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Indian defence industry: Walking the tightrope between self-defence and self-reliance

India must be more strategic with its goals for self-reliance in the defence sector, with careful planning of future needs and effective participation from the industry. This can be ensured through a more streamlined acquisition process, addressing concerns of foreign OEMs, building private sector innovation and manufacturing capability and building a vibrant export market.

  • India was the second largest arms importer globally during 2015-19, accounting for 9.2% of total arms imports during the period.
  • Improving India’s self-reliance in defence has been integral to the policy framework of successive governments. Recently, the government announced a list of 101 items where imports will be progressively banned.
  • Even as India attempts to strengthen indigenous capability through such a decision, it is important to give due consideration to factors like ability to deliver within the cost, timeliness and quality parameters. Private players also need an assurance of certain business, either through government or via the export market.
  • Further, there is a need to be more strategic with our goals for self-reliance, through careful selection of weapons and platforms for our future needs, along with desired efforts towards a robust R&D ecosystem.

Brahmos Missile

Image Credit: Zee News

When it comes to self-defence, it is better to have the power and not need it than to need it and not have it.

– Kevin Shearer

Despite being fundamentally averse to war as a nation, the subject of self-defence is of critical importance to India, especially given the unfriendly neighbourhood on both its eastern and western land borders. Having the requisite self-defence capability and preparedness at all times will keep the country in good stead for any military conflict, or even better, act as an effective deterrent for conflicts altogether.

In an ideal situation, India’s own defence industry should be up to the task to be able to meet all the current and future needs of our armed forces. Of course, the reality is that India’s defence imports will not practically come to zero in any foreseeable scenario in the immediate future. But enhancing India’s indigenous defence capability to the extent possible serves to reduce the fiscal deficit, keeps critical technology expertise within the country to counter threats and aids in employment generation. This requires a holistic and self-propagating ecosystem with multiple elements coming together. Lt Gen J S Bajwa, Editor, India Defence Review, elucidates:

An indigenous defence industrial base cannot be established on borrowed or handed down technology. Integrated R&D is a pre-requisite for an independent defence industry. This in turn, implies that an equally vibrant and technologically advanced network of ancillary units in the MSME sector co-exists in the ecosystem. These together knitted with a competent skilled workforce are perquisites to produce goods of highest precision and quality to compete with similar products produced in advanced industrial economies.

So unsurprisingly, defence indigenisation has been a key focus area of successive governments. India was the second largest arms importer in the world during 2015-19, accounting for 9.2% of all arms imports during the period (SIPRI). Defence expenditure accounts for around 2.4% of GDP and India depends heavily on Russia, US, France and Israel for vital platforms and weapons. Around 86% of all weapons, equipment and platforms deployed in India are of Russian origin. Besides the commercial dealings, weapon purchases are equally part of a delicate geopolitical balancing act between India and these crucial allies.

Recently, India took a major step to promote indigenisation, by finalising a list of 101 items where imports of defence equipment will be banned in a phased manner up to 2024. The list includes major armaments such as artillery guns, assault rifles, corvettes, sonar systems, transport aircraft, light combat helicopters, ammunition, radars, conventional diesel-electric submarines, communication satellites and shipborne cruise missiles. The total value of the items on the list is estimated at Rs 4 trillion, which includes Rs 1.3 trillion each for the Army and Airforce and Rs 1.4 trillion for the navy.

Industry stakeholders hail it as a great step towards self-reliance, considering that the domestic industry will be in the driver’s seat, even as foreign OEMs stay engaged via direct orders/technology transfer/collaboration with Indian companies. Interestingly, foreign players can set up JVs with Indian companies with a majority control of up to 74%, to be considered Indian entities and be eligible to manufacture these items. While some industry people are confident that the announcement will bolster the Indian defence industry, others caution that the import content of many of these items is still high even though they are already made/assembled in India. Brahmos cruise missile has quite a significant share of critical Russian components. This is true for most items assembled in India by defence PSUs.

The embargo on 69 of these 101 items will come into effect in December 2020. For these items, the domestic industry is already tuned to the needs of the armed forces, including the light combat aircraft (LCA) and the Pinaka Multi Barrel Rocket Launchers. But for some others, experts point out that the Indian industry lacks the capacity to design and develop them, both due to the limited time and lack of visibility on the qualitative specifications laid down by the armed forces, which are typically disclosed only when the tender is issued.

Some items like the light transport aircraft and light combat helicopter are made exclusively by India, while some others like the AK-203 rifle are stuck over pricing issues. Moreover, these items are built from well established and proven technologies, thereby not requiring critical or cutting edge technology.

Source: Stockholm International Peace Research Institute (SIPRI)

The crux is whether domestic industry is capable of providing high levels of indigenisation for defence equipment with competitive costs, timelines and quality. A report cites the examples of HAL’s light combat aircraft, Arjun battle tank, air independent propulsion systems for the navy’s Scorpene submarine and weapons locating radar for the Army (acquired before Kargil) to illustrate many instances of mismanagement, delays, late stage design modifications and cost escalations with indigenous development.

On the other hand, army veteran Vikram Mahajan, Director, US-India Strategic Partnership Forum, is positive that both small and large Indian defence companies have begun to manufacture quality equipment for foreign OEMs and have the potential to build a strong ecosystem. But the consensus is clear that India has taken some baby steps towards self reliance, and it must carefully chart its course ahead to balance this objective with the immediate and futuristic needs of its security forces.

Collaborate to upgrade

India’s importance as a defence market is huge, but foreign players will have to also appreciate its need for greater self-reliance. A collaborative style of functioning will prove to have long-term benefits for both. A number of Indian companies have successfully used the offset clause from arms imports to forge vital partnerships with foreign companies. From the Indian perspective, procurement has to be immediate where it’s a question of critical requirements of the armed forces. But where long-term procurements are feasible, they should happen through joint collaboration in terms of both production and R&D.

Source: Stockholm International Peace Research Institute (SIPRI)

A case in point is the aerospace sector, where we have instances of tie-ups with American and Israeli firms like Tata-Lockheed Martin, BAE Systems-Mahindra Defence, etc. With this intervention, Indian companies have developed niche capabilities and emerged as an integral part of the supply chain. A few years ago, even this was considered a far-fetched idea, with foreign companies lamenting lack of capabilities in Indian partners.

Going forward, they can expand their capacity further and expand their presence in defence as well as the civil aviation industry. On similar lines, India has developed technologies in collaboration with friendly countries, which are of relevance to the militaries of both – examples include the Barak 8 with Israel and the Brahmos with Russia.

Besides this, the strategic partnership model is a good route for domestic companies to acquire capabilities for high-end defence equipment like fighter jets, submarines and helicopters in collaboration with foreign companies. Sameer Patil, Fellow, International Security Studies Programme at Gateway House, opines:

There is a need to leverage the defence public sector units’ (DPSU) strengths of experience and infrastructure and the private sector’s management and financial expertise to forge partnerships between the two. This partnership between the DPSU and a private player should be prioritised in defence procurement to manufacture the 12 categories of equipment and platforms under the SP model.

Innovation breeds future-readiness

As far as indigenous R&D is concerned, India has largely relied on the DRDO so far, while the ordinance factories (OFs) just manufacture products based on blueprints. But since these factories do not have their own R&D division, they have largely been producing outdated technology. The importance of indigenous R&D is exemplified by Lt Gen J S Bajwa with an example:

The West is reviewing the role of one of the armed forces most venerated weapon systems, the Main Battle Tank (MBT). The 60-ton monster of a MBT, the Challenger 2 of UK is finding no role in its future army!! The Chinese have deployed a 33-ton indigenous light tank in Tibet recently. The only option India had was that of the T72 and T90 which are 11-15 tons heavier than the Chinese light tank. Not to mention the 59 ton-Arjun.

In case of a war-like scenario, it is obvious that the vehicle factory at Avadhi cannot produce a competing tank to match China’s capabilities at least in the short term. The lesson we should learn in peace time is to develop domestic R&D to a level that at least matches capabilities of potential adversaries before it betters them.

DRDO, with an allocation of 4-5% of the defence budget (including pensions), cannot be expected to make simultaneous breakthroughs across the spectrum of futuristic capabilities needed by the armed forces.  Lt Gen Bajwa feels that India must link the 23 IITs and the private defence manufacturing sector to DRDO to upgrade research quality and broaden the base of the industry.

The government has taken a vital step with IDEX, which has identified startups to develop technologies like related to secure hardware encryption devices, unmanned surface and underwater vehicles, and 4G/LTE tactical local area network, etc. Catalysing the progress of these startups through academic tie ups, funding and foreign collaboration will go a long way in achieving desired outcomes.  Moreover, the private sector needs a vision that it will get adequate business in what is so far a monopsonic defence market with the government as the sole buyer.

Exploring the global arms marketplace

Continuing on the market point, a well developed and stable export market would go a long way to make the private sector invest in manufacturing scale and innovation capablility. A welcome development over the more recent past is the rise in India’s defence exports by 700% over the last two years, from Rs 1,521 crores in 2016-17 to Rs 10,745 crores in 2018-19, ranking 19 globally. The government has drafted a Defence Production & Export Promotion Policy 2020 with a goal of Rs 175,000 crore in turnover and Rs 35,000 crore in exports of aerospace and defence goods by 2025. Towards this target, defence PSUs have been asked to earn 25% of their revenues via exports by 2023 and diplomatic missions have been tasked with actively promoting defence exports.

Source: SIPRI, trend indicator values as expressed in million

As discussed earlier, there is little one can expect from the public sector at present. Their capacity for innovation and competitive products has been patchy at best. An example is the 155 mm/45 calibre Dhanush howitzer. Although a significant improvement over the original Bofors FH-77B, it took the Indian Army’s artillery corps over two decades post the Kargil war to develop it.

While India has indigenous capabilities in ship building, warships lack in configuration or price, or both when it comes to exports. Even the Dhruv advanced light helicopter has not fared well on sustainment costs in military operations. There are pockets of success, which are worth mentioning like weapon locating radars. India procured these from US and Israel in the 1990s, but it has recently exported to Armenia.

Dhruv Helicoptor

Image Credit : The Hindu

Besides this, India may be a little late to the market, as there are already well established competitors, with cutting edge technologies. So it may have to initially compete heavily on price, and look for opportunities which are currently underserved by the competition.

Also, it makes sense to clearly identify critical strategic capabilities or platforms where India needs to develop core capabilities. In these areas, India must build end-to-end scale and competitiveness on every front, which will boost both indigenous capability and exports.

Encouraging FDI in defence

Defence happens to be among the least attractive sectors for FDI, which stood at Rs 24.96 crore between 2000-2014 and has jumped to reach Rs 56.88 crore as of 2020. The FDI cap of 49% was considered a major roadblock in ensuring foreign interest. The FM had announced that the cap for FDI in defence will be raised to 74%, beyond which government approval will be needed. Amit Cowshish, Consultant, Manohar-Parrikar Institute for Defence Studies and Analysis, comments:

The investors’ response to the higher cap may largely depend on whether the companies with 74% FDI will be treated at par with other Indian companies and permitted to participate in the defence acquisition programmes under various procurement categories.

However, a defence official recently announced that the raise in the FDI cap will not apply to the strategic partnership model (SPM). Under this model, foreign players can have a stake of upto 49% in strategic partnerships for the manufacturing of four programmes – fighter aircraft, armoured vehicles, helicopters and submarines. The strategic partnership clause is aimed at bringing in high technology and improve indigenous capabilities, boost the MSME ecosystem and ultimately provide much needed jobs as well.

While the SPM is definitely of interest to foreign OEMs due to a pre-commitment from the government to buy, they have communicated that they are not comfortable with the norms of FDI, since they won’t control the Indian entity or the technology that they transfer, especially since they are also responsible for essential deliverables on cost and timeliness.

Moreover, the overall cap of 74% in defence and the cap of 49% for SPM are a mismatch – a 74:26 partnership between a foreign OEM and an Indian one for other defence equipment will be ineligible to bid for an SPM project!

Streamlining the defence procurement process

The need to be overtly objective and avoid all scrutiny has made the defence procurement procedures only more complex and time consuming. A normal defence procurement contract typically takes around 2 years, and successive governments have been reluctant to undertake large defence commitments, instead opting for a piecemeal approach based on exigency.

Besides the FDI cap issue, procurement policies are a major determinant of interest by the private sector as well as foreign OEMs. India’s procurement process for defence is bound by the Defence Procurement Procedure (DPP), 2016. Despite successive iterations over the years, the process has been largely viewed as cumbersome, process-driven and time consuming.

While the latest version (2016) came after in-depth consultations, critics point out that a procurement proposal still has to negotiate at least ten stages before finalisation of the contract, and no proposal gets finalised within the stipulated timeline of 70 to 126 weeks. Amit Cowshish feels that this criticism is not entirely justified, as there are no credible inputs from any quarter on how to reduce the stages.

Content requirements by category under DAP-2020

Category Proposed Indigenous Content DPP 2016
Buy (Indian-IDDM) Indigenous design and ≥ 50% Min 40%
Buy (Indian) In case of indigenous design ≥ 50% otherwise ≥ 60% Min 40%
Buy and Make (Indian) ≥ 50% of the ‘Make’ portion Min 50% of Make
Buy and Make ≥ 50%
Buy (Global – Manufacture in India) ≥ 50%
Buy (Global) Foreign Vendor – Nil Indian Vendor ≥ 30%

Source: Ministry of Defence

The Defence Acquisition Procedure 2020 (DAP, 2020) is the latest iteration of this, which includes more procurement categories, concepts and procedural changes. In the draft DAP 2020 released in April this year, the Ministry of Defence has put in higher local content requirements, new multipliers in defence offsets, a procurement category for leasing and new options for equipment sustainment activity. The most preferred category for defence procurement is Buy ‘Indian Indigenously Designed Developed and Manufactured’ or (Indian-IDDM).

The general principle to be followed for defence procurement is as follows:

‘Preference will be given to indigenous design, development and manufacturing of defence equipment. Therefore, whenever the required arms, ammunition and equipment are possible to be made by Indian Industry, within the timelines required by the Services, the procurement will be made from indigenous sources. While examining procurement cases, the time required for the procurement and delivery from foreign sources vis-à-vis the time required for making it within India, along with the urgency and the criticality of the requirement will be examined before deciding to proceed on categorisation.’

This means that the first priority is given to an Indian manufacturer, after which a foreign OEM may be asked to deliver, with a pre-condition that the equipment is made in India. But even this requirement is waived off if the requirement is urgent. Changes in the process and addition of new categories and concepts could reinforce the perception of the process being cumbersome. In this regard, Amit Cowshish suggests:

For it to be user-friendly and result-oriented, the final version of DAP 2020 must have textual clarity so that its provisions do not lend themselves to varying interpretations, pay attention to details of how the processes linked with each stage in the procurement cycle are to be completed, have real-time grievance redressal mechanism, and beef up the system of decision making.

Also, he assures that there is significant scope for the private sector despite the perception, as they can participate as prime vendors in every procurement category, except the ‘Buy and Make’ category, in which they can participate only as the local production agency for foreign vendors.

Further Lt Gen Bajwa suggests that the process must support MSMEs in particular as they are more innovative and develop the next generation technologies that make the industry cutting edge. However, they often lack the financial capacity to absorb the cost of producing a prototype product and then fail in the competition. He feels that the government should fund the R&D efforts of all those companies, which are prospective manufactures of that product, so as to generate competition for a technologically superior product.

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