A Long Way To Go
Despite all the good intentions and policy initiatives, Make in India in the defence sector is yet to have much impact. What are the problems and what needs to be done?
India is a country with the world’s third largest military and fifth largest defence budget. However, even 70 years after Independence, India continues to dole out billions of dollars every year on arms purchases from abroad to meet its defence requirements. Presently, India is the top importer of arms in the world, contributing 13 per cent of global imports, which is clearly a worrying trend.
A recent report by Stockholm International Peace Research Institute (SIPRI) on global arms sales showed that India was among the top five spenders on arms and military services in 2016, spending $55.923 billion in arms and military services.
The benefits of reducing India’s dependence on imports of defence equipment, arms and ammunitions are manifold. According to experts, the Make In India initiative for the defence sector holds the potential to provide a significant upside to the trajectory of the country’s GDP growth in the next 10-15 years.
It is felt that indigenising supplies to the sector holds the potential to realise India’s ambitious plans to grow the manufacturing sector from the current 17 per cent of GDP to 25 per cent over the next decade.
“With planned defence capital acquisitions to the tune of Rs 14-16 lakh crore per year (over $100 billion in 10 years) and a vision to enhance defence indigenisation from current levels of 35-40 per cent to 70-75 per cent, the defence sector alone can contribute an additional Rs 40 lakh crore or 1.7-1.8 per cent to India’s GDP over the next 10 years, with the economy growing at 8-10 per cent year-on-year (considering the multiplier effect across the tierised value chain that one expects from defence manufacturing),” says Jayant Patil, whole-time director (defence business), Larsen & Toubro.
The Make In India programme for the defence sector could, if implemented efficiently, create over a quarter of a million jobs and save $10-12 billion in foreign exchange over the next decade. On the policy front, several game changing initiatives have been announced by the government to boost domestic defence manufacturing, but we need a faster pace in procurements to ensure the desired benefits, adds Patil.
The urgency to indigenise India’s defence requirements can also be gauged from the recent statement made by India’s Vice Chief of Army Staff, Lt Gen Sarath Chand, who revealed (and it was reported first in an exclusive report published on swarajyamag.com) that two significant defence operations — Operation Parakram (13 December 2001–10 June 2002) that was launched soon after the attack on the Indian Parliament, and the Kargil War (May-June 1999) — faced challenges of adequate equipment and ammunition.
“After attacks on the Parliament, we were very keen to teach Pakistan a lesson. We had mobilised and some of the formations had actually started moving also... but we had to halt our troops in their tracks as we were not sure if we were adequately prepared with our equipment and ammunition,” said the Vice Chief of Army Staff. He added that during the Kargil War, which although was a very limited war, “the Army had to scout all over the world to get ammunition for its artillery guns.”
Post the Pathankot attack, the Ministry of Defence (MoD) has, in the last one year, delegated several procurement decisions to the vice-chiefs of the services, eg. making up critical deficiencies in ammunition, security of posts and defence installations. The outcomes of these initiatives are still awaited.
Realising the importance of indigenous solutions, the Narendra Modi government, immediately after coming to power in 2014, put defence manufacturing at the heart of its flagship Make in India initiative. But tangible results are yet to emerge.
One of the most innovative and forward looking documents for the initiative, announced in 2015-16, is the defence procurement procedures (or DPP 2016) policy, which includes introduction of indigenously designed, developed and manufactured or IDDM category for indigenisation of defence products and categorising procurement in favour of Indian companies.
The DPP 2016 also allows for single-party bids by Indian companies (through apex level approval), wherever high technology products have been developed either in-house or through collaboration with premier research organisations like the Defence Research and Development Organisation (DRDO).
There were also other policy drivers from the government. The highest priority was given to acquisition of indigenous equipment. Certain “Make” procedures were restructured under the DPP 2016. As against the earlier “Buy and Make” procedures, the government introduced various categories under Make 1 and Make 2 to encourage industry to design, develop and manufacture in India. While Make 1 has larger funding support from the government, Make 2 covers industry-funded projects, where prototypes are created, accepted and introduced.
Testing ranges were opened for trial evaluation by private industry. Earlier, defence public sector units (DPSU) were given shipbuilding contracts through nomination. This has stopped, and contracts are now being awarded through bidding. Under the strategic partnership (SP) policy for undertaking big programmes, Indian companies can form joint ventures with foreign defence majors to manufacture in India. Items like fighter jets, submarines and helicopters are covered under SP.
But then why is it that despite the intent and appropriate policies from the government, we are yet to witness any tangible results?
Emphasising on the urgency of indigenisation, Lt Gen Subrata Saha, former deputy chief of army staff and 15 corps commander in Kashmir, says, “The threat spectrum that India has to contend with is much more challenging and unique. Whether it is along the Line of Control with Pakistan or the Line of Actual Control with China, where the level of belligerence in face-offs has been increasing, there’s a continuous ongoing sub-conventional conflict with a high risk of escalation.”
“Peculiar to India too is the widely diverse terrain, weather and climatic conditions along the borders. While imported solutions may meet operational requirements, there are adaptations that compromise optimisation,” he adds. “Our international stature is growing rapidly. With growth, there is added power, and with power, there are added expectations. In line with the unfolding narrative, a greater assertiveness is visible in our security conduct — both military and diplomatic. To be sure, the armed forces rise to the expectations of the emerging security environment, but the urgency to get out of the trappings of importing capability is like never before.”
The majority of India’s private sector feels that the operationalisation of the policies has not been quick enough. In the four years of this NDA government, India has seen three defence ministers — Arun Jaitley (twice), Manohar Parrikar, and now Nirmala Sitharaman. This has clearly delayed timely operationalisation.
Another reason is the lack of large orders from the government, besides stutters in implementation of already-announced big defence programmes like the future-ready infantry combat vehicle (FICV) — this is delayed by seven years and has still not progressed.
Baba Kalyani, chairman and managing director, Bharat Forge Ltd, one of the biggest spenders on R&D amongst the leading defence players in India, had recently said that the real Make in India will be evident when industry starts investing on receipt of orders. “To achieve faster implementation, we need to kickstart the process by converting the major acquisition programmes where trials or negotiations have been completed,” he had said.
It is felt that even though the present government is pushing hard to promote indigenous solutions, the policy makers need to do some hand holding for the private sector for development of Indian systems under IDDM or for all the other Buy categories.
These issues were also brought up during a recent meeting chaired by Sitharaman with the defence industry on 28 October 2017. It was brought out that the DPSUs, by virtue of the long-term practice of nomination, enjoy licences and special permissions for prototype testing, which the private sector does not have today.
“Since DPSU books are full of nominated contracts, their portfolio risk is negligible. On the other hand, private sector companies have to provide bank guarantees as collaterals for all contracts, and in the process, they end up blocking their bank fund borrowing limits, bear bank guarantee costs on year-on-year basis, thus raising their cost of borrowing. These sums add to the costs, and at times, end up being the differentiator with respect to winning contracts,” says Larsen & Toubro’s Patil.
Kalyani feels that no nominations should be accorded to DPSUs and equal opportunity should exist for private and public sectors. In addition, he says, acquisition cycles need to be shortened, licensing norms need to be made much easier, and at least eight to 10 Make programmes should be launched every year.
The unavoidable truth appears to be that whilst the government has made some pathbreaking announcements to bolster indigenous defence manufacturing, there is a lack of capability in taking decisions.
“I am of the view that the onus of Make in India in defence is a shared responsibility of the DRDO, industry and the armed forces,” says Gen Saha. While commending the policies, he notes, “We have some really forward looking policy directives, but if the stakeholders are reluctant to make use of them, how do we bring about the desired change?”
For instance, he explains that as part of the DPP 2016, “enhanced performance parameters” in GSQR (general staff qualitative requirements, used for defence procurements by the services) were introduced to achieve convergence between the L1 (lowest bid) with the T1 (that is the best in technology). “But it is unfortunate that neither the services nor the industry have taken advantage of this provision to push higher technology products. This is something we need to focus on.”
Another key initiative by the government is “Skill India”, where the small and medium enterprises should get a big boost. Specifically for the skilling of defence industry, Nirmala Sitharaman is encouraging the SIDM (Society of Indian Defence Manufacturers, an industry body dealing with the government to bridge and smoothen policy gaps and for promoting defence manufacturing in the country), along with regional SME associations to undertake skilling and other functions.
“We were asked by the defence minister on 18 November in Chennai that SIDM should come up with some specific recommendations on how to make it easier for the MSMEs to do business with DPSUs/Ordnance Factory Boards (OFBs). At SIDM, we have made a small committee of experts to come up with standard operating procedures (SOPs) for the MSMEs to be able to work with the DPSUs and OFBs. Once such an SOP comes out, private industry could also be guided by that,” says Gen Saha.
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