Defence industry feels the heat of rising dollar, seeks govt protection

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As the dollar has hardened almost 25 per cent from about Rs 45 a year ago to Rs 56 levels, the country’s import dependent defence is taking a hit, says a report. The 13.15 per cent rise in the latest defence budget — from Rs 1709.37 billion last year to Rs 1934.07 billion for 2012-13 — has been wiped out and more. The picture is even bleaker when inflation is factored in, which runs at about 15 per cent annually for defence equipment.

The damage extends to the Indian defence industry, which even in ‘indigenous’ weaponry uses a substantial share of foreign components and systems, ranging 30-70 per cent. Until last year, the Ministry of Defence (MoD) sheltered the defence public sector — which includes eight defence public sector undertakings (DPSUs) and 39 Ordnance Factories (OFs) — through a mechanism called foreign exchange rate variation (FERV), which adjusted their income to cover forex fluctuations. In contrast, the private sector has stood exposed to foreign exchange risk.

Consequently, many private players stare at unexpected losses. Take Larsen & Toubro (L&T), which won a Rs 10 billion contract in March 2010 to build 36 fast interceptor craft for the Indian Coast Guard. These are 110 tonne patrol and rescue vessels propelled by water jets at a scorching 44 knots (81 kilometres per hour). L&T says about 40 per cent of the vessel is imported, including the engine and the water jets. Given a profit margin of 10 per cent, the L&T quote catered for a forex component of Rs 360 crore. Given the rupee’s fall, that forex component has risen to Rs 445 crore today. L&T says it is struggling to break even on this contract.

“With the rupee nose diving, quoting for fixed price contracts has become extremely risky without hedging at a  high cost. Imagine the plight of Indian bidders when competing for Indian defence contracts against foreign companies who are anyway automatically protected,” says MV Kotwal, president (heavy engineering), L&T.

The private sector has asked industry bodies, CII and Ficci, to approach the MoD for protection. Ficci will be considering the issue at its National Executive meeting. So far, the MoD has been unsympathetic. L&T’s Kotwal says private sector companies had asked the MoD to treat them on a par with the DPSUs, which enjoyed FERV protection. The government acceded to that request in the latest Defence Procurement Procedure of 2011 (DPP-2011), but not in the manner requested. “Instead of allowing FERV for the private sector, DPP-2011 denied it to both the public and the private sector!” says Kotwal.

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