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Insights Daily Current Events, January 12, 2014



January 12, 2014


Government notified new natural Gas Pricing Formula

  • The Government of India  notified the new natural gas pricing formulae, which will be in effect from 1 April 2014.
  • As per the newly issued notification, the rate of all domestically produced fuel will be almost doubled to 8.2 to 8.4 dollar per unit.
  • The notification of the Petroleum and Natural Gas Ministry said that the prices of the gas will be the average price of liquid gas imports into India and benchmark global gas rates.
  • This formula will be in applicable for the next five years from the date of its being into effect. The rates will be changed every quarter on the basis of the 12 month average of global rates and LNG import price.
  • This formula will be applied to all gas produced by both the public sector firms like ONGC and the private companies.
  • The formula was announced during the Petrotech Conference, where the government interacts with the industry leaders and markets the next round of the New Exploration Licensing Policy for the potential investors. Might be possible that the development of the formula will help in development of the new fields, which were missed out by the companies that doesn’t know about the revenue can be generated from the gas fields.Effects of the formula on prices of other materials: 
  • This formula will lead to raise the subsidy on fertilize and will enormously raise the costs of the power plants fired with gas. The fertilizer and power firms lobbying exercise failed to be in effect with the raise of the domestic gas prices.



Japanese exports to India picked up momentum after the CEPA came into effect, but India’s exports to Japan have not seen much of an increase. 

There has not been any significant change in the composition of trade and  the major  items of  India’s  exports  to  Japan  continue  to be  gems  and jewellery,  marine  products,  minerals,  iron  ore  and  textiles  whereas Japan’s  exports  have  been  mainly  centred  on  machinery,  transport equipment,  electronic  goods,  chemicals  and metal  products.  In other words, Japan’s exports to India consist of products that are on the higher side of the value chain, but India’s exports to Japan cover only the lower levels of the value ladder. Any significant breakthrough in the bilateral trade can occur only if India is able to diversity its exports.

In 2012-13 India-Japan bilateral trade touched US$ 18.6 billion. Indian exports to Japan were at US$ 6 billion, and imports at US$12.5 billion. In effect, India’s exports and deficit were nearly equal.

Official Development Assistance (ODA)

The ODA has been the core component of the bilateral partnership for decades now and India was the first country to receive Japanese assistance (1958), following Prime Minister Jawaharlal Nehru’s historic visit to Tokyo in 1957.

In 1990s Japan became the largest donor to India. Even at a time when Japan’s overall ODA volume has shrinking to declining economy after 2003, its assistance to India markedly increased. This indicates the importance that Japan attaches to its partnership with India.

In general terms the basic objective of Japanese ODA loans is to facilitate long-term, low interest funds for the self-help efforts of developing countries for their socio-economic infrastructure development.

Japanese ODA has three categories- bilateral loans, grants and technical assistance. Loans are extended at the government to government level on the basis of extensive negotiations and consultations. These loans are repayable within a prescribed time and carry a fixed rate of interest.

Today the ODA loans are totally united and project related. The sectors that benefitted most were electric power, gas, transportation, irrigation and environment. Some of the important projects that received ODA were Delhi Mass Rapid Transport system, Kolkata East-West Metro project, Chennai Metro project etc.

India’s flagship projects and Japanese assistance: Japan is closely associating itself with India’s three mega power projects which would give a huge boost to investment and industrial progress. The projects are:             1) Delhi Mumbai Industrial corridor

2) The dedicated fright corridor project

3) Chennai Bangalore Industrial Corridor

India-Japan complementarities


  • Surplus capital with businesses and technology powerhouse
  • Limited  investment opportunities and stagnant domestic demand
  • Aging population – 23% above  65 years
  • Limited availability of skilled and technical manpower
  • High tech hardware and technological capabilities
  • High cost economy


  • Requires capital in all areas and technology
  • Many investment
  • opportunities with strong
  • domestic demand
  • Young population
  • Easy availability of scientific,
  • Technical and skilled personnel
  • Global powerhouse in software solutions
  • Extremely cost competitive

There is a lot to do!!!!

The growing presence of Japanese companies in India are obvious, as India offers a large domestic market base, but mutual synergies between businesses in the two countries are also driving initiatives. Japan is a relatively labour-scarce, capital and technology abundant country that complements India’s rich spectrum of human capital.

India’s prowess in the software sector lends synergy to Japan’s excellence in the hardware sector. India’s abundance of raw-materials and minerals matches well with Japan’s capabilities in technology and capital to produce knowledge intensive manufactured goods.

But still Japanese companies have apprehensions about underdeveloped infrastructure, policy bottlenecks, red tapism, Land acquisition problems, Labor laws etc. It is imperative for India to ally these apprehensions to tap the unrealized potential of Indo- Japanese economic cooperation.


In July 2001, the first comprehensive bilateral security dialogue was held in Tokyo to discuss security and defence policies, the Asian security environment and nuclear non-proliferation. The dialogue was institutionalized as an annual event.

This was followed by greater military-to-military  cooperation  between  the  two  countries.  Japan’s participation  in  the  International  Fleet  Review  held  in  Mumbai  in February  2001  was  an  important  event  followed  by  the  visit  of  a Maritime Self-defence Force (MSDF) squadron to Chennai in May 2001.

Such mutual visits have been taking place regularly since then, in addition to exchange of visits by service chiefs.

India and Japan also set up another mechanism on counter-terrorism within the bilateral security framework.


A truly epoch-making development in Defense and Security arena took  place  on October  22  2008, when  Prime Minister Manmohan Singh and his Japanese counterpart Taro Aso signed the Joint Declaration on Security Cooperation on the sidelines of third annual summit. This is a historic document in that Japan  has  such  arrangements  only  with  Australia  and  the  US.

Undoubtedly, it was an outcome of the continuous efforts made by the top leaders of both countries over a long period. A study of the document shows that it embodies almost all the pledges and assurances made by them in various joint statements and other official meetings since 2001.

One significant aspect of the Declaration is the emphasis placed on the need  for  bilateral  policy  coordination  in  regional  affairs,  as  well  as bilateral cooperation within multilateral fora in Asia such as the EAS(East Asia Summit), ARF(Asean regional forum) and RECAAP (Regional cooperation Agreement on combating piracy and armed robbery) .

The Declaration essentially seeks to build on the existing tempo in defence ties, while attempting to broaden the framework with a view to influencing the emerging security architecture. In this context, it has also envisaged an action plan that would define specific measures to concretize security cooperation.


In 2009 Japanese Prime Minister Hatoyama visited India and the two significant outcomes of this visit were signing of an action plan to strengthen bilateral security cooperation and initiation of 2+2 security dialogue at the cabinet/official level.

The  Singh-Hatoyama action plan lays out a comprehensive agenda that mentions specific measures to be taken by the two countries in nine areas, including strategic and defence cooperation mechanisms, maritime security, safety of  transport,  cooperation  at  the  UN,  disaster  management,  and cooperation  on  disarmament  and  non-proliferation.


As noted earlier, the India-Japan Action Plan pays considerable  attention  to  maritime  security  as  a  critical  area  in  the bilateral relations.

Both countries share identical interests and concerns on  the  need  to  ensure  the  safety  of  the  sea-lanes  of  communication (SLOCs) in the Indian Ocean area. Maritime security in the Indian Ocean calls for systematic efforts at multilateral levels in view of the diverse and overlapping interests of numerous countries involved.

In this context, it is imperative for both Japan and India to jointly address several issues such as ocean piracy, maritime environment, transport of weapons of mass destruction (WMD) and the safety of Malacca Strait. Indo-Japanese cooperation should become a key component in the whole Indian Ocean security mechanism.

Why does it hold great importance for Japan and India?

Japan is a maritime  nation  depending  on  the Ocean  for  its  basic  resources  and external  trade. More than seventy per cent of its energy resources are transported by sea from the Middle East and any disruption to its energy supplies could seriously affect its economy. Indian Ocean security is directly linked to the well-being of the Japanese economy.

With a coastline of 7,500 kilometers, India too has a vital stake in the security of the Indian Ocean.

Since the end of the Cold War, India has pursued a  comprehensive  maritime  strategy  that  emphasizes  the development  of modern  ports  and  harbours,  exploitation  of marine resources, expansion of shipping, and modernization of fishing industry. Following the implementation of  the UN Convention on Laws of the Sea (UNCLOS), it set up its Exclusive Economic Zone (EEZ) and went on  to widen  the  framework  of  its maritime  strategy. Equipped with warships, aircraft carriers, submarines and minesweepers, India has one of the strongest and most sophisticated navies in the Asia-Pacific region. India also has a highly developed Coast Guard whose main function is to protect life and property at sea against piracy and terrorism.

With India’s commercial and trade relations growing with East and Southeast Asia, the need for ensuring the safety of the SLOCs has assumed much greater importance. More than 90 per cent of India’s external trade is sea borne. India also depends on oil supplies from the Middle East to the extent of seventy five per cent. There is therefore a strong convergence of mutual interests between India and Japan.  They share many common perceptions on the evolving security situation in the Indian Ocean.

Since piracy is one of the most serious threats to the SLOCs, they have already started cooperating with ASEAN countries. The India-Japan Action Plan talks about strengthening cooperation between the navies and Coast Guards of the two countries. Both countries have held periodical antipiracy joint exercises in the Bay of Bengal.

 Compelling interest in freedom of the sea

 India and Japan share a compelling interest in freedom of the seas. The three common areas of interests are:

1)    South China Sea: 

Both India and Japan are dependent on freedom of passage through the South China Sea for trade flows and access to naval partners in Southeast Asia. (Nearly 60 percent of Japan’s energy supplies are shipped through there.) One-third of all global trade passes through the South China Sea.

The Indian armed forces’ exchanges and joint-exercises with not only Japan but also with Vietnam, Indonesia, and South Korea require unimpeded access through these waters. China’s 2012 warning not to penetrate the South China Sea littoral for an Indian Navy vessel’s port call in Vietnam was seen as unwarranted interference in India’s relationship with a third country with which it has long enjoyed ties.

2)     Western Pacific

The Western Pacific is another maritime domain of vital concern to both India and Japan. These waters connect both nations to their principal military partner, the United States, and its major hubs of power projection in Guam and Hawaii, while carrying exports to North America. Chinese dominance of these waters would put at risk the security of the air and sea lanes and the US military’s ability to operate freely in waters that bind together the economies of East Asia and North America. New Delhi has demonstrated its strategic interest in the freedom of these distant sea lanes by holding naval exercises with both Japan and the United States east of Okinawa.

3 ) Indian Ocean

The third maritime domain of special interest to both India and Japan is the Indian Ocean, which carries a majority of both nations’ energy imports from the Persian Gulf and is, therefore, intrinsically important.

It is the home sea of India, whose balancing role in East Asia is growing, as attested by the development of security partnerships with Japan, Vietnam, Indonesia, and other regional powers.


Defence Technology Indigenisation Guised Indigenisation

Over the last three decades, India has evolved significant design capabilities, as evident from its missile programme, its nuclear propulsion programme, a series of light helicopters, the Tejas light combat aircraft (LCA), the Arjun tank, and an array of naval technologies that drive warship building. Safeguarded technologies in electronic warfare, combat management systems and secure communications have also been developed.

However, analysts and government watchdogs like the Comptroller and Auditor General (CAG) are critical. In August 2010, the CAG criticised the Dhruv helicopter, pointing out that 90 per cent of its systems and sub-systems are sourced from abroad. The Tejas LCA and the Arjun tank also have a high percentage of foreign components. While the warship building programme has made indigenisation a priority, some 60 per cent of the weapons and sensors in most Indian-built warships continue to be sourced from abroad, including in the recently launched aircraft carrier, INS Vikrant.

What does Indigenization Mean?

In 2001, a growing ministry of defence (MoD) realisation that the public sector could not meet India’s defence needs triggered the entry of private companies into this sector. But that laudable policy change was not accompanied by a clear, holistic plan for indigenizing defence production. A dozen years later, there is no clarity about what indigenisation means. Instead, indigenisation has been reduced to a slogan – India’s current equipment ratio of 30 per cent indigenous and 70 per cent foreign equipment must be reversed to 70 indigenous and 30 foreign.We could indigenize 70 per cent and still have no real control over a product that we build a large part of. That is because we continue focusing on components and numbers rather than design expertise. If we build most of a system in India, but cannot tweak, modify or export it, how can we say we have indigenized it?”

Indigenisation, in a broader sense is being able to master; develop technologies and being proficient in externally acquired technology rather than just production of all defence equipment within India without the knowledge of related technologies.

The Kelkar Report states: “There is an urgent need to review the whole concept of indigenisation and self-reliance and it is time to go beyond the idea of looking at indigenisation purely as import substitution of components, sub-assemblies, etc. within the country from raw materials. Today indigenisation as a concept will need to involve capability enhancement and development, increasing know-why, design and system integration, rather than having numerical targets.”

Indigenisation involves the Defence Research Development Organisation (DRDO), Defence Public Sector Undertakings (DPSUs), and Ordnance Factory Board (OFB), private sector, the Services and the civilian leaders.

Procurement including transfer of technology

India has been manufacturing Russian fighter aircraft and tanks under license for many years, the Russians never actually transferred weapons technology to India. Although the country has now diversified its acquisition sources beyond Russia to the West and Israel, recent deals have failed to include transfer-of-technology (ToT) clauses. India never had a relationship in defence production beyond buyer-seller or patron-client, with Russia or any other nation except in the production of BrahMos missiles. India’s efforts to sign contracts with foreign companies that include both licensing as well as transfer of technology were never fruitful as the trade policy in those countries strictly restricted the companies to only licensing and sale of equipment, denying the transfer of technology.

Whatever India procures now must be procured with a ToT clause being built into the contract even if it means having to pay a higher price. The aim should be to make India a design, development, manufacturing and export hub for defence equipment in two to three decades.

Role of Defence Research and Development

Though it seeks to encourage public-private partnerships, privately the government continues to retain its monopoly on research and development and defence production through the DRDO, the ordnance factories and the defence PSUs (DPSUs).

Since its inception in 1958, the DRDO has achieved some spectacular successes like the missile development programme, but also has many failures to its name. Programmes like the Light Combat Aircraft (LCA) and the Main Battle Tank (MBT) Arjun have suffered inordinate delays and time and cost overruns.

However, to its credit, the DRDO worked under extremely restrictive technology denial regimes and with a rather low indigenous technology base. The DRDO is now in the process of implementing the report of the P Rama Rao committee that had asked it to identify eight to 10 critical areas that best fit its existing human resource pool, technological threshold and established capacity to take up new projects. And, it must scrupulously stay out of production as the private sector has shown its readiness and technological proficiency to take up the production of weapons and equipment designed by the DRDO and must be trusted to deliver.

Required strategy for Indigenization

The DRDO must now concentrate its efforts on developing critical cutting edge technologies that no strategic partner is likely to be willing to share; for example, ballistic missile defence (BMD) technology. Other future weapons platforms should be jointly developed, produced and marketed with India’s strategic partners in conjunction with the private sector. The development of technologies that are not critical should be outsourced completely to the private sector. Also, the armed forces should be given funding support to undertake research geared towards the improvement of in-service equipment with a view to enhancing operational performance and increasing service life. Gradually, the universities and the IITs should be involved in undertaking defence R&D. This five-pronged approach will help to raise India’s technological threshold over the next two decades by an order of magnitude.

As the largest importer of arms and equipment in the world, India has the advantage of buyers’ clout. This clout must be exploited fully to further India’s quest for self-sufficiency in the indigenous production of weapons and equipment.  In all major acquisitions in future, India should insist on joint development, joint testing and trials, joint production, joint marketing and joint product improvement over the life cycle of the equipment. The US and other countries with advanced technologies will surely ask what India can bring to the table to demand participation as a co-equal partner. Besides capital and a production capacity that is becoming increasingly more sophisticated, India has its huge software pool to offer.

Today software already comprises over 50 per cent of the total cost of a modern defence system. In the years ahead, this is expected to go up to almost 70 per cent as software costs increase and hardware production costs decline due to improvements in manufacturing processes.

In 10 to 15 years India must begin to acquire most of its defence equipment needs from Indian companies—with or without a joint venture with an MNC. Only then will the era of self-reliance in defence acquisition truly dawn on the country. It will be a difficult quest, but not one that a great nation cannot realize.

With the defence budget languishing at less than two per cent of India’s GDP – compared with China’s 3.5 per cent and Pakistan’s 4.5 per cent plus US military aid – it will not be possible for the armed forces to undertake any meaningful modernisation in the foreseeable future.

India is expected to spend approximately USD 100 billion over the 12th and 13th defence five-year plans on military modernisation. As 80 per cent of weapons and equipment are still imported, there is an urgent need to further refine the defence acquisition process and insulate it from the scourge of corruption that has afflicted all other national endeavours, including major development projects, while simultaneously encouraging self-reliance and indigenisation.

India cannot leap-frog to a higher defence technology trajectory virtually overnight. Transforming a low technology base to a higher plane will need time, patience and large scale capital investment. It will also need strong support across the political spectrum.

Defence Procurement Procedure undermining the role of Private sectorand MNCs

The Defence Procurement Procedure (DPP) manual was introduced in 2005. Since then it has been revised and modified several time. The Defence Production Policy unveiled in 2011 with major objective of self-reliance in design, development remained wishful as at present most weapons and equipment continue to be imported.

The Defence Procurement Procedure (DPP) was amended once again in April 2013 to reflect the current thinking on ‘buying Indian’. However, in effect it still favours the defence PSUs over the private sector. MNCs are allowed to bring in only up to 26 per cent FDI as against 74 per cent for non-defence sector joint ventures.

Required amendments to DPP

The defence production process must provide a level playing field between defence PSUs and Indian private sector companies forming joint ventures with MNCs where necessary.

The amount of FDI that MNCs can bring in must be raised to 49 per cent immediately and to 74 per cent in due course to make it attractive for MNCs. However, no MNC that is unable to provide transfer of technology – either due to the home country’s restrictive laws or due to proprietary considerations – should be considered for future defence acquisitions.