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DEFENCE INDUSTRIAL PRODUCTION CORRIDORS: HOW CRITICAL IS THE REQUIREMENT?

That defence production in India, especially by the private sector, is at a sub-optimal level is undeniable but any notion that this is on account of the absence of industrial corridors is questionable. The need for such corridors does not figure in the current discourse on defence. The author deliberates—

While delivering his budget speech earlier this year the finance minister announced out of the blue that the government has decided to develop two defence industrial production corridors in India. This came as a total surprise as there has been no demand for developing such corridors and, in any case, there are more pressing issues concerning defence and security of India, including inadequacy of budget outlays, which warrant greater and immediate attention but did not find mention in the speech.

According to the available information, one of the two corridors will connect Chennai with Bengaluru, passing through Hosur, Coimbatore, Salem and Tiruchirappalli in the southern part of India while the other will link Agra-Aligarh to Lucknow-Kanpur-Jhansi-Chitrakoot in the north. The location of these corridors seems more of a political statement than a well thought out trigger for rejuvenating domestic defence production.

That defence production in India, especially by the private sector, is at a sub-optimal level is undeniable but any notion that this is on account of the absence of industrial corridors is questionable. The need for such corridors does not figure in the current discourse on defence. Nor have any of the several committees set up by the government in the recent years made any such recommendation.

A Committee of Experts was set up by the MoD in 2015 specifically to suggest a policy framework and concomitant changes required to be made in Defence Procurement Procedure (DPP) 2013 to promote 'Make in India' in defence. Even this committee, which had interacted extensively with all the stakeholders, including the industry representatives, did not report that any of them had raised the issue of industrial corridors before the committee.

So, why has it been decided to develop the corridors? There is no clear answer to this. It is not known if any feasibility study was carried out and the objectives clearly set out before taking this decision. The first insight into the government's thinking was provided by the prime minister who, while inaugurating the Investors' Summit at Lucknow in February 2018, said that the corridor in Uttar Pradesh-Bundelkhand region will bring in an investment of Rs 20,000 crore and generate employment avenues for 2.5 lakh people.One cannot help wondering if it would not have been better to achieve these objectives by investing in development of infrastructure along our north-eastern and northern borders.

Some other press releases from the Press Information Bureau provide a glimpse into what it expected of the southern corridor, now being referred to as the Tamil Nadu Quad. Apparently, this corridor is expected to provide major opportunities to the vibrant manufacturing sector in the state and bolster interaction between all industry players in order to create long-term synergy and eventual development of the area into a Defence Production powerhouse.

While it remains to be seen whether these corridors will bring in investment, generate employment and create major opportunities for the defence industry without any concomitant measures taken by the government. On the face of it, development of these corridors cannot be the end in itself. This is not central to generation of opportunities in the defence sector which are basically related to only one factor: a steady flow of procurement orders to the private sector for indigenously developed and manufactured equipment.

Defence is a monopsony with the Ministry of Defence (MoD) and, to a much lesser extent, Ministry of Home Affairs (MHA), which administers the central paramilitary forces, being the only major buyers. True, exports also offer exciting opportunities but the domestic defence production cannot survive, much less thrive, only on the basis of exports. The basic sustenance for the industry has to come from a robust domestic market but this is where the problem is.

A large proportion of the equipment MoD and MHA, especially the former, buy is from the foreign sources or the public sector entities in India, both of which do not stand to gain in any substantial measure from development of the corridors for they already enjoy a major share in the defence market. Besides this, there is no study that establishes that further growth in their production, improvement in their productivity or betterment in the quality of service they provide to the buyers are dependent on development of the corridors.

The government has been vigorously pursuing the policy of promoting private sector participation in defence production. It would, therefore, be reasonable to assume that the corridors are intended to cater to the need of the private sector more than the public sector. This is where one runs into a blind alley as no blueprint of the project seems to have been prepared before making the announcement to ensure that the corridors bring benefits to the industry.

In any case, the decision to develop the corridors has come a bit too late in the day. With the general election due next year, the government will be hard pressed for time to see to it that the project at least takes off the ground and does not run into impediments later on. There are several issues related to land acquisition, coordination with states, funding, just to name a few, which could pose insurmountable challenges at a later stage.

An industrial corridor is a communication and transport network developed in a specific geographical area for the purpose of providing better connectivity to the already existing industrial units in that area or to make it attractive for the new industrial units to set up base along the corridor.

This requires the corridors to be connected through arterial roads to the nearby seaports, airports, highways and railroads, as well as the already existing or newly developed residential complexes and civic facilities, including schools, hospitals and skill development centres. All this entails a huge amount of investment. A large part of the investment will have to come from the private investors but they will invest only if they feel that there is a strong business case for doing so.

This brings us back to the question of whether there is indeed a business case for private investment in development of infrastructure along the corridors. It is difficult to say because, as of now, it is not clear what benefits will these corridors bring to the pre-existing defence industrial units and whether there is an economically viable case for setting up new industries along these corridors.

In the ultimate analysis, further growth of the existing industry and survivability of the new industry along these corridors, as indeed elsewhere, are dependent on the ability of these manufacturing units to sell their products to the armed and paramilitary forces.  With the budget outlays progressively going south doubts are being expressed about the sustainability of the acquisition programmes of the MoD in particular. Even if sufficient funds are allocated in future for procurement of defence products, the industry will continue to face difficulties because of the structural and procedural problems that bedevil the procurement regime in India.

A tricky issue that is likely to come up is the impact this project will have on states like Rajasthan and Maharashtra which have been making serious efforts to attract investment in defence. These states are not located on the axes of the proposed corridors. This could affect their interest adversely, especially if the states through which the corridors will pass also decide to provide incentives to the industry located along those corridors.

These broader issues, as also several others which need to be identified immediately, will have to be addressed to realise whatever potential lies in development of the corridors but the immediate challenge would be to ensure that the project actually takes off the ground and subsequently managed efficiently till its completion. As the things stand at present, it is not even clear which agency will handle the project. One can only hope that the Detailed Project Reports that are reportedly being prepared will carry out a realistic risk analysis and provide a clear roadmap. It would be a folly to launch the project unless a holistic plan for its execution is in place.

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