Defence Industry

India's Defence Economics
Star Rating Loader Please wait...
Issue Vol 21.4 Oct-Dec 2006 | Date : 09 Nov , 2010

Indian media often highlights the criticism voiced against the Ministry of Defence and its Departments of Research & Development, Defence Production and Defence Finance regarding the cost and time over-runs in crucial defence projects.

Sometimes the criticism is motivated by the import lobby. Sometimes the criticism reflects the anguish of the Army, Navy and Air Force regarding depletion in force levels and fears of obsolescence by the time of eventual delivery.1 Sometimes the criticism is directed at the Army, Navy and Air Force for formulating exotic staff requirements based on futuristic technologies culled from foreign brochures. Sometimes the criticism is aimed at the R&D scientists and Defence Production managers for making rosy promises and tardy progress.2

Despite all the criticisms, setbacks, cost and time over-runs and realities, India has made impressive progress in defence R&D and defence production. The determination to keep abreast of new technologies will continue to drive Indian innovation to surmount technology denial regimes.

Sometimes the criticism reflects the skepticism of constitutional institutions like the Controller and Auditor General and the Public Accounts Committee whether public money is being wisely spent. Each has a grain of truth.

This complex jumble of issues is permeated by realities that are unique to India.

Firstly, in the allocation of resources for defence, India’s priority has been, and will remain, socio-economic development and well-being, followed by defence preparedness and not the other way round. Failure of a monsoon will constrain defence allocations. Two failed monsoons, as happened in the late 1980s, will dislocate defence planning.

Secondly, India has been, and will remain, committed to self-reliance for defence requirements but only to the extent that it is cost beneficial to do so or where technologies are not available. Whenever self-reliance is not cost effective or transfer of technology is necessary, India will import.3 The hazards of sanctions and denial regimes will, to the extent possible, be managed by diplomacy and ‘strategic relationships’ to assure life cycle support.4

Thirdly, India has been, and will continue to be, denied access to futuristic defence technologies which foreign countries develop at great cost. India will continue to develop these on its own. In the 1990s, denial regimes stimulated India to develop world class super computers, space rockets and long range missiles. Knowledgeable persons are well aware that time and cost over-runs are inescapable when developing futuristic technologies.

Fourthly, foreign military-industrial complexes canvas for global orders to amortise their cost of R&D and minimise unit cost so as to be competitive in a global market. Consequently, there will always be seductive glossy foreign brochures to attract the attention of those who formulate staff requirements. The import lobby will always be tempted to belittle indigenous R&D and disparage its time and cost over-runs.

Finally, despite all the criticisms, setbacks, cost and time over-runs and realities, India has made impressive progress in defence R&D and defence production. The determination to keep abreast of new technologies will continue to drive Indian innovation to surmount technology denial regimes.

Relationships

India has dealt with the military-industrial complexes of Russia, the European Union, Israel and South Africa for a number of years. Invariably, defence relationships have been underwritten at Government to Government level.

In the 1990s, denial regimes stimulated India to develop world class super computers, space rockets and long range missiles. Knowledgeable persons are well aware that time and cost over-runs are inescapable when developing futuristic technologies.

During the 1945-91 Cold War between America and the Soviet Union, America and India abstained from a substantive defence relationship. In the 1980s, the Cold War began to wane. Coincidentally, India had started transforming its economy. American industrial corporations began to view India as an attractive investment destination and a promising middle class consumer market – but not yet as a defence market

In the 1990s, a succession of American and European studies began to extol India’s geo-strategic, geo-political and geo-economic potential. India’s democratic secular polity, her non-aligned foreign policy, her aversion to the use of power beyond her borders, her increasingly youthful demographic profile, her educated English speaking engineers and managers, her ongoing economic reforms and her steady economic growth – all these raised their expectations that India could and would assume responsibilities in the North Indian Ocean and on the southern rim of Asia.

After the turn of the century, circumstances coincided to attract the military-industrial complexes to deepen their participation in India’s defence production:

  • The recognition by their governments that it was in their interest to strengthen India’s stabilising influence by forming “strategic partnerships”.
  • The profits to be made from the impending modernisation of India’s Armed Forces.
  • Their acquiescence of India’s insistence on three basic points that would help them when negotiating defence contracts – “Transfer of Advanced Defence Technology”, “Joint Ventures” with India’s private sector corporations and mutually advantageous “Offsets”.
  • As regards ‘Offsets’, an offset clause has been introduced for all contracts above Rs 300 crores. Transfer of Technology for maintenance infrastructure to an Indian public or private firm will be applicable where equipment is bought from foreign vendors. In connection with offsets in defence deals, a recent media report stated “Under the new arms acquisition guidelines, all defence deals worth over $ 70 million will be used as offsets. This requires foreign vendors to buy defence or procure other specified equipment locally from Indian suppliers. With the offset clause in place, foreign fighter jet vendors including Boeing, EADS and Lockheed Martin, have shown interest in developing their activities in India. Boeing, (which is offering the F 18 Super Hornet), is setting up a $ 100 million maintenance repair and overhaul facility in Maharashtra. EADS, (which is offering the Typhoon Eurofighter, the French Rafale and the Swedish Grippen), has pledged training and engineering operations. Lockheed Martin (which is offering the F 16 F Desert Falcon) has made its intention clear of partneering Indian companies to meet its offset requirements.” (Tribune Oct 3, 2006)

In step with these developments, India has recognised that its defence sector, hitherto reserved for the public sector, has to be opened for the private sector and that if reputed Indian companies are to be attracted to diversify into defence production, some rationalisation is necessary.

Rationalisation

Two logical requirements need to be rationalised. The first is the principle of the “Lowest Tender”. The second is the principle that “The Customer is Boss”.

The Lowest Tender Problem

The quantum of preference would need to be kept flexible to attract reputable private sector companies to the defence sector.

A private sector company will participate in defence production only if it can make profits. It has this responsibility to its shareholders.

Since public money is involved, tenders have to be invited. Contracts for initial development are awarded to the lowest tender. After development is completed, specifications and drawings are frozen. Tenders are invited for bulk production. Profits are made mainly in bulk production and not during initial development.

Until recently, the position was that should the company that undertook the initial development not be the lowest tender for bulk production and the contract was awarded to another company, the developer company was neither assured reimbursement of a portion of development cost nor assured of a portion of the bulk production order. The first step has been taken to rationalise this vexed issue. Preference is now given to companies who were involved in the development process. The quantum of preference would need to be kept flexible to attract reputable private sector companies to the defence sector.

The “Customer is Boss” Problem

The Army, Navy and Air Force have clearly established responsibilities. Prima facie, they know best what equipment is “acceptable” and what is not.

Self-reliance, indigenous development, transfer of technology, joint ventures and offsets are not their primary concerns. When their force levels decline and indigenous projects are delayed, they resort to imports wherein

  • Either bulk production is undertaken in India, with import of finished products semi-knocked-down (SKD) or completely-knocked-down (CKD) confined to a limited number (as in the case of the Sukhoi 30 aircraft and the T 90 tanks)
  • Or the entire production is undertaken in India (as in the case of the Scorpene submarines).

The “acceptability” benchmark is taken care of by the Army, Navy and Air Force being fully involved in the competitive evaluations and the final negotiations.

A private sector company will participate in defence production only if it can make profits. It has this responsibility to its shareholders.

In indigenous projects however, the ‘Customer is Boss’ problem takes a different twist. The Army, Navy and Air Force lay down the Staff Requirements and expect, rightly, that the end product will meet these requirements. This rarely happens in major projects because a number of sub-contractors and original equipment manufacturers (OEMs) have their own problems.

Cumulatively, this merry-go-round affects operational readiness, undermines confidence in indigenous capability and defeats self-reliance.5

In one form or another, the same dilemma affects even those countries that have well developed military-industrial complexes.

INNOVATIONS

Replacing Staff “Requirements” by “Staff Desirements”

It is interesting to examine the relevance of a reform initiated in 2002 of the Pentagon’s weapon acquisition process, which reportedly “takes two decades to produce a finished product”.6 Under their old procedure, “a weapon did not enter production until 100 percent of the requirement was met”. The reform aimed to field new systems in as little as five to seven years. This was to be achieved through two interlinked concepts – Evolutionary Acquisition and Spiral Development.

Evolutionary Acquisition

In simple terms, this called for the Services to accept a weapon if it met over half the original staff requirement. And thereafter, to improve and upgrade the weapon as it aged instead of creating a new weapon system. Successive upgrades would aim to fulfill the original staff requirement.

Defence staff officers are trained to assess future threats and formulate staff requirements for weapons that would be able to cope with those threats. Staff requirements do not make allowance for the limitations of indigenous capability or changes in technology.

The idea of upgrades, per se, is not new. The British practice of designating systems as Mark 1, Mark 2, Mark 3, and the American practice of designating missiles as Block 1, Block 2, Block 3 have been there for decades.

The new idea was for the services to consciously accept into service a new weapon that is known to be short of the staff requirements by, say, 30% to 40% and accept that the weapon would gradually evolve as it is updated. In short, it is an incremental approach to delivering new weapon technology.

Spiral Development

Traditionally, a staff requirement defines, as precisely as possible, the weapon/system that is required and the time frame. Spiral development is a method borrowed from the software industry. Its underlying principle is the need for rapid adaptability to change. If during development, the technological risk of rigidly adhering to a staff requirement is likely to negate its timely fulfillment, the development organisation should have the flexibility to redesign what the staff requirement seeks to accomplish.

In short, it is a method that accepts the possibility that the eventual weapon may be quite different from what the staff requirement envisaged but will still accomplish the capability that was sought.

At the intellectual level, this reform requires a mindset different from the traditional one:

  • Traditionally, defence staff officers are trained to assess future threats and formulate staff requirements for weapons that would be able to cope with those threats. Staff requirements do not make allowance for the limitations of indigenous capability or changes in technology.
  • The mindset underlying the reform is that given the rapid pace of change in military technology, “the Defence Staff’s primary responsibility must be to get mature technology to those in the front line as rapidly as possible” rather than insist on 100% fulfillment of staff requirements. It is precisely for this reason that the greatest advances in military technology occur during war. To achieve any desired capability rapidly, it is necessary to accord flexibility to the development organisation.

Institutional Resistance to Change and Caveats

The idea that the eventual weapon may not reflect the original requirement would not find easy acceptance in those having a traditional mindset. Several gut issues are involved like:

  • It is the services who have the responsibility and the accountability for present and future defence.
  • The services know best what they need.
  • A Development Organisation cannot be (nor perhaps would it wish to be) responsible and accountable for ‘effectiveness’ since much would depend on how well the ‘user’ exploits it. Nevertheless, DRDO has repeatedly urged adoption of the Mark 1, Mark 2, Mark 3 concept for DRDO products but it has yet to gain widespread acceptance.

The main caveats would be that the reform is being attempted in America where:

Whenever the DRDO and Defence Production are unable to deliver on time and the Services cannot wait, the Services import their requirements from abroad.

  • There are well funded Government agencies and large private sector defence corporations, whose experienced scientists are engaged in wide-ranging research on future weapons.
  • It is customary for the Government to fund two contenders for developing major platforms like ships, tanks and aircraft. Final selection is made after an operational competition. The loser does not suffer financial loss.

The situation in India is different:

  • Whilst India’s DRDO is the government counterpart of the US’ DARPA, India’s Defence Research Laboratories cannot be considered as the counterparts of the huge American private sector corporations whose survival and profitability depends on their systems finding acceptance in the services.
  • Whenever the DRDO and Defence Production are unable to deliver on time and the Services cannot wait, the Services import their requirements from abroad.

Despite such caveats, there is evidence that Indian innovation can achieve remarkable things when there is synergy. One outstanding example is the Navy’s APSOH Sonar.

The APSOH Project

The Advanced Panoramic Sonar Hull-mounted (APSOH) achieved, as early as the 1980s, exactly what the Pentagon reform sought to achieve in 2002. The time taken to develop APSOH from concept to Sea Acceptance Trials was six and a half years.

The genesis of the project lay in the sinking of the frigate Khukri during the December 1971 Indo-Pakistan War and the inability of the subsequent Hunter-Killer operation to destroy the Pakistan Navy submarine. The urgency of finding a remedy led the Navy to wholeheartedly support what is now termed Evolutionary Acquisition and Spiral Development.

Between 1976 and 1983, a team of talented young naval officers worked hand in hand with scientists at the Naval Physical and Oceanography Laboratory, with professors at the Indian Institute of Technology, Delhi and with experienced naval officers at the production agency Bharat Electronics. They designed, developed, produced and installed the Navy’s first indigenous hull-mounted sonar which, in the complex hydrological conditions typical of Indian waters, performed better than any other sonar in the world.7

Indeed, one of the important recommendations of the Group of Ministers constituted after the 1999 Kargil War was that the Army, Navy and Air Force should establish linkages with DRDO and the production units.

THE WAY AHEAD

Recent changes in Government’s policies encompass four areas:

Joint ventures have been permitted in the defence sector”¦ Joint ventures will help, gradually, to reduce the technology gap and R&D gestation times.

  • An apex multi-disciplinary Defence Procurement Agency has been established.
  • Joint ventures have been permitted in the defence sector. America, Russia, France, Britain. Israel and South Africa, each having well-established military-industrial complexes and defence industries, have offered to join with India to co-develop, co-produce and co-market defence equipment. Joint ventures will help, gradually, to reduce the technology gap and R&D gestation times.
  • Production of defence equipment that was reserved for the public sector has been opened up to the private sector.
  • Defence exports are being encouraged.

This setting presents an opportunity for the Armed Forces, the Defence Research Laboratories, Public Sector Defence Production Units and India’s Private Sector corporations to close ranks.

The first step is to replace “Staff Requirements” by “Staff Desirements”. By limiting themselves to stating the capabilities that are desired, the Services can share their responsibility for defence with other equally earnest segments of Industry and Government.

This will give flexibility to DRDO and provide focus to Defence Industry (both public sector and private sector) in their selection of joint ventures with foreign corporations. They alone know best which technologies the collaborator must transfer to achieve the futuristic capability in the timeframe that the Services desire.

The choice of Joint ventures must be seen by collaborators as dependant on the transfer of the ‘sunrise’ technologies that India requires rather than on the transfer of ‘sunset’ technologies that the collaborator no longer needs.

An essential pre-requisite for success in defence exports has always been whether equipment is in service with the vendor country’s Defence Services. This gives the customer credible assurance of life cycle support. Acceptance into service of the “first version” of Evolutionary Acquisition increases the potential for successful export. It reduces the initial cost of weapon induction. Evolutionary upgrades spread the burden on the budget.

Taken together, changed mindsets, the new policies and concepts like Evolutionary Acquisition and Spiral Development can mitigate the present customer-vendor relationship between the Services and the DRDO. As the Navy’s APSOH has shown, a ‘desirement’ was not only able to deliver world class equipment two decades ago but its upgrades continue to be fitted in the Navy’s latest warships.

Notes

  1. The general grouse of the Army, Navy and the Air Force is that DRDO takes much too long to develop and deliver their requirements. When delays become operationally unacceptable, import has to be resorted to, which because of gestation, entails further delays.
  2. DRDO, on the other hand, has its own problems. Perhaps the most serious one arises from the fact that futuristic qualitative requirements (QRs) require access to frontier technologies that are not acquirable by import because of regimes that deny such technologies on the argument of ‘end-use’. Indigenous development of such technologies invariably takes time. To forestall the obsolescence resulting from these delays, QRs are updated leading in turn to further delays.
  3. Periodic imports will remain advantageous for maintaining force levels and infusing new technology.
  4. Instead of attempting 100% self sufficiency, it is better to ensure product support throughout service life by appropriate clauses in contracts that are underwritten by assurances at Government to Government level, as recent contracts have done.
  5. Indeed, the ‘technology control regimes’ of supplier countries aim to achieve this and keep recipient countries dependant on them.
  6. Defence News of June 2002
  7. The evolution, the unusual combination of circumstances and the fruition of the APSOH sonar project has been discussed in the Navy’s history titled “Transition to Eminence” published in 2004.
Rate this Article
Star Rating Loader Please wait...
The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

More by the same author

Post your Comment

2000characters left

One thought on “India’s Defence Economics

More Comments Loader Loading Comments