Indian Defence Review

Under the present government, Rs 6,000 crore of the Defence Budget was surrendered in the last financial year. A former Vice Chief while in service was told by a friend in Defence (Finance) that they were required to submit a quarterly report on how much money from the Defence Budget they “can” surrender by the end of the financial year. A senior military veteran posted on social media that at the end of the financial year, the Under Secretary dealing with Ordnance procurement, wants the dealing Directorate to initiate a minute sheet recommending that the hundreds of crores of unspent money be given to DPSUs for procurement of raw materials against the pending requirements for next financial year – a most innocuous and innocent demand on face value.

In one particular financial year, he himself got a call from the JS (O) in MoD to initiate one such minute sheet. He, however, declined based on past observations of auditors that such funds provided in advance were not used to purchase raw materials; instead the money was used to purchase Bonds to earn interest for one year. Raw materials were purchased ‘after’ one year when the Bonds matured and interest earned was used for ‘private’ purposes. How very ingenious and cool! Try and calculate the interest on a one year Bond for say Rs 10,000 crore just for theoretical interest.

Bottlenecks

Some of the bottlenecks are common knowledge. The lack of a conducive DPP or shall we say, Defence Procurement and Production Policy (DPPP) is top of the ladder. What needs to be examined are the problems of the manufacturers; what is the market – only in India or are there other avenues? Who is available for JVs and whether the partner has got adequate infrastructure and technical expertise, if his is going to be the major contribution, how can he set up base – land facilities? In what timeframe can one obtain the required clearances and get cracking. In context of the latter, even the US has recently stated that the Modi government has not been able to get rid of the “red tape”. So, while there is much hype about $16 billion worth of ‘cleared’ deals, no Request For Proposal or tender has been issued.

What Has Changed

In terms of private participation in defence production, the MoS (Defence) informed the Parliament in July 2015, that 287 Industrial Licences (ILs) had been issued and FDI amounting to $5.02 million had been received in the defence industry albeit details of actual investment made in respect of Industrial Licences was not available. He also informed the Parliament in a written reply that Defence Products List for the purpose of issuing Industrial Licences (ILs) under IDR Act had been revised to reduce the entry barriers for the industry, particularly small and medium segment; process of applying for IL and Industrial Entrepreneur Memorandum (IEM) has been made online.

The processing of extension of validity of Industrial Licence had been streamlined. A security manual for the Licensed Defence Industry has been issued obviating the requirement of an affidavit and the restriction of annual capacity in the IL for Defence Sector has been removed. Licensee has been allowed to sell the defence items to the Government entities under the control of MHA, PSUs, State Governments and Other Defence Licensee companies without the approval of the DoDP.

An advanced version of the NIC Code (NIC 2008) has been adopted, which is a highly contemporary industrial classification. All Indian industries (public and private) are subjected to the same kind of excise and custom duty levies now – level playing field. To promote private sector participation, particularly SMEs for defence manufacturing, Outsourcing and Vendor Development Guidelines for DPSUs and OFB have been circulated, mandating each DPSU and OFB have a short-term and long-term outsourcing and vendor development plan to gradually increase the outsourcing from private sector including SMEs, including vendor development for import substitution.

The SOP for the issue of a No Objection Certificate for export of military stores has been simplified and put on the website. The list of military stores has been finalised and put in public domain to make the process transparent and unambiguous. The FDI policy for the defence sector has been reviewed and as per the revised policy, the composite foreign investment up to 49 per cent is allowed through the Government route (FIPB) and beyond 49 per cent with the approval of the Cabinet Committee on Security (CCS) on case-by-case basis wherever it is likely to result in access to modern and state-of-the art technology.

A Defence Exports Strategy outlining steps to be taken has been formulated and put up in public domain and preference to ‘Buy (Indian)’, ‘Buy and Make (Indian)’ and ‘Make’ categories of acquisition over ‘Buy (Global)’ category thereby giving preference to the Indian industry in procurement.

There is no doubt that above measures are laudable but by no means do they address the bottlenecks discussed above holistically. With the entire hullabaloo, a measly FDI of $5.02 million should need serious examination as to what is wrong. If there have been any worthwhile changes, these appear to be happening in the aerospace industry with HAL also to undergo a revamp. But what would indicate our lackadaisical approach and slow pace is that a report submitted in September 2012 by a government appointed Expert Group for Strengthening and Restructuring of HAL has only recently been approved in 2015.

On the brighter side, global aircraft maker Boeing and Tata Advanced Systems Limited (TASL) have signed a pact to collaborate in aerospace and defence manufacturing as well as to tap into integrated systems development opportunities, including unmanned aerial vehicles. The collaboration, which is in line with the government’s Make in India initiative, will not only work in the domestic market but will also be for international markets. TASL plans to produce Chinook helicopter parts in India even before the procurement contract is signed with the Indian government. The government has already cleared acquisition of 22 Apache attack helicopters and 15 Chinook heavy-lift choppers at a cost of $2.5 billion.

Tata Advanced Materials Ltd (TAML) and TAL Manufacturing Solutions (TAL) are already supplying components to Boeing. TAML is providing power and mission equipment cabinets and auxiliary power unit door fairings for the P-8I long-range maritime surveillance and anti-submarine warfare aircraft and TAL is providing floor beams for the Boeing 787-9 and ground support equipment for the C-17 Globemaster III strategic airlifter. Hyderabad’s strong base of over 1,000 SMEs, coupled with IT firms catering to the aerospace segment, has proved to be a major draw for global aerospace giants. Boeing has already been working with Hyderabad-based Avantel on mobile satellite systems for the P-8I military aircraft and Cyient Ltd (formerly Infotech Enterprises) for many of its commercial airplane projects.

Indian Rotorcraft, a joint venture between AgustaWestland and Tata Sons have broken ground on a new helicopter manufacturing facility next to Hyderabad’s international airport to produce the Light Utility Helicopter (LUH), starting with the 8-seater AW 119KE both for the Indian and foreign markets. HAL has acquired 610 acres in Karnataka to establish a facility for manufacturing Light Utility Helicopters (LUH) and plans to commence production from April 2017, with annual production capacity of 60 helicopters. The Kalyani Group has entered into a Joint Venture (JV) with Israel’s Rafael Advanced Defense Systems to develop and manufacture a wide range of missiles, remote weapon systems and advanced armour solutions.

Rafael will provide the JV technology to manufacture Spike missiles for the Indian armed forces, for which the government is slated to float a tender soon, and will also manufacture weapon systems and advanced armour solutions for Indian, as well as global customers. The group would broadly focus on four new areas — artillery weapons, anti-tank missiles, armoured vehicles and aerospace components.

Requirements

“Make in India” surely is the need of the hour but we need the right composite Defence Procurement and Production Policy integrating defence offsets. Over and above, we need the right attitude for facilitating business cutting out the red tape. The government needs to make a drastic departure from its earlier way of functioning. We need an urgent attitudinal change. The fact is that for the reasons discussed above, we have not been able to develop and optimise Private-Public Partnership in the true sense. As far as JVs are concerned, while foreign investors are eager to invest in the defence sector, India lacks the capacity to absorb the investment. This requires special attention. While, we forge ahead with Make in India, there is also the need to holistically look at our defence needs rather than focus only on sectors such as aero-space and big weapon systems. The military needs urgent capacity building in network centric warfare. To that end acquiring C4I2SR capabilities and cyber warfare must also be given equal importance.

At one time in history, India was leading in science and technology, mathematics, astronomy, navigation, medicines, surgery, education, you name it. We have fallen behind because we have been falling behind in terms of research and development. Our investment in Defence R&D is abysmally low compared to modern nations. According to official figures, the overall allocation to R&D in India to the DRDO is a mere six per cent of defence expenditure whereas successive parliamentary committees have recommended a minimum of ten per cent.

To make matters worse, our defence budget as percentage of GDP has been decreasing. The Indian defence budget dropped from 1.81 per cent in 2014-2015 to 1.75 per cent in 2015-2016. The economy of the country cannot flourish without adequate investment in defence. It needs to be borne in mind that due to utter neglect of defence over the past decade, the capacity gap between our military has widened exponentially. Many parliamentary committees have strongly recommended the defence budget to be pegged at three per cent of the GDP but little heed has been paid.

Similarly, Prime Ministers and Defence Ministers have been calling to enhance investments in R&D but neither the government nor the private industry has paid any heed. Technologically advanced nations the world over spend 2.5 to 3.5 per cent on R&D while India spends only 0.85 per cent. Unless these issues are addressed, our defence needs in terms of state-of-the-art technology and weapon systems can hardly be met indigenously.

There is also a need to ensure that while development of indigenous weapon systems would take considerable time, the military’s voids in the meantime should not be allowed to go critical. We cannot afford to go slack on the imports that have already been approved. Case in point is the languishing deal of the Rafale fighter aircraft. During his visit to France, Prime Minister Modi salvaged the Dassault Rafale fighters deal by announcing the decision for outright purchase of 36 fighters in ‘ready to fly condition’.

However, the deal appears to have got bogged down for multiple reasons including our insistence that Dassault invest 50 per cent of the overall contract price as offsets in its domestic defence or internal security sectors. Unless quick political intervention resolves all issues, there may be further problems including pricing since Dassault Aviation is reportedly setting up production of the Rafale fighters from the current 11 to 16 per year but it already has orders of 26 fighters each from Qatar and Egypt with India third on the list.

It has been pointed out many times by scholars and strategists in the past that staffing of organisations dealing with defence acquisitions with specific specialists, trained manpower and ensuring continuity are key issues.

The defence of India is not only about establishing shop for indigenous development though vital. It is even more important to acknowledge that the system followed in the past decades has not delivered the way it should have and needs major corrective action. That the Defence Secretary and the DG Acquisition are responsible for the pathetic state of equipping the Indian Military and have been the main culprits in all defence scams is unquestionable, no matter the cover ups.

If the Defence of India is to improve there is no shortcut from bringing in military professional in higher defence structures including the MoD and the defence industrial complex at the design, planning and decision making levels.