Indian Defence Review

As a part of PM’s grand initiative to combat COVID and looming economic crisis, the FM has been unveiling a slew of major initiative to resuscitate MSMEs, Power sector, migrant workers, farmers etc. These are essentially intended to provide increased sinews to the “Make in India” initiative, christened “Atmanirbhar Bharat”.

While many doubting Thomases dub these announcements as “old wine in new bottle”, it must be admitted that many of these initiatives are genuine move by the government to support beleaguered segments like MSMEs, migrants, street vendors and marginal farmers who are not part of the discourse of elite urbanized organized India.

The credit guarantee to these highly stressed class in the time of acute financial distress is as much an uncanny political move to obliterate political opposition as also a testament to a more inclusive India where the defenseless does matter to the state in demonstrable manner.

Defense Sector Reforms

Today’s script in regard to the defense production sector tries to take the initiative of Make in India initiative to a more concrete paradigm shift. As would be recalled, Kargil war with the Pakistani army was a real wake up call to the India’s security apparatus, to be more integrated in terms of intelligence gathering, be more nimble and improve the structural arrangement in the Ministry of Defense so that procurement and acquisition processes are properly categorized and indigenization is given pride of place.

The Defense Procurement Procedure (DPP) 2005 is testimony to the above structural reforms that the Subramanian Committee had suggested. The broad panoply of DPP is predicated on three planks namely Make in India through indigenous design of equipment and platforms, or buy technology from abroad and convert the designs to production or import platforms, weapons and systems from abroad outright.

The import option was the predominant option till India’s debacle against China (1962) which has made technology transfer the most widely used option since 1963, beginning with TOT for Mig-21 aircraft from USSR. India’s romance with Russia and its 80% defense inventory from Russia is a testimony to Nehru’s India predilection towards Soviet Union. The intermittent import of Jaguars, Mirage have been aberrations rather than the norm.

Economic Liberalization in Defense Production

Economic liberalization in the defense sector in 2001 for the first time encouraged 100% private sector participation in defense production and 26% FDI. This has given a nudge to the Make in India initiative. The Kelkar Committee (2005) made a powerful plea to provide level playing field to the private sector players who are understandably peeved that they are upstaged and ostracized by carefully protected defense PSUs and ordinance factory behemoths.

While the DPP has been revised from time to time to encourage greater private sector participation, introduce an offset policy, the Dhirender Singh Committee (2015) was a major attempt to bolster strategic partnership with private sector players. Despite its pious intentions, these recommendations have remained still born.

The FDI limit was subsequently increased to 49% by the Modi government, with a provision to increase the limit based on strategic consideration. However, this has not attracted major foreign players to set up production base in collaboration with private sector players, nor has it brought any significant FDI into the defense sector.

Increase in FDI limit

The announcements by the FM to increase the FDI limit to 74% is indeed a masterstroke. This is indeed the policy followed by China which attracts major OEMs like Boeing to set up their manufacturing base in China. The FM is expecting that the Anti-China Wave that is wafting through the air will help India to garner partnership with major foreign OEMs like Lockheed Martin and Boeing.

Many sensible observers have been continuously bringing to the attention of the government that unless OEMs or a design house has major equity stake and decision making power, it will not bring in critical technology to India and set up production arrangement in India.

Hopefully, this major metamorphosis in India’s policy architecture in defense FDI will make India a preferred destination in Indo-foreign joint ventures.

The Corporatization of Ordinance Factories

The other major recommendation has been to corporatize the 40 ordinance factories which produce arms, guns, tanks, Infantry Combat Vehicles, ammunition, and a host of low tech items. Unlike the defense PSUs which have considerable autonomy, the India’s defense ordinance factories are cesspools of inefficiency, poor quality, high cost and lack of accountability.

As a government department, it enjoys the protection of the government against a slew of complaints from the defense services ranging from poor clothing, ill-fitting shoes and accident prone ammunition. The P.M. Nair Committee in 1988 had suggested that the clothing group of factories should be privatized.

The Kelkar Committee had suggested that the Ordinance factories should be corporatized. However the government has not been able to take decisions in this regard since the powerful trade unions of 1.5 lakh ordinance factory employees have successfully check mated the government in this regard. It remains to be seen whether this corporatization move would add to the woes of pandemic and migrant workers being faced by the government at the moment.

Be that as it may it is presumed that corporatization may possibly bring in greater cost consciousness and pricing mechanism of products of ordinance factories. Besides it is hoped that with greater autonomy as a Navratna Company, the ordinance factories will have greater flexibility in forging joint venture arrangement with foreign players and promote defense exports.

FM has been careful to avoid privatization of the ordinance factories which is indeed unfortunate. As the P.M. Nair Committee had very rightly suggested that the ordinance equipment factories at Kanpur needs to be privatized and the services certainly deserve better uniforms and shoes.

Protecting indigenous defense manufacturers

The third major announcement that the FM has made is to encourage the Make component by preempting imports in certain areas. She has also suggested that a separate budget would be provided for domestic capital requirements.

Presently, nearly 70% of India’s defense arsenal is imported. While the present initiative of the FM is continuation of her earlier announcements to deny global tenders upto Rs. 200 Crores to encourage purchase from MSMEs, the present move by the FM to replicate it for defense products is most regressive.

There is always a raging debate in the defense ministry between the services and the DRDO that the services should be happy with what they provide as second best but reasonably safe weapons systems, which comes out through indigenous design. This is indeed a very unsustainable argument as the services must be provided with the best weapon system to upstage the adversary.

It may be worthwhile to mention that many times the terrorists have a significant edge over the local police because of the superior weaponry that they wield. The self-reliant bravado in choice of weapons and platforms by the defense services at the cost of quality is indefensible.

Bolstering MROs in India

The FM has also made several suggestions for making India a Manufacturing, Repair and Overhaul (MRO) hub. In the last budget she had also suggested that the tax concession would be extended for setting up such MROs in India. At present, MRO is a big business globally accounting for nearly $45 Billions. India accounts for less than 1% of such business.

Most of the Repair and Overhaul (ROH) of civil aviation platforms and military platforms are done abroad. MROs require massive capital investment, quality man power, tooling and proper certification and safety arrangement. India can be an ideal MRO destination with its skilled manpower and excellent IT base.

It has been assessed that the cost of ROH of aviation platform like Jaguars and Su-30 will cost 30% less compared to their ROH cost abroad. This is indeed an opportunity for defense PSUs like HAL and defense shipyards like MDL to invest in ROH facility, thereby bringing down the humongous cost and equipment downtime that ROH entails when undertaken abroad.

India can also be a sweet spot for attracting foreign countries. However the pious intention of FM in this regard needs to be followed up properly and translated into the reality. Else the saga of many recommendations like the Dhirendra Singh Committee and Sisodia Committee would only gather dust under bureaucratic obduracy.

Dilution of GSQR

Finally, the FM has suggested that a project management unit should monitor delay in weapon acquisition. She has also suggested that the GSQR (General Staff Quality Requirement) should be realistic. These are old arguments being revived again possibly to dilute the qualitative requirement needed by the defense services for pandering to supply by domestic suppliers. This is again a veiled attempt to encourage low technical dimension products from indigenous suppliers as against a global tender which will give India the best of defense products at realistic costs and acceptable quality.

Nirmala Sitharaman is an old mandarin of the defense ministry and has a ring side view of how the services crave for state of art weapon systems through imports and the DRDO, DPSUs and ordinance factories constantly bat for dilution in quality standards.

David Ricardo, father of free trade, dismantled the obnoxious Corn Law in 1840 which protected the rich farmers and harmed the consumer interest with high price. The complicit state fostered the veil of protection to inefficient entities. The world has come a long way to sing the hosannas of Globalization which has made capital mobile, knowledge to move freely which has helped developing countries immensely due to free trade.

The way forward

Defense production and acquisition of weapons system have been part of this free trade regime where the defense services set the tone of quality requirement for their weapons system. Any policy which seeks to compromise and belittle such a robust arrangement under the shenanigan of “Atmanirbharta” is both ill-conceived and compromise in security imperatives.

The Kalam Committee in 1993, after extensive study had assessed India’s Self Reliance Quotient to be 30% only and had pitched to increase it to 70% by 2005 by augmenting research and testing facility and absorbing as much design capability for subsystems like seekers, AESA radars, RLG, Stealth technology, smart munitions etc.

DRDO’s track record in indigenization of Propulsion, Avionics and Weapons has been rather poor. Its Joint Design Development venture in MR SAM with Israel has been edifying. Our Joint Venture (JV) with Russia for producing Brahmos missiles is creditable.

However, HAL’s JV Co Design and Production agreement with Russia for producing a fifth generation stealth aircraft has been shelved. India’s effort should be to facilitate such Joint Design and Development initiatives for critical systems by involving the private sector and academia, funding them and busting DRDO’s monopoly.

Defense must not compromise on GSQRs to facilitate acquisition of substandard indigenous products to promote Make in India.

The renewed thrust on Make in India in Defense Production will turn the clock back on global competition, quality and price. The government must do all policy jigs to encourage MSMEs to revamp their efforts by giving tax holiday, credit guarantee, skill support to improve the quality of their products and even tax holiday to invest more in R&D, but not protection from global competition. However the government needs to be complemented for increasing the FDI limit to 74%, a long felt demand.

Time has come for forging long term partnership and JVs with reputed OEMs and design houses in India. The Chinese dragon must get a real competition from a resurgent Indian economy for building a global supply chain in many defense products. The government must also eschew its reluctance to prop up defense exports, without compromising our strategic interests.

One wishes that the proposed corporatization of OFs should have been complemented by privatization of low tech products. We cannot protect acute economic inefficiency of non-performing OFs.