[Updated] Indigenisation of Defence technology: A Big-picture Analysis

First Published: March 2019

Updates*

According to the latest data released by a global think-tank, Stockholm International Peace Research Institute (SIPRI), India has dropped to the 2^nd ranking behind Saudi Arabia among the world’s largest arms importers after staying at the top for around a decade. India imports arms from countries like Russia, the US, Europe, and Israel.

India’s continuance at the very top in the global arms import rankings, be it first or second, once again highlights the sustained failure in building robust indigenous defence industries.

Why India imports defence equipment?

• India’s defence industries dominated by the Public sector and defence ministry find it difficult to promote the private sector. Roughly 60% of India’s defence requirements met through Imports.
• Importing defence equipment’s from major arm producing countries has ensured and enhanced India’s defence on the global front.
• Due to a lack of clear-cut vision in India’s defence industry, India lacks the flourishing defence industry of its own.
• India is still struggling to upgrade its arms manufacturing industries. Despite the huge budgets, there is no systematic transformation and over-dependence on Russia is a hindrance to indigenization.
• After India declared itself “Nuclear Power’ in 1998, it has been under obligation to move towards greater power status.
• India currently faces two enemies Pakistan and China, as Pakistan is also importing weapons from China, violation of Peace treaty and border standoff between India and China is also there. To counter these India is strengthening its defence.
• India needs weapons to protect it from internal enemies, there are Naxals and other internal security issues to deal with.

What is the situation of other countries?

• The United States is the leading arms exporter in the world with increase in exports by 11% in the last decade.
• Conflicts in the past decade drove Saudi Arabia to increase its military stock, making it 1st largest importer of arms.
• China holds the thirds place as an arms exporter and fourth as an importer of arms.
• Pakistan as the major buyer of China’s arms managed to strengthen its military power.

Why the indigenization of defence technology is necessary?

Boost domestic industries: India is the world’s second-largest importer of defence equipment with 70% of its requirements met from outside the country. Such a huge demand can be translated into a great business opportunity for those building domestic capabilities in defence. Also, the government has pledged to spend USD 250 billion by 2025 on weapons and military equipment.

Create Jobs: Our defence industry in the private sector is still small. But, it already employs thousands of people.

• There are studies that show that even a 20-25% reduction in imports could directly create an additional 100,000 to 120,000 highly skilled jobs in India.
• Jobs would also be created indirectly in the related manufacturing and services sectors.
• If we could raise the percentage of domestic procurement from 40% to 70%, we would double the output in our defence industry.

Problems with foreign techs: Defence forces are facing the problem with respect to maintenance, repair & overhaul of the imported equipment because of low availability of spares and assemblies.

Affect sovereignty: Depending on other countries for arms would affect the sovereignty of India with respect to military policies and decisions.

What are the issues that plagued the Indian defence sector?

Lack of Private Sector participation: The defence manufacturing has been dependent on DRDO & Defence PSUs only. The participation of the private sector has been allowed only recently but that too limited (up to 49% under automatic route).

Lack of expertise: In the Navy only, the naval architects were recruited from IITs & were provided training in foreign countries. However, the army & air force does not have such kind of capacity building programme.

Delays in manufacturing/procurement: Bureaucratic hurdles + Political hurdles + Shortage of human & technical resources = Lack of timely delivery.

Conflicts of view between manufacturers & defence forces: regarding the capacity and design of products.

Inefficient budgeting: Most of defence budget goes towards salaries, perks & maintenance of equipment.

Corruption: in arms sales & lobbying reduced efficiency and effectiveness of defence spending.

Lack of Coordination: between academia, military & industry.

Poor R&D: due to lack of government funding and poor industry-academia collaboration.

What are the Measures taken by the government?

Defence Acquisition Council (DAC)

• The Defence Acquisition Council (DAC) headed by the Union Minister of Defence was constituted to ensure a fair defence procurement planning process.
• The Council aims to ensure expeditious procurement of the requirements of the Armed Forces in terms of capabilities sought and the time frame prescribed by optimally utilizing the allocated budgetary resources.
• functions of the DAC include:
  1. Principle approval authority for 15 Years Long Terms Integrated Perspective Plan for Defence Forces.
  2. Categorization of the acquisition proposals relating to ‘Buy’, ‘Buy & Make’ and ‘Make’.
  3. Addressing issues relating to Single vendor clearance.
  4. The decision regarding ‘offset’ provisions in respect of acquisition proposals above Rs. 300 crores.
  5. Decisions regarding Transfer of Technology under the ‘Buy & Make’ category of acquisition proposals.
  6. Field Trial evaluation.

Foreign Direct Investment:

Currently, FDI up to 49 percent is permitted in the sector through automatic route and beyond that up to 100 percent via government nod is permitted.

Defence Procurement Procedure 2016:

• A new category of procurement Buy India-IDDM (Indigenously Designed, Developed and Manufactured) has been introduced in DPP.
• Preference has been given to Buy (Indian) and Buy and Make (Indian) categories of capital acquisition over Buy (Global) & Buy & Make (Global)
• The requirement of indigenous content has been increased/rationalised for different categories of capital acquisition.
• The ‘Make’ procedure has been simplified with provisions for funding of 90% of developmental cost by the government to Indian industry and reserving projects not exceeding development cost of Rs. 10 crores (govt funded) and Rs. 3 crore (industry funded) for MSMEs.

Liberalisation of licensing:

The centre has also liberalised the industrial licensing regime for Indian manufacturers and most of the components/parts/sub-systems have been taken out of the list of defence products requiring industrial licenses.

• This has reduced entry barriers for new players in this sector, especially small and medium enterprises.
• Furthermore, the initial validity of an industrial license has been increased from 3 years to 15 years with a provision to further extend it by 3 years on a case-by-case basis.

Offset implementation has been made flexible:

by allowing change of Indian Offset Partners (IOPs) and offset components even in signed contracts.

• Foreign original equipment manufacturers are now not required to indicate the details of IOPs and products at the time of the signing of contracts.
• Services as an avenue for the discharge of offsets have been reinstated.
• Note: Indian enterprises and institutions and establishments engaged in defence products & services like DRDO are referred to as the Indian Offset Partner (IOP).

Defence Production Policy (DPP) 2018:

was released by the defence ministry.

Strategic Partnership Policy (SPP) *

Defence Production Policy (DPP) 2018

Objectives

• To mark India’s position among the top defence production countries in the world through a focus on self-reliance.
• To change India’s position as the largest importer of arms in the world.

Features

Indigenous Defence Production:

• It targets 2025 as a year for becoming self-reliant in 13 weapons platforms. It includes fighter aircraft, warships, tanks, missiles, and artillery, which constitute the bulk of India’s imports.
• It plans to develop 2 defence production corridors.

PPP Model: It aims at increased productivity and innovation = calls for enhanced participation of MSMEs, start-ups and other players from the private sector in the defence industry and creation of defence innovation hubs.

Liberal Policies:

• The policy would liberalise licenses that will be provided to defence industries.
• Unnecessary requirements for renewal of licenses will be withdrawn.
• Companies with a good track record will be given priority.
• Also liberalises the FDI regime in the defence sector. It has permitted 74% FDI in “niche” technologies.

Skill Development: It aims at strengthening the existing defence PSUs through skill development and overall program management.

Overseas marketing: The policy seeks to integrate technologies from Ordnance Factory Board, Defence PSUs, and Private players by establishing Defence Export Organisation in partnership with the industry. This will enable overseas marketing of domestically manufactured goods.

What are the expected outcomes of this policy?

• With proper implementation, the policy will reduce the import bill.
• It will increase domestic defence production = attract more investors = massive market creation.
• Export earnings could be increased by up to Rs 1,70,000 crore and also creating employment for more than 3 million people.
• India will become a top destination in the world for Research & Development (R&D) in defence sector.
• India may become a hub for defence related Intellectual Property (IP) through effective implementation of the policy.

What are the challenges with the policy?

• Serious changes are needed in order to realise the goals of the policy.
• Many categories listed for complete indigenisation are already available. However, the military has often insisted on inducting into service only cutting-edge, fully proven weaponry.
• Need to revamp infrastructural, fiscal and legal environment as well as testing and validating facilities that individual companies cannot cost-effectively create.
• As the policy involves multiple ministries, it could lead to delay in the creation of defence production ecosystem within the targeted time frame (2025).
• Technology transfer by foreign manufacturers may be affected by political and military considerations, geopolitical factors and long term business commitments.
• The technology of the equipment should be equal to or better than that of adversaries.
• The domestic industry lacks the capability, domain knowledge, skill, expertise and experience in terms of research, design, development, and manufacture of the technology. It includes adequate trained manpower, specialised test facilities, test ranges etc.

Strategic Partnership Policy (SPP) *

• The Government of India has started the acquisition of defence infrastructure under the newly adopted Strategic Partnership Policy.
• It intends to promote Indian private sector participation in defence manufacturing.
• It was approved by Defence Acquisition Council (DAC) in 2017 and placed in the Defence Procurement Procedure (DPP) – 2016 titled as ‘Revitalising Defence Industrial Ecosystem through Strategic Partnerships’.
• The concept of this model was first suggested by the Dhirendra Singh Committee.
• The partnership model broadly involves creating two separate pools of Indian private companies and foreign Original Equipment Manufacturer (OEMs).
• The policy aims to promote Joint ventures between the indigenous private sector and global defence majors.
• These few Indian private companies will be designated as Strategic Partners (SP) that would assume the role of system integrators and also lay a strong defence industrial foundation. The Government will co-opt them for ‘Buy and Make’ and Government-to-Government procurement programmes.
• The selected SPs by the Defence Ministry will tie up with foreign original equipment manufacturer (OEM) to build weapon platforms in India under four segments — fighter aircraft, helicopter, submarine, and armoured fighting vehicles or main battle tanks.
• The government aims to achieve a turnover of Rs 1,70,000 crore in military goods and services by 2025.

Significance of SPP *

• It will boost self-reliance by encouraging the indigenous defence industry and aligning the defence sector with the ‘Make in India’ initiative leading to a reduction in dependence on imports.
• Help enhance competition, increase efficiencies, facilitate faster and more significant absorption of technology.
• Create a tiered industrial ecosystem, ensure the development of a wider skill base, trigger innovation and enable participation in global value chains as well as promote exports.
• It can bridge the long-standing trust gap between the Indian private sector and the Ministry of Defence.
• Streamlining procurement as dependence on foreign players causes a delay in procurements and at times substandard quality is provided by them, there are issues regarding getting the spare parts too.

What could be done?

Industry Collaboration with DRDO: Industry could be the lead agency for the development of new products. However, it may sub-contract the development of certain sub-systems to a DRDO laboratory. It is because industry’s managerial expertise and DRDO’s technical expertise are both needed for effective indigenisation.

Funding by armed forces: Instead of MoD funding the DRDO for the development of new products which is the current scenario, funds should be provided directly by the armed forces. It is for the purpose of monitoring, make-buy decisions, trials at the sub-system stage, releasing funds based on reaching milestones, minimise time and cost overruns, etc. For this purpose, armed forces are needed to be instilled with project monitoring skills.

Manufacturing ecosystem: The defence production sector would need about 20 tier 1 companies (integrators) and several lower-tier companies. Tier 1 companies have to support MSMEs initially in order to ensure long term loyalty and commitment.

Conclusion *

At present India is the 2^nd biggest defence equipment importer as it got stuck among politically unstable countries and adverse neighbours. Therefore being Military active and strong is not a choice but a necessity. Due to defence scams of earlier governments, slow progress was seen. Now, India is moving towards its own defence system, prompting it under ‘Make in India’ initiative. Many praiseworthy progresses are seen in missile technology building India’s own defence equipment. Yet, a lot needs to be done to make sure that there are an effective private-public partnership and joint-production with foreign firms for the growth of India’s own defence Industry. DPP and SPP are indeed a step in the right direction and their effective implementation is the need of the hour to bring self-reliance in defence technology.