Making Make in India a Reality in Defence and Aerospace Sector

Making Make in India a Reality in Defence and Aerospace Sector

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India, an aspiring world power, has long harboured the goal of possessing a technologically-advanced, self-sufficient arms industry. While its economic power has expanded, and its technological prowess in certain areas — such as information technologies — has grown, it has not been able to create a world-class globally-competitive defence industry. Consequently, India is still saddled with a bloated, non-competitive, non-responsive military, capable of producing only technologically inferior military equipments, and that too never on time and mostly exceeding their original cost estimates.

The result is that India still imports 70% of its defence requirements and the armed forces continue to grapple with the outdated, vintage and obsolete weapon platforms — submarines, fighter aircraft (MiG-21) and helicopters (Cheetah, Chetak, MI-8 and Seaking). A two-million-strong military (the third largest in the world), which has fought four wars since the country’s independence and continues to confront an unstable security situation in its neighbourhood, certainly deserves better.

Traditionally, Indian armaments production has been entirely embedded within a government-run military industrial complex — eight Defence Public Sector Undertakings (DPSUs), 41 Ordinance factories and the powerful Defence Research and Development Organisation (DRDO). The Indian Government has for long been aware of the deficiencies affecting the defence industrial base and has pursued a number of initiatives to reform and revitalise the defence sector, including allowing the recent entry of the private sector. Barring a few modest reforms, the vast bulk of defence and aerospace manufacturing still remains in the hands of the State. It is, therefore, surprising that a nation, which stunned the world by putting a satellite in Mars orbit in its very first attempt, is dependent on the western world and Russia for 70% of its

military hardware.

Make in India – a reality check

The new government’s ‘Make In India’ policy and increase in the Foreign Direct Investment (FDI) cap in the revised defence FDI policy (from 26% to 49%), announced with a lot of fanfare during the Aero India show in February this year, was seen as a major step to revitalise the defence industry and awaken it from its long slumber. This government action was expected to infuse refreshingly new attitudinal change in India’s policy-making processes, foster a trust between the government and the industry, and usher in major reforms to improve India’s standing in World Bank rankings.

Accordingly, a number of committees under retired bureaucrats were set up by the government to review the problems being faced, and recommend suitable solutions to improve the business environment in India. However, despite the prime minister’s personal thrust toward the ‘Make in India’ mantra, very little has changed on the ground. This is evident from the

fact that even though the government has increased the FDI in the defence sector to 49%, there are almost no takers so far. According to the latest figures tabled in the Parliament in March 2015, in the last seven months, only six proposals worth USD15.3 million have been received. Out of these six proposals, only two are for FDI of 49%. So, why are things not working out? Let’s find out…

Despite various committees being appointed, no marked changes are visible on the ground — be it the negative fiscal environment (including taxation), the lack of critical infrastructure (roads, ports and power), antiquated labour laws, or corruption continuing to loom large. Manufacturing requires a significant edifice of infrastructural support, which is currently absent in India. There is a lack of regulatory framework, especially in the general aviation sector, which has a huge growth potential. Reforms require ongoing consultations with the industry, and presently, there is no positive movement on this.

Regardless of all the tall talk of tax reforms in the defence and aerospace industries, they continue to be taxed as before. It should be noted that the high rate of service tax has placed India’s Maintenance, Repair and Overhaul (MRO) industry at a disadvantage vis-à-vis the MROs in Gulf countries and South East Asia.

The biggest challenge in ‘Make in India’ policy framework is the existing antiquated Research & Development infrastructure with severely constrained design capability and limited support, both scientifically and financially. The issue that needs to be addressed is whether the government and the DRDO are following the right approach and strategy for R&D and technological development. What India needs is a research and development institution like the Defence Advanced Research Projects Agency (DARPA) in the US.

One of the key reasons behind this sorry state of affairs is the complete side-lining of the Indian private sector by DRDO and DPSUs in design, production and maintenance. Public sector monopolies breed complacency, arrogance and incompetency. Continued reliance on licensed production by many state-owned enterprises, especially the Hindustan Aeronautics Limited (HAL) has compromised the domestic competence and capability to develop a product from scratch.

Further, decision-making in defence procurement is bureaucratic, as compared to the space and nuclear sectors where the respective commissions report straight to the prime minister.

Global Original equipment manufacturers (OEMs) have developed sensitive and strategic technologies, especially in the aviation sector, related to engines, navigation, surveillance, avionics and state-of-the-art weapon systems over several decades, investing billions of dollars. It is a fallacy that these can be handed over to India without a majority control. The range of emerging technologies is so complex that even the US has 100% subsidiaries of foreign defence OEMs, like Airbus, BAE, Saab, Rolls Royce, etc. Competing with them improves the standard of US defence companies and prevents complacency.

The way forward

What India needs is a single FDI slab of 74% in defence with clear norms and a level-playing field. Forty-nine percent is of no use and 100% may be too one-sided. The Indian obsession with ‘ownership and control’ needs to be curtailed. Higher FDI limit will also expose certain global OEMs that are not keen to invest in India, and are using 49% FDI as a ‘convenient’ excuse to stay out.

The Indian private sector needs to be co-opted as partners and not vendors by DPSUs. Certain non-performing labs and plants of DRDO and DPSUs respectively need to be privatised. R&D funds for defence need to be allocated to the best Indian organisations and universities.

The ‘Make in India’ programme in defence will have to be facilitated by way of bold reforms in policy, procedures and our approach towards global investors. There is an urgent need to facilitate removal of other manufacturing roadblocks, like land, power, transportation infrastructure, taxation and multifarious government clearances. The idea of technology transfer through either licence production or offsets is misunderstood by the decision makers. Making this the principal strategy and cornerstone of defence technology development and self-reliance in the country is like chasing a mirage. All it does is, perhaps, short-circuit or kick-start a process. But it can never lead to realising the national strategy of indigenous capability and self-reliance. Nothing can substitute strategic research and development and it can be achieved only by involving the entire knowledge sector of the economy. The private sector in India today is in an embryonic stage when it comes to the matters of defence technology. Setting up manufacturing facilities, and fabricating buy-back components using outdated technologies as a part of the offset policy, may perhaps be a good start in their learning cycle. However, major efforts have to be made to hop step this learning curve and mature fast.

One sure way to do this is to develop technologies in-house, both designing as well as manufacturing, so as to catch up. India has to deliberately enter the age of innovation in which research and development becomes an integral component of science, technology and engineering development, an element totally disregarded by the Indian industries so far and unthinkable in the aerospace sector. HAL has singularly survived on licence production and shown improved bottom lines on captive production without any investment in strategic research and development.

National Aerospace Laboratories (NAL) could be made a centre for excellence in aerospace, with capabilities in developing analytical tools, simulation tools, simulator platforms, and a centre of flight research with a fully-capable experimental flight laboratory with their own experimental helicopters and aircraft.

This is indeed a task that requires an honest effort, planning and sincere implementation. If it remains simply a vision, as is typical of the Indian bureaucracy, and stagnates with time, then all this would be hallucination; a dream in futility. There is a need to incorporate mechanisms for formal public consultations with the Indian defence. industry, both private and public, on proposed changes before their adoption by the Defence Procurement Board (DPB) and the Defence Acquisition Council (DAC). Under the US public procurement system (both defence and non-defence), initial drafts of proposed regulatory changes are mandatorily published with a standard 30-day notice period and the final regulations necessarily indicate how certain public suggestions have been incorporated therein, or why certain stakeholder suggestions have not been accepted in the final rules. This ensures transparency. In contrast, the suggestions on defence acquisition reforms made by the Naresh Chandra Committee and the Rabindra Gupta Committee have remained unavailable to Indian industry stakeholders, virtually ignoring the latter’s potential for contributing meaningfully to the reforms process.

The next set of Defence Procurement Procedure (DPP) reforms could therefore focus on improved information-sharing protocols between the MoD and the Indian industry, perhaps along the lines of the US system where security-vetted key management personnel from its domestic industry routinely enter into in-depth, wide-ranging discussions on planned capabilities with the DoD’s acquisition wing — right from the planning stage of the acquisition process. In contrast, DPP’s present system of industry meetings facilitated by Headquarters Integrated Defence Staff (HQIDS) is rather ad-hoc, with unilateral presentations by industry associations based on ‘hearsay’ information on user requirements. Improved dialogue and consultations could eventually help MoD in more ways than one.

Hopefully, the DPP 2015 will address these issues.

It is time that a level-playing field is provided to the Indian defence industry for being able to showcase its capabilities and manufacturing plans to users in the defence establishment in a much more structured and formal manner than is possible at present. Even though the MoD does interact with the Indian defence industry in a number of small and ad-hoc ways, the challenge going forward — for the ‘Make in India’ mantra to become an all-pervasive reality in defence acquisitions — will be to multiply manifold the onset, frequency, range and depth of its industry engagements.

Many Indian companies, especially the new entrants into defence, are yet to understand the finer details of the Long Term Integrated Perspective Plan (LTIPP) and its public version the Technology Perspective Technology Roadmap (TPCR). The MoD needs to make this process more interactive; this would benefit the end users as well as industry. The MoD’s procurement procedures are still very cumbersome and time consuming; these need to have clarity and the procurement cycle shortened.

While the modernisation of the military requires substantial budgetary outlays, in reality, the gap between the requirement of funds projected by MoD and the actual budgetary allocation has been widening over the years. This trend is likely to continue, as is clearly evident in the defence budget for 2015-2016. But of greater concern is the fact that the MoD surrendered a total of Rs 28,000 crores between 2001- 02 and 2010-11 under the capital head. This was mainly due to stalled projects amidst allegations of wrong doing, lack of indigenisation and complexity of procedures. However, grave the situation, the way out of the morass has to be found to ensure the acquisition of operationally- critical weapon systems, including guns, helicopters, submarines, aircraft and ammunitions that form the core of a nation’s defence capability.

Conclusion

The entry of the private sector into defence sector is a game changer. This revered holy cow no longer remains the preserve of the State. The challenges to the Indian defence industry are likely to increase over the next few years as the country embarks on the massive modernisation of its military. The private industry can play a very crucial and positive role to help overcome these challenges. While the government has displayed the necessary political will for indigenisation and establishment of an advanced manufacturing base in the country, the challenge lies in its comprehensive implementation — an enabling policy framework, focus and commitment, including addressing the fiscal and taxation issues, which currently impact negatively on the private industry. In this context, the prime minister’s directive to the secretary-level officers to take decisions and implement policies without fear is very reassuring.

This will provide them protection against the 3Cs — the Central Bureau of Investigation (CBI), Central Vigilance Commission (CVC) and the Comptroller and Auditor General of India (CAG). With the government committed to carry out reforms in defence sector, we are likely to witness a greater participation of the domestic industry (both private and public) in the design and production of defence equipment. The government and the defence industry need to work together on the model of 3Cs — compete, co-operate and collaborate to ensure that ‘Make in India’ becomes a reality.

The good news is that the revised DPP 2015 will be out in two months with the basic thrust on ‘Make in India.’ It will be useful to envision how India’s DPP could be retrofitted with this new vision by incorporating a culture of dialogue and consultations into the defence acquisition process itself, as a necessary prerequisite for building enhanced confidence and trust in MoD’s procurement systems in the longer-run