Defence Industry

From Net Defence Importer to Net Exporter?
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Issue Net Edition | Date : 26 Nov , 2019

On November 11, 2019, Defence Minister Rajnath Singh stated, “Looking at the talent India possesses, I am pretty confident that we can become a $10 trillion economy in the next 10-15 years”. He added that the need of the hour is to strengthen research and development in defence manufacturing and that India needs to change course from being a net importer to a net exporter of defence technologies in the near future. He was speaking at the ‘Defence Connect’ seminar organized by the Ministry of Defence (MoD) to showcase accomplishments of the Innovations for Defence Excellence (iDEX) initiative.

For India to emerge as a $10 trillion economy in next 8-10 years, it will depend on the government focus, technocratic handling of finance and management of social change together with tackling unemployment in backdrop of the unbridled population growth. Presently, even the target for $5 trillion economy appears remote in the timeframe specified.

For improving defence manufacturing and becoming net exporter of defence technologies in the “near future” as specified by the Defence Minister, lot will depend on how the indigenous governmental defence-industrial sector is handled in terms of management, accountability, politicized unions, strikes, work culture, output and transforming patchy successes to the required across the board excellence.

For the present, periodic CAG reports point to sub-standard products, exorbitant prices, inability to meet demands of the Armed Forces, as also rampant corruption which is hardly possible without complicity of the Department of Defence Production (DoDP) and MoD officials. Ironically, both MoD and DoPD lack defence specialization. Government’s decision to turn the Ordnance Factory Board (OFB) into a public sector corporate for increasing exports, self-reliance, and latest technologies and innovations announced in May 2019 appears to have run into rough weather.

What financial loss the month long strike by some 60,000 OFB employees agitating against corporatization incurred remains unknown. But significantly the strike was called by the Confederation of Defence Registered Associations comprising multiple unions, including the BJP-affiliated Bhartiya Pratiraksha Mazdoor Sangh (BPMS), Left Front-affiliated All India Defence Employees’ Federation (AIDEF) and Congress-affiliated Indian National Defence Workers’ Federation (INDWF).

After talks with unions, government was to set up a committee to examine aspects of corporatizing OFB and work out modalities. Does this mean sidetracking the issue for the time being considering that the TKA Nair Committee in 2000, Vijay Kelkar Committee in 2004 and the Vice Admiral Raman Puri Committee in 2015 had all already recommended corporatizing the OFB suggesting how to go about it?

October 2019 witnessed some 20,000 employees of the state-run Hindustan Aeronautics Limited (HAL), including 10,000 in Bengaluru, go on indefinite strike for revision of their wages since January 2017 till after nine days the Karnataka High Court ordered them to resume work directing, “It is obligatory for the workforce to call off the strike and resume work, failing which (it) would amount to contempt of the court.” Again, what was the loss to the state is unknown and ironically our Constitution has little provisions against such strikes by government-run institutions causing enormous loss to the country’s economy.

The good news presently is that the MoD is to earmark at least Rs 500 crore for innovations under the iDEX initiative. Media reports government will “try to” bring together innovators with public and private sector industry and the Armed Forces to find new technology solutions.  

Plans are afoot to fund at least 250 defence startups over the next five years in seeking new technologies for providing a cutting edge to the Armed Forces. The plan is to achieve at least 50 ‘tangible innovations’ by the startups that can be inducted over the coming years.

This is a good development but whether these startups will be ‘unofficially’ forced to tie up with public sector undertakings (PSUs) or given free hand to tie up with private sector industry and the Armed Forces will be important.

Unfortunately governmental focus on the micro, small and medium enterprises (MSMEs) appears to have diminished despite all the talk by government officials and media about their importance and future contribution towards India becoming a super power. MSMEs are important for checkmating unemployment since they are the largest employment provider after agriculture. Many OEMs are offloading manufacture of components and sub-assemblies to MSMEs but shortage of skilled manpower is forcing MSMEs to employ mix of semi-skilled and unskilled workers.

Limited availability of skilled manpower results in low productivity of MSMEs. Government’s ‘Skill Development’ program is unable to meet the requirement of skilled manpower of MSMEs. There is provision for government providing stipends to trainees recruited by MSMEs but reimbursement is stuck in vortex of the bureaucracy and red tape.   

US-China trade war should have increased Indian exports but our MSMEs are unable to match Chinese prices. Banks are instructed to give loans to MSMEs on priority but banks insistence on collateral forces MSMEs taking loan from co-operative banks only and borrow from friends at higher rate of interest. Reduction of corporate tax is applicable only to companies.

Almost 90% of MSMEs being either partnership firms or proprietorships are not eligible to reduced corporate tax rate, and end up paying higher rate of tax – about 35%. All these make exporting products at competitive prices difficult. Many MSMEs, like those supplying automotive parts, are not getting enough orders resulting in many shutting down or working partially with many workers adding to the unemployment.

From the above, it is apparent that while theoretically there is government will to improve and move forward speedily, seamless execution in the overall matrix is grossly lacking. In the defence sector, corporatization of the governmental-defence industrial complex and streamlining functionalities of the MSMEs must remain the top focus.

The annual budget of DRDO is some $2.5 billion compared to a little over $3 billion of America’s Defense Advanced Research Projects Agency (DARPA). So why does DARPA accomplish so much and DRDO so little despite guzzling so much money? The recent news of the DRDO wooing private sector for more involvement should not deflect the government from full corporatization of the governmental defence industrial complex. Otherwise transforming from net defence importer to net exporter will remain a pipe dream.

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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

Lt Gen Prakash Katoch

is a former Lt Gen Special Forces, Indian Army

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