Indian Defence Review

Economic liberalization came to defence manufacturing in 2001, a decade after liberalization in other sectors, which then permitted full partnership of private sector and equity inflow of 26% from foreign manufacturers. The Kelkar Committee (2005) provided the ballast for level playing field for the private manufacturing defence industry which was hitherto being treated as pariahs by the defense Public Sector Undertakings (PSUs) and Ordnance factories. Prof Kelkar also mooted the concept of Public Private partnership and recommended to institute a defence offset policy through which India can leverage its big ticket acquisitions to receive FDI, key technology and outsourcing orders. These suggestions were duly incorporated in the Defence Procurement Policy 2006. Despite such fervent efforts to rope in private players, the military industry complex remains firmly anchored with Department of Defence Production, with private sector still being perceived merely as suppliers and not partners. The Dhirendra Singh Committee in 2015 mooted the concept of Strategic Partnership between public and private defence industries. All these recommendations have remained as pious promises in deep hibernation in the cupboards of South Block. The DRDO, with the sole monopoly of design and development, has rarely allowed private sector players to play the role of partners in their activities. Given their unedifying record design capability of critical defence subsystems like engines, weapons and sensors, the Self Reliance Index has remained fixated at 30% of India’s total imports, despite recommendations and road map to improve it to 70% by 2005 by the Kalam Committee in 1993.

Budget 2022-2023: Major Policy Change

In this backdrop, the Atmanirbhar initiative of the Prime Minister has infused a new ray hope in the hearts of indigenous defence players in the country. In the last budget, the Finance Minister changed the rules of importation in General Financial Rules (GFR) by reserving all items upto 200 crores to be produced by indigenous manufacturers. As a continuation of that policy, the Budget today has indicated that 68% of total capital procurement by the Services will be earmarked for domestic players. The other big announcement has been that defence R&D will be opened for industry, start ups and academia with 25% of the defence R&D budget earmarked for them. The private industry will be associated in design and development of military platforms and equipments through a special purpose vehicle model. An independent nodal umbrella body for certification requirement will also be set up.

Budget Allocation Trend in Defence

Before analyzing the implication and viability of these far reaching changes, it would be useful to look at the budget outlay trends of three services in the past and for the upcoming year in terms of capital and revenue allocation.

Budget Outlay Of Defence Services ( RsCrores)

It would be seen from the above the overall increase in the defence outlay in real terms would be negative, given the fact that inflation is around 6%. Further, capital allocation would witness a measly increase of 4%.  In terms of share of GDP, it would be around 1.9% which is way below the demand of the services which is around 3%. Incidentally, as per the SIPRI report, most countries spend close to 2.5% of their GDP on defense and India is the second largest importer of conventional arms, next to Saudi Arabia.

Viability of the Two New Policies

The capital expenditure of the three Defence Services has been largely met out of Buy (Import) option, followed by Buy & Make, where the PSUs and OFs receive technology. The product is an offshoot of Know How rather than Know Why, which comes out of indigenous design capability. The PSUs have a dubious record being integrators, with much low value addition than was envisaged at the time of license agreement. The Make option with indigenous technology is now being accorded highest priority in terms of capital acquisition.

The reality, however, has been that poor design capability in weapons, sensors and propulsion systems have stymied India’s new policy thrust to Make in India and improve the design & development capability. Be it passive seekers, or carbon fibers, Active Electronically Scanned radars or Stealth capability, DRRO has not been able to deliver credible indigenous alternatives to importation. The engine that propels LCA (Light Combat Aircraft) is supplied by GE (General Electric) of the US. So is the case with engine for MBT (Main Battle Tank). Noting these concerns, it was decided to have design collaboration with reputed global design houses. One such successful engagement has been MR SAM (Medium Range – Surface to Air Missile) which is a culmination of collaboration with Israel. We also went in for JV (Joint Venture) with a Russian Company for producing cruise missiles, christened BrahMos. We had also inked an excellent D&D (Design and Develop) contract with Russia for producing a fifth generation Stealth Aircraft.

Concluding Thoughts

Atmanibharata in defence manufacturing is a policy in the right direction. But unless we create enabling conditions, it will remain a pipe dream. What we do not need is reinventing the wheel, but embark on collaborative efforts with best design houses and production houses. In this exercise, the Government must give option to OEM (Original Equipment Manufacturers) and Design Houses to choose their partner , and not be hamstrung for choosing a PSU or an OF. This has been the policy in Offsets. Joint Ventures should be encouraged. Though the FDI limit has been increased to 76% in March 2020, it had very little impact on FDI inflow in to defence manufacturing sector ($9.5 m) only. Its largely due to the perception that the defence manufacturing is captive to its own Defence PSUs (including OFs now). The work culture and accountability, adherence to time and cost implication is poor. There is a strong case for privatising most of the production items being undertaken by defence PSUs. A case in point is ALH’s (Armed Light Helicopters) which can easily be outsourced to private sector players like Tatas, with significant economy, and timely delivery. MoD had a successful experience of outsourcing OPVs (Off-Shore Patrol Vessels) and IPV’s (Inshore Patrol Vessels) to L&T, with substantial cost reduction compared to GSL (Goa Shipyard Limited) and better delivery compliance.

Allowing private players and academia to collaborate with DRDO is a good idea. The R&D budget of India is a measly 0.7% of GDP as against most developed countries who spend around 3%. The DRDO’s budget is pegged at 6% of total defence outlay (Rs 9674 Cr). This is much lower than 10%, which was recommended by a Parliamentary Standing Committee. To be fair, DRDO may not be able to absorb this hefty allocation in the absence of well-designed D&D collaboration with global design houses. What the FM does not realize is that the private sector and academia, without global collaboration would not be able to come out with design of major platforms and weapon systems. The example of JVs like BrahMos and D&D like MR SAM should be templates for defence manufacturing, rather than rhetoric of self-reliance by tweaking procurement policy or providing budget for industry and academia in DRDO’s budget. The time for privatization of defence manufacturing, except strategic systems and  JV and D&D with global players has come.