Indian Defence Review

Remaining constantly on the receiving end and with a view to promote indigenisation, the GoI opened up its defence industry in 2001, up to 100 per cent for the private sector and up to 26 per cent through Foreign Direct Investment (FDI), but both subject to licensing. The decision to permit the private sector in the exclusive domain of the state-controlled DPSUs was considered as a major breakthrough, with expectations of ushering the indigenous industry into an era of high technology. The excitement and enthusiasm in the boardrooms of many a corporate house has since diminished in the ensuing thirteen years, primarily due to the slow pace of development on FDI.

The infusion of modern technologies has not occurred as the foreign companies are hardly enthused by the limit of 26 per cent. The private industry has been insisting on an increase in the FDI limit to at least 49 per cent, if not more, with other incentives, but the GoI continues to be wary about it. The Minister for Defence Equipment, Support and Technology, UK, Mr Phillip Dunne, has even gone on record to say, “a higher FDI limit would certainly encourage investment….a genuine joint venture is 50:50 and joint ventures are good ways of doing business.” (Force, Oct 2013, p56)

With defence production gradually opening up to the private enterprises, many large corporate houses such as the Tata Group, the Mahindra Group, the Kirloskar Brothers Ltd, Larsen and Toubro Ltd and a few others, have evinced interest. The private sector is no longer content with its role as supplier of raw material or semi-finished products. Today, it aspires for greater participation in defence production. The private entrepreneurs, however, also expect a steady stream of orders and a production policy with no ambiguities or conjectures, and nothing to be read between the lines. They are looking for a level playing field in comparison to the DPSUs, but the prolonged period for which the private sector has been kept out has impacted its ability to start operating at a competitive level.

The only promising start in the aerospace sector is the Mahindra Group, which produces 30 aircraft each year at its manufacturing facility in Australia; Mahindra Aerospace acquired an Australian aircraft making company and another spare parts manufacturing company. The Group currently sells only one type – an eight-seater aircraft – and is now looking forward to market its five, ten and 18-seater aircraft in another three years. The production rate is expected to rise to 40-50 aircraft once the new aircraft start rolling out; it has another assembling unit in USA that assembles ten aircraft per year.

Compare this with the progress of the new transport aircraft that HAL is supposed to be building from scratch, in collaboration with the Russians. This writer has no knowledge if the aircraft is off the drawing board, even after HAL singing its own praises for the last decade. On the other hand, the Defence Minister has asked for a ‘relook’ at the terms and conditions of the Request for Proposal (RFP) for the replacement of the IAF’s fleet of Avro aircraft and delayed the submission for the proposals by three months. This has been done on receipt of a letter from another Minister probably because HAL felt slighted at not being included in the list of vendors for the RFP and is now trying for a back-door entry.

As per SIPRI, India has the dubious distinction of being the largest importer of weapons in the world in 2012. It has also estimated that in the next ten years, India would be spending over $100 billion for import of military hardware. No small wonder as the private sector currently contributes only nine per cent of the total 30 per cent of the indigenous production.

So how does India energise indigenous production in the defence sector, especially energising the aerospace industry to cater to its civil and military needs? Aerospace industry is a high-technology and high-risk industry, which translates in to high costs. The GoI has to change its mindset and go about providing the private players with a level playing field. It is not just sufficient to give the permits; it has to be followed up with concrete action.

The DPSUs have held a monopoly in aerospace equipment manufacture for years, charging exorbitant rates for poor quality. Today the time has arrived to take the private sector as a partner with similar generous financial and technical support, for leaving them entirely on its own will be detrimental to the entire aerospace industry and the nation. The management and organisation of the entire aerospace industry needs a relook.

A National Aerospace Policy, that caters to the interests of all stakeholders, duly synchronised where necessary, is the need of the hour along with an Aeronautics Commission and a dedicated Department of Aerospace with other supporting organisations. The Commission, Department and other supporting bodies should be tasked with designing and realising scientific, technological and industrial targets. This proposal was first placed for a decision in 1994, and later modified and re-submitted in 2004. It is still gathering dust tied up in red tape and ignorance.

There is a debate within the country’s experts on future product directions; some believe in the achievement of full capability to design, develop and produce a platform, while others argue that the aerospace industry should concentrate only on certain niche areas in collaboration with foreign expertise. Considering that our nation has been deprived of state-of-the-art technology, for whatever reasons, Joint Ventures (JVs) and Public-Private Partnerships (PPP) seem to be the path to be taken. The GoI should encourage this path and not place obstacles with riders such as, “within the Government approved framework”. One acknowledges the continued dependence on imports and foreign technology for some time, but hopefully the path to autonomy and self-reliance would have opened.

While India boasts of the largest aerospace industry in Asia, it has no vision or strategy to lead it. The industry (read HAL) seems content with the existing low technology and claiming credit points for license manufactures. International companies are also quite content with such a situation in India, as any development of the aerospace industry would be a competitor to them. Permitting a foreign vendor to choose a partner in the private or public sector for a joint venture, is all very well, but we need to be sure-footed and capable ourselves with a clear national vision and an aerospace policy before we try such departures as mentioned in the DPP of 2013.

The reason for being chary is the dependence on procedures, rather than on a policy, has its pitfalls. Procedures are mere actions and processes to execute policies and can easily be modified to suit whims and fancies. Policies, on the other hand, are based on vision, and have long-term objectives, hence the need for a National Aerospace Strategy.

The latest version of the DPP, issued in April 2013, contains clauses to promote indigenisation and push back foreign procurements in a bid to curb corruption through the lobbying by foreign vendors and their agents. While the intention is noble, it needs to be understood that indigenisation in the aerospace industry cannot be pushed with just this desire to rein in bribery and dishonesty. What it needs is dynamism and a well-calibrated strategy. The challenge is not unique to India, but is a global phenomenon; there is the need for a distinctive structure for doing business in this sensitive sector, fine-tuned between free markets on the one hand and State control on the other.

The current economic gloom cannot obscure the enduring growth trend of India’s economy. The GoI, the aerospace industry and all those connected with defence procurement and production, need to have a long-term vision. Globally, India represents the most vibrant defence business environment due to the urgency to modernise its Armed Forces. Notwithstanding the reforms announced over the years, indigenisation in the aerospace industry is suffering because of the lack of modern technology. The restriction of 26 per cent in FDI needs to be increased to 49 per cent, if not more, to ensure the infusion of state-of-the-art technologies. The private sector should be encouraged with the necessary incentives and handholding by the GoI, to participate in JVs and PPP; Mahindra Aerospace has shown the way, the others need to follow. The vast existing infrastructure of R&D with the DRDO should be made available to the private sector; consultations with the scientific community and the academicians are also a part of technology absorption. Non-performing DPSUs should be corporatised, either in totality or partially. Performing DPSUs should be made to understand the benefits of collaborating with the private sector, rather than always be in competition to it.

The aerospace sector, military and civil, has bright prospects as the demand for air travel and military aircraft will not dwindle but only increase in the coming decades. The industry – defence and civil – needs to be energised with a combination of new technology, new policies and no riders. Changes have been introduced; they should be followed without fear of failure – or else we are doomed to a lifetime of dependence on imports.