Indian Defence Review

The ‘Make in India’ initiative has made a huge impact on the domestic sector and motivated the private sector to participate in the government projects with renewed confidence. Indian domestic private sector now has the ability to deploy the best of the technology available worldwide, invest large finances and produce state-of-the-art equipment in the country. If necessary, they are also in a position to get into Joint Ventures with the best technology providers in the world. Changes being brought in the policies for doing business with the MOD, specially under the provisions of the new DPP and DPM must aim to bring the domestic private industry to invest in defence manufacturing sector.

The Indian Armed Forces have been facing perpetual shortage of many of the strategic defence items ranging from military hardware to a variety of ammunitions. Maintenance and repair problems have reached critical levels wherein our aircraft, helicopters, tanks and electronic warfare systems are functioning at nearly 50 per cent serviceability. It is a matter of operational criticality and concerns national security, an issue which has been highlighted by the Chief of the three Services from time to time. The situation has also been discussed in the Parliament and commented upon adversely by the Comptroller and Auditor General (CAG) as well as defence experts.

This situation is not new. It may be recalled that during the Kargil conflict, the army had to move guns, ammunition and equipment from deserts and other sectors due to deficiencies and maintenance issues. While certain organisational restructuring and modernisation initiatives have been undertaken from time to time, not much has happened on the ground which would substantially enhance the confidence of the three Services.

In so far as the Indian Army is concerned, the shortage of ammunition has been a matter of great concern. The criticality is across the entire spectrum from quality to quantity. Such is the criticality that substantial restrictions had to be placed on the ammunition for training so as to manage huge shortages of critical items such as tank ammunition, Bi-Modular Charge System (BMCS) for medium artillery guns, 30 mm ammunition and modern hand grenades for infantry. While some initiative for modernisation of hardware is taking shape, the TNT filling in the tank and artillery ammunition is of late 1960s and early 1970s vintage. This has resulted in stockpiling less efficient ammunition and longer logistics chain due to the large quantum of ammunition necessary for the assigned task. This in turn has a tremendous effect on the government exchequer.

In the past, the Ministry of Defence (MoD) largely depended on the Defence PSUs (DPSU) and imports to meet India’s defence needs. It remains so even now. The change that has taken place relates to the coming of age of private sector manufacturing in the country. The interest of the indigenous private sector to invest in the defence sector has been lacking due to various reasons. Perhaps it did not have technology, finance and confidence to venture into uncharted and risky defence business. The policies were not conducive and were found restrictive for the domestic sector to enter the defence manufacturing sector.

The Defence Procurement Procedure (DPP) and Defence Procurement Manual (DPM) were complex and inflexible, as also huge delays in finalising procurement projects created considerable uncertainty. The resultant delays in procurement processes and dependency on imports has resulted in huge outflows of foreign exchange and delays in meeting commitments by the foreign suppliers. The case of the Gorskhov aircraft carrier, SU-30 fighter aircraft, T-90 tanks, ANTPQ 37 gun locating radars, air defence radars, missiles and guns are well known and needs no emphasis.

The ‘Make in India’ initiative has made a huge impact on the domestic sector and has motivated the private sector to participate in government projects with renewed confidence. Indian domestic private sector now has the ability to deploy the best of the technology available worldwide, invest large finances and produce state-of-the-art equipment in the country. If necessary, they are also in a position to get into Joint Ventures with the best technology providers in the world. Changes being brought in the policies for doing business with the MoD, specially under the provisions of the new DPP and DPM must aim to bring the domestic private industry to invest in defence manufacturing sector.

However, there are few inherent issues that can derail the new initiative of the government. Foremost among these are the issues of level playing field and overreach by the DPSUs to take projects beyond their present and future installed capacity and thus restricting private sector participation. Perhaps this is one of the principal reasons for the present criticality in the equipment holdings with the three Services. This issue needs to be resolved through major policy initiatives by the government.

While there are many cases affecting the Indian Army’s preparedness due to unmanageable equipment deficiencies, the most critical example is that of the Bi-Modular Charge System (BMCS). BMCS is the propellant used to fire 155 mm category guns such as Bofors, Dhanush, up-gunned Soltam and other modern artillery. Without BMCS, the army will have Bofors and other modern guns that cannot be fired. It is reported in the media that BMCS deficiency in the army is over 1.5 crore sets, which is expected to grow rapidly in the future once the modernisation programme of the artillery gathers momentum.

Now that the government is amending the DPP and DPM to bring in policy interventions so as to provide opportunities to the domestic private sector and integrating them with the MoD, a new chapter in defence manufacturing is opening up. The challenges are complex and have multi-departmental ramifications. The complexities can be better explained by few examples as follows:

BMCS. It is a well-established fact that long term perspective plan of the army had approved full mediumisation of artillery to 155mm howitzers. The process of induction of new 155mm guns has already commenced with the induction of Ordinance Factory Board (OFB) built Dhanush howitzers, up-gunning of 130mm guns to 155mm and trials of the 155mm self-propelled and towed howitzers (Buy and Make), issue of RFP for 155mm 52-calibre Mounted Gun System (MGS) and issue of indent to DRDO for the developing fourth generation 155mm 52-calibre gun. It is appreciated that the quantum of new medium guns to replace the existing 105mm/122mm/130mm guns held on the inventory of the army would be over 2,000 or more. The shells for all these guns are made in India by the OFB. Sufficient manufacturing capacity exists with the OFB to meet the army’s requirement in the near future. However, the crisis in the artillery is due to acute shortage of BMCS.

In fact, appreciating the huge requirement of BMCS once the artillery modernisation gets underway, the MoD embarked upon an ambitious project to manufacture BMCS in the country. Accordingly, in the late 1990s it was decided to set up an Ordnance Factory (OF) at Nalanda in Bihar. Vast tracts of land were made available by the State Government and the plant was partially constructed after long delays. The Rs 300-crore project overshot to over Rs 1,200 crore and yet not a single piece of BMCS has been produced by the factory as yet. There are lingering technical and administrative issues that will affect commissioning and regular production from this plant for a considerable time, maybe four to five years or more. In the meantime, OFB is supplying some quantity of BMCS from its existing plants making base ingredients and some are being imported from abroad at high costs.

With galloping deficiencies of BMCS in the Indian Army, final installed capacity at OF Nalanda would not be able to meet the basic minimum requirements of the Army now or in future. If the Investment and the Return on Investment to the government on this project is worked out, then the OF Nalanda will be at a perpetual loss. To make up the losses the OFB would have to increase the cost of BMCS periodically. The Army will have to fund the increase from its Revenue budgetary allotment, which otherwise should have been utilised in other critical procurements. Thus, the Indian Army and the MoD would face huge avoidable losses of revenue on a long term basis and yet the deficiencies of BMCS would continue to increase thereby affecting the Army’s training and operational commitments. There is a need to appreciate that new guns will need intensive training for which the training firing would have to be increased substantially. Absence of BMCS would not permit such an essential aspect of integration of the new guns in the army for which the government is spending crores.

The MOD should, therefore, consider offering the domestic private sector which has the relevant license, approvals and capabilities to come forward to support the operationalisation of OF Nalanda as also manufacture the BMCS within the country. However, such a far sighted initiative would require serious policy intervention by the government as only one or at best two domestic manufacturers may be interested in such a high-tech, high investment project. Therefore, the issue of single vendor limitation for concluding such contracts may be considered prior to embarking on such an initiative. Such initiatives in other critical deficiencies must be considered now and included in the new DPP/DPM. The new DPP/DPM should permit comparison of the product cost and quality of the private sector with the procurement cost from the DPSUs and other sources viz ex-imports.

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On its part, the domestic private sector needs to assure the MoD of its ability to produce world class quality within the laid-down timeframe utilising technology already approved by the army and in use. It is well known that approval and absorption of different technologies takes years to mature and absorb, which is not advisable in critical deficiency conditions. Issue of an RFI to find out the interest and capability of the private sector to produce BMCS in the country should be considered by the MoD. However, it would be prudent to suggest that much caution and due diligence would be necessary to weed out non-serious vendors who obtain a Letter of Acknowledgement from foreign vendors and join a project to derail it. Such vendors would eventually defeat the purpose of the initiative. Therefore, core competency should be one of the governing factors for selection. This concept should be considered by the MoD for any new project of this nature.

Pinaka Rocket. The Pinaka is a successful ‘Make in India’ venture. The equipment was developed by the DRDO and the technology was transferred to L&T and Tata Power for commercial production. In view of planned raisings of quite a few Pinaka regiments in the near future, the Army HQ placed indents on OFB for 10,000 Pinaka rockets to be supplied over a period of five years at the rate of 2,000 per annum. However, very limited numbers could actually be produced by them. This affected the training and optimal utilisation of the Pinaka in the Army. Yet the existing policies do not permit outsourcing of the shortfall to the private sector by the OFB. Thus, due to policy limitations, neither can the OFB/DPSUs fulfill the demand of the armed forces nor can the shortfall be outsourced to the private sector on turnkey basis with technical support of the OFB.

The OFBs cannot embark upon such a venture due to policy restrictions. With the Extended Range Pinaka Rockets (DRDO) having been successfully fired recently, the challenge to the OFB to produce them has increased manifold. Perhaps the time has come for sharing the production responsibilities for Pinaka rockets between the OFB and the private sector, and reduce the burden on the government exchequer.

With OFBs setting up of facilities to produce 5,000 Pinaka rockets per annum at an investment of more than Rs 950 crore in the next three to four years, some of the hollowness of the Pinaka rockets is expected to be met. However, unless timely action is initiated, the problem of critical deficiencies of Pinaka rockets is likely to accentuate to crisis levels, as in the case of BMCS. Perhaps the situation can be managed adequately if the private sector is asked to show interest in the project at “no cost, no commitment” basis. As the OFB is the prime manufacturer of the rockets and DRDO is the technology provider, their support to such a novel initiative would be necessary. In doing so, the DRDO/OFB can get consultancy and technical fees, which would be beneficial to the government. Such an initiative, if successful, would substantially improve upon the quality and delivery parameters of the product at no cost to the government making it a win – win situation for all.

However, a caution must be sounded from the point of safety, security, Quality Assurance/Quality Control (QA/QC) and timely implementation of the project by the private sector jointly with the DPSUs or singly, for which strict rules and protocols, checks and procedures may have to be enforced.

To view the issue of challenges towards integrating the domestic private sector with the nation’s defence production efforts, few important issues that emerge are:

Transfer of Technology (TOT). The DRDO, OFB and other government organisations are carrying out substantial original research work. The private sector closely works with these organisations during the product research and prototype building stage, as these are governed by the respective lab policies. However severe constraints are faced at the commercial production stage due to the absence of a well-defined policy on TOT and technical support/collaboration between the research laboratory, production agency and the private sector. All such cases need to follow a complex route of government approvals, which takes at least two to three years in the present system. Thus, the project loses dynamism resulting in loss of production and capital utilisation. In some cases, the research effort does not see the production stage as, quite often, import is undertaken to tide over the criticality due to inordinate delay in domestic production. Hence, there is a need to bring in definite policy interventions to correct the situation. As a policy it would be beneficial if proposal for new/improved product introduction be completed within 24 months. The revised DPP/DPM could assist in achieving this concept.

Persistent Failure to Supply of Indented Inventories by DPSUs and Government agencies. This is a perennial problem faced by the armed forces. Even at the cost of increasing operational hollowness, no policy exists to invite private sector to take on responsibilities to bridge the production gap on a long term basis. Instead efforts are made to expand the existing capacities of the DPSUs and other production institutions of the government. This involves huge financial commitment by the government and inherent time penalty. Thus, Service Headquarters are deprived of its essential operational requirements even if the domestic private industry is confident and capable of meeting the requirement. This issue requires serious policy intervention through the revised DPP/DPM.

Conclusion

The ‘Make in India’ initiative can change the parameters of the way the MoD does business with the domestic private sector. It would save time, reduce inventory hollowness, reduce government expenditure, increase domestic employment, increase skill level of workers and save foreign exchange. Domestic private sector may also be invited to invest in the construction of specialised warehousing facilities for the armed forces against rent. These initiatives will make huge Capital and Revenue budgetary savings for the exchequer. On its part, the MoD will have to formulate policies to encourage participation of the domestic private industry in defence production through initiatives in the new “Defence Procurement Procedure and the Defence Procurement Manual” as also by providing specific financial incentives.

Provision of a level playing field to the private sector that will provide a boost to industrial growth in the country should form part of this vital initiative. In order to encourage the private sector participation in the defence production, the following may be considered:

Concept of National Resource. MoD/Service Headquarters should consider the facilities available in the private sector as national resource for manufacturing of defence products on a long term basis. Maintaining a National Manufacturing Asset Register and close interaction and visits to the facilities available with the domestic private sector by the stakeholders would increase confidence and progress projects optimally.

Product Development and TOT. The DRDO, OFB, Directorate General Quality Assurance (DGQA) and other government departments should provide requisite support for TOT, product development and validation, QA/QC support to the private sector at a reasonable cost. A Comprehensive Policy on the subject is necessary.

Protocol on Third-party Inspections. Third party inspections by the agencies of national repute duly, approved by the DGQA/MoD may also be permitted to provide QA/QC coverage to the private sector. It will assist the DGQA in expediting the product validation process. A separate protocol in this regard needs to be evolved. Protocol on third party inspection between the DGQA and top private laboratories, in India and abroad will bring in immense dynamism and latest practices into the system.

Managing Critical Deficiencies by Involving Private Sector. If the OFB and DPSUs fail repeatedly to fulfill the demands of the Armed Forces due to capacity and operational constraint over a long period, an alternate procedure should be available to invite participation of the private industry for supply of defence items through a transparent manner on a long term basis. This will require a policy intervention wherein the users must have the authority to invoke the provision through the MoD.

Flexibility. The new DPP and DPM should have enough flexibility to invite the private sector, initiate technical cooperation including QA/QC requirements, safety and security audit and other regulatory requirements at a reasonable cost so that the process of inclusion of the domestic private sector proceeds unhindered.

QA/QC. Military equipment requires high levels of QA/QC so as to sustain the challenges of training, deployment and war. However, not one agency/institution has been appointed by the government to check, advise and approve manufacturing standards at the production level in the private sector. The DGQA comes into picture only when official trials commence. Then how can indigenously produced equipment pass the GSQR parameters without earlier testing and advice by MoD appointed experts? Foreign equipment that competes with the indigenous ones would have better chance to succeed since their equipment are tested and inducted in their respective countries.

Similarly, DPSU manufactured items have the advantage of inhouse DGQA and other QA/QC support. Hence, the issue of manufacturing level QA/QC support by the government for the private sector needs to be considered and policy enunciated. It is, therefore, recommended that a ‘Consultancy Section’ under a fairly senior officer having experts in various fields from DRDO and DGQA be nominated by the MoD and be available to the Indian industry on request, at a reasonable payment. While these officers may continue to be employed by their respective departments, they should be available on directions of the MoD, on case to case basis, to undertake product validation and provide technical advice. The MoD should become the driver of any major defence product entrusted to the private sector, by providing support that is not available in the private sector.

Trials. It is almost impossible for indigenous manufacturers to undertake live firing trials since weapons, crew for firing, ammunition, range, range clearance, equipment for fall of shot observation and all other issues connected with the trials firing are not available on request. No weapons are earmarked for trials by the private sector as in-service weapons cannot be used for trials of ammunition or connected equipment. Thus, a domestic private sector manufacturer cannot undertake dynamic tests of his product to check quality and GSQR parameters. The DRDO and OFB have some weapons for trials which cannot be loaned to the private sector. In addition, the cost charged for ammunition and services by the MoD is prohibitive and needs to be substantially reduced to no profit no loss value for indigenous manufacturers. Unless this anomaly is corrected, the domestic private sector will never stand a chance against the foreign vendors and the DPSU. It is, therefore, suggested that a fresh approach to this problem be undertaken by the MoD wherein acquired artillery firing ranges and technical support be made available at a token cost to the private sector.

The DGQA should be allotted weapons and crew for proof testing for the private sector. Acquired field firing ranges close to manufacturing hubs may be made available for initial trials viz Devlali/Ahmednagar Field Firing Ranges for manufacturing hub at Pune albeit within the safety, security and applicable government policies. Longer acquired ranges viz Pokaran and Mahajan in Rajasthan should also be made available for maximum stress/range trials. Experts from the three Services, as per the requirement, and civilian personnel and equipment as also QA/QC team as discussed above should be made available while undertaking production level dynamic trials, at a reasonable cost.

Overhauls of Guns and Equipment. Presently, these are mostly undertaken by Electronics and Mechanical Engineers (EME) base workshops/DPSU. However, there is a large backlog affecting the operational effectiveness of the army. Delay and cost overruns for Base Overhaul by the EME Base Workshops for the critical equipment like 155mm Bofors gun, Main Battle Tanks of earlier vintage and heavy engineering equipment are well known. It is also a fact that during 2012-2013, the Base Overhaul of Bofors Guns was stopped due to multiple reasons. It should be appreciated that the present lot of 155mm Bofors guns are over 25 years old and their repair and maintenance requirements are increasing by the day.

Similar is the case of older model T-72 tanks and Armoured Fighting Vehicles. Delay in Base Overhaul would result in rapid degradation of this equipment. Artillery gun manufacturing industry by the private sector in the country has been modernised substantially and appears to be confident to undertake the challenge of overhaul and repairs of artillery guns. Notably, Bharat Forge Limited which has already produced a 155mm 52-calibre artillery gun and set up a medium gun production line, can undertake ‘Base Overhaul’ of 155mm 39-calibre Bofors as also other guns viz 105mm LFG/IFG and Russian 122mm towed gun, which has almost become obsolescent. Hence, the DPM should look into the existing policy of Base Overhaul of important equipment afresh and domestic private sector be brought in to share the load in an open and transparent manner.

In this process, the army and the government will gain substantially. On a long term basis, the government will be able to reduce the non-fighting component of the armed forces and use the manpower saving towards strengthening the combat elements. This concept has been attempted by the army from time to time but with little success. Such an initiative would reduce the logistics tail of the army as well and result in substantial financial savings to the exchequer.

Skill Development – Centres of Excellence. The involvement of the Indian private sector can provide necessary thrust to the ambitious initiative by the present government towards Skill Development at the grassroots and advanced levels, training of which is limited in the country. The defence private sector has the technological wherewithal, financial strength, infrastructure and motivation to effectively support this initiative. These Centres of Excellence will form part of the respective manufacturing processes and can provide substantial employment opportunities. They can become co-opted partner with the government departments to support the initiative in a scientific manner. The DPP/DPM under formulation should look into this concept and provide policy initiatives accordingly.

Joint Operating Charter. Indian defence industry in the corporate sector is highly nationalist. High ‘Return on Investment’ does not drive this sector of the industry. The corporate leaders who have entered this ‘risky’ business have done so due to their own conviction to do something for the nation, national security and the Indian Armed Forces. Industry associations viz CII, FICCI and ASSOCHEM are representing these industries and are the informal link between industry and the government. While certain seminars and trade fairs have been conducted jointly, much more need to be done at the functional and execution levels, should the government wish to make indigenisation initiative a success.

The basic framework to move ahead would be a Joint Operating Charter, which will act as Standard Operating Procedure (SOP) for any interaction, discussion, support, technical coverage, QA/QC, trials, warranty/guarantee, legal issues, arbitration and other miscellaneous issues. ‘Joint Operating Charter’ would be acceptable by all the government agencies including users and the industry. This will provide assurance of quality to the government and the user, and assurance of government support to the industry. It would be the most effective step towards Indian industry’s deep association in defence production in the future.

The MoD needs to recognise the private sector organisations that take proactive steps towards successful indigenisation of complex products and support the ‘Make in India’ initiative by providing incentives in terms of technical advice, business related support and tax benefits as also providing level playing ground. The issue of equalisation of foreign exchange fluctuation on order value having foreign exchange component as also the issue of very large collateral deposit through bank guarantee needs to be analysed and a fair policy should be worked out for the domestic sector. Perhaps the time has come to divide large sector into very large sector and large sector, followed by Medium and Small Sector. Regular exchange of scientific and technical knowledge between the government departments, DPSUs and DRDO with the private sector will substantially improve indigenous manufacturing base, which in turn will enhance quality and ensure better value for money for the Govt of India. It would also be beneficial if the MoD (Defence Production) invites the leaders of various specialisation viz design and production, ammunition, components and electronics as also large corporations, medium and small scale manufacturers and listen to their views, so that the final DPP and DPM becomes complete in all aspect and becomes an engine for the great industrial leap in the future.

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It may be pertinent to mention that India imports nearly $9 billion or more of defence products per annum. If the government involves domestic private sector’s capability to undertake import substitution and hi-tech manufacturing, it would be able to save at-least $2.5 to 3 billion worth of foreign exchange and possibly another $1.5 billion from ancillary supplies. An initiative of this nature will ensure induction of cutting edge technology in the country at no cost to the government. It will be the best example of ‘Make in India’ initiative by the government.

As a concept, the private industry need not be seen as a competitor to the DPSUs but as a strategic partner with common goals. If the private sector is contracted to make up the production shortfall from the DPSUs, it would take care of the critical hollowness at no cost to the government. The downstream benefits at the level of job creation, upgrading of skill, economic benefits in the region and higher revenue to the government through taxes can well be understood.