Introduction
A country which imports 60% of its military hardware has a big reason to worry. Amid concerns of obsolescence of Soviet-era weapons, India looks to modernise its forces by investing approximately INR 250 billion during next 7-8 years. India’s current outlay for defence in 2014-15 is INR 2.29 trillion, an increase of 12% over the previous year. India’s domestic defence manufacturing is a story of mix of successes and failures. The Defence Procurement Procedure – 2013 (DPP) was revised last year and the government promises to revise it every year with the aim to modernise its armed forces. The Modi government wants to speed up the modernisation process which itself contradicts the aim of self-reliance.
Fringe Industries
Military technologies are cutting-edge and take years for development. Any country which aims to be self-reliant and indigenise its defence production must develop an appropriate eco-system to support the core industries. Indian cabinet in February 2014 approved two semiconductor manufacturing facilities with cumulative investment of more than Rs. 6300 Cr. An indigenous semiconductor manufacturing is the right step in ensuring security of critical components. Steel Authority of India Limited has been successful in developing very high grade steel used for building India’s first indigenous aircraft carrier, INS Vikrant. This steel is also used to make Kamorta class of ASW corvettes, removing our dependence on imported steel. ‘Make in India’ must encourage growth of these industries by providing the necessary technological and financial support.
Public Private Partnership (PPP)
The last two decades have witnessed the Indian private sector’s exponential growth trajectory and its capacity to innovate, develop, and produce world class solution in fields of cutting edge technology. Thus it is necessary to utilize the immense potential of private sector in the domain of defence. India should harness this resource to create an indigenous manufacturing hub. The public-private partnership model is a tried, tested and benchmarked method to achieve self-reliance in defence and is in use in various countries. PPP has proved to be quite successful for Indian Navy. Today, all the 45 warships being built for the navy are taking shape in Indian shipyards. Perhaps the best examples demonstrating this will beINS Arihant, India’s first nuclear propelled, nuclear missile-carrying submarine built by DRDO alongside private companies, especially L&T.The revised DPP makes a step in the right direction by prioritising ‘Buy & Make (Indian)’ and ‘Make’ categories of procurement. Private companies simply cannot be expected to invest completely in a very capital-intensive industry. Government must provide subsidy schemes to develop the necessary infrastructure and provide tax holidays for the period of 5 years.
FDI policy
The FDI limit has been raised from 26% to 49% this year, which is a positive move for the indigenous defence industry. This implies that the government still wants Indian manufacturers to maintain control and ownership of the joint ventures. Although this might prove to be inadequate as foreign manufacturers would expect a 74% ceiling. Foreign manufacturers would prefer ownership of the joint venture before sharing technology know-how. Until now, defence has attracted less than $5 million in foreign investment.
The foreign OEM with a majority stake in an Indian subsidiary must fulfil its obligation of accomplishing domestic sourcing targets in a time-bound manner. ‘FDI in defence’ should not be another route to assemble semi-knocked down (SKD) or completely knocked down (CKD) kits in India.
Transfer of Technology (ToT)
The transfer of technology (ToT) is at the centre of every defence joint venture. Dodging the stringent export control laws remain crucial in acquiring cutting-edge technologies. A case in point is Sea Harrier, which is an aircraft carrier borne and uses vertical take-off and landing (VTOL). The U.K. was the inventor of VTOL technologies, but many of the critical systems and modules were imported from U.S. Indian Navy operated that aircraft over 25 years but no efforts were made to successfully indigenise those modules. As a result the exchequer had to pay huge increase in the price of imported components from time to time. The route of co-production and co-development in developing state-of-the-art weapons must be the basis of our dealings in future.
India has second largest pool of scientists and engineers in the world, although beset with challenges in quality of education. Several education institutes are setting up aeronautical departments, but active involvement of government and private players is essential to develop industry specific courses that are relevant and effective. The quality and robustness of certifications organisation like CEMILAC and DGCA needs to be strengthened. The present certification process is complex and expensive and the government needs to step in with schemes to increase awareness among SMEs.
India needs to use FDI to bring the know-how and not just the product. The idea is to grow the Indian-ecosystem of suppliers across categories into the global supply-chain. This will ultimately make India an ideal ground for global export of military equipment.
Stakeholders’ support
Indian Navy has been a staunch supporter of indigenisation and promoted Indian over foreign warships and equipment. As a result, Indian ship building industry is growing with the participation of many private shipyards. The new government seeking to develop capabilities of private warship builders by allowing only private shipyards, including Pipavav, ABG and L&T along with their foreign players to take part in the Rs. 25,000 Cr project for building four amphibious warfare vessels. Such support from government is necessary to create a competitive environment and improve efficiency in project execution. ‘Make in India’ should reserve certain projects for Indian companies.
Indian Army has remained a laggard in both indigenisation and procurement, with little movement on the acquisition of badly needed artillery guns and anti-tank missiles. India needs to transform these delays into an advantage. There are atleast three entities- the DRDO, the Ordinance Factory Board and a slew of private companies that are eager to develop artillery for the army. In a recent development, the procurement offer of anti-tank Javelin missiles have been transformed by the unprecedented U.S. offer to co-manufacture the highly advanced Javelin missiles in India and co-develop an advanced version of it for the future. Such opportunities should involve participation of private and public players from India.
Indian Airforce has tried to spur domestic industry by assigning upgrades, co-production and joint development work in various areas. Hindustan Aeronautics Limited (HAL) is working with numerous foreign and local partners on developing missiles and aircrafts through a JV. HAL has partnered with Sukhoi of Russia on the joint development of 5th generation heavy combat aircraft known as FGFA project in India. HAL is also working with DRDO to produce light combat aircraft, Tejas. It can use the learnings from both these projects for developing India’s 5th generation medium combat aircraft.
DRDO, India’s only defence research agency, needs to strive hard to complete the projects on time. The issue of endemic delays in several of its major project such as Light Combat Aircraft, Nag missile, Long range surface to air missile and Airborne Early Warning and Control System has badly affected the confidence of armed forces on DRDO. PM Modi has asked DRDO to be proactive and set agenda for the world and not merely respond to the situation. The DRDO has been asked to recruit more youth and empower them to make decisions, given the dismal intake of 70 scientists every year.
‘Make in India’ should ensure that DRDO limits itself to core research work and some part of the research and development is done by a private player. Such projects must be allotted on a competitive basis to ensure timely completion of projects.The R&D budget allocated for DRDO is Rs. 5985 Cr. which is 5% of the defence budget. DRDO requires at least 7% of the total defence budget allocation. The need to boost the current outlay of 7% to R&D cannot be less emphasised. We must learn from South Korea, which has developed a very impressive ship building industry by inviting foreign investment in certain key areas.
India must innovate to become leaders in this industry. ‘Make in India’ must provide the necessary impetus for fostering an ecosystem conducive to the development of domestic manufacturing.
Prasad Gujela
Jamnalal Bajaj Institute of Management Studies
References:
[1] DPP 2013, Ministry of Defence [2] Union Budget 2014-15 [3] SAIL India on INS Vikrant – http://www.sail.co.in/sail-news/ins-vikrants-first-victory-being-built-indian-steel [4] Indian navy warship –http://defencenews.in/defence-news-internal.aspx?id=J9VzjoJRg34=
[5] FDI in defencehttp://www.business-standard.com/article/economy-policy/fdi-in-defence-increased-to-49-114071001148_1.html
[6] Private shipyards exclusive orderhttp://www.deccanherald.com/content/430844/rs-25000-cr-navy-tender.html
[7] PM Modi asks DRDO to speed up projectshttp://www.hindustantimes.com/india-news/modi-asks-drdo-to-speed-up-projects/article1-1254106.aspx