna's trading volumes necessary for the country to achieve
to 3% of gross domestic product (GDP) in the
and share prices, CVM said in a report emailed investment-grade status.
third quarter of the year from 2.5% the
to Dow Jones Newswires. "Generally, investment-grade sovereigns are in
Reserve Bank said. In its December quarterly
bulletin, the Reserve Bank said South Africa's Russia reports $3.8 trillion in suspect charge of their own fate, meaning they are
trade surplus with the rest of the world had transfers: report able to absorb exogenous shocks by drawing
increased significantly in the third quarter of Russian financial institutions reported 120 on entrenched economic, political, and
2010, as terms of trade improved and trillion roubles ($3.8 trillion) of suspicious institutional strengths," S&P credit analyst
volumes of exports and imports increased. transactions to the anti-money laundering Agost Benard said in a statement.
But this was neutralised by a widening in the watchdog in the first nine months of 2010. Indonesia’s foreign currency debt is rated BB
deficit on the income, services and current Russian businessmen sent hundreds of billions (with a positive outlook) by S&P, which is two
transfer account, partly because of lower of dollars abroad in the years following the 1991 notches below investment grade. At the
receipts from foreign tourists after the end of fall of the Soviet Union, though such a high beginning of this month, rival agency Moody’s
the 2010 Fifa World Cup hosted by South volume of suspicious transactions could fuel assigned a positive outlook to Indonesia’s
Africa in June to July. fears of increased capital flight and money foreign currency debt, which it rates Ba2
4. Which country's foreign market is known as Chinese Premier Wen Jiabao's three day visit to India from 15-17 December
'Rembrandt Market'? 2010 is projected to be a milestone in Sino-India relations, which similar to
other high profile visits in last one month, is primarily aimed at expanding
5. Which leadership guru coined the term
bilateral trade .However, China maintains that it also hopes to strengthen the
“Transformational Leadership”?
high level contacts to enhance strategic mutual trust and build consensus.
6. With which form of economy is the term “Laissez-
Heading the biggest ever delegation of 400 businessmen, Wen is expected to
faire” associated?
sign deals worth 20bn US$ with India. The booming bilateral trade which is on
7. The Hollerith Corporation changed its name to course to touch $60 billion has already crossed $49.84 billion this October
something iconic in the future. What is it? with Indian exports amounting to $17 billion, while China continue to
dominate with 32.87 billion worth of exports.
8. Which Financial Giant has Rocks of Gibraltar as its
logo?