Defence Industry

Make in India – Indian Style
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Issue Vol. 32.2 Apr-Jun 2017 | Date : 25 Jan , 2018

The vibrant defence industrial base of DPSUs, OFs and R&D that has existed for decades has not produced the desired results; though there has been success in many fields, predominantly in space ventures, defence manufacturing is not one of them. A low plateau has been maintained in gaining self-reliance in defence production, the reasons for which are many. Can India usher in an era of transformation and self-reliance in defence production with the Prime Minister’s call for ‘Make in India’, supported by the introduction of new policies, thus leading to a shift in focus from being import-dependent to a global exporter in its own right? The answers to this and other questions can be found only if all facets of the problem are examined.

Indigenised defence production is a significant factor that provides strategic independence to a nation…

It is now nearing three years since the present dispensation at the Centre announced its ‘Make in India’ programme with much fanfare. The Government has not tired of announcing its success at every possible forum, yet a brief report in the media in mid-March, announced that the metallic lion, symbolising the programme, has been relocated to an insignificant spot at the Ministry of Heavy Industries, giving it the short shrift!

Some of the big announcements of achievements in the ‘Make in India’ programme have come in the electronic space – mobile phones; one wonders if they are factual. Flextronics, with its headquarters in Singapore, has a capacity to make about ten million mobile phones at its Chennai facility. However, at Flextronics, where mobile phones under the popular brands of Lenovo, Motorola, and Huawei, roll out, the products are assembled, not manufactured! The same is the situation at every other mobile manufacturing site in the country! Yes, it is a big change, considering the difference between imports and assembly; nevertheless, the country still imports the components. The same story exists in the defence manufacturing sector too, where the announcements of ‘Make in India’ were received with much enthusiasm.

Indigenised Defence Production

Indigenised defence production is a significant factor that provides strategic independence to a nation, thereby adding exponentially to national security through round-the-clock defence preparedness. All over the world, military supplies are high-value goods due to their specialised nature and the control exercised over the defence industry. Indigenisation provides flexibility in security planning to a nation, by reducing continued reliance on external sources and frees it from peripheral pulls and pressures, be they political or otherwise.

The technologies used in defence production and more so in the aerospace industry, are normally at the high-end of the spectrum and hence, are very complex and expensive to develop…

India has been pushing for indigenisation in defence manufacturing for over three decades now, but with little success to show for the efforts made; the dubious status of being the world’s largest arms importer, continues to be ours. On assuming office, the current Government, amidst a flush of hopes and slogans such as ‘Make in India’, promised the Indian Armed Forces their long outstanding demands for modernisation, through indigenisation. The Armed Forces, and the industry, national and international, perked up with excitement!

The Government, especially the Ministry of Defence (MoD) was positive in its pronouncements. Officials in the MoD began talking of spending Rs 15,00,000 crore over the next ten years; the Defence Acquisition Council (DAC) cleared proposals worth Rs 3,10,000 crore within a few months of the Government taking over. It does go to the credit of the Government that reforms in the defence-manufacturing sector have had some effect on its growth. Removal of over 60 per cent of the products, components and accessories from the list for compulsory licensing, has indeed opened the gates for a large section of the defence industry to collaborate with MoD in R&D and thereafter, in production. The much discussed and maligned Defence Procurement Procedure (DPP) has been revised, though for the umpteenth time and with a chapter missing; it, however, has provided a boost for indigenous manufacturing, encouraging MSMEs for direct partnerships with the Government. The ‘Make’ procedures have been revised to quite an extent to provide the necessary impetus to the industry to take up challenges and partner the Government. That is where all the initiatives stand as on date! Barring an odd story of success, India continues to place orders for military hardware with foreign vendors!

The vibrant defence industrial base of DPSUs, OFs and R&D, that have existed for decades, has not produced the desired results; though there has been success in many fields, predominantly in space ventures, defence manufacturing is not one of them. A low plateau has been maintained in gaining self-reliance in defence production, the reasons for which are many. Can India usher in an era of transformation and self-reliance in defence production with the Prime Minister’s call for ‘Make in India’, supported by the introduction of new policies, thus leading to a shift in focus from being import-dependent to a global exporter in its own right? The answers to this and other questions can be found only if all facets of the problem are examined.

Production in the aerospace industry has a long gestation period and is technology-intensive, involving many other industries of the nation…

The Current Aerospace Industry

Production in the aerospace industry has a long gestation period and is technology-intensive, involving many other industries of the nation. Hindustan Aeronautics Limited (HAL), the aviation DPSU in India, is synonymous with the aerospace industry in the country, with sales turnover of Rs 15,622 crore during the Financial Year 2014-‘15. It reportedly has an R&D corpus that comprises ten per cent of its profits, has about 30 licenced-production and indigenous aircraft to its credit, and has developed over 2000 tier-two suppliers. The author’s notes of an annual Seminar in 2014, on ‘Energising Indian Aerospace Industry’, indicate that HAL had then, around 34,000 employees and is a ‘Navratna’ company since 2010. It also claims to have over 60 per cent indigenous content in the much-delayed Light Combat Aircraft (LCA), collaboration with about 20 academic institutions and about 150 industries for its production of which about 80 are in the private sector. Such impressive figures and yet, it has not been able to meet the demands for modernisation of the Indian Air Force (IAF) or the air arms of the other Services! One should not wonder why the IAF and other Services take their shopping list outside the country!

No aerospace company in the world today worth its reputation, attempts to cover all aspects of aerospace activity as HAL does. HAL is engaged in an endless list of activities ranging from design, development, manufacture, repair/overhaul and upgrade of aircraft, engines, accessories, avionics, structures for aerospace launch vehicles, integrated systems for satellites and industrial/marine gas turbine engines. Technologies in the aerospace industry are so spread over a broad spectrum that it is almost impossible for any single company to be self-contained, irrespective of its size. I It is essential to have cross-linkages to be vibrant, proficient and economical. Yet HAL attempts to do just the opposite! Why has this sorry state of affairs been permitted to exist?

India’s march to progress after independence was bolstered through major contribution in the fields of science and technology by organisations such as the CSIR and ISRO. This notwithstanding, the Armed Forces have continued to depend on imports to meet their needs for military hardware. Even as India moves ahead in its 70th year of Independence, there is no major change in the situation. Be it snow boots and gloves for soldiers in Siachen or the humble combat rifle or augmentation of operational and strategic capability with the purchase of aircraft, India goes with a shopping list to friendly nations. These scary situations are not because the lack of capability to produce, but because of the delays involved due to misplaced priorities and the use of outdated technology.

Even as India moves ahead in its 70th year of Independence, there is no major change in the situation…

Challenges Facing the Aerospace Industry

Before commenting on the challenges facing the aerospace industry in India, there is a need for a quick lesson on air power – or aerospace power as it now should be so addressed. Aerospace power is the cross-domain effect provider which it provides with simplicity, through flexibility, an inherent quality of aerospace power and which is so essential for survival. With the other Services, depending upon the target selected, aerospace power makes strategic operational integration and tactical effectiveness easily available. For the political decision makers, aerospace power naturally supports a global approach through gradual visibility, an adjustable footprint and more importantly, with an ability of reversibility and instant disengagement. Do the lower level government machinery and the private/public sector industry in India understand the character of aerospace power to support the IAF requirements? It does not appear so!

The technologies used in defence production and more so in the aerospace industry, are normally at the high-end of the spectrum and hence, are very complex and expensive to develop and integrate; a fact not well comprehended by many who have to take the final decision on file. Defence procurements are not a standard “off the shelf” purchases. They have certain unique features such as, supplier constraints – both domestic and foreign, technological complexities, extremely high costs, foreign exchange implications and geo-political limitations.

The word ‘technology’ is often loosely used, without an understanding that it comprises a number of hard and soft elements, which have to be collectively understood to gather an all-inclusive picture. The hard elements include materials to be used, design documents, manufacturing and assembly infrastructure – available and required – and more such issues; these, however, do not complete ‘technology’ on their own. The soft elements too are numerous and include the likes of human skills, attitude and aptitude to absorb new knowledge and practices, teamwork, potential and skill to handle new equipment, leadership and application of new management processes. This package of the hard and soft elements is a part of ‘technology’, whenever one talks of technology expansion or technology absorption.

Whatever little the aerospace industry has designed and produced in the past is reminiscent of the Fiats and Ambassadors…

India missed out on the Industrial Revolution in the pre-independence era thus causing a deficiency of technologically advanced and an internationally competitive industrial base. This adversely influenced India’s efforts in defence production especially in the aerospace sector. Whatever little the aerospace industry has designed and produced in the past is reminiscent of the Fiats and Ambassadors, which monopolised the automotive segment for many years after independence. A rapid modernisation of the Indian industry in general has taken place in the last twenty-five years or so, but not in the aerospace sector, which has lacked the requisite momentum and enthusiasm, so essential to cater to force-modernisation requirements. Just as the DPSU-bureaucratic combine (one wishes to use the word ‘nexus’) has flourished over the years, the ever-increasing demand and consequent dependence on foreign supplies has continued too; indigenous defence equipment production caters to just about 30 per cent of the demand!

What Ails the Industry?

While the call for indigenisation in defence manufacturing has been getting louder over the years, the Indian aerospace industry has been stuck in the comfort zone of ‘licenced-production’, with implied support from the bureaucracy which has almost always insisted on including a clause of ‘Transfer of Technology’ (ToT) in contracts. A ToT gets the country only modern production techniques, but does not help in getting new state-of-the-art technology to assist in design and development, the need of the hour. The Intellectual Property Rights (IPR) continues to remain with the Original Equipment Manufacturer (OEM). One wonders if the bureaucrat appreciates that! It is only now that the call for “Make in India” from the Prime Minister himself, has shaken all concerned – bureaucrats, DPSUs and the private sector – out of their Rip Van Winkle stupor and projects with state-of-the-art technology are on the anvil through Joint Ventures (JVs) and Strategic Partnerships (SPs). At least there is talk of it!

The OEM and the industry await the finalisation of the policy on SPs, as was recommended by Dr V.K Atre. The Task Force has recommended a model for creating infrastructure and capability in the private sector on a long-term basis under two groups which include heavy hardware, such as aircraft, warships, guns, ammunition and material. The Indian industry, while it awaits the announcement, has submitted a dissent that a company can only be in one of the two groups, which, it feels, could create a private monopolistic venture rather than a free-market initiative. The announcement has been now delayed, with the Raksha Mantri Manohar Parrikar, having taken up another appointment.

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Inadequate privatisation is another important cause for the present ‘vegetative state’ of the aerospace industry. The conglomerate of the OFs and other DPSUs may take the credit for having encouraged medium and small entrepreneurs, but only as tier-3 and tier-4 suppliers. There are not many or any tier-1 or tier-2 suppliers. Successive governments have been hesitant to implement policy changes announced earlier. For the answer, one needs to go back into history, to the rationale that existed when laying down the First Industrial Policy of 1948. This Policy was given the importance of a statutory legislation by the Industries (Development and Regulation) Act of 1951 and a decision was taken to keep defence manufacturing under government control, recognising its critical importance for national security and the country’s need to be self-reliant in this sector. Accordingly, the Government invested heavily in setting up the massive empire of DPSUs and DRDO, the capacities of which match the biggest and in some instances, even the best in the world, but the output is nowhere near global standards.

Focus on Government Policies

The Prime Minister is convinced that India needs to upgrade its security preparedness, considering its not-too-friendly neighbourhood and the menace of insurgency within the country. The ‘Make in India’ plan conforms to his vision and affirms his reputation of being a pro-growth leader. There is no disagreement that defence manufacturing needs an impetus for the economy to surge ahead. Studies have indicated that even a 20 per cent reduction in imports, would create an additional 100,000-plus high-skill jobs in India, with the inclusion of high-end technology. If the present domestic procurement was to be increased from 40 per cent to 70 per cent in the next five years or so, the output of the defence industry would be doubled. A strong industrial infrastructure can boost investment, expand manufacturing, support MSMEs, raise technology levels and hence, contribute towards the overall national economic growth. Mere words and assurances either by the PM or by the RM are not sufficient to steer the industry. Announcements of essential policies to ensure success in this field are welcome, but need action on ground.

If India is to attract a foreign investor as an SP in defence production, it has to portray itself as an attractive business destination, giving confident vibes to the investors…

On November 10, 2015, an announcement unveiled a new framework of regulations for Foreign Direct Investment (FDI) in as many as 15 sectors of industries in India, defence manufacturing included. In addition, there has also been an effort to improve the system to enhance the ease of doing business in the country. The policy for enhanced FDI of 49 per cent was amended to permit 100 per cent in June of last year. Although this does not translate to an automatic approval for defence deals and those above 49 per cent FDI would still need government approval, but now deals not involving transfer of ‘state-of-the-art’ technology can also opt for this route.

With a view to streamline the acquisition process, the first DPP was put in place in 2002. It has, thereafter, been subjected to seven major reviews during the last 13 years! Even before all the players understood an amendment, it was already under re-examination, thus causing extended delays in an already long and tiring process. It is now once again been ‘refurbished’ in 2016 – minus a crucial chapter! An expert committee under Dhirendra Singh submitted its recommendations to the Government in July 2015. The Committee made 43 recommendations out of which, 16 were regarding ‘Make in India’ and 27 were regarding the Defence Procurement Policy. The Committee’s recommendations were suitably factored into the DPP 2016, which focuses on boosting the indigenisation initiative by promoting indigenous design, development, and manufacturing of defence equipment, platforms and systems. The recommendations of the Committee are grouped under four sub-heads: conceptual ladder for ‘Make in India’ mission; amendments to DPP 2013; integration of the private sector and lastly, some supplementary issues which otherwise fall outside the purview of the DPP.

While it goes to the credit of the MoD to have made the recommendations public, going by experience, it appears that only those recommendations that suit it, have been accepted, so as not to lose its stranglehold on the acquisitions process through preferences to the DPSUs and OFs.

Heart of hearts, the Armed Forces, and even the Central Armed Police Forces (CAPFs), would like to go the indigenous way to decrease dependence on a foreign nation, but it is just not happening! The new policies promulgated in the recent past were supposed to provide the necessary drive to India’s quest for self-reliance. The new production policy has clauses in it to support indigenisation and upgrading of technology, but, has this not been the thrust ever since independence? Sadly, implementation of earlier policies in letter and spirit has been found wanting. Public-Private Partnerships (PPP) in defence production have been recommended by the many committees that have been formed thus far, but to no avail. While one can see a change in thinking in the nation’s top leadership; frankly speaking, one is quite perplexed over the manner changes are being planned, only to be sidelined later.

Inadequate privatisation is another important cause for the present ‘vegetative state’ of the aerospace industry…

The Way Ahead

By 2030, it is estimated that the world will be dominated by the middle class – so would be the story in India. As the economy grows, so would the call to protect our assets, both in the public and private sectors. The delays and indecision, however, are phenomena unique to the Government of India. A decision, if a new layer of indecision can stall it, will be stalled! What then is the way ahead? Few suggestions are as under:

  • The way ahead is to place accountability for every rupee spent of public money, not just to make a noise in Parliament, but also to ensure that national security requirements are fulfilled in totality.
  • There needs to be clarity of vision and mission statement. The decision to buy or make the new Light Utility Helicopters (LUH) and the replacement for Avro aircraft have been changing with sickening regularity in the past many months.
  • In all indigenous projects, be they in the manufacturing or in the R&D sector, there has to be accountability for every month of time overruns and demand of cost overruns. There has to be a clear realisation plan, as to which organisation is to do what, timelines for approvals and detailed project reports.
  • The potential of the private sector needs to be harnessed through synergy with the public sector and the users.
  • The DPSUs/DRDO must shed their mindset of considering the private sector as competitors and rather see them as partners.
  • The private sector has to be given the necessary encouragement by providing it a level playing field by removing protective policies favouring the DPSUs and OFs. The taxes are 41 per cent higher if made in India! The private sector should be on a par with DPSUs and foreign suppliers.
The myopic view of those who inhabit the corridors of power should not hamper the growth of defence manufacturing…
  • Support innovative skills in the defence production sector by encouraging MSMEs.
  • Improve R&D and skill levels with constant interaction with the academia and allocation of extra funds for research.
  • All acquisitions should be through an unambiguous policy and a single agency, rather than having multiple documents and multiple agencies.

If India is to attract a foreign investor as an SP in defence production, it has to portray itself as an attractive business destination, giving confident vibes to the investors. For that, it must fine-tune its policies to provide freedom of action to the JVs that have now begun to form, to respond as per market dynamics. It is, therefore, prudent for the policy makers and those who have to implement those policies, to peep into the minds of investors to appreciate where their motivation lies to invest large sums of money in a foreign nation and the associated risks. The investor would like to have adequate control over the use of his funds, sufficient freedom of action to increase/decrease production capacity and have access to markets to ensure commercial viability, through economies of scale. Towards this end, India needs to have a relook at its defence exports policy.

India’s defence exports have been pitifully low over the years. Defence exports during 2010-2012 were just $183 million, which the former Defence Minister, A.K Antony, had himself termed as “woefully meagre”. There has been a major policy decision by the present Government, wherein it has notified a new strategy for export of defence products. Not only is the sale of military equipment to foreign nations to be given a boost, but a structure has also been proposed, for India to finance purchase of Indian arms by countries, which may need financial assistance. The ‘Strategy for Defence Exports’, issued by the MoD, contains a new set of rules for obtaining clearances for export of military stores by both private and public sector enterprises. Amplifying the new strategy for commercial, military and diplomatic gains, the document specifies for the establishment of a new Defence Export Steering Committee (DESC), along with a National Defence Export facilitation body. It, however, needs to be seen, whether the Policy is faithfully implemented or would the old mindset of questioning every deal through the lens of suspicion continue.

An increase in FDI, new policies in manufacturing and export and a new DPP document are initiatives in the right direction to encourage indigenous defence production…

Conclusion

The world over, nations have a system in place that respects priorities and processes that deliver accountability to hasten decisions, especially in matters relating to national security. India witnessed an example of rapid decision making by the French Government after the 13/11 attacks in Paris. Do we have it in us, or is it the best India can do to promulgate new policies, amend some old ones and live with a system that sleeps over decisions, even if those decisions concern self-reliance in national security?

One hopes there will be some introspection in this regard. The myopic view of those who inhabit the corridors of power should not hamper the growth of defence manufacturing. Processes have been initiated and more are in the pipeline, but the medicine must be administered in the right doses, with regularity and with due care. Just facilitating JVs with foreign partners, bypassing the FIPB, to increase investment is not likely to prove successful; the process of recognising what technology comes into India and how would it be absorbed, also needs to be looked into.

An increase in FDI, new policies in manufacturing and export and a new DPP document are initiatives in the right direction to encourage indigenous defence production. The creation of a favourable atmosphere, the change in the thinking, shaking off the lethargy in various government organisations, are some of the other processes that need to be accelerated, if the slogan of ‘Make in India’ is not to remain a mere slogan. The Government needs to act on these issues with a sense of urgency. The world is watching!

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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

Air Marshal Dhiraj Kukreja

former Air Officer Commanding in Chief of Training Command.

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