Military & Aerospace

India’s Defence Industrial Complex
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Issue Vol. 29.4 Oct-Dec 2014 | Date : 19 Feb , 2015

For India the urgent reorganisation of the MoD needs to be undertaken; it is important – not only for optimising the defence-industrial complex but also to leverage the defence of the country. It would be prudent to replace the MoD by a Department of Defence (DoD) staffed by military professionals with the DoD placed directly under the Prime Minister. Military (user) professionals must also be inducted at all levels of DRDO, DPSUs and OFs including at the managing and decision making levels. We must holistically review our defence technology roadmap with requisite focus on developing cutting edge technologies replete with plans to leapfrog technologies of the future.

As per one report, only ten per cent of the projects undertaken by the DRDO have MoD clearance…

The fulcrum of India’s defence – industrial complex hinges on the 50 plus laboratories of the Defence Research and Development Organisation (DRDO), nine Defence Public Sector Units (DPSUs) and 42 Ordnance Factories (OF). All these together employ an overall manpower of 180,044 employees as on date. Many countries do not have this type of luxury. Private companies hitherto supplied equipment that was not manufactured by the DRDO, DPSUs and OF. The rest of private sector participation in defence was mostly ‘through’ DRDO-DPSUs that left the private sector frustrated while the defence forces ended up paying more money. Also, the equipment arrived in later timeframe than it would have if orders were placed with the private industry.

In the recent past, some projects such as Defence Communication Network (DCN) albeit minus the software, the Tactical Communication System (TCS) and the Battlefield Management System (BMS) the Developing Agency (DA) did finally go to the private sector. However, with the opening up of the defence sector to private companies by the new government already the concept of indigenisation appears to be catching on with Tata, Reliance and Mahindra all taking steps to establish military hardware production facilities in the country.

Yet, the neglect that the defence-industrial complex has suffered over past decades, requires that its reorganisation and remodeling be done in a focused manner under professional supervision. With reference to defence equipment, the Ministry of Commerce and Industry states that the defence equipment in India currently is 50 per cent obsolete, the proportion of state-of-the-art equipment also needs to grow from its current level of 15 to 30 per cent, and the current cycle including acquisitions drafted under the Long Term Integrated Perspective Plan (LTIPP), is expected to include procurements worth $ 100 billion by 2022. So the picture is not very rosy and hence, the earlier we get on with self sufficiency in indigenisation of defence equipment, the better.

The DRDO hierarchy admits they only have ‘pockets of excellence’ to show…

Defence Research and Development Organisation

Despite the DRDO being in existence for decades, the bulk of India’s defence requirements continue to be met through imports. In order to increase the level of indigenisation and enhance self-reliance, a Review Committee was set up in 1995 under the chairmanship of former President Dr Abdul Kalam. This Committee set the target of achieving 70 per cent self sufficiency by the year 2014. Sadly, even after 19 long years, in 2014 the nation still imports over 70 per cent of defence equipment. Obviously, there were no checks and balances, periodic reviews or accountability as even now, no heads have rolled.

Forget the past 19 years. Scrutiny of CAG and CGDA audit reports just for the past four to five years reveal the unethical and corrupt practices that have been prevalent in the system. As per these reports, the DRDO has been developing either substandard equipment or it has extended deadlines and budgets. Many projects have no government approval. As per one report, only ten per cent of the projects undertaken by the DRDO have clearance of the Ministry of Defence (MoD). As per the CAG, corruption and nepotism exist in the upper echelons and there is an exodus of qualified scientists.

As expected, the DRDO challenged the CAG findings though the MoD took cognizance and ordered a review of the approval processes. Even the CGDA audit findings raise serious questions about the capabilities of the DRDO. The audit noted that in several cases, the DRDO had bought equipment from other companies ‘after’ spending huge sums on “Research and Development”. For instance, after spending five years and Rs 129.96 crore to develop satellite signal monitoring equipment, the DRDO ultimately bought the same from a PSU on single tender basis for Rs 724.50 crore in April 2011.

The DRDO has been developing either substandard equipment or it has extended deadlines and budgets…

When COTS equipment is available, the DRDO still spends crores of rupees for reinventing the wheel. For example, the DRDO spent Rs 6.85 crore to develop explosive detectors, which were then offered to the army for Rs 30 lakh per piece while the COTS versions were available at Rs 9.8 lakh apiece and that too with repair and maintenance. The CGDA report also criticised the Joint Venture (JV) technology initiative of DRDO, calling it “import older foreign technology under the guise of joint development” and also accused the DRDO of promoting foreign firms without the mandatory formal Transfer of Technology (ToT) agreement.

Even in an earlier CAG report (2011-2012), the DRDO was found to be spending crores on random research projects while out of 55 high priority projects based on user-requirements, only 13 had gone into production. Again in 2010, a modular bridge being developed for the Indian Army was shelved after eight years of experimentation and expenditure of Rs 21.46 crore. Despite this, just six months later, another Rs 13.25 crore was sanctioned for a modular bridge project. The initiative to produce next generation laser weapons was shut down within a month after equipment for research was procured. These are just a few examples.

The military as the user often has to put up with sub-standard products despite protracted time delays. Many products are nowhere close to their foreign counterparts. Despite importing all IR tubes, indigenous night vision equipment continues to be heavy and bulky.

If we have major voids in modern technology and modernisation in our armed forces, it is because the DRDO emphasis was less on R&D and more on commercialisation in order to earn profit, whereas the emphasis should have in converse – bulk focus on R&D, synonymous with the name of the organisation. Even basic small arms are being imported by the military and the Central Armed Police Forces (CAPF), which should be a matter of serious concern.

Realising that India has been left behind in the technology race, the Prime Minister has given the call to “Make in India, Sell Anywhere”…

The DRDO hierarchy admits they only have ‘pockets of excellence’ to show. The idea of leapfrogging technology has been lost in the practice of re-inventing the wheel despite the avoidable loss of money and time. The irony also has been that all this has been going on with full knowledge of the Department of Defence Production (DDP) of MoD since the Joint Secretaries of the MoD are on all the board of the DRDO, DPSUs and OFs.

Foreign Collaboration

Realising that India has been left behind in the technology race, the Prime Minister has given the call to “Make in India, Sell Anywhere”. Using these Joint Ventures (JVs) and ToT, it would be possible to narrow the technology gap, increasing self sufficiency in indigenisation progressively. However, despite this bold step, a lot of focused measures need to be taken to implement the Prime Minister’s initiative.

Foreign Direct Investment

The website of the Ministry of Commerce and Industry cites a survey undertaken by KPMG saying that approximately 62 per cent of the companies believe that the Indian market is an attractive proposition for foreign defence companies owing to India’s large procurement plans ($100 billion by 2022). But the interest of these companies hinges on India’s ‘large procurement plans’. The question remains whether we are facilitating conversion of their interest into actual investments. We just raised the Foreign Direct Investment (FDI) in defence from 26 to 49 per cent but it is unclear whether we incisively analysed reasons why with 26 per cent FDI in defence over past 14 years, we could attract just less than $5 million (just 4.34 per cent). Had we done this analysis, it would have probably indicated as to what should be the level of FDI that would make the defence sector lucrative to foreign companies.

A day after the 49 per cent limit for FDI in defence was announced, Ulrich Grillo, President, Federation of German Industries met the Defence Minister and later told reporters that German industries would not like to invest in India since with 49 per cent FDI they would not have control over selling the products. That is the harsh truth applicable across the board as far as the defence sector is concerned. How will we attract foreign companies for already announced projects like the mid-sized military transport aircraft and the light utility helicopters to be manufactured in India?

62 per cent of the companies believe that the Indian market is an attractive proposition for foreign defence companies…

The fact is that while the FDI Confidence Index of the country per se has been very high, that in the Defence Sector has been extremely low, and in the current context is likely to remain so unless the FDI policy is reviewed. It is not without reason that the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry has been recommending 74 per cent FDI in case of ToT and 100 per cent FDI in case of the investing foreign partner willing to make available state-of-the-art technology. After all, these recommendations must have been made with due deliberation and need to be taken seriously considering the Ministry of Trade and Industry would logically have much more expertise in the issue compared to the MoD, and more significantly being outside the influence of the arms mafia that works against the vital need of indigenisation. Acknowledging that we have already lost many years, the government needs to take a call on this urgently.

Defence Procurement Procedure (DPP)

The DPP in its present shape is not attractive enough for private industry and more importantly ‘cannot’ absorb foreign technology. This is despite the yearly propaganda of having ‘simplified’ the DPP, done in-house in MoD. Agreeably, some steps have been taken but the question is whether these are enough. Whether this is by design or default is difficult to gauge but the definitive atmosphere of total unaccountability and unconcern points to the former. Coupled with the 49 per cent FDI, the current DPP discourages private industry, both indigenous and foreign. Take for example US technology being offered to us under the US-India Defence Technology and Trade Initiative (DTTI). We float a Request for Information (RFI) as per our DPP asking for a response within three months.

If a US firm is to respond, it needs permission from the US government. If the equipment has components from other firms, each of those firms needs permission individually from the US government. Then there are items and technologies, export of which the US permits only on government-to-government basis through the FMS route. All this can hardly be achieved within stipulated time and requires much streamlining. Without a DPP facilitating absorption of foreign technology in JVs, implies enforcing the status quo in terms of arms export, playing into the hands of the arms mafia. Instead of continuing to annually make cosmetic changes to the DPP in-house by the MoD, it would be prudent to review the DPP through an independent body (preferably non-government aided Think Tank) integrating representatives from military (users), MoD, DRDO, DPSUs, OF, private industry (both Indian and foreign) in 30 to 45 days.

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