Indian Defence Review

Any current survey of India’s Defence Industry would take us back to the Fiat and Ambassador age. Should it be so at a time when we are on the threshold of emerging as a software superpower and – the Made in India – Mercedes and the BMWs are plying on our roads? Or at a time when the world is looking at us with awe because of the rate of growth of our economy and the rapid strides we are taking in IT. Or when we have begun to flex our muscles as a regional power with global ambitions.

But any claim to power, without a reasonably strong and modern defence industry would lack credibility and be premised on a fragile foundation.  A dynamic, efficient, technologically advanced and profitable defence industry is a pre-requisite for military muscle and without military muscle we cannot expect to be counted as a nation with influence.

Any current survey of Indias Defence Industry would take us back to the Fiat and Ambassador age. Should it be so at a time when we are on the threshold of emerging as a software superpower and ““ the Made in India ““ Mercedes and the BMWs are plying on our roads?

Export of weaponry and military technology creates dependencies besides bringing in revenue. Additionally military technology has always had commercial spin offs. As a matter of fact through most of the twentieth century the bulk of commercial technologies were derived from military research and development. It is only in recent times that in some cases commercial technologies have led to military applications. Thus from the point of view of economic growth, again a sound defence industry backed by dedicated, focused R&D is vital for us.

After the 1962 debacle there was realisation that we must be self sufficient in military hardware or at least have a much bigger and wider defence industrial base. The Ordnance Factory Board was expanded. Under its umbrella new factories came up. Quite a few defence public sector undertakings were set up to cover defence electronics, defence aeronautics, missiles and weapon platforms, plant and machinery.

Concurrently defence R&D was also given greater importance. Defence R&D laboratories covering a wide range of disciplines were established. There may be views that the money allocated for R&D was relatively lower than what some other countries were investing but nevertheless it was not insubstantial. A walk through almost all our defence research establishments would reveal that these organisations are much better looked after than most other Government establishments and certainly better than the military that they are meant to serve.

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How have the nation’s investments in the defence R&D and industry fared? The Army, Navy and the Air Force have consistently maintained that both have been significantly short on delivery. But for a variety of reasons no serious attention was ever paid to the views of the three services.

The bolder move was to permit 26% foreign investment. It is now being contended that 26% is insufficient and the level should be raised to 49% to make it attractive for foreign investors. Even if this is desirable, the courage and the vision of opening the defence sector to foreign funds must be lauded.

After the Kargil War the Government did some stocktaking. The findings were corroborative of the views that the services always held. The performance of both these establishments were unsatisfactory. Urgent and major reforms were necessary in the management of the defence R&D effort as also in the functioning of the OFB and the defence PSUs. Some suggestions were made and since then the government has been engaged in exploring and formulating policies that could catalyse the country’s defence production establishment. Political considerations make the governments task extremely difficult. And, therefore, it is to the credit of the government that it is still moving forward, albeit, somewhat hesitantly.

The last five to six years illustrate the governments commitment to reforms in the defence sector. The first landmark policy announcement was that the defence industry would be opened to the private sector. This was significant but the bolder move was to permit 26% foreign investment. It is now being contended that 26% is insufficient and the level should be raised to 49% to make it attractive for foreign investors. Even if this is desirable, the courage and the vision of opening the defence sector to foreign funds must be lauded. At an appropriate time the government may well hike the limit of 26%.

Having made some fundamental policy changes the government took the next logical step. How do we implement the new policy? The Kelkar Commission was thus appointed. The commission after examining a wide range of issues has submitted its report. And unlike the fate of most such commissions this report is being acted upon.

Thus we have the new procurement procedure promulgated. Much of the fog around the offset policy has been cleared up. However, among a few there is still insufficient understanding and there are some who have issues with the policy. But then no policy can be perfect. What ought to be appreciated is that there is now a policy and foreign companies seem to have by and large accepted it. The benefit to the country of this policy and to our industry is unquestionable. The extent to which we succeed in exploiting the offset policy to our advantage will depend on our genius. But it is certainly not fuzzy economics as one senior executive of a foreign firm recently said at one of our seminars in Delhi.

The clamor of the private industry to give it a level playing field has generally been heard and acceded to. There is recognition that the private sector can undertake major defence projects and also acceptance that it can compete with the OFB or the defence PSUs.

The clamor of the private industry to give it a level playing field has generally been heard and acceded to. There is recognition that the private sector can undertake major defence projects and also acceptance that it can compete with the OFB or the defence PSUs. The concept of RURs ( Raksha Utpadan Ratnas) has been defined and the guidelines/ methodology to identify such private sector companies have been laid down and are unexceptionable.

From the private sector’s point of view some irritants and some leveling issues still remain but there is considerable appreciation of the steps that the government has taken so far. Some may say that the process is still too slow but given our track record on such matters the government deserves to be commended.

It is understood that some twenty-nine private sector companies have already obtained licenses to manufacture defence equipment. It is possible that many more will progressively seek to enter the fray. Most of our major industries have declared their intent to participate and are exploring opportunities and tie-ups. Tatas, Mahindras, L&T, Bharat Forge, Godrej Boyce, and a few other big players have registered their interest to participate in defence tenders. Besides them, there are a large number of smaller companies that are gearing up with big expectations to penetrate the defence business.

The defence business in India is quite large with enough room for most players. Given the unfolding security environment it is unlikely that we would be cutting down on our defence expenditure in the foreseeable future. As a matter of fact our defence spending may just witness a proportionate rise. This years defence budget was around Rs 90 thousand crores. With the economy growing at 8-9 % the defence budget can also be expected to grow at about the same rate. Now that is a huge amount of money if we extrapolate -for say the next five to ten years.

The most important feature of defence equipment is its reliability. Now reliability implies that firstly the system must perform to the specifications stipulated and secondly it must not fail to function.

So now let us look at the big picture. Will the sizeable defence budgets, the liberalised defence industrial policy now being promulgated and the attempts at reforms in the management of the Defence R&D, the OFB and the defence PSUs give the desired impetus to our indigenous defence industry? This is the real issue. Our ambition to have a globally competitive defence industry must be realised. The question therefore to be answered is whether we are doing all that we can or is there scope for further fine-tuning our regulatory mechanisms and policies?

Before delving into policy issues it would be prudent to understand some of the special requirements of defence equipment. This is important and relevant because quite often, lack of knowledge of the uniqueness of defence requirements have resulted in locally manufactured products not finding acceptance of the user. Consequently the military is denied the equipment that it needs and the developer or the entrepreneur is disappointed or has to suffer losses.

The most important feature of defence equipment is its reliability. Now reliability implies that firstly the system must perform to the specifications stipulated and secondly it must not fail to function. The meantime between failures must be stated, it must be very high and it must achieve the claimed figures under our operational conditions. The implications  are – rugged, military specifications – systems, sub systems and components. Quality control besides precision engineering would be of the utmost importance.

Curiously instead of accepting and recognising this failure one now frequently hears the view that transfer of technology deals are not really workable.

The other significant feature of major military equipment is its life. Most major systems remain in service for thirty to forty years. Therefore, when it enters service it must necessarily be as modern and contemporary as feasible. As a matter of fact the users desire is to seek equipment that is technologically ahead of what its adversaries possess. This viewpoint is logical and cannot be faulted.

If systems are to remain in service for such protracted periods they must be designed for product improvement/ upgrades. System designers and manufacturers must take this into account while conceiving products and engineering them.

Ergonomics and user friendliness are again important requirements. This is another weak area of our designers. Hopefully now they will learn from the emphasis that the automobile and telecommunications industry is paying to these features.

The next notable feature of defence equipment is the rapidly growing content of electronics and software. Today on an average the cost of embedded electronics and software on any military platform is approximately 60%. And with each generation and advancement this percentage is set to increase. The import of this feature must not be missed given our growing strength in software as also electronics.

South Africa, Israel and China have successfully exploited technologies that they paid for. Even Turkey and Brazil have done much better. We are the rare exception.

Having cursorily glanced at the special features of military hardware, we may now address the central question. Do we have the wherewithal to produce world- class military systems? Till about the eighties the answer to this question would be- unlikely or doubtful. Not today. Primarily because of the rapid growth in the automobile and the telecommunications sectors coupled with the strides that we have taken in emerging as a software superpower. It would be fair to believe that we are now poised to achieve global competitiveness in any sector we choose including defence. In what time frame and how efficiently we do it will depend on our motivation levels and the strategies we adopt.

An often-debated subject when we discuss the defence industry is self -reliance. The advocates of mindless self- reliance have for long manipulated us. It is an appealing slogan and extremely difficult to counter, particularly, when the issue has to be discussed with the uninformed. Any objective analysis would tell us that the concept of making every thing within the country is outmoded and bad economics. Even the world’s sole superpower is nowhere close to being completely self -reliant. We should be self- reliant in areas where technology control regimes have been imposed or where imports can be cut-off without serious repercussions to the supplier. Otherwise self-reliance is in creating greater interdependencies.

Even though this topic has been frequently commented upon our inclination to drift, perhaps has prevented us to draw up a clear road map on the subject. The government must at the earliest formulate an approach paper on self-reliance in defence technologies. Obviously this task cannot be entrusted to the defence scientific community alone. It could be steered by a suitably selected service officer with members from the DRDO, and other scientific bodies, industry both public and private and maybe academia. This paper then would also be very useful in ‘make or buy’ decisions of the MOD.

For technology, both would currently remain dependent on foreign companies. But then why has the governments proposal for private-public partnership not got off the ground? ”¦ because the marriage is being imposed instead of the partners choosing to wed on their own.

Linked to the question of self- reliance is the business of transfer of technology. Over the last decade or so there has been considerable criticism of the governments defence PSUs and OFB for not achieving the objectives of transfer of technology wherever this clause has been linked to procurements from abroad. In almost every instance dependencies have remained and rarely have we imbibed know how that could be exploited by us. Curiously instead of accepting and recognising this failure one now frequently hears the view that transfer of technology deals are not really workable. The technology supplier rarely parts with technology that is important or critical and therefore though on paper technology may have been transferred on the ground it does not happen. What is even more intriguing is the authorities acceptance of this ridiculous position.

It is the business of those who have paid for the technology to extract every bit of what has been paid for and maybe more. If we have not done it, the blame lies with us and not with the seller. The technology supplier will obviously try and delay or deny transfer of technology. It is for us to impose penalties if required so that contractual clauses are not deviated from. South Africa, Israel and China have successfully exploited technologies that they paid for. Even Turkey and Brazil have done much better. We are the rare exception.

Another issue currently much in debate is the theme of public-private partnership. When did the idea get mooted? It would be reasonably accurate to date its birth to some time after the announcement of the policy of opening up the defence industry to the private industry. What triggered it is the fear of survival. The private sector demanded a level playing field and fair competition. The public sector apprehended competition and argued that it would have to shut shop if the government went ahead with implementing the new defence industrial policy. The government listened and then came up with the concept of public-private partnership. The prime reason for the origin of this concept may be concern for the survival of the OFB and the defence PSUs but yet when analysed there is sound logic for such a concept.

We need a road map for self -reliance. This road map must also identify critical and important defence technologies and the path to the acquisition of such technologies.

But before examining the concept of public private partnership a few observations on the performance of the defence PSUs and the OFB: Their products have generally been poor on quality and as expensive as its imported equivalent. On delivery schedules their track record has again not been good and instances of product improvement are difficult to find. There may be some exceptions to what has just been recounted but by and large the views expressed- hold.

Reverting to the idea of public-private partnership. As stated earlier there is considerable merit in the proposal. Just look at the infrastructure to include plant and machinery, manpower, experience and domain knowledge of the range of products that each of these establishments possess. These are enormous assets and in some instances can compare with the biggest and the best in the world. What they lack is efficient management practices.

On the other hand, the private sector is now rapidly improving performance in order to survive and face the challenge of global competition. In recent times its pace of assimilation of technology has been praiseworthy. It is displaying considerable dynamism and sufficient hunger for growth. However, it lacks the infrastructure and also the domain knowledge. It is yet to make sufficient investments in acquiring the desired levels of understanding of modern warfare and the technologies that drive military doctrine. Since the top management of the private sector has little or no knowledge of the defence industry it is somewhat risk averse and naturally slow in decision- making. It wants to drive change but yet remains reluctant to put its money where its mouth is. Opportunities are allowed to slip because of the absence of the certainty of orders.

Looking at the strengths and weaknesses of both there is strong argument for synergy cooperation and partnership. The private sector would have to needlessly duplicate infrastructure and also invest in learning the business. The public sector could benefit from the management systems of the private sector its work culture and its relative freedom and flexibility of decision- making.

While the idea of public-private partnership is sound it is unlikely to happen unless the public sector companies see it as their route to survival. Forcing such tie- ups may turn out to be counterproductive

For technology, both would currently remain dependent on foreign companies. But then why has the government’s proposal for private-public partnership not got off the ground? Firstly because the marriage is being imposed instead of the partners choosing to wed on their own. Market forces are not yet driving it.

From the public sectors point of view they gain little by partneering the private sector. Better management is a notional issue and not easy for the public sector to accept. There is nothing else that the private sector can bring to the table. Therefore the public sector has virtually no interest in the proposed reforms and would prefer to let the system of protection continue. Moves and initiatives taken by the private sector have so far generally been spurned by the PSUs. There might be some exceptions but these are hardly indicative of any serious desire for partnership.

To support their position, they point out that adequate public-private partnership is already in place. They quote figures of the orders that they place on Small and Medium Enterprises ( SMEs ) for raw materials and components. However the nature of this relationship needs some delving into. The SMEs have certainly benefited from the point of view of making money. But have they imbibed efficiencies or better technologies or improved on quality? Unlikely!

Also read: Doing business with the Indian Defence Regime

On the other hand the private sector finds it expedient to partner the public sector. There are many reasons for such an approach. The primary being their assessment that in the short term the easy way to penetrate the defence business is by joining hands with the public sector. They suspect that despite the pronouncements of the government in practical terms the government is unlikely to afford them a level playing field. Then there is the question of risk mitigation. Other issues like investments in infrastructure etc need no reiteration.

Beyond the debate of private versus public there are some genuine issues of government control over technologies and processes considered critical. We also have legitimate macro-economic management concerns of duplication of capacities and labour management. These issues cannot be glossed over and require considerable deliberation for sound policy formulation.

Together with the policy changes that are being implemented, the way ahead is to concurrently push for reforms in the management of the OFB and the PSUs. On this subject it is understandable that political considerations would finally determine decisions and therefore some fine balancing would be unavoidable besides regulating the pace of change in order to make the process as acceptable as possible.

In pushing for public-private partnership the government must be wary of sending good money after bad money. It would be advisable to just let the market forces dictate the formation of joint ventures and consortiums.

 For accelerated economic growth a countrys ability to absorb and develop technologies is a key factor. A dynamic and thriving defence industry helps to create and sustain this capability.

What is being done about our strength in software development? Not enough! With the world’s best software companies like Infosys, TCS and WIPRO and a large number of smaller software companies that are highly cost competitive we should by now have been developing software for most of the major global defence companies. The same software could concurrently be adapted to meet our specific needs. For most military applications firms have developed generic software capable of adaptation. Currently most systems are operating on the third or fourth generation of such software. That is the level at which we must enter so make up for lost time. For this idea to take concrete shape the government should create an appropriate forum that can give direction and monitor progress. Software we must note is going to be the main component of future defence systems.

To summarise: –

For accelerated economic growth a country’s ability to absorb and develop technologies is a key factor. A dynamic and thriving defence industry helps to create and sustain this capability. Besides it can also contribute significantly to the country’s wealth.  We have in recent years set in motion the process of reforming the defence industry. What we need to do now is to build up on the momentum gathered.