IDR Interview: Lt Gen S S Mehta, Director General, CII

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  “…all competencies in the country, both in the public and the private sectors must be optimally harnessed.”

With a membership of close to 7500 manufacturing companies, Confederation of Indian Industry (CII) has been in the forefront in the promotion of defence-industry partnership. It has strived hard to bring various stake holders in the defence industry on a common platform to exchange views and resolve issues of dissonance. Bharat Verma caught up with CII’s dynamic Director General Lt Gen S S Mehta to elicit his views on various issues of common concern to the Indian defence industry.

Constitution of six Ministry of Defence – CII Task Forces in 1998 was a landmark step. A number of innovative recommendations were made to integrate the private sector in defence production to achieve self-reliance. Despite many ground-breaking and pragmatic policy initiatives, there has been little progress on ground. Do you feel disheartened?

The domestic defence industry has so far been exclusively in the public sector and has not been able to meet the demand.  Indigenous capacity can only be increased by integrating the private sector in defence production. Additionally, the Indian private sector has proved its credentials by exceptional performance in various fields. As the defence industry relates to national security, all competencies in the country, both in the public and the private sectors must be optimally harnessed.

In a sense, 1998 has been the beginning of the acknowledgement of the need for enlisting the strength and capability of the private sector in defence production. This process has continued through appointment of the Kelkar Committee followed by the Committee for selection of Raksha Utpadan Ratnas (RURs). It is this new perception about the capability of the private sector that outsourcing by DPSUs & OFB to private sector has increased significantly in the last few years.

Opening of the defence sector to private industry has been a somewhat slow process all over the world. But, you must take into account the ground realities as of today. There have been huge developments in the capability of the Indian Industry, evidence of which is everywhere around us. There is also now an increasing emphasis on Public-Private Partnerships. Add to these two factors, the large requirements of defence purchases and significantly increased role of the private sector.  We now need to make every attempt to facilitate this partnership.

CII is very optimistic and so am I, personally.

Many feel that exhibitions, seminars, group discussions and joint meetings produce no tangible gains. As the present pace of reforms is slow, what further steps does CII propose to take to accelerate participation of the private sector in defence production?

Exhibitions, seminars, group discussions and joint meetings serve many useful purposes. They provide a platform for interaction between the industry, the services and the Ministry of Defence. The services articulate their projections whereas the industry showcases its potential. It is, however, agreed that the expected tangible gains in terms of orders for the private sector have not materialised as yet. There is definitely a need to hasten the process. CII is working in that direction by facilitating coming together of foreign vendors, Indian companies and the users for joint collaborations and offsets. CII also studies various policies through dedicated study groups and recommends changes to the Government. 

With a view to provide equal opportunities to the private sector, the Government had announced a scheme to award Raksha Utpadan Ratna (RUR) status to select private sector companies. What is the latest in this regard?

RUR companies are potential systems integrators from the private sector. They will also be entitled to Ministry of Defence funds for R&D in projects specified by the services. A committee headed by Prabir Sengupta was set up in May 06 to identify companies that fulfill RUR parameters-Rs 1000 crores in annual sales, Rs 100 crores in capital, and a proven track record in defence R&D. The Committee received applications from 41 Indian companies. Around 15 of them were asked to make detailed presentations. After a full year of deliberations, the Committee presented its report to the Defence Minister in June 2007.  The report will now be considered by the Defence Acquisition Council (DAC). We are awaiting Government orders.

Indian defence industry is euphoric over business opportunities likely to be available under the new offset policy. However, many feel that the main beneficiary would be the public sector and only marginal spill over benefits may accrue to the private sector.

The quantum of envisaged defence offsets is far too large to be absorbed by the public sector alone.  The private sector will have to be associated. It is estimated that the public sector can absorb offsets of around Rupees 12,000 crores and the balance will get passed on to the private sector. In any case, the Government policy has left it to the foreign vendor to choose his Indian offset partner which may be a public sector or a private sector entity. Therefore, CII is highly optimistic about the private sector getting a fair share of offset business.

Transfer of technology is considered the best form of offsets, especially for nations that strive to develop their indigenous defence industry. India, however, does not allow it at present. Should India change its policy?

Undoubtedly, India needs to import technology to develop indigenous competence. However, CII does not recommend its inclusion in offsets for the present for the following reasons:-

• There is a risk that obsolete technologies may be passed on by the foreign vendors.
• Valuation and costing of technologies is a highly complex process.
• Economics of offered technology need comprehensive prior appraisal, lest it proves financially unviable and wasteful.

CII, therefore, is of the view that proper systems have to be put in place before accepting transfer of technology against offsets. Transfer of technology should be a part of the contracts for purchase of systems or sub-systems, but not a part of offsets as such.

Most foreign vendors have been advocating introduction of offset banking. What are the views of the Indian industry?

CII supports introduction of offset banking, but does not advocate trading of offset credits, although both are mutually contingent. A foreign vendor with banked credits may not get the expected main contract. In that case, the only option available to him is to sell his offset credits to recover his costs. CII is of the view that offset banking requires a complex mechanism for implementation and monitoring. 

In many countries offsets form an integral part of the total commercial package. Quantum and nature of offsets become instrumental in determining as to whom the contract is awarded. In India’s case, all proposals which meet minimum offset requirement are treated at par. Do you think it is the correct approach?

India is new to the world of defence offsets and has adopted a policy that can be easily implemented. As India gains experience, the policy will get more comprehensive with better focus. CII feels that the current policy of the Government of following a phased and graduated approach is best suited for the country. We suggest no major changes at this stage. That is the reason why the CII does not recommend higher offset threshold or introduction of multipliers for the time being.

India is one of the largest buyers of military hardware, has abundance of skilled manpower and occupies a favourable geo-political position. Many believe that India has the potential to emerge as the Asian hub for the manufacture of high-tech defence equipment in the coming years. Do you agree?

India can certainly emerge as the hub for manufacture of defence products in Asia. The defence industry unlike the commercial sector is totally government- centric for two reasons – policies are framed with national security interests in mind, and the Government is the sole buyer. In order to make this vision a reality, the Government has to perform the role of a facilitator through innovative policy initiatives, speedy decision making and effective ground implementation. Further, the Government has to nurture private sector enterprises through financial support in the initial stages. Once the private sector starts playing a role, the combined capabilities of public and private sector will provide immense potentialities for India emerging as a regional hub.

How can we leverage our strength in IT to acquire greater capabilities in defence production?

I agree that India needs to leverage its prowess in IT for the development of an indigenous defence industry. This can only be achieved by involving leading IT companies in the development of defence related software. They could even be considered for the award of RUR status, albeit with relaxed annual sales and capital norms. IT companies should also be permitted as offset partners without having to apply for any licence. Special task forces should be constituted to draw out long term plans, lay down milestones and assign responsibilities. 

Many feel that the public sector is wary of the private sector as it considers it to be a threat. Do you agree with this perception?

The stumbling blocks towards greater integration of the Indian defence industry are some totally misplaced apprehensions. Opponents of the private sector’s entry in the defence industry cite the following major reasons:-

• Under-utilisation of the infrastructure created by the Government for defence production.
• Loss of jobs in the public sector with associated socio-economic upheaval.
• Issues relating to quality standards and security.

CII believes that the public and the private sectors are complementary to each other. Both have their respective strengths. Their mutual relationship should be collaborative rather than adversarial.  The country with the current level of infrastructure, imports most of its requirements from abroad. While the Government is amenable to purchasing defence hardware from foreign companies, it is reluctant to let the Indian private sector produce the same citing the above reasons. CII strongly advocates close public-private partnership in defence production.

Presence of both private and public sector here only enriched industries like  steel and refinery in India. We firmly believe that it is not an either-or situation, but a situation where a combined presence will lead to collaborations with significant value additions, new innovations, faster technology development and also giant strides towards self-reliance.