Poor state of defence industry: private sector is equally to blame

Poor state of defence industry: private sector is equally to blame

Major General Mrinal Suman

Speaking at an awards function in New Delhi on 26 November 2013, Defence Minister Antony exhorted both the public and the private sectors to play a meaningful role in manufacturing defence equipment and platforms for the armed forces. Sounding a note of optimism, he said, “Several large industries have shown a keen interest to invest and develop capabilities in defence production and assume the role of system integrators”.

It is a well known fact that India possesses inconsequential defence industry, imports more than 70 percent of its defence requirements and has the shameful distinction of being the largest buyer of conventional weapons in the world. Although the defence industry was opened to all companies in 2002 with great fanfare, the private sector continues to be a fringe player even after more than a decade.

Although most of the blame for the continued neglect of the defence industry is righty apportioned to the monopolistic domination of the public sector, the private sector cannot be absolved of its share of culpability – it is to blame for its selfish approach, insincere conduct, lack of unity and supine disposition, thereby strengthening the common impression that the private sector is out to make a quick buck and lacks necessary sincerity of purpose. Even the big players and well respected doyens of the industry appear to be obsessed with ‘profit-for-me-at-all-costs’ attitude.

Many feel that the private sector’s often proclaimed concern for self-reliance in defence is sheer baloney and a charade for furthering its commercial interests. As will be seen subsequently, the private sector has not covered itself with glory by its attitude and conduct. All those who have been supporting a bigger role for the private sector in defence production feel let down. 

Absence of Unified Approach

Disunity is an integral part of the Indian psyche and culture. The defence manufacturers are no exception. One of the major reasons for the continued neglect of the private companies in the defence sector is their failure to organise themselves into a collective effort to project their common viewpoint to the Government in a cogent and forceful manner. Lack of unity renders the industry irrelevant. 

In every arms producing country, defence manufacturers have an exclusive association to provide single point interface for effective interaction with the government and other agencies to promote their common interests. Most importantly, all governments recognise the criticality of their suggestions and consult the associations regularly while framing policies and procedures. For that matter, they are considered as indispensable partners in the quest for building national defence industry.

US National Defence Industrial Association (NDIA) boasts of a membership base of over 1,100 corporate members and more than 36,000 individuals. A defence industrial-government network consisting of 29 Divisions and 5 Industrial Working Groups drives the future of defence through education, access and influence. In the case of UK, in order to make their collective say more effective, the Defence Manufacturers Association, Society of British Aerospace Companies and Association of Police and Public Security Suppliers merged in 2009 to form Aerospace Defence Security (ADS). In South Korea, Korean Defence Industry Association provides a platform to defence manufacturers to interact with different ministries concerned with national defence, strategy and finance.  

India has three major business associations – the Confederation of Indian Industry; the Federation of Indian Chambers of Commerce and Industry; and the Associated Chambers of Commerce and Industry of India. All the three associations deal with the complete gamut of business and industrial activities. Defence is handled by one of their numerous committees. Resultantly, they are unable to influence Government policies due to lack of focused and integrated approach. In some cases, these associations compete against each other. 

The defence procurement procedure allows the Categorisation Committee to call representatives of the private sector for consultations on indigenous competence and to seek inputs to help identify competent Indian vendors for ‘Buy & Make (Indian)’ cases. Similarly, the Acquisition Wing needs to nominate representatives of the private sector as members of the integrated project management teams in ‘Make (High-tech)’ cases. 

Due to a total lack of mutual trust, all major players are wary of each other and want their own henchman to represent the industry. They fear that their competitor would bag contracts through unfair presentation of facts. In one case, three major players could not agree on any name to represent their association despite repeated meetings. The level of distrust was so acute that MoD was requested to accommodate three representatives from one association, one from each competing company. As no Government can accommodate all the business interests, it decided to do away with any representation of the private sector.  

Unhealthy inter-association rivalry bodes ill for the private sector. Worse, even within every association there are dissenting voices. When the Government sought recommendations of the associations with regard to the proposed increase in the Foreign Direct Investment (FDI) ceiling, there was no unanimity. 

Demand for Free Competition: an Unabashed Hogwash

The private sector has been resenting the monopoly enjoyed by the public sector in defence production and has been vociferously demanding a level playing field. Highlighting inefficiencies that afflict the public sector, the private sector has been seeking an open, transparent and equitable system. The key rationale has been – ‘A competitive environment will force all entities to excel as only the fittest can survive. India will get multiple options to select the best’. It is an indisputable assertion – open competition is certainly best for every industry. 

In order to attract foreign manufactures for joint ventures in India, most industrial houses have been vocal in demanding an increase in the current FDI limit of 26 percent. In several seminars, one has been hearing numerous speakers from the private industry questioning rationale of the FDI policy and even suggesting abolition of the upper cap. One applauded them for their conviction and advocacy of level playing field for all.

A discussion paper was circulated by the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry DIPP in May 2010 advocating raising of FDI cap to 74 percent to encourage ‘established players in the defence industry to set up manufacturing facilities and integration of systems in India’. Responses were sought from all stakeholders. 

Hollowness of the often stated support for open competition the private sector was exposed when it opposed the above proposal. Almost all big players were quick to do a turn-around. They wanted FDI limit to be capped at 49 percent so that the control of joint ventures remained in their hands. Apprehending threat to their business interests from the powerful foreign manufactures, Indian companies wanted joint ventures on their own terms and with controlling stake. Their earlier enthusiasm for limitless FDI had been replaced by a realisation that their growing clout and business prospects may be adversely affected. Consequently, all the three major industry associations/chambers recommended capping of FDI at 49 percent. 

It really showed the true face of the Indian private sector. It demands open competition with the public sector but dreads competition from the foreign companies. The reasons are apparent – it feels confident that it can outdo the public sector but lacks confidence to face the challenge of foreign companies. Therefore, all the high sounding talk about the merits of open competition is sheer hogwash. 

  

Self Serving Attitude

In order to facilitate participation of the private sector in defence production, the Kelkar Committee had recommended in 2005 that select private sector companies be identified as ‘Raksha Udyog Ratnas’ (RURs). The committee wanted RURs to be treated at par with Defence Public Sector Undertakings (DPSUs) for all defence acquisition purposes, including receipt of technology and undertaking licenced production with Transfer of Technology (ToT) from overseas sources. In addition, it was proposed to extend to RURs all excise and tax benefits that are presently available to the public sector units. 

Accordingly, the Government constituted a selection committee in May 2006 under Prabir Sengupta. The committee invited applications and carried out detailed scrutiny as per the laid down criteria. Reports suggested that 15 companies had been shortlisted for the award of RUR status.

Before the names could be announced, all unsuccessful companies represented against the scheme’s criteria. They alleged that the scheme was discriminatory and highly loaded in favour of the big players.  Instead of presenting a united front to MoD and the public sector, the private sector displayed shocking penchant for selfish interests. Expectedly, MoD and the public sector were elated. Blaming lack of consensus amongst the private sector, MoD was only too happy to drop the RUR scheme and the private sector missed a rare opportunity to get a foothold in defence production due to disunity in its ranks. The fiasco reflects very poorly on the private sector. 

Another disturbing aspect is the complete domination of the industrial associations by big companies. Consequently, all recommendations and suggestions are tailored to further their interests. It was apparent when the question of raising FDI limit was under discussion. A number of companies that intended to diversify into the defence industry were willing to join hands with foreign majors with 51 percent FDI component. Similarly, small and medium enterprises were ready to welcome entry of foreign companies even with full controlling rights. However, their interests were totally overlooked. 

Supine Demeanour

Indian political leaders and bureaucrats are known for their haughty and pretentious attitude. As they have powers to grant favours, they look down upon the industrialists. Thus the equation between the government and the industrial community in India is highly skewed and unhealthy – dispenser vis-à-vis seeker of favours. Worse, Indian business community has got used to such an inequitable and slighting equation.

It will not be incorrect to state that the industrialists are responsible for their own discomforting state and subservient position. They lack courage to stand up to unfair inequities. Instead of challenging convoluted policies, they consider it more expedient to heap false and undue praise, only to remain on the right side of the policy makers. Their spineless behaviour borders on blatant servility. They appear ready to sacrifice their self-respect for the sake of furthering their business interests. That has been the bane of the Indian defence industry as well. 

Every budget speech is received with uninhibited acclaim by the industry majors. It is a pitiable sight to see all of them trying to outdo each other in the use of hyperbole to praise the wisdom flowing from every word spoken by the Finance Minister. Their desperation to score brownie points renders them impotent to make any dissenting suggestion. They prefer to tow the government line rather than assert their viewpoint. 

It is sickening to see the industry doyens fawning over government functionaries in seminars. Every word uttered by them is hailed as a pearl of wisdom. It was a most nauseating spectacle to see well respected industry leaders singing paeans in praise of a young political leader’s highly juvenile and amateurish address to an industry association. It was variously termed as ‘an outstanding speech’, ‘a level 5 speech’ and ‘an inclusive and relevant speech’. 

In developed countries, business associations are quite forthright in their criticism and constructive in their suggestions. Therefore, they are taken on board by the governments while policies are under formulation and every proposition is given due consideration. They are respected for their knowledge, skills and experience. Entrepreneurs are considered as partners in national progress and drivers for technological advancements.

Indian industrial community has rich experience and can guide the government with constructive suggestions. Unfortunately, they consider playing a subservient role to be a safer option. Their supine sycophancy of political masters and bureaucrats is depriving the country of their knowledge and acumen.

The Way Forward

As stated earlier, the private sector is equally responsible for the current bleak state of the defence industry. By becoming seekers of favours and giving precedence to selfish business interests, it has let the nation down. As a thriving, innovative and competitive defence industry is essential for the defence of the country, it is time the private sector carries out self-introspection and puts national interests above petty commercial gains.  

First of all, industrialists must shed their demeanour of servility and rediscover their backbone. Business interests are certainly important but obsequiousness cannot be taken to shameless limits. Secondly, it is time Indian defence manufacturers come together to form an association with total focus on defence industry. Instead of seeking individual favours, they should present a unified front. Thirdly, a word of caution, discord and disunity amongst the private sector companies is a sure recipe for their continued neglect. Unless they put their act together, all the efforts put in over the last 10 years will become futile. That shall be a very unfortunate development for the country and a big blow to India’s aspirations to becoming self-reliant in defence production.

Finally, major companies must eschew petty squabbling and lead by example through rational and altruistic conduct. It is not enough to be united only to oppose the monopoly enjoyed by the public sector. Unity of intent and purpose is far more critical for the development of the Indian defence industry. India has high hopes from the private sector and wants it to deliver. *****