Dismal State of the Indian Defence Industry: Challenges for the New Government

Dismal State of the Indian Defence Industry: Challenges for the New Government

 (FORCE May 2014)

                                                                                                             Major General Mrinal Suman

Indisputably, India’s defence industry is in a pitiable state. India is the largest buyer of conventional weapons in the world. Even after 67 years of Independence, India continues to remain wholly dependent on the imported defence systems. Despite repeated assertions in quest of self-reliance, India’s dependence on imported defence equipment has increased from the earlier 70 percent to close to 75 percent now. Worse, the indigenous production of the balance 25 percent is limited to the assembly of imported sub-assemblies and manufacture of low-tech components. While the indigenous defence production is languishing, the armed forces continue to suffer shortage of critical defence systems.

Since the inception of the Defence Procurement Procedure (DPP) in 2002, India has been revising it biennially, but the much touted reforms have been limited to the rationalisation of some clauses. Similarly, all expert committees constituted to suggest reforms have also limited themselves to minor procedural changes. No serious thought has been given to providing an impetus to the indigenous production.

The current dispensation has been an unqualified failure. The new government will have to initiate bold, drastic and innovative measures to kick-start the indigenous defence industry. Six key areas that need urgent attention have been highlighted in this article. 

1. Need for Structural Revamp  

As regards provision of the required defence equipment to the armed forces, two basic imperatives cannot be ignored. One, acquisition of defence systems is intrinsically interlinked with the development of the indigenous defence industry. Therefore, there has to be a single agency to oversee the complete gamut of related activities. The present system of the Acquisition Wing and the Department of Defence Production (DDP) handling acquisition and production functions respectively can never deliver.

Two, planning and implementation functions are distinctly different. They demand dissimilar but highly focused treatment. Therefore, they must be segregated. Planning functions should primarily be performed by officials and military leaders who possess necessary understanding of the national security issues. On the other hand, implementation functions must be entrusted to professionals who are fully conversant with modern technologies and are aware of the latest management tools and techniques to administer multi-faceted and multi-agency programmes. 

A multi-disciplinary and broad-based Defence Perspective Planning Council (DPPC) should be constituted as the highest policy making body to handle all planning functions. Its role should include identification of the capability gaps, approval of 15-years Long Term Integrated Perspective Plan and 5-years Services Capital Acquisition Plan. It should be empowered to approve changes in the acquisition procedures, grant deviations from the laid down policies and accord approval to invoke the Fast Track Procedure.

For executive functions, a Defence and Aerospace Commission should be established to implement perspective plans approved by DPPC. It should be the nodal agency to oversee the complete defence acquisition process and the development of the indigenous defence industry. Highly successful models of the Atomic Energy Commission and the Space Commission can be replicated, albeit with due changes.  

Chairman of the Commission should be a distinguished person who is known to possess competence to synergise, harmonise and administer complex programmes involving multiple agencies. He should be given the rank of Minister of State to authenticate his status.

The Defence and Aerospace Commission should be tasked to handle all activities pertaining to the production, acquisition and export of all defence systems/equipment. While promoting the development of the indigenous defence industry, the Commission will have to ensure that all approved procurement proposals are implemented within the specified timelines, satisfying all performance parameters and obtaining best value-for-money for the country.

For each procurement proposal, the Commission should debate, analyse and determine the route that should be adopted – outright import or indigenous development or a combination of the two. Factors like quantity, economic viability, urgency, criticality, indigenous capability and acceptable timelines would be the key deciding factors. However, technical evaluation and field trials should continue to be held under the aegis of the respective Service Headquarters as hitherto fore.

2. Modernisation of the Public Sector and Integration of the Private Sector

DDP was set up in 1962 in the Ministry of Defence (MoD), in the aftermath of the Chinese aggression to create a self-reliant and self-sufficient indigenous defence production base. Unfortunately, it has turned out to be the biggest impediment and is mainly responsible for the current deplorable state of the indigenous defence industry.

DDP failed to appreciate the fact that both the public and the private sectors constitute a nation’s defence industry. It assumed the mantle of being the god-father of the defence public sector units and concentrated on perpetuating their monopoly. Consequently, DDP faced internal contradictions in its role; leading to acute conflict of interest with ensuing subjectivity and impropriety.

DDP is guilty of shielding an inefficient public sector whose proverbial complacence is solely due to their conviction that DDP would force the services to buy whatever they produce. All ploys are tried to ensure regular flow of orders to the public sector units. The private sector is kept at bay through cleverly introduced provisions of nominating public sector units for major contracts. Thus, the nation remains deprived of the technological prowess acquired by the private sector and its enormous potential remains untapped.

MoD has to realise the fact that both the public and the private sectors are national assets and harnessing of their potential is essential if India wants to build globally competitive defence industrial base with necessary economies of scale. While the public sector possesses huge infrastructure, trained manpower and considerable experience in systems integration with imported technology, the private sector excels in innovative management, marketing and financial skills.

Four measures need to be taken on priority. One, DDP should be abolished and a Department of Defence Industry be created in its place. It should look after the interests of the defence industry as a whole and not be biased in favour of the public sector units. A level playing field should be provided to all companies. Two, MoD should shed control of all public sector units to other ministries. Three, all ordnance factories should be corporatised, as recommended by the Kelkar Committee. Four, working with an open mind, MoD should explore all viable avenues such as formation of consortia, joint ventures and public-private partnership for optimum results.

3. Supporting Innovations and SMEs

It is a well-established fact that any country that neglects innovations is doomed to become a technology-laggard. Innovation is considered to be a dynamic catalyst to growth. It implies an active and exploratory drive that seeks to better existing products, processes (including services) and procedures for more effective results. Neglect of innovations means stagnation, languishment and decay.

In the case of defence systems, innovations acquire added criticality. As continuous upgradation of defence equipment through the application of innovative solutions is of vital importance, an open architecture which allows ‘plug and play’ is considered essential to ensure seamless incorporation of evolving technologies for defence systems.

Unfortunately, India has failed to assign due importance to the promotion and development of a culture of innovations. Despite having a plethora of defence laboratories and public sector entities, not a single innovative idea or technology solution has been generated through indigenous efforts during the last six decades. The Global Innovation Index 2013, issued by the reputed business school INSEAD, places India at 66^th rank in the world. Most distressingly, instead of improving, India’s position has been sliding – 41^st in 2009, 56^th in 2010 and 62^nd in 2011.

Whereas most defence contractors are simply systems integrators; small and medium enterprises (SMEs) drive innovations and are rightly called ‘the engines that spearhead technological advancement’. Although Indian SMEs have been supplying sub-assemblies and components to the public sector entities for decades, they produce low-tech items and continue to be peripheral players. Their technological competence has not kept pace as they have never been encouraged to invest in developing newer products or carrying out pioneering innovations. Resultantly, very few SMEs have acquired competence to develop, manufacture and upgrade defence systems.

Being small players with limited resources, SMEs cannot thrive on their own. They lack adequate financial endurance for long term sustainment and find investment risks to be dissuasive due to the uncertainties of the defence business. As they operate in niche segments, economies-of-scale is also a matter of serious concern for SMEs. Therefore, they need governmental support and hand-holding. It is for MoD to create a favourable ecosystem that is conducive to the promotion of new initiatives in defence systems to keep pace with cutting-edge technologies.

4. Flexible FDI Policy

No issue concerning self-reliance in defence production and modernisation of the armed forces has been subjected to as intense a debate as the question of Foreign Direct Investment (FDI) in defence. The current FDI policy was promulgated in 2001 with an upper limit of 26 percent. However, foreign investors have given it a cold shoulder. There has been negligible inflow of funds during the last 12 years.

FDI is a need based concept. The host nation needs funds and technology for its accelerated growth while a foreign investor is guided purely by economic considerations. Therefore, most consider the policy with 26 percent FDI limit and associated restrictions to be highly dissuasive. For, no foreign investor is going to part with his closely guarded technology unless he has adequate control over the enterprise. The host nation’s policy must provide sufficient autonomy. Excessive bureaucratic control is resented by foreign investors as they feel stifled.

FDI is not just a question of getting funds, but access the latest technologies as well. FDI pre-supposes a long term commitment and lasting relationship between the foreign and the local entity. FDI sets in motion a chain reaction wherein FDI upgrades local technology which, in turn, attracts more FDI with higher technology and the cycle goes on. This is of vital importance to the defence sector which is highly capital intensive and undergoes rapid obsolescence of technology.

MoD has opposed all proposals to increase the FDI cap on the ground that the ownership of core strategic industries like defence must always remain under Indian control. Apprehensions are being expressed that foreign investors may close production and deny supplies to the armed forces during warlike emergencies.

There cannot be a more specious argument. No foreign vendor will ever risk his total investment by such a hostile move. In any case, factories cannot be shut and shifted at a short notice. As a matter of abundant caution, the Government can reserve the right to take over critical industries under certain extraordinary circumstances of national emergencies. An enabling provision can be incorporated in the licence.  Most nations that allow 100 percent FDI follow the same route.

Most importantly, a vast range of items (from mundane low-tech articles to high-tech systems) fall under the taxonomy of defence industry. It is patently incorrect to apply a single FDI cap to all of them. Therefore, India should adopt a flexible and technology-specific FDI policy. Upper cap should be determined on the basis of nature, level, depth and exclusivity of the technology involved.

Proposals that entail infusion of frontier and cutting edge technologies should be allowed FDI up to 100 percent. An upper limit of 74 percent should be accepted for joint venture proposals that promise transfer of technologies that are not available commonly. Similarly, FDI caps should be fixed at 51 and 49 percent in cases that bring in high technology. The current cap of 26 percent should be retained for proposals with commonplace low technologies. 

As prospective investors are guided purely by economic considerations, they carry out a comparative appraisal of all likely destinations to identify the best option available to them to earn optimum returns. Therefore, if India is serious about attracting FDI in defence, it has to position itself as the most lucrative FDI destination.

5. Simplification of the Offset Policy

India announced its intent to demand offsets against defence procurements in early 2005. Products and services eligible for discharge of offsets relate to defence, internal security and civil aerospace. Services mean maintenance, overhaul, upgradation, life extension, engineering, design, testing of eligible products and related software or quality assurance services with reference to the indicated eligible products and training. The first offset contract was signed in 2007. The policy has undergone a number of revisions. The latest policy, called the Defence Offset Guidelines (DOG), came into effect from 01 August 2012.

Offsets worth 21 billion dollars are expected to flow into India during the next 10 years. However, offsets do not come for free as foreign vendors have to incur additional expenditure to fulfill their obligations. It is seen that offsets generally result in cost escalation by 10 to 20 percent. It is a huge cost penalty. Hence, offsets make sound business sense only if the trade-off results in extraordinary economic or technological gains.

To upgrade indigenous technological base, the powerful leverage of offsets can be used to obtain technologies that industrially-advanced countries are unwilling to sell. However, India’s experience of the past few years has been highly disappointing. No benefits have been drawn from the offsets received to develop a vibrant defence industrial base.

All nations seek offsets that are in consonance with their national needs – either to meet an urgent economic need or to fill a critical technology void. It is not the type of offset but its relevance that matters. Therefore, offsets must be need-based and not availability-based. Shockingly, India has abrogated the right to select methodology, fields and offset programmes in favour of the vendors, thereby rendering India’s needs inconsequential. As is expected, foreign vendors opt for programmes that cost the least and are easy to fulfill – India’s needs do not matter to them at all.

Penchant for preferential treatment of the public sector has made MoD promulgate a highly complex and convoluted offset policy. Instead of having a single policy for the transfer of technology (ToT) to all Indian entities, MoD has created exclusive provisions for the public sector and the Defence Research and Development Organisation (DRDO).

For example, government institutions/establishments and DRDO are allowed to receive equipment and/or ToT from foreign vendors for augmenting capacity for research, design and development; training; and education. This facility has not been extended to the private sector. Similarly, DOG stipulates that ToT to Indian enterprises must be provided without licence fee and there can be no restriction on domestic production, sale or export. However, there are no such stipulations in the case of receipt of technology by the government entities.

It is rightly said that ‘unmonitored offsets are unimplemented offsets’. As India lacks a credible verification mechanism, it is an open invitation to unscrupulous foreign vendors and their dishonest Indian partners to collude and cheat the country by presenting exaggerated claims. MoD has no option but to accept their claims at their face value. 

It will not be incorrect to state that India’s defence offset regime is in a total mess. DOG suffers from major infirmities and can neither contribute to the growth of indigenous industry nor provide long term economic benefits. There is an urgent need to take a fresh look at all facets of the policy. 

6. Training and Accountability of the Workforce

No reforms can yield results unless the concerned functionaries are trained and equipped to translate progressive policies into tangible actions on ground. Sadly, the thrust so far has been on policy revisions and procedural reforms only, whereas mediocrity of the workforce has been one of the primary reasons for the non-delivery.

Promotion of indigenous defence industrial capability and management of defence acquisitions are multifaceted processes and are highly specialised activities needing extraordinary professional skills and unique attributes. Unfortunately, officers on routine postings are being asked to handle these functions. They are not selected on the basis of any demonstrated flair or talent or expertise.

Worse, all civil servants and service officers feel that they can carry out any job assigned to them. They believe that their initial training and subsequent exposure equip them to shoulder any responsibility. Resultantly, they do not strive to educate themselves. Equally worrisome is the fact that there is a complete absence of the concept of accountability in the current dispensation. With assured career progression, it is always considered safer not to take a decision rather than take one and risk being held accountable for the same. Inaction never gets punished.

It is time that India pays attention to the quality of the workforce and takes concrete steps to improve it. Delays due to deliberate dithering should never be condoned. Additionally, any functionary who vacillates in taking decisions as per the powers delegated to him should be considered unworthy of that appointment.

Finally

Continuance of the current status quo is in the interest of all the beneficiaries, and most unfortunately, they are the ultimate decision-makers. As supremacy of personal interests over national interests is the hallmark of the Indian governance, MoD refuses to acknowledge the fact that the current regime is an utter failure. Regrettably, MoD is living in a denial mode with ostrich-like mindset. Unless existence of severe infirmities is accepted, reforms cannot be initiated. Therefore, despite incontrovertible effectiveness and practicality of the recommended six measures, the next government would need to muster great courage to counter bureaucratic inertia to change and break free of deep-seated prejudices to implement them.

In the past, all review panels and expert committees have dealt with reforms in a piecemeal manner, concentrating mainly on irksome policy provisions and streamlining procedures. No holistic, comprehensive, dispassionate and objective exercise has ever been undertaken to identify intricate interplay of dynamics of domain interests and conflicting attitudes that defeat all attempts at improving the system. Lack of courage to undertake radical overhaul of the regime have been making the government officials flounder in the labyrinths of bureaucratic indecision while the armed forces and the country continue to suffer. *****