It is almost seven years since the first set of major policy changes were promulgated by the Government to give a fillip to our stagnating and moribund defence industry. The fundamental underpinnings to the policy changes were two: firstly, bring in the private sector; and secondly, opening the door for foreign companies by permitting up to 26 percent investment, so that technology inflows are facilitated. It was perhaps rightly believed that these were the two principle measures that were required to catalyse our ailing military industrial capabilities.
While most observers welcomed the policy announcements, there was considerable skepticism over the Governments’ resolve to implement them. Could a system that was wedded to the philosophy of state led industrialisation for almost fifty years, change course that easily? Unlikely! Then there was the problem of our establishments’ recognised and reputed talent for conceptualising great ideas, but seldom demonstrating the capacity to execute them.
The role of defence service officers in galvanising the industry merits special attention. Other than these officers, not many in India, have any idea of modern warfare, military organisations, weapon systems, munitions and the support systems.
However, after having out-of-habit taken recourse to castigating the Government, it would be prudent to also try and understand its compulsions and concerns. The first is that given the nature of the UPA Government, no reforms can be implemented without the Left’s concurrence. The Left’s dogma is to stonewall any measure that appears to threaten the interests of the PSUs and the Ordnance Factory Board (OFB). Thus the Left would not be inclined to acquiesce to proposals that contemplate the relaxation of state control over most core industrial sectors.
Similarly, the defence PSUs and the OFB, would also not be willing to dilute their monopoly of their defence market. Then there is the problem of the huge investments and the capacities created in all our Government owned defence industrial under-takings. Logically, it cannot be any one’s case, that these assets are permitted to decay instead of putting them to optimal use. With the private sectors’ case for a level playing field, the fear that over time, the Government owned defence industrial establishments would be progressively edged out of business, is genuine.
The third concern, and not easy to counter, pertains to the argument of national security. Since the private sector is not under Government control, in times of a crisis it may not respond to national requirements in the same manner that a Government owned unit would do. It is a combination of the preceding concerns that explain the Government’s hesitation in letting go the control that we have witnessed since the policy changes were promulgated in May 2001.
Having acknowledged the issues, it must be conceded that these are not new or unique to us. All nations have had to grapple with the same set of dilemmas, and since we are in the catch-up game, our problems ought to be easier to solve, for we have the experience of other countries to learn and benefit from.
So, while the Government at one level remained wedded to the policy of reforms, in its implementation, it dragged its feet. Consequently, the practice of doing business only with the Government owned industries did continue unchanged for three to four years, much to the frustration of the private sector. This ambivalence of the Government impacted negatively on the private sectors’ attempts at collaboration with foreign companies.
A change in approach is long overdue. India urgently needs an HAL/BE in the private sector. The Government must encourage and support their emergence.
It should therefore be accepted that foreign partnership was, and is, vital for our industry to take off. Indigenously we do not have the technology, nor the know-how, for state-of-the-art systems that the defence services aspire for. Since foreign defence companies were unclear of the Governments’ intent, they were not prepared to enter into collaborative arrangements with the private sector. For quite a while they remained cautious, indulged in fence sitting–hedging their bets.
The air was finally cleared with the Government’s announcement of the Defence Procurement Policy of 2006. The most significant features of this policy were its ‘offset clauses’ and the concept of RURs (Raksha Utpadan Ratnas). Of the two, it is the offset policy that has the potential to yield spectacular results in energising our defence industry.
The billions of dollars of business that this policy will bring to the Indian industry has generated unprecedented excitement among our domestic players. In excitement lies the challenge. They will have to be prepared to absorb complex technologies and engineering skills, and then manufacture components, assemble sub-systems, and systems, at a cost that is competitive and sufficiently profitable.
Ever since the idea of the offset policy was mooted, all foreign multi-nationals have been lobbying intensely to sabotage it. Arguments—that the policy would push up prices, that the Indian industry is incapable of absorbing high technology ‘direct offsets’, that monitoring mechanisms cannot be effective etc–have been in the air for a while. A few days back, it was reported, that the Government is considering some relaxation in the policy.
The areas mentioned were the adjustment of the cost of technology transfer against offsets, banking of offsets and the acceptance of indirect offsets. Though these issues may merit consideration, it would be somewhat premature to accept policy changes even before we have begun. The pressure on foreign vendors to fulfil their offset obligations must remain undiluted. Concurrently, we must concentrate on finding satisfactory solutions to the issues being raised.
Our process of reforms in the management of the Government controlled defence research and production establishments, have regrettably floundered. Many studies have been done, yet”“to all intent and purposes”“the drift continues.
Having dwelt somewhat cursorily on policy issues, an objective assessment of our present industrial capability and its growth potential would now be in order. The Defence industry cannot be viewed in isolation. It has to be a manifestation of the nation’s overall industrial and technological capabilities. Often we tend to ignore this fundamental.
The first place to begin this survey would be to look at the captains of our industry. There is a growing realisation that they have arrived. Globally, they are winning admiration and recognition. In the early nineties, when the first steps of liberalisation were initiated, they nurtured apprehensions about their survival. Having successfully negotiated that phase of transition in our economy, they have at the beginning of the twenty first century emerged with renewed strategic sense that has a global sweep.
Witness the takeovers and the expansion plans of quite a few of our companies. Just a decade ago, who could have imagined, that the Jaguar brand car would be owned by an Indian Company? They have in the recent past displayed vision, and matched that vision with the capacity to implement.
The next requirement is of the work force. It is abundantly available in all categories; managerial, technical and in terms of working hands—our biggest asset being the young age profile of our people. Some intervention can be expected from the government in its labour policies. But being a politically sensitive issue, the Industry will have to live with this problem, till a change becomes environmentally possible.
In terms of spheres in which we have advanced to global standards our range has remained somewhat limited to the automobile sector, pharmaceuticals and a few other disciplines. We have hardly any capabilities in electronics, communications, optics and in the field of aviation. Our industrial policies should focus on these voids. To become a meaningful player in the defence sector, these technologies are vital.
Our biggest strength is software services. Infosys, Wipro and TCS are globally among the best. In addition, there are a host of second tier companies, clocking rapid growth, while doing both domestic and international business. Unfortunately, this strength has not been effectively harnessed to give the requisite impetus to our defence industry. Particularly, because the new generation of weapon systems and related support systems, are all heavily dependent on extremely sophisticated software, the cost of which may be as high as 30–40 percent of the total value of the platform. Electronics we know takes up another 30–40 percent.