The much publicised Strategic Partnership Model (SPM) launched with a laudable aim to allow the growth of the private sector through the route of Joint Ventures with foreign OEMs failed to deliver initially due to lack of clarity on many issues. The SPM, from the word ‘Go’, was put through so many amendments that it seemed to lose focus. For instance, the very definition of a ‘strategic partner’ saw any number of amendments. All the above put together ensured that while the slogan of Make-in-India made much thunder and noise in the defence manufacturing circles, its translation into ‘orders for the private sector’ remained only a dream.
Just six years ago a critical procurement deal got derailed because the foreign Original Equipment Manufacturer (OEM) could not find suitable private players in India…
Open sources reported on April 07, 2020, that the private sector giant Larsen and Toubro (L&T) has won a ‘large contract’ worth –around Rs. 5,000 crore for establishing a comprehensive unified Network Management System for the Indian Army. A huge success indeed for a firm in the private sector of the Indian defence industry! Compare this with the scenario just six years ago when a critical procurement deal got derailed because the foreign Original Equipment Manufacturer (OEM) could not find suitable private players in India who were ‘technologically matured enough’ to absorb the type of technology offset which it was mandated to be discharged in the private sector. The inability of the OEM to implement the offsets commitment killed the deal.
Around the same time i.e. from 2011 to 2014, the ongoing negotiations with an Israeli OEM for the Medium Range Surface to Air Missile (MRSAM) system ran into a huge work-share problem. The Indian partner was rightfully demanding enhancement in the ‘qualitative content’ of the work-share while one of the many arguments of the OEM was that ‘this level of technology cannot be handled in-house’ by the Indian player. From the state mentioned in the above two incidents till what happened on April 07, 2020, is a long and an uphill journey for the defence private sector – a journey that has been filled with unkept promises, frustration, endless waiting for orders, and also, some occasional bright sparks of successes. This journey can be divided into some distinctly identifiable milestones as under:
• The Slogan Phase
• The Thaw
• Move Forward
• Initial Successes
Long Way Ahead
On September 25 2014, Prime Minister Modi launched the Flagship ‘Make-in-India’ initiative opening some 25 sectors of the Indian economy that included the defence manufacturing sector…
The Slogan Phase
While the history of the defence private sector began in January 2002, when the Government opened defence production to the private sector, for most of the early existence, it simply simmered as if to indicate ‘that it is there’ while the complete ecosystem of defence production was anchored on and dominated by the public sector. Besides the Defence Research and Development Organisation (DRDO), it was the Defence Public Sector Undertakings (DPSUs), state-run shipyards and a mammoth Ordnance Factory Board (OFB) with 41 Ordnance Factories (OFs), that shared amongst themselves whatever little the country produced indigenously (a mere 20-30 percent) while the nation held the tag – ‘second largest arms importer of the world’.
For many years, while all the above continued to happen, the defence private sector existed as a non-entity handling some low-end business that got doled out/spilt over from the kitty of the public sector monolith. Something big happened in 2014, when on September 25 that year, Prime Minister Modi launched the Flagship ‘Make-in-India’ initiative opening some 25 sectors of the Indian economy that included the defence manufacturing sector.
The majestic lion made up of machine and industrial parts that stood for ‘Make-in-India’ said it all. It gave a clarion call to foreign investors and OEMs to set up shop in India, increase their investments here and enter into a regime of Joint Ventures (JVs), co-development, co-production with buy back, Transfer of Technology (ToT), Memorandum of Understandings (MoUs) and more.
Much of the spirit of Make-in-India was captured in the Defence Procurement Procedure (DPP) which got launched with much fanfare at the Goa Defence Expo on March 16, 2014. The DPP 16, as it is commonly referred to, set out in the preamble its key aim of ‘building self-reliance’ in defence equipment production and acquisition. It also talked about the core values of ‘fair competition and level playing field’ besides other virtues of probity, accountability and transparency. To walk the talk, the Ministry of Defence (MoD) introduced several new provisions to boost indigenous production. Indigenously Designed Developed and Manufactured (Buy Indian-IDDM) was introduced as Priority 1 categorisation of procurement, innovative ideas like Make 1 and Make 2 procedures with special reservation for the Micro Small and Medium Enterprises (MSMEs) therein (For Make 1 < Rs 10 crore and for Make 2 < Rs 3 crore worth of projects earmarked for MSMEs), unshackling the L1 syndrome by building options in Qualitative Requirements (QRs), eliminating the single vendor phobia and putting forward bold and progressive options like the Strategic Partnership Model (SPM), and so on… the list can go on. But did all the above address the core issue under discussion? Did the private defence industry derive the benefits and the strengths that were envisaged in the Make-in-India initiative? Alas! No.
The private sector players continued to wait for some goodies from the government falling in their laps, but nothing happened at least in the two years that followed the launch of Make-in-India. Some facts are presented:
• Just to state the starting conditions, in the year when Make-in-India got launched, the share of Indian Army’s capital acquisition for the FY 2013-14 was 82.39 percent for the public sector and 1.91 percent for the private sector (the balance being of foreign vendors and other expenditure for which public/private classification is not available).
• The same figures for the Indian Air Force were; public sector 41.84 percent, private -1.47 percent.
For long periods of time in their existence, the DPSUs and the OFs were used to the ‘nomination process’ for orders that avoided all competition…
Nothing much changed in the next financial year and a half:
• In the financial year 2015-2016, the DRDO alone won a total of 78 projects amounting to a whopping 70 percent of all the projects sanctioned, mopping up some Rs 3,723 crore while the total share of the private sector remained a pittance at less than five percent.
For long periods of time in their existence, the DPSUs and the OFs were used to the ‘nomination process’ for orders that avoided all competition. For instance, all orders for the Akash Weapon systems, HAWK jet trainers, SU 30 MKIs went by nomination of a DPSU/OF. While the MoD did institute a major policy change for the defence industry in the FY 2009-2010 by introducing competition in ‘Buy Indian’ and ‘Make India’ categories, sadly the ‘mindset’ of the bulk of orders to DPSUs/DRDO/OFs continued well into FY 2015-2016 and 2016-2017. The results were evident in the year-on-year swelling order books of public sector players while the private sector largely remained bereft of any major orders. A case in point: the order book of Bharat Electronics Limited (BEL) increased by a whopping 25 percent to Rs 17,000 crore in the FY 2016-2017 while similar growth in the private sector was minimal.
To make things worse, many new and bold initiatives offered in DPP 2016 had a slow and problem-ridden start. A sample: The initial Make-in-India Projects such as the Futuristic Infantry Combat Vehicle (FICV), Tactical Communication System (TCS) and Battle Management System (BMS) had a troubled start and a snail-paced forward movement. Even four years after sanction, these projects did not even reach the development stage – approval and production are another story. In the initial stages, there were many doubts on several aspects of the Make 2 procedures such as modalities of implementing the ‘relaxed criteria’, suo moto proposals, foreclosure of projects and others. The required clarifications from the MoD remained awaited for a long time.
The much publicised Strategic Partnership Model (SPM) launched with a laudable aim to allow the growth of the private sector through the route of JVs with foreign OEMs failed to deliver initially due to lack of clarity on many issues. The SPM, from the word ‘Go’, was put through so many amendments that it seemed to lose focus. For instance, the very definition of a ‘strategic partner’ saw any number of amendments. All the above put together ensured that while the slogan of Make-in-India made much thunder and noise in the defence manufacturing circles, its translation into ‘orders for the private sector’ remained only a dream. This phase which carried on more or less till the end of FY 2016-2017 ultimately turned out to be nothing more than a ‘slogan phase’. Ironically, the biggest culprit for inflicting the ‘slogan phase’ on the private defence sector was not finance, not procedures, not rule books, but ‘an attitudinal mindset’ of the authorities and the decision makers that it is the public sector that will somehow drive defence manufacturing while the private sector was ‘not yet ready’.
Appraised of the “hollowness of Make-in-India” for the private sector in nearly two years of its launch, the Government of India came out with some concrete steps…
The first signs of success post the Make-in-India launch, appeared in the heavy vehicle sector or more appropriately, the High Mobility Vehicle (HMV) sector. Thanks to the imbroglio created in the Bharat Earth Movers Limited (BEML) Tatra vehicles with all the allegations of bribes, kickbacks, bloated up prices and more, the private sector tried to fill the vacuum so created. In some of the earliest successes, in September 2014, L&T bagged a contract for vehicle platforms for Grad BM 21 rocket launcher for Rs 90.89 crore. This was followed by Tata Motors winning a huge contract in March 2015 for supplying 1,239 6×6 HMVs with cranes at Rs 914 crore and Ashok Leyland for 6×6 and 8×8 HMVs at Rs 355 crore.
Right from 2002, when the Indian defence sector was opened up 100 percent to participation by the Indian private sector, the Government mandated the private players to obtain an Industrial Licence (IL). Initially, there was a lot of confusion as to what items will require an IL. Also, against a stipulated period of seven to eight weeks, the grant of ILs took up to two years. Much of these started to ease out in 2016-2017, as the Government stepped in to streamline the IL process. The numbers of IL granted increased sharply. It is no wonder that as of December 2019, a total of 460 ILs had been issued covering some 275 companies., Appraised of the “hollowness of Make-in-India” for the private sector in nearly two years of its launch, the Government of India came out with some concrete steps in the FYs 2017-2018, 2018-2019, 2019-20. Some of these are covered:
• Pursuant to the pro-active initiatives of institutionalised platforms for MoD – Industry interaction (CII, FICCI, PHD Chambers), the Government addressed the lurking doubts in the SPM. It also made efforts to enthuse some life in the Make 1 and Make 2 procedures and tried to live up to the promise of ensuring a semblance of reservations to the MSMEs in Make projects. Resultantly, as of July 2019, some 36 Make 2 projects were given the ‘in principle approval’ by the Government. Also the validity of the IL was enhanced from the earlier three to 15 years with a provision for an extension for another three years.
• The Government also addressed the loopholes in the Make 2 procedure. These included measures as relaxation of eligibility criteria, minimal documentation and provision for consideration of those proposals which have been suggested suo moto by the industry.
• The SPM which had got stuck due to many issues ever since its launch in February 2016, moved towards resolution based on a direct push from the Prime Minister’s Office (PMO) itself saying that the private sector must get a significant share of projects and contracts as the ‘public sector alone’ approach has not yielded the desired end-state.
From around 2018 beginning, the move forward of the private sector had started to become visible…
• There were huge insolvents in the SPM such as the question of ensuring competitiveness once a private player has been chosen as a strategic partner for a certain specific sector/role or the misgivings in the fairness/eligibility of the selection process or lack of clarity on the division of work. All these issues were slowly moved towards resolution in a spirit of finding the middle ground.
• In April 2018, the MoD launched an innovative ecosystem for defence-titled Innovation for Defence Excellence (iDEX). The aim was to enhance innovation and technology development in defence and aerospace sector by engaging the private sector, be it big players, start-ups, individual innovators or academia. Two years of iDEX have been a very good going indeed. As of July 2019, some 600 start-ups have been engaged in yielding 44 different solutions in response to many-a-problem statements received from the armed forces.
With all the measures as stated above, the initial ‘NO GO’ stage of the ‘slogan phase’ started to get a move on and the private defence industry started to see a ‘thaw’ happening.
The Move Forward
From around 2018 beginning, the move forward of the private sector had started to become visible. Starting with their minimal share in the defence pie as quoted earlier, it continued to grow steadily. For instance, in the FY 2018-2019, for the defence and aerospace sector, the share of private sector touched Rs 15,000 crore as compared to the public sector share of Rs 63,208 crore. A climb of more than 20 percent in the last two fiscals! In 2019, another significant development took place. In September of that year, the DRDO formulated a policy aimed at ToT. Under its programme titled ‘DRDO-Industry Partnership: Synergy and Growth,’ ToT contracts were signed by the DRDO during the Goa Global Expo and Summit 2019 with 16 Indian companies that included three companies in the start-up mode. The Defence Minister’s delegation to Russia in November 2019 included some 50 Indian companies in a bid to attract Russian partners in JVs and MoUs in order to boost defence production in India.
From around this time, some initial successes started to happen by ones and twos. Some examples:
• The acquisition of K9 Vajra Self-Propelled Howitzer was a huge contract valued at Rs 4,366 crore. For the first time in history, a bid of this value led by the Indian private sector major, L&T won a global military tender.
This was not all. The contract for the above deal, signed on November 09, 2018, made India proud once again. Out of the 100 K9s that were contracted for, only ten were to be received in Semi-Knocked-Down (SKD) kits from the South Korean OEM Hanwha Land Systems (HTW), the balance 90 were to be made wholly made in India; all in a matter of two years. One can imagine the windfall of opportunities such a contract would bring to the Indian private sector. Surely L&T will not make the K9 all by itself. What about a small time player who supplies a tiny sub-component? Many wheels in many companies will roll.
• Another initial success related to the procurement of 145 M777, 39-calibre 155mm Howitzers from M/s BAE Systems, USA under the Foreign Military Sales (FMS) route. A huge contract valued at Rs 5,070 crore is a glorious chapter for the Indian private sector giant Mahindra Defence. Some highlights:
— Way back in February 2016, BAE Systems, upon careful analysis of the technical prowess of Mahindra Defence, selected the private sector player to establish an in-country Assembly Integration and Test (AIT) facility for M777.
The Defence Minister’s delegation to Russia in November 2019 included some 50 Indian companies in a bid to attract Russian partners in JVs and MoUs…
— With AIT operational on our land, out of 145 howitzers contracted, only 25 were scheduled to come fully assembled from the BAE, rest of the 120 Howitzers were to be progressively built by Mahindra Defence in India.
— AIT also meant a facility for life-time support of a foreign made weapon in India. What a reassuring fact!
• Another initial success relates to a Public-Private Partnership (PPP) Project for the Advanced Towed Artillery Gun System or ATAGS for short. At Rs 3,364.78 crore for 150 guns, ATAGS has the distinction of being the biggest completely indigenous PPP Project. Also, the prototype ATAGS from Bharat Forge holds the world record for achieving the longest range of 48.074 km.
The uniqueness of ATAGS is that not only one but three private sector giants have joined hands in producing the gun. Bharat Forge along with OFB is making the gun barrel, Mahindra Defence is manufacturing the recoil system while TATA Power Strategic Equipment Division (SED) along with Punj Loyd, is producing the muzzle brake and some other components. It is indeed a positive development for the private sector wherein the Government in a kind of policy reversal, has decided that that the country’s first home-made 155mm towed gun ATAGS will be built jointly by public and private sector players.
• Open sources reported in March 2019 that TATA Power SED has bagged a Rs 1,200 crore contract for supplying 23 systems of Three-Dimensional (3D) ship-borne air surveillance radars. While this is a radar which has been built by a Spanish company Sistemas Defence, it is TATA power SED that is the Prime contractor with the foreign OEM providing product support.
Slowly but surely, a network of Indian private sector players are finding themselves worthy, by way of business experience, domain expertise and financial clout…
• Indian Defence and Aerospace Company (IDAC) the flagship company of Adani Defence and Aerospace is already into a number of niche sectors such as systems and avionics for aerial platforms, carbon composites, aero-structures and assembly for Unmanned Aerial Systems (UAS), transmission and gearboxes for rotary-wing platforms. IDAC is poised for integration of larger platforms such as fighter and transport aircraft, helicopters, UAS, as well as transporter-erector-launcher platform for missile system.
From coal mining to highways to gas retail, and on to defence and aerospace, this private sector player is focusing on ToT from global players for critical platforms and technologies, helping out the growth of MSMEs and building capabilities for strengthening the indigenous muscle.
This list can go on and on, establishing one fact over and over again that the private sector ‘has the capability and the potential’. Not that it has no unresolved issues. It has many of them with the MoD, with the Government and with the old public sector mindset that refuses to change. With all the initial successes and amidst buoyant sentiment, a new meaning of the Make-in-India has emerged in recent times – the one that goes to strengthen the defence manufacturing ecosystem by cutting through the red-tape and inertia of yesteryears. It roughly unfolds like this:
• Slowly but surely, a network of Indian private sector players are finding themselves worthy, by way of business experience, domain expertise and financial clout, to measure up as ‘suitable global partners’ and trustworthy members of the global supply chain.
• Such players, as stated above, are taking bold steps to forge international partnerships with world’s best OEMs by first putting Indian money and capability on the table and then asking them to join in for a win-win. With the aura of a market as huge as India, the foreign OEMs are all too willing, in fact queuing up!
• Winning bids amidst fierce global competition and taking upon them to supply major platforms in niche technology domains to the defence forces all on their own clout and confidence.
• Taking on the role of becoming centres of excellence in the global supply chains by undertaking design, development, manufacture and export of big ticket/small ticket items on the global format.
By default, the big projects in the hand of leading front-runner giants also bring many opportunities to small businesses to keep the wheels rolling. The results of the above can be gauged in the pattern of growth of funds of the private sector vis-à-vis public sector in the recent past. Here is a sample:
• It was reported in July 2019 that the sales turnover of the private sector is rising faster than the DPSUs. In that, in FY 2018-2019, while the annual production of the private sector jumped by 12 percent year-on-year, the same was only three percent for the DPSUs. This translates to a compounded annual growth rate of seven percent for the private sector as compared to the 3.5 percent of the DPSUs.
As much as 73 percent of the share still belongs to DPSUs and OFs and a mere seven percent is attributed to other PSUs/JVs…
• Out of the total domestic annual sales turnover of the defence industry amounting to some Rs 80,502 crore in FY 2018-2019, the share of private sector has jumped to Rs 16,000 crore, (20 percent) recording a positive year-on-year increase of over four percent.
Still a Long Way To Go…
All that has been said above must not lead to a conclusion that the private sector has arrived fully. In fact, the overall picture is far from perfect and there are miles to go. Some details:
• Just as a mirror image of the rosy picture of the faster growth in the revenue and a bigger total share of 20 percent in the pie of defence annual sales, the fact remains that as much as 73 percent of the share still belongs to DPSUs and OFs and a mere seven percent is attributed to other PSUs/JVs. So where are the bulk of orders? This requires no answer.
• All the initial successes of the private sector notwithstanding, the abiding feeling in the private sector is that they are still very much struggling for orders.
• According to an open source report quoting a market expert, the reality on ground is that still there is large pipeline of procedures, approvals and multiple layers of processing before an order ultimately reaches a private sector order book. The stark fact is there are ‘hardly any orders on the table’.
It is for the MoD to realise that private sector has the capability and the potential to take Indian defence manufacturing sector to higher levels…
The Way Ahead
It is for the MoD to realise that the abiding feeling in the private sector that there are hardly any orders addressed and is reversed over time. It is for the MoD to realise that private sector has the capability and the potential to take Indian defence manufacturing sector to higher levels. The bureaucracy needs a change of mindset. It is for the MoD to walk the talk on its many promises, whether it is SPM, PPP, ILs and most importantly, the “order flow” to the private sector. It is for the MoD to cut out the l existing unending procedural delays, multiple stages of bureaucratic approvals and the thriving muscle memory of ‘public sector – first port of call’.
If Prime Minister Narendra Modi’s dream of Rs 35,000 crore in defence exports in the next five years is to be realised, then the combined might of the public and private sector will have to pull together. For this to be optimal, the huge untapped potential of the private sector must be exploited to the hilt. That the MoD is at it, is the hope of the author.
 “Defence procurement: way forward” Defence ProAc Biz News VOL VI Issue 1,” at defproack.com. Accessed on 11 Apr 2020.
 2 ibid.Accessed on 12 Apr 2020.
 Ibid.Accessed on 13 Apr 2020.
 8 ibid.Accessed on 14 Apr 2020.
 “Rajnath Singh pushes for indigenisation of defence equipment,” NDTV 16 Sep 2019
“BAE Systems selects Mahindra as partner for Howitzer assembly facility,” at www.livemint.com.Accessed on 15 Apr 2020.
 Ibid.Accessed on 15 Apr 2020.
 “Growth with goodness,” at www.adani.com.Accessed on 15 Apr 2020.
 “Adani Defence & aerospace …” at www. adanienterprises.com. Accessed on 15 Apr 2020.
 “Defence Production: revenues of private companies rise fster than DPSUs,” at wwwbusinesstoday.in.Accessed on 16 Apr 2020.