Self-reliance and indigenisation in defence manufacturing is vital for success in future wars. The doors for Private Industry participation were opened fifteen years hence, but the response has generally been muted. Other than manufacturing low technology items, assemblies and components, hardly anything of significance has been manufactured indigenously by the Domestic Private Industry. Our defence acquisitions still have 60% import content, which would expose our national security to grave risks, especially in times of war.
Under the ‘Make-in-India’ drive initiated in 2014, the Govt has undertaken a slew of measures to encourage Private Industry participation in defence manufacturing. Releasing the List of Defence Items, pruning down the Defence Items List, facilitating ‘ On-line ’ application by the Private Industry for grant of Industrial Licences, enhancing the Foreign Direct Investment (FDI) Limit in the Defence Sector are some of the notable measures taken by the Govt, in the past three years. In May 2017, the Govt took a path-breaking step by acceptance and approval of “The Strategic Partnership Policy (SPP) ” and included it as Chapter VII of the Defence Procurement Procedure – 2016 (DPP-2016) in accordance with recommendations of Dhirendra Singh Committee. The Committee had emphasized that the ‘Strategic Partnership Model’ be established in addition to the existing infrastructure and capacity of Public Sector Units, whereafter, the VK Aatre Task Force was appointed by the Govt which recommended detailed criteria, methodology and parameters for the selection of Strategic Partner.
The SPP is essentially aimed at enhancing self-reliance by expanding the defence industrial base, progressively building indigenous capabilities in the Private Sector to design, develop and manufacture complex weapon systems. Currently the policy is focused on four segments viz Fighter Aircraft, Helicopters, Submarines and Armoured Fighting Vehicles (AFVs). Only one Strategic Partner will generally be selected per segment. MoD may consider if deemed necessary, addition of more segments or sub-division of identified segments.
The Strategic Partner (SP) is expected to play the role of a system integrator by building an extensive eco-system comprising development partners, specialized vendors and suppliers, in particular, those from the Micro Small and Medium Enterprises (MSME). The Applicant Company has to be an Indian Company, owned and controlled by resident Indian Citizens with more than 50% of the capital directly or beneficially owned and controlled by resident Indian Citizens.
Ever since its approval, Think Tanks and Scholars have extensively analysed the implications of various parameters / modalities as detailed in the SPP. The Indian Private Industry and Foreign Companies have expressed keen interest in the business of defence manufacturing. However, since the policy has been approved only in May 2017, significant progress in selection of SP in any of the four segments has not been made.
Certain issues of significance which have been voiced by various stakeholders that need detailed analysis and deliberation are discussed in subsequent paras.
FDI Limit and Ownership Issues
The FDI Limit of upto 49% (by automatic route) remains applicable. Thus, no relaxation has been accorded for enabling higher FDI in manufacture of complex weapon systems to meet further needs of the Armed Forces.
Limiting FDI has a direct impact of the ownership structure ; which dictates that the ownership has to be firmly in the Indian hands. The Foreign Original Equipment Manufacturers (OEMs) are citing this issue as a major cause for disagreement and a stumbling block in forging partnerships with potential SPs in the identified segments. Some of the OEMs have articulated a view that the FDI Limit could be enhanced beyond 49% in specific cases, where the manufacture of weapons and equipment is primarily intended for exports.
Minimum Order Quantity
The forging of SP provides limited certainty in the form of initial contract / supply order. However, there is no assurance for additional orders. Further, the Govt has retained the option for placement of future orders on Defence PSUs / Ordnance Factory Board (OFB). Whether any kind of priority will be accorded to the SP for a specific segment, in future procurements, is not clarified. Economies of scale are crucial in calculation of cost of production per unit of output and sustenance of big ticket projects. In the absence of assured future supply orders, achieving economies of scale would be heavily dependent on exports. Large investment, without any assurance of orders from the Indian Armed Forces would be akin to wading in a minefield, which the investors are wary of.
Transfer of Technology
Transfer of Technology (ToT), FDI / ownership and assurance of future orders for weapons / equipment are in a way closely linked to each other. Foreign Govts and OEMs are reluctant to transfer high end technology unless attractive returns are assured. Currently the Ordnance Factories (OFs) and Defence Public Sector Undertakings (PSUs) are mostly engaged in licensed production. Hundred percent ToT for complex weapon systems / equipment is feasible only in rare cases. In instances where ToT has been concluded in the past, Indian companies have been known to be slow to absorb the ToT.
Another issue of contention is about the methodology to measure the extent of ToT and its costing. OEMs would expect more incentives for higher percentages of ToT offered.
Joint Responsibility for Quality
OEMs have in various forums expressed reservations about joint responsibility of the quality of product in view of the foreign stake being limited to 49%.
Funds for Projects
The potential Strategic Partners are generally expected to raise funds for the projects all by themselves. As the investments for manufacture of complex weapon systems by the Strategic Partners are likely to remain ‘ Non-Performing ’ assets till the production starts, the risks that potential Strategic Partners face are intimidating. Further, the research and development (R&D) for up-gradation / product improvement also requires substantial amount of funds. Whether the Govt would be willing to support the R&D financially is a question that needs to be clarified to reassure the potential SPs.
Eco System of Domestic Manufacturers
The SP is expected to submit a plan for developing tiered industries in each segment by developing partnerships or entering into teaming agreements with MSMEs, Defence PSUs, OFB, DRDO, other PSUs and foreign companies for development of an eco-system of domestic manufacturers and repair / maintenance facilities. However, the implementation will be monitored by the Ministry of Defence (MoD).
Potential SPs have an apprehension about the degree of freedom that they are likely to enjoy in carrying out vendor development in accordance with the approved action plan and level of deviation that may be permitted in case MSMEs or any other team partner fails to perform to the desired level. Whether the relationship between an SP and local vendors would be fixed or open, needs clarification.
Transparency and Level Playing Field
The Private Industry, both domestic and Foreign, is apprehensive of the Govt’s contention in keeping the option to consider the role of Defence PSUs / OFB in conjunction with SP or separately for development of the weapon systems. The industry seeks assurance that the protectionist policies with respect to Govt Controlled Enterprises will not be arbitrarily adopted, which could jeopardize the efforts and investments of the SP and the OEM.
The issues, as discussed above, are some of the major unresolved issues that need to be addressed on priority. A prompt action would reaffirm the Govt’s commitment to promote ‘ Make in India ’ in the Defence Sector in a big way.
Courtesy: With permission reproduced from www.claws.in