Indian Defence Review

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.

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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.

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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.

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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.

Look at the pending procurements: some 200 helicopters, 126 advanced fighters, approximately 800″“1000 artillery guns, and half a dozen submarines. Each of these would run into billions of dollars. The conclusion is obvious ““ buy sensibly.

The Left and a few other groups have consistently opposed the opening up of the defence industry to the private sector. They have repeatedly been claiming that the public sector units can produce all that our armed forces need. A brief look at their track record will establish that such confidence in the state owned establishments is quite misplaced. We have 39 Ordnance Factories, 8 Defence PSUs and 50 Defence Research Laboratories, ie. close to 100 establishments, all well equipped, extravagantly staffed, with some excellent scientists and managers, and yet no creditworthy achievements to show.

And what equipment do they produce which is to the satisfaction of our Armed Forces? It would be difficult to list any, other than the ALH from HAL, which has the potential to be a good product. The DRDO might want to take credit for the Agni (1 and 2) and the Prithvi. These are good systems but lose a fair amount of their sheen since they come twenty to thirty years after similar systems were inducted in China.

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. Over the last three to four years the Government has been pushing for public private partnership. The idea being that such association would bring about the desired efficiencies in the public sector.

But the problem is that such forced marriages do not really work. Driven by expediency, some private companies, may consider coming to an under-standing with PSUs for the short term, but such arrangements are not likely to be conducive to the real growth of the defence industry.

The policy of opening up of the defence industry to the private sector was successful in attracting quite a few industrial houses–large, medium and small, to enter the fray. Even prior to the formal opening of the defence sector, some had indirectly been in the business by manufacturing components, sub-systems and systems–for integration by the defence PSUs. Besides, our nuclear and space programmes had involved the private industry. Such companies have executed sophisticated design and engineering jobs that include special metals and alloys, and therefore have acquired the confidence to take on the development and manufacture of defence systems.

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L&T, Tatas, Mahindras, Godrej Boyce, Bharat Forge and more recently Punj Lloyd, are some of the major industrial houses that have staked their claim for defence contracts. Following them, are a large number of second and third tier companies covering a wide range of technologies.

The basic handicap of all these companies at the time the policy change was announced in 2001 was their lack of domain knowledge. They did not know weapon systems, or what force multipliers were, or how the procurement procedures worked. They also did not know how the global arms market operated. They were equally unaware of the equipment profile of our armed forces and their future requirement.

The laudable role played by the CII merits recognition. Both the Government and the industry should continue to encourage the CII to step up its activities to accelerate reforms and change.

Even though these companies inducted service officers whose advice was available, lack of personal knowledge of the business inhibited executives from pursuing projects that entailed taking investment decisions. Increased involvement in the defence sector; and interaction with the defence services, the procurement arm of the Ministry of Defence, and the big multi-national defence companies, over the last five to six years; has impacted positively on the confidence levels of company executives.

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. Such domain knowledge within the industry is imperative. All over the world companies engaged in the business of military hardware extensively employ service officers to develop products and promote business.

Not only this, even governments in order to support domestic industries, lend serving officers and men to participate in trials or make presentations. We may recall some of the service-industry seminars held in Delhi in the recent past which had serving officers endorsing products.

Unfortunately, the environment that we have nurtured in India discourages our retired/retiring officers from being employed. If employed they cannot be optimally used because of the establishments’ attitude towards them. Who benefits? Only the foreign companies and maybe our adversaries! This must change. By encouraging the absorption of service officers by the defence industry, the nation will reap multiple benefits.

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Firstly, the users would have access to informed inputs on developments, which would contribute to better decisions on choice of systems and the formulation of specifications. Rather the industry would gain from the expertise of these officers in an area which they have much to learn about. Secondly, to some extent, the problem of rehabilitation of officers who retire at relatively younger ages would get addressed. It is important that the Government revisits this issue.

While charting the strategy for the development of our domestic defence industry we must identify technologies that require special attention; technologies where our capabilities merit quantum upgradation.

The central issue facing the defence industry is access to contemporary technology, its absorption and assimilation, and then the use of domestic research and development to graduate to next generation systems. South Africa, Israel, China, South Korea, Brazil, and even Singapore, have learnt to successfully navigate this cycle. There is no reason why we cannot emulate their example.

In our case, so far, technology transfers have taken place only to the OFB and the defence PSUs. Their experience should not become the only basis for drawing conclusions on this subject. The appetite for growth of the private sector, and its new found confidence, would undoubtedly yield different results.

A survey of the global defence market will reveal that we are currently the biggest importers of defence systems. The US and China do spend more but they mostly buy domestic. The figures of our projected purchases are being regularly quoted in thousands of crores. They do give us sufficient strength to extract terms that could be used to considerable advantage. Look at the pending procurements: some 200 helicopters, 126 advanced fighters, approximately 800–1000 artillery guns, and half a dozen submarines. Each of these would run into billions of dollars. The conclusion is obvious – buy sensibly.

With these purchases in the pipeline, if we did not get all the technologies we need, we will have only ourselves to blame. Procurement terms must state our purchase imperatives unambiguously. As a matter of fact we could consider modifying our procedures when acquiring big ticket items. Take the case of advanced fighters. All contenders have proven comparable systems. The differences essentially stem from design philosophies and the source of sub-systems and systems that have been selected for integration.

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The gaps in features are so narrow that quite often the choice can be a matter of individual predilection. The same arguments can be applied to the helicopters we want or the submarines. Selection could therefore be based on the totality of the package a vendor offers and not just the L-1 criteria after qualifying. To what extent and in what manner is technology being offered? What are the long term buy back agreements? What kind of investments is the vendor making in India? For such high value transactions we must extract much more than what we have done hither to.

The rules of interaction with industry representatives must change. The MOD and the services headquarters should be more accessible to domestic industry. Currently doors for foreigners open up much more easily.

We need to therefore delve deeper into the manner in which we pursue major acquisitions. There could also be a case for some co-ordination with say the Civil Aviation Ministry taking into account the carriers that Air India would be planning to induct. An important caveat at this point would be in order: under no circumstances should the views of the concerned service headquarter not be the ultimate deciding factor.

While charting the strategy for the development of our domestic defence industry we must identify technologies that require special attention; technologies where our capabilities merit quantum upgradation. It can be assumed that the DRDO, the services headquarters, and also the CII, would have undertaken studies on this subject. Our acquisition plans must look at integrating the road map that we should have drawn for technology inflows and digestion.

Electronics, optics, communications and avionics, are generally the areas that we should be focussing on. We have for a few decades depended exclusively on Bharat Electronics for all our communication requirements as also all our electro-optical products. Today Bharat Electronics may be a profit making company but has little to offer in terms of future technologies or next generation products. The same story applies to HAL, notwithstanding the successful development of the ALH, which should have been offered at least ten years earlier.

There is therefore a strong case to encourage private sector companies to enter these fields. The logic that since the Government has made investments in creating capabilities, all orders must be confined to these companies has proven over time to be counterproductive. 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.

The Indian Government has gradually opened its key sectors to foreign participation and foreign investment in the Indian aerospace and defence industry which currently has a 26 percent cap.

The subject of exports has also been grossly neglected. There may be a Joint Secretary in the Department of Defence Production responsible for promoting exports, but he can do little under the present dispensation. Pakistan’s Ordnance Factories have consistently exported more than us. No defence industry can expect to sustain itself purely on the basis of sales in the domestic market.

Our private sector, unlike our Government owned establishments, have understood this. But they need much more support. The Government and the industry have to work together in a closely co-ordinated manner. Witness the way in which over the past few months the Heads of Governments of Germany, UK and France have brought with them the captains of their defence industries to India. The agenda requires no amplification. Here again we must push to get our act together

If India’s defence industry is today on the threshold of transformation, considerable credit must be given to the role played by the CII. FICCI has also contributed, but only marginally. We may recall the first Army- Industry Partnership Seminar conducted in the mid nineties under the aegis of the CII.

Many of us skeptics murmured—‘what’s the point?’ But CII persevered. It continued with its efforts to nudge the industry and simultaneously influence our policy makers. It has also been actively persuading the big global players to look at teaming with the Indian industry. The results though slow, in the coming times would soon be there for us to witness. Having reached thus far, the CII must not take its foot off the pedal. Much more still needs to be done.

Our vision for India in the next two decades would be flawed if it did not envisage a sizeable, vibrant and sophisticated defence industry for us that is globally competitive and has the capacity to research and develop new state of the art cutting edge technologies.

Before concluding, some of the suggestions made are listed below:

Our vision for India in the next two decades would be flawed if it did not envisage a sizeable, vibrant and sophisticated defence industry for us that is globally competitive and has the capacity to research and develop new state of the art cutting edge technologies. Our industry has acquired a new found confidence. All it needs is direction and support form the Government. The launch of the Nano within four years of it being conceived has been inspiring. We hope the global awe it has attracted is repeated time and again. We want Nano clones now coming out of India’s defence industry stable

With increasing outsourcing opportunities, the Indian aerospace and defence industry is emerging as a key participant in the Asia Pacific aerospace and defence market. Apart from India’s perceived viability as an outsourcing hub for aerospace and defence products, the overwhelming involvement of the Government in areas of supply and demand cements its advantage in the industry. The Government’s pro-active soliciting of international co-operation has seen production moving to India, generating more opportunities for the country. Export competitiveness has been given priority, hence, there has been an increased thrust towards reduced import dependency.

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The Indian economy is one the fastest growing in the world, reflecting the successful reform process initiated in 1991. The Indian Government has gradually opened its key sectors to foreign participation and foreign investment in the Indian aerospace and defence industry which currently has a 26 percent cap. Meanwhile, since two-thirds of the Indian population depends on agricultural income, reforms in this area are widely considered necessary to aid economic growth. Development of the agriculture sector, trade, as well as capital liberalisation, and improvement in investments, are some vital areas being focused upon by the current Government.

The Frost & Sullivan Country Industry Forecast service for the Indian aerospace and defence industry uses a macroeconomic perspective to provide a focused analysis of the industry. This service covers an array of issues pertaining to the industry including political stances, trade policies, industry regulations, as well as their overall impact. Besides enabling decision makers to assess the impact of non-market forces, this analysis also helps in identifying new opportunities in the industry. In addition, it provides a strong base for preparing business contingency plans.