Economic liberalization in the defense production sector came in 2001 by allowing full private sector participation and FDI up to 26%. The GOM recommendation after the Kargil war suggested creation of NTRO (National Technical Research Organisation) for centralized intelligence gathering, positioning a CDS to give single point military advice to the RM (Raksha Mantri – Defence Minister). This paper takes stock of major reforms which have been introduced in the defense sector, particularly by the Kelkar Committee to provide level playing field to the private sector players and impact of these reforms.
While noting the impact of these reforms, it brings out the deficits in design and development of critical subsystems, non-moving SRI (Self Reliance Index) and structural challenges that confront the defense sector. It laments the present trends towards protectionism to bolster Make in India and suggests the criticality of creating enabling environment for greater investment by OEMs and design houses, need to privatize many of the products supplied by DPSUs and Ordnances Factories and higher investment in R & D and human capability development. It makes a strong case for having a U.S. DARPA (Defense Advanced Research Projects Agency) like organization to realize the best of emerging technology. Political will and priority can only usher in the unfinished reforms in the defense sector.
In the complex web of policy, execution, production and indigenization, there are often blame games and predilection towards turf protection, delaying timely placement of state of art weapon systems with the services.
India’s defense sector is sui generis as compared to other ministries including Ministry of Home Affairs, which handles the paramilitary forces as well. This is because of its strategic role in defending India and every part thereof including preparation for defense and all such acts as may be conducive in times of war to its prosecution, as mandated in List I of Seventh Schedule of the Indian Constitution. In 1977, the mandate was further amplified to include aid of civil power to any state. The naval, military and air forces come under the control of Indian Union.
Ironically, expenditure towards the defense services do not come within the ambit of charged expenditure as listed in Article 112(3), though there is a de facto understanding that the expenditure towards defending the country would never be denied or debated. Historically, a little under 3% of GDP is committed for the defense services which constitutes around 13% of central government expenditure. This is in line with military expenditure of most countries as evidenced in SIPRI reports.
The MoD is at the helm for ferreting out the policy decisions, in which the RM and Cabinet Committee on Security headed by the PM are the principal players, while the three services would execute the security mandates. The Defense Production Undertakings are expected to undertake defense production while the SA (Scientific Adviser) to RM is mandated to promote indigenous design and development of defense platforms. In this complex web of policy, execution, production and indigenization, there are often blame games and predilection towards turf protection, delaying timely placement of state of art weapon systems with the services.
Given the wide panoply of issues and concerns, this paper would address (a) the major policy reform initiatives (b) taking stock of reforms (c) the way forward
Major Reform Initiatives: Kargil Committee
The Kargil Review Committee Report (2001) recommended creation of Chief of Defense Staff (CDS), a full time National Security Advisor, NTRO as centralized communication and intelligence agency, a Defense Intelligence Agency (DIA) and establishment of Think Tanks. CDS was the last to be operationalized in 2020, while Defense Acquisition Council, Integrated Defense Staff, the Andaman & Nicobar Command, Nuclear Command Authority, Strategic Forces Command, Department for Ex Servicemen Welfare were quickly put in position. This has largely mollified the understandable angst among the services that the SHQs (Service Headquarters) are not attached offices or appendages to MoD but an integral part of decision making, including procurement of revenue and capital items.
In fact, resource sharing, particularly air assets, is one of thorniest issues that bedevil relationship between the Army and IAF.
The DPM (Direct Procurement Method) and DPP (Defence Procurement Procedure) provided the policy architecture for procurement, prioritization and timeliness and the overwhelming refrain has been probity, transparency and indigenization. The latest tag line is Make in India; to promote self-reliance in defense manufacturing and technology, notification of positive indigenization list, liberalizing FDI up to 74%, and boost the growth of MSMEs and startups.
Impact of CDS & Kargil
While it’s premature to assess the impact of CDS in the functioning of the Defence sector, General Rawat mooted the concept of creating integrated theatre commands with all the three services being part of it, the IAF has been opposing formation of unified theatre commands, citing limitation of resources. In fact, resource sharing, particularly air assets, is one of thorniest issues that bedevil relationship between the Army and IAF. Gen Rawat also did not help matters by calling the IAF, a supporting arm of defense network and infrastructure. His untimely death has possibly brought a sobering impact on hustling major structural reforms.
With the creation of Department of Military Affairs (DMA) under the CDS as Secretary DMA, the responsibility of the DoD under the Defense Secretary like JS (Army), Navy and Air has been taken over by the defense services. Except for the DGA who takes responsibility for acquisition for the three services, the civilian control over the three services has been taken over by the CDS as Secretary of DMA. On the face of it, its functionally a better arrangement as the services take nodal responsibility of policy formulation and execution and provide single point military advice to the RM.
Evolution of Reforms in Defense Sector
While India embraced economic reforms in 1991 to come out the dirigisme of Nehru and Indira Gandhi and embrace free market and accept private sector as the new temples of modern India, the defense production sector took a decade more to encourage full private sector participation and inflow of FDI up to 26%. This was due to the Industrial Policy Resolution of 1956 which put arms and ammunition and defense equipment production as the exclusive responsibility of the state.
The Dhirendra Singh Committee strongly recommended a Strategic partnership model between DPSUs and private sector companies.
The defense services were captive buyers from DPSUs (Defence Public Sector Undertakings) and Ordnance Factories (OF’s), without accountability for cost control, quality and timely delivery. All technology transfers from OEMs (Original Equipment Manufacturer) would have to be necessarily passed on to the DPSUs and OFs.
Post economic liberalization in defense sector in 2001, Kelkar in 2005 made a strident call to provide level playing field to the private sector, encourage PPP (Public Private Partnership) and suggested an offset policy to be introduced to leverage big ticket acquisition to get key technologies, outsourcing and export order. The example of Brazil making Embraer aircraft out of technology provided by the USA for F16 aircraft order carried resonance for the offset policy in the corridors of south Block. This policy became part of the DPP 2006.
Mr Sisodia , DG IDSA suggested the DGA model of France to be adopted in India, as it will bring both design development, acquisition under one overarching umbrella. The Rama Rao Committee suggested that the design and development agency should come under the Production Agency to achieve better synergy, coordination and accountability.
The Dhirendra Singh Committee strongly recommended a Strategic partnership model between DPSUs and private sector companies. While the private sector is no longer treated as a pariah by the DPSUs, the SP model is nowhere in sight.
Make in India Conundrum
In 2020 the MoD had come up with a slew of major changes by encouraging ToT (Transfer of Technology) partnership of foreign companies with private sector, identifying a negative list for imports including barring global imports up to Rs 500 Cr, creating a non-lapsable Renewal & Replacement Fund for capital equipment procurement, giving primacy to indigenous design and production over license agreements and imports and most importantly increasing the FDI limit to 74% and preferred treatment to SMEs. The Ordnance factories have been converted in to Corporation to improve their functioning, financial viability and accountability.
Taking Stock of Reforms
To be fair to the reform process of MoD in general and defense production in particular, India has come a long way from the shadows of the civil servants and DPSUs and OFs to a more professional architecture of CDS and private sector playing an important role in defense production. Dr Kalam has demonstrated how Joint Ventures like Brahmos for producing cruise missile is a very robust method for attracting collaboration with OEMs. The joint D & D collaboration with Israel for producing MR SAM (Medium Range Surface to Air Missile) is a useful model to emulate.
IIT, Kanpur is the only IIT offering courses in naval engineering design.
With Ordnance factories becoming corporates, there are indications that they have become more cost and quality compliant. The professional competence of the service officers in India is often compared to the very best in the world. With creation of NTRO, networking of intelligence has become better. While integrated theatre commands remain as work in progress and possibly need greater care rather than being rammed in to, there are a few areas where India’s resolve to Make in India, bolster indigenous design capability has been rather unedifying. These concern areas need to be addressed properly.
When it comes to designing critical subsystems, the record of DRDO labs, universities and DPSUs remain at a low ebb. As early as 1964 the Subramaniam Committee had recognized that our engineering colleges do not have technical wherewithal to design, say a gas turbine engine and needs collaboration with reputed engine houses of the world. IIT, Kanpur is the only IIT offering courses in naval engineering design. No wonder, in terms of indigenous design, be it sonar and torpedoes, Navy steals a march over the other two services. The subsystems, where DRDO’s record is lamentable are passive seekers, Focal Plane Array, AESR radar, stealth, INS GPS, air to air missiles, CNR, smart munition & carbon fibers. In fact, propulsion, weapons and sensors remain India’s Achilles heel. Dependence on import in these critical subsystems is around 90%.
Non-Moving Self Reliance Index
A committee under Kalam in 1993 had assessed India’s SRI in defense acquisition as 30%. It had set out a road map to achieve 70% SRI by 2005, by setting up facilities like cavitation tunnels, collaborating with OEMs & design houses and focusing on critical subsystems like seekers, FPAs, radars and communication. India has the dubious record of being the highest importer of conventional arms (SIPRI 2022). The hype of Make in India and Kalam’s vision remain unscripted.
In France the DGA was created in 1961 as the agency to coordinate technology development and acquisition. The Sisodia Committee strongly pitched for it.
The Dhirendra Singh Committee has merely shifted the goal post of achieving 70% SRI by 2026! we are not able to attract credible collaboration with OEMs and design houses despite FDI being raised to 74% it is a testimony to the lack of enabling environment to attract foreign investment. Some private companies like L&T and Bharat Forge who have collaborated with OEMs are regretting because of lack of firm orders etc.
In France the DGA was created in 1961 as the agency to coordinate technology development and acquisition. The Sisodia Committee strongly pitched for it. While this is unlikely to happen, the DARPA model of USA needs serious consideration for emulation. DARPA is the agency to develop emerging technology in collaboration with industry, academia and important government partners. Economist calls DARPA, the ‘The Agency That Shaped The World’. Its cupboard of success includes internet, satellite GPS, drones and during COVID 19 the Modern Vaccine.
Instead of Ordnance factories being converted in to PSUs, it would have made sense if most of them involving low technology could have been privatized. ALHs of HAL, trainers, IPVs (Inshore Patrol Vessel) & OPVs (Off-shore Patrol Vessel) of defense PSUs can be easily privatized. When this was experimented with OPVs & IPVs the orders were bagged by the private sector with much lesser cost commitment, quality compliance & timely delivery. Major Private Industry players like the Tata’s, L&T, Mahinder & Mahinder can step in to major production of defense production, instead of patronizing DPSUs interminably.
Think Tanks and Professional Gaps
The Group of Ministers had recommended creation of Think Tanks for each service. It may be recalled IDSA that created in 1965 as India’s foremost think tank for advanced research in IR, especially defense, strategic and security issues. Think tanks like CLAWS and CAP for Army and IAF and Naval Foundation for the Navy have also been set up. These are funded by their respective Service. However, unlike RAND Corporation in the USA, these think tanks are hugely handicapped as the Ministry hardly shares any information beyond what is available in the public domain. The SHQs are also chary of any sharing data on the decision-making process or formulation of QRs (Qualitative Requirements). MoD remains shrouded in infernal secrecy even for data which can be shared with the Think Tanks
Further, critical support services like Finance are hugely handicapped in the absence of professional CAs and MBAs as they are manned by the IDAS (Indian Defence Accounts Service) who have a sense but inadequate depth in issues involving budgeting, life cycle costing, IRR of project proposals. Major contracts requiring in-depth legal knowledge is also conspicuously absent in these IDAS and accounts officers. In contrast, the DPSUs are manned by professionally competent finance officers. The legal back up in MoD is also wafer thin. This creates needless lack of trust between the service officers and integrated financial advisors, who most often depend on gut feeling rather than sound financial, contractual and legal knowledge.
Presently India spends only 0.8% of its GDP on R&D, 80% of which comes out of government as against 3-5% by DCs and EMDEs like China.
The Way Forward
While unveiling the 1991 budget, Dr. Manmohan Singh as Finance Minister quoted Victor Hugo: “No one can stop a moment whose time has come”. He was putting the clock of socialism and command economy behind and ushered free market economy and private sector to take charge of the economy. The Military Industrial Complex guarded by PSUs and OFs gave way to private sector and foreign company participation in a gradual manner. The Mantra now is Make in India and promotion of indigenous technology and production.
Economists like Prof Bhagawati and Panagariya believe that India is putting the clock back on free trade and globalization through a protectionist regime. The Make in India to be truly successful needs greater investment in R& D by both government & the private sector, forging JVs with OEMs, Design & Development collaboration with design houses & building design institutes and funding courses in Aerospace engineering in IITs. Presently India spends only 0.8% of its GDP on R&D, 80% of which comes out of government as against 3-5% by DCs and EMDEs like China.
Factor productivity is critically dependent on investment in human capital, quality education and Research and innovation. Solow & Romer, both Nobel laureates in Economics, have harped on endogenous and exogenous growth, which is critically dependent on investment in S&T, skilling of personnel. As the biologist EO Wilson rightly avers: We have stumbled in to the 21st Century with stone-age emotion, medieval institutions and godlike technology. To make India a part of global manufacturing, India Military Industry Complex must treat both private and public sector alike, ease the process of investment by OEMs and foster the process of globalization.
When Raghuram Rajan took over as RBI Governor in 2013, he had famously said: ‘there is enough political instability in the country. I do not want to add to economic instability’. India has been lucky in terms of political stability. With Mr. Modi likely to have a safe passage in the next general election and the way India has come out of the cusp of Covid 19, with high growth, the role of political leadership would be critical to usher in next generation of reforms in the defense sector.
Of critical importance would be the way it brings synergy between Indian industry (public & private) and OEMs & Design houses for forging JVs, Joint D&D and Production & create enabling environment for foreign investment in critical technology. India must try to have a DARPA like organization to harness the best of emerging technology. While probity and transparency in acquisition is important, what is more important that the best equipment and platforms are available to the services in a timely manner? Political will and priority will only ensure that the structural and functional reforms of India’s Military Industry Complex become a reality.
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