Defence Industry

Atmanirbhar Bharat in Defence Sector: A Dream Comes True
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Issue Net Edition | Date : 21 Oct , 2021

Its strong economy and strong army know a nation’s strength. As far as India is concerned, it has a strong economy but not a strong army so far. It is doubtful to withstand joint operations from China and Pakistan supported by Taliban Afghanistan, as the full support from the US is doubtful. India has to therefore become self-reliant – Atmanirbhar – to defeat the enemy.

The Indian Army accounts for more than half of the total defence budget of India, with most of the expenditure going to the maintenance of cantonments, salaries and pensions, instead of critical arms and ammunition.

The military budget or defence budget of India is the portion of the overall budget of Union budget of India that is allocated for the funding of the Indian Armed Forces. The military budget finances employee salaries and training costs, maintenance of equipment and facilities, support of new or ongoing operations, and development and procurement of new technologies, weapons, equipment, and vehicles.

The Indian Army accounts for more than half of the total defence budget of India, with most of the expenditure going to the maintenance of cantonments, salaries and pensions, instead of critical arms and ammunition.

Presenting her second and Narendra Modi Government’s seventh regular budget on February 1, 2020, Finance Minister Nirmala Sitharaman earmarked Rs. 4,71,378 crore (US$ 66.9 billion1) for the Ministry of Defence (MoD), stating that national security is a top priority of the government. Of the MoD’s total allocations, Rs. 3,23,053 crore ($45.8 billion) has been provided under the Defence Services Estimates (DSE), an annual publication of the finance wing of the MoD that primarily deals with the expenses of the three armed forces and the Defence Research and Development Organisation (DRDO), and is popularly considered as India’s defence budget. The balance allocation is distributed between defence pensions (Rs. 1,33,825 crore or $19.0 billion) and MoD (Civil) (Rs. 14,500 crore or $2.1 billion). Representing a growth of 9.4 per cent, MoD’s overall allocation translates into an increase of Rs. 40,367 crore. This raises the question, how would this increase affect India’s defence and modernisation in particular?

This budget is just 1.7 per cent of the GDP, which is just not sufficient for the modernisation of defence forces keeping in view of the threat perception from China and Pakistan especially after the independence of Afghanistan with Taliban at the helms of affairs.

India emerged as the second-largest importer of arms transferred between 2016-20, with a share of 9.5 per cent of global arms imports India’s arms imports fell 33 per cent between 2011-15 and 2016-20, said a report released by the Stockholm International Peace Research Institute (Sipri) at a time the country has taken a raft of measures to cut dependence on imported military hardware.  

The new companies now have an order book of Rs 65,000 crore. These orders were in the pipeline and have been shifted to the new entities.

To make India self reliant in the defence sector, the Ordnance Factory Board (OFB) has been split into seven different companies. Prime Minister Narendra Modi has dedicated these seven companies to the nation on the auspicious occasion of Vijayadashmi. The new Defence PSUs are 100 percent government owned corporate entities and will help in improving the country’s self-reliance in defence preparedness.

Business in the seven new entities started from October 1, 2021. These new companies are: Troop Comforts Limited (TCL); Yantra India Limited (YIL); Gliders India Limited (GIL); India Optel Limited (IOL); Advanced Weapons and Equipment India Limited (AWE India); and Armoured Vehicles Nigam Limited (AVANI).

Paying tributes to Dr APJ Abdul Kalam, Prime Minister Modi said that Dr Kalam had dedicated his life to the cause of a strong nation. “Restructuring of Ordnance Factories and creation of seven companies will give strength to his dream of a strong India,” the PM added. According to him the new companies are a part of the various resolutions, which the country has been pursuing to build a new future for them and these, would play an important role in import substitution, in line with the vision of ‘Atmanirbhar Bharat’.

The new companies now have an order book of Rs 65,000 crore. These orders were in the pipeline and have been shifted to the new entities. The PM in his address cited Defence Corridors in Tamil Nadu and Uttar Pradesh as examples of the new approach. In the last five years the defence exports, according to the Prime Minister, have touched 325 percent and due to policy changes new opportunities have emerged for the youth in the MSMEs.

In the 21st century, since the growth and brand value of any company or nation is based on its R&D and innovation, through his address he appealed to the new companies to take the lead in future technologies. These new companies have complete functional autonomy and the interests of the employees are fully protected.

The Centre, in May 2020, had announced increasing the FDI limit from 49 per cent to 74 per cent under the automatic route in the defence sector.

According to Defence Minister Raj Nath Singh, the move to create new companies is a reflection of the government’s commitment to Atmanirbhar Bharat. And stating the objective of the restructuring of the OFB, he said, “It is to transform the Ordnance Factories to improve expertise in product range; profitable and productive assets; ensure self reliance; enhance cost effectiveness and improve quality and increase competitiveness.”

He also voiced the government’s resolve of creating India as a defence manufacturing hub and net exporter. This can be achieved through the active participation of the private sector, setting up of defence manufacturing units as well as creating joint ventures. According to the defence minister, “To enhance preparedness of the armed forces, the public and private sectors are working hand-in-hand.”

The members of Society of Indian Defence Manufacturers (SIDM) welcomed the creation of seven new companies and expressed that the industry is looking forward to doing business with them. These new companies will adopt corporate standards for their commercial activities. This includes tendering, contracting to payment systems etc. and vendor development.

The Centre, in May 2020, had announced increasing the FDI limit from 49 per cent to 74 per cent under the automatic route in the defence sector. The government has been emphasising boosting indigenous defence manufacturing.  The Ministry has set a goal of a turnover of $25 billion (Rs 1.75 lakh crore) in defence manufacturing by 2025 that included an export target of $5 billion (Rs 35,000 crore) worth of military hardware.

The delay in announcing the corporatising of 41 ordnance factories is understandable, given its antiquity and the powerful and entrenched unions that they have with 81,500 employees.

India has the dubious reputation of being the second-largest importer of conventional arms (9.5 per cent) as per the SIPRI 2021 report.

The current arrangement of the government is significantly different since the four proposed public sector undertakings (PSUs) will continue to handle gliders, parachutes, optics, components and ancillaries, and products designed for troop comfort. This will perpetuate poor quality, delay and high price in products that can easily be sourced from private players at better price and quality. While this strategy made sense during the world wars, when the private sector’s capability was inadequate, India after 1991 with its thrust on liberalisation, privatisation and globalisation, must not perpetuate making these low tech, non-strategic items in captive ordnance factories.

While the level playing field doctrine advocated by Kelkar has encouraged companies like L&T, Mahindra & Mahindra, Godrej & Boyce, Tatas and a number of IT companies to come in, the paltry 26 per cent FDI hardly enthused any major OEM to set up a production base in India. The government then announced an offset policy in 2006 to leverage India’s big-ticket acquisition to get outsourcing, export orders and critical technology from major global defence manufacturers. The experience so far has been dismal, except for some outsourcing orders for low-tech items.

Despite these initiatives, India’s military industry capability shows a sorry picture and the private sector is still not being treated as a partner in India’s quest for higher self-reliance. A GE 404 engine from the US powers the much-hyped indigenous Light Combat Aircraft (LCA), while the radar is sourced from ELTA, Israel. The Kaveri engine development by the Gas Turbine Research Establishment (GTRE) has been an unmitigated disaster. German MTU engines power the Main Battle Tank (MBT), the showpiece indigenous tank. Despite the significant hike in FDI, the inflow has only been $300 million from April to September 2020. This is largely due to the number of caveats for allowing 76 per cent FDI.

India has the dubious reputation of being the second-largest importer of conventional arms (9.5 per cent) as per the SIPRI 2021 report. The Kalam Committee assessed our Self Reliance Index (SRI) in 1993 as 30 per cent, with a road map to increase it to 70 per cent in a decade’s time. The committee had identified a number of critical subsystems like the focal plane array, passive seekers, stealth, AESA radar, RLG and carbon fibres where India’s design and development quality needs to be significantly ramped up. Weapons, propulsion and sensors remain the main bugbears of India’s design capability in the DRDO and India’s SRI has not inched forward.

The government clearly prefers the private sector. A major development has been the ToT contract with Tatas rather than with HAL for building 40 C-295 transport aircraft.

Technology transfer has been India’s major policy mosaic to build major systems and platforms since 1963 (in the aftermath of the MiG-21 aircraft). HAL has been producing Sukhoi Su-30 on the basis of technology transfer documents from Russia. Similar is the story of the T90 produced in the Avadi tank factory, based on technology transferred from Russia. From this, it is evident that manufacturing is based on foreign design, rather than indigenous design. The general diatribe against defence PSUs is that they are good integrators of imported subparts rather than manufacturers in the true sense. No wonder, value addition of HAL in Su-30 production is less than 20 per cent.

The major problem afflicting the OFB is not the lack of autonomy or accountability but the wherewithal to improve capability. The R&D spending in OFB is as low as 0.7-0.8 per cent of their turnover. The other big drag has been expenditure on new capital, which is less than 1 per cent of their revenue expenditure. The capital expenditure is also a measly 3-5 per cent of total expenditure. While the ordnance factories have a well-run renewal and replacement budget to replace obsolete machines, they invest very little in state of the art capital and machinery.

The Corporatisation of the OFB has to be seen in the overall context of improving India’s military industry capability, self-reliance quotient, design capability in critical systems and quality, time and cost-effectiveness and involvement of private players in defence manufacturing as partners in tandem with OEMs and design houses. The shift from MMRCA transfer of technology (ToT) contract with HAL (buy and make) to buying aircraft from Dassault Aviation in France directly is a clear demonstration of how HAL has not been meeting user expectations and also of the ToT partner.

The government clearly prefers the private sector. A major development has been the ToT contract with Tatas rather than with HAL for building 40 C-295 transport aircraft. This is the first time that a major ToT is being availed of by a private company. Research cannot be the monopoly of the DRDO. The private sector, academia and reputed design houses must be part of this process, which will improve India’s design capability significantly.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Col (Dr) PK Vasudeva

is a Defence Analyst and Commentator.

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