Indian Defence Review

Understandably, India does not wish to be a 70 per cent import-dependent nation. Yet, at the same time we cannot be 100 per cent self-sufficient nation. It is just not feasible to be an isolationist in a networked world of global trade. Indigenisation will have to be in phases, as there is no ‘quick-fix’ solution. Since it is a networked world, there has to be give-and-take with the foreign OEMs. The government of the day probably understands this, since certain favourable steps have been initiated to remove bottlenecks, but much more needs to be done to make the sector more conducive for business. The defence industry, both Indian and foreign and the Armed Forces need to work together on co-production of proven platforms and co-development of new projects.

To protect a nation as large as India with hostile neighbours, it is crucial to have a strong and well-equipped military, ever ready to thwart any misadventure. An attempt to gain what had been lost during the colonial era was made in the years after independence, with success in many fields, but we reached a plateau on the path to self-reliance in defence production. Indigenous defence production is an essential capability to provide strategic independence to a nation, thus making exponential additions to national security through round-the-clock defence preparedness. World over, the defence industry is a specialised and highly controlled industry as military supplies are obvious high-value goods. Indigenisation provides alternatives to the security plans of a nation by avoiding continued dependence on external sources and unshackles a nation from peripheral pulls and pressures, be they political or otherwise.

India has, over the last three decades plus, been making half-hearted attempts to indigenise defence production. While doing so, it has not been able to shake off the dubious distinction of being the world’s largest importer of arms. As per the figures released by the Stockholm International Peace Research Institute (SIPRI), India is the world’s largest importer weapon systems accounting for 13 per cent of the total global arms import for the five-year period of 2012-2016. This is despite the ‘Make in India’ programme launched by the NDA government! This trend shows no signs of a reversal, even though some brave statements have been made in Parliament by the erstwhile Raksha Mantri (RM), Manohar Parrikar. Why is such a situation continuing, despite a push from the highest office in the form of major policy changes? The reasons are many.

Existing Defence Industrial Base

India’s defence production base consists of a vast network of factories, shipyards and laboratories with approximately 200,000 employees. Yet, it is unable to meet the increasing defence requirements of the nation. While the initiative to use the existing base is laudable, it is almost impossible to use existing infrastructure for the high technology defence equipment that the Indian armed forces aspire for. The immediate reason that comes to mind is this – whether or not is the Indian defence industrial base capable enough to grasp the high-end technologies, even if a foreign Original Equipment Manufacturer (OEM) transfers the technology, which it has created and developed after substantive investments of money, time, Research and Development (R&D)? While not wanting to sound pessimistic, the answer is in the negative and this situation is likely to continue for some time to come, notwithstanding the ‘Make in India’ push.

Fingers have been pointed at the Indian Armed Forces for not accepting or encouraging indigenous products. Can the Indian Armed Forces accept weapon systems and platforms from Indian OEMs that have no track record in defence manufacturing or from DPSUs, which have a dubious record in respect of quality and manufacturing, with delays unlimited? To expect the Indian companies, whether in the private or the public sector, to absorb all the new technologies is wishful thinking. Instead, the approach should be one of a mix of imports and indigenous production, with the latter scaled up gradually, as the industrial base starts to prove itself. Foreign OEMs would be amenable to such an approach, unless India scares them through frequent changes in policies.

Existing Defence Acquisitions Framework

India’s defence acquisition process is complex, cumbersome, time-consuming with uncertainties lurking at every step. This is to say the least! From fighter aircraft, Unmanned Aerial Vehicles (UAVs), helicopters, air-to-air refuelling aircraft to submarines, minesweepers, artillery howitzers, armoured vehicles, assault rifles, Light Machine Guns (LMGs), the Indian Armed Forces are grappling with gaping holes in operational preparedness, all due to a convoluted procurement process. Reportedly, only eight to ten per cent of the 144 deals initiated during the last three years of the present government have come to fruition within the stipulated timeframe; this when officials in the Ministry of Defence (MoD) had started talking in 2014 of spending Rs 15,00,000 crore over the next ten years and the Defence Acquisition Council (DAC) had cleared proposals worth Rs 3,10,000 crore within a few months of the NDA government taking over!

What ails the system? As reported in the media, a presentation by the Minister of State for Defence Subhash Bhamre to the PM, states, “…the process is dogged by multiple and diffused structures with no single point accountability, multiple decision heads, duplication of processes, delayed execution, lack of real-time monitoring and a tendency to find fault rather than facilitate.” The delays begin at the very initial stage of formulation of Staff Qualitative Requirements (SQRs), which is often attributed to lack of synergy among the three Services and even within the Service HQ. Thereafter, from the time of issuing a Request for Proposal (RFP), to the finalisation of a contract, it takes an average of 120 weeks, which is about six times the time stipulated in the Defence Procurement Procedure (DPP), 2016. At times, it has taken as much as eight years! How can an OEM supply equipment at a price quoted eight to ten years before? Can the Service accept technology that was first conceived 10-15 years ago, when the information was asked for from the market, or when the RFP was issued?

There is also the ‘financial crunch’ that is oft quoted. A report of the Institute of Defence Studies and Analysis (IDSA), a government-supported think-tank, has indicated that by the current financial year, 56 per cent of defence expenditure would be on pay and pensions; this would be a 12 per cent increase over what it was seven years ago! Obviously the trimming would be from the capital acquisitions and the unforeseen expenditures that arise due to political compulsions and populism. Such infringements on the defence budget generally stem from a tendency to impose political and ideological goals on the nation’s defence policy.

Government Policies

That India needs to continuously monitor and upgrade its security preparedness, considering its not-too-friendly neighbourhood and the menace of insurgency within the country, is an accepted fact by all, especially the Prime Minister. The ‘Make in India’ plan evolves from it and is in consistence with his vision. There is no disagreement that defence manufacturing needs an impetus for the economy to surge ahead. Studies in 2014-2015 have indicated that even 20 per cent reduction in imports, would create an additional 100,000-plus high-skill jobs in India, along with the introduction of state-of-the-art technology. If the present domestic procurements were to be increased from 40 to 70 per cent, in the next five years or so, the output of the defence industry would have to be doubled. A strong industrial infrastructure can boost investment, expand manufacturing, support Micro, Small and Medium Enterprises (MSMEs), raise technology levels and hence, contribute towards national economic growth. Mere words and assurances, however, are not sufficient to steer the industry. Announcements of essential policies to ensure success in this field are welcome, but need action on the ground.

On November 10, 2015, an announcement unveiled a new framework of regulations for Foreign Direct Investment (FDI) in as many as 15 sectors of the industry 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 percent under the ‘automatic’ route, in 2017. Under the automatic route, a foreign OEM is not required to obtain government approval for its investment proposal. This is the most liberal FDI policy with an aim to attract Rs 35,000 crore investments in the defence sector in the next five years.

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. The last issue of the DPP was in 2016. An expert committee under Dhirendra Singh, a retired bureaucrat, had submitted its recommendations to the government in July 2015. The Committee had made 43 recommendations out of which 16 were regarding ‘Make in India’ and 27 were related to the Procurement Policy per se. 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.

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The policy on Strategic Partnerships (SP) was another policy that was eagerly awaited by the private sector and foreign OEMs, but did not meet the expectations of the industry. The policy was recently amended to meet the concerns of the industry by permitting Indian companies to participate in defence manufacturing, across segments while keeping room for participation by the DPSUs. Indian companies can now have Strategic Partnership (SP) in two or more sectors. This amendment has provided relief to conglomerates such as the Tata Group, L&T and Reliance which are spread across segments from aviation to naval systems. The Indian Armed Forces too are relieved for they can now initiate major projects with the private sector, after obtaining Acceptance of Necessity (AON).

Defence Procurement Organisation

In spite of the ‘distinction’ of being the top ranking in arms imports, India does not have a dedicated and centralised defence procurement body. The existing system is, at best, a loose ad hoc mix of defence experts, public sector manufacturers, R&D ‘experts’ of the DRDO, bureaucrats and the political leadership. A proposal to set up an organisation as a single point for defence procurements is reportedly under consideration by the government. The new Defence Procurement Organisation (DPO) is intended to integrate and streamline the long and arduous procedure of defence acquisitions. While managing defence acquisitions, is would also be providing assistance in developing a robust defence industrial base in the country.

Acquisitions are currently managed through a loose structure that has the DAC and various other supporting bodies, such as the Defence Procurement Board, the Research and Development Board and the Defence Production Board. The entire procurement process is tedious and tardy. The Group of Ministers set up after the Kargil War had recommended a revamp of the entire national security system and had proposed a centralised acquisition body. The MoD has taken all these years to realise the requirement of such an organisation and appointed a high-powered committee under the stewardship of Dr Pritam Singh, former Director of the Indian Institute of Management, Lucknow. The Committee submitted its report to the then RM Manohar Parrikar in February last year. If and when the report is accepted, the organisation will need at least another two to three years to be established with a dedicated cadre. The body, once established, would be autonomous under the RM, with experts in legal, costing, contracting, technical issues related to armaments.

Western nations such as the UK, France, USA and others, have such organisations for defence procurements, which Indian planners need to observe and learn from. France is one good example that could be adapted to suit the Indian requirements and was recommended to be followed even by the Kelkar Committee, appointed by the MoD in 2005, for ‘Self Reliance in Defence Preparedness’. The French body has about 10,000 personnel, highly professional and trained in their respective fields. The technical and professional competence of this body has resulted in France fulfilling over 90 per cent of its military requirements through its domestic defence industry.

In comparison, the Indian current defence acquisition manpower is drawn from civil bureaucracy and the armed forces, very few of whom, if any, are trained in the legal, contractual or technical issues pertaining to acquisitions. In addition, none of the personnel are permanently deputed to the organisation, which further leads to delays in decisions. The proposed DPO would have to be structured in a manner to overcome the present shortfalls and be able to efficiently expend the huge funds earmarked each year in the defence budget for capital acquisitions.

Additional Steps Needed

There is no doubt that steps have been taken to make the dream of ‘Make in India’, a reality but much more needs to be done. If India wishes to attract a foreign OEM as SP in defence production, it has to show investor-friendly business intentions, giving positive vibes to investors. For that, it must fine-tune its policies to provide freedom of action to the joint ventures that are now steadily mushrooming, to respond as per market dynamics. It would, therefore, be sensible for the policy makers and for those who implement those policies, to gain an insight into the minds of investors to understand where their motivation lies to make large investments in a foreign nation with the associated risks. It is but obvious that an investor would want complete control over the use of his funds, freedom of action to increase/decrease production capacity as per market trends and have access to markets to ensure commercial viability, through economies of scale. Towards this end, India would also need to relook at its defence exports policy. There is also the need to address the following urgently:

•  Place accountability for expenditure of public money, not just to raise an issue in Parliament, but to ensure that national security requirements are fulfilled in entirety.

•  There has 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 several months. Similarly, the decision to make/purchase single-engine fighter aircraft has been changing almost on an overnight basis!

•  Introduce accountability in all indigenous projects, be they in manufacturing or in the R&D sector, for every month of time and cost overruns. There has to be a clear plan for each organisation’s charter of duties, 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. Their manufacturing competency should not just be profit-oriented.

•  The DPSUs/DRDO and their controlling babus in the MoD 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 public sector. Simplification of the tax regime, through the implementation of Goods and Services Tax (GST) is a welcome step, but ambiguities need to be removed.

•  Tap the potential of MSMEs by supporting their innovative skills in the defence production sector and viewing them as strategic partners. MSME defence licensees should be the automatic choice for Indian Offset Partners.

•  Further simplification and streamlining of the Defence Offset Guidelines.

•  Enhance R&D and skill levels through constant interaction with the academia and allocation of funds for research, much more than what is being done now. The private sector should be partner to the development of advanced technologies, based on shared expenditure.

•  All acquisitions should be through an unambiguous policy and a single agency, rather than having multiple documents and multiple agencies. The setting up of the DPO should be accelerated.

•  The Defence Export Policy needs to be simplified. The mandatory requirement of the present NOC and End-User certificates should be removed, if the export is to the published list of countries, where exports are permissible.

The most formidable impediment to the success of the ‘Make in India’ campaign, to quote Bharat Karnad, will be, “…relying on the existing decrepit apparatus of the State, unimaginative policy establishment and the government’s usual lackadaisical way of doing business to deliver results.” In short, a major bureaucratic overhaul and a change of mindset in the government thinking would probably get the ‘Make in India’ campaign rolling.

Concluding Thoughts

According to an answer to a question raised in Parliament, Subhash Bhamre has admitted that the country has attracted just Rs 1.17 crore as FDI in the defence production sector, under the ‘Make in India’ framework in the last four years. This measly amount is notwithstanding the FDI policy being liberalised, open-minded changes made in the policies for creating SPs and the abolition of the Foreign Investment Promotion Board (FIPB), all enablers of indigenisation. The sector has floundered, to say the least, in attracting FDI. Not that the ten years of the previous government did any better, wherein less than $5 million had come in. For some reason, the private sector of the country too has not displayed much enthusiasm on the ground, except in making statements and welcoming certain changes to existing policies.

Understandably, India does not wish to be a 70 per cent import-dependent nation. Yet, at the same time we cannot be 100 per cent self-sufficient nation. It is just not feasible to be an isolationist in a networked world of global trade. Indigenisation will have to be in phases, as there is no ‘quick-fix’ solution. Since it is a networked world, there has to be a give-and-take with the foreign OEMs. The government of the day probably understands this, since certain favourable steps have been initiated to remove bottlenecks, but much more needs to be done to make the sector more conducive for business. The defence industry, both Indian and foreign and the Indian Armed Forces need to work together on co-production of proven platforms and co-development of new projects. India has had an excellent record of the “man behind the machine”, but defence preparedness is not just training the man, the man needs weapons and machines too. A carefully worked out plan for indigenisation that encourages the participation of all concerned and which recognises that India must learn to walk before it can run, would be the pragmatic path for the government to follow.