March 2, 2022

India’s Progress As A Defence Manufacturing Hub

Written By: Anil Jai Singh

In August 2014, India’s newly elected Prime Minister Shri Narendra Modi gave a clarion call to the nation to focus its attention on making India a manufacturing powerhouse with his ‘Make in India’ vision[1]. Defence manufacturing was identified as one of the 25 sectors in this vision[2].

India has been one of the largest importers of defence equipment for over three decades and had the ignominious distinction of being at the top of the list from 2004 to 2014. As per the authoritative data base released by the Stockholm International Peace Research Institute (SIPRI) in 2020, India’s defence imports reduced by 33% from 14% of the global total in the period 2011-2015 to 9.5 % in the period 2016-2020, with Saudi Arabia pushing India to the second position.[3] Whether this drop was due to the success of the indigenisation process or due to the complexity of the acquisition procedure will become evident only when the figures for the current five year period are released. India is slated to procure some significant military hardware in the next few years including its most expensive ever import, the S-400 Air Defence system from Russia, 24 Sikorsky MR-60 helicopters from the USA, two Type 1135.6 Krivak class frigates and possibly, a nuclear-powered attack submarine on lease from Russia. The Air Force and the Army are also in need of modernisation and not all requirements can be met indigenously due to the capacity and capability constraints of the Indian defence industry.

Indigenisation and self-reliance in defence manufacturing is a strategic imperative for India. As a regional Indo-Pacific power, India’s dependence on imports is a critical vulnerability. This has been exposed more than once; the first time was when the Soviet Union collapsed and so did its defence industry which left the Soviet equipped Indian Armed Forces facing a spares crisis with serious consequences for the country’s security. The second instance was the sanctions imposed by the West in the wake of the nuclear tests carried out by India in May1998 which also affected India’s military preparedness adversely. Both these events led to a thrust on indigenisation but was limited in scope and substance and focussed more on addressing the immediate crisis.

In 2020, the Ministry of Defence unveiled a Draft Defence Production and Export Promotion Policy[4] to energise the defence manufacturing sector and set an ambitious target for defence turnover of USD 25 billion in ‘Aerospace and Defence Goods and Services’ with exports worth USD 5 billion by 2025. It is also intended to double defence procurement from the present Rs 70,000 crore to Rs 140,000 crore in the same time frame. Presently, the share of domestic procurement is about 60% of the total procurement[5]. The recent Budget has increased this allocation to 68%, which in percentage terms is 10% more than the current financial year. With the projected capital allocation of Rs 1.52 lakh crore[6], this amounts to a considerable Rs 1.03 lakh crore. This is ambitious but attainable and when seen in conjunction with the review of all ‘Buy Global’ cases undertaken by the Defence Acquisition Council in January 2022, it clearly spells out the intent to minimise the dependence on imports and invest more in developing indigenous capability. While this is indeed encouraging and necessary, there are considerable capacity and technology constraints in the defence industrial ecosystem which will need to be addressed. Perhaps an indication of how much of the 58% committed in the current FY has actually been spent on indigenous equipment would offer an insight into the probability of attaining the intended target.

In 2021, the Government listed a total of 209 items which would be produced indigenously with the timeline reflected against each in two ‘Positive Indigenisation Lists’. Another ‘Positive Indigenisation List’ included 2,851 items including assemblies. Components and sub-components, imports of which are also embargoed. In addition, various other initiatives have been taken to encourage indigenous defence production. These include the ‘Innovations for Defence Excellence’(iDEX) scheme to encourage MSMEs, the Implementation of “Public Procurement (Preference to Make in India), Order 2017, the launch of the SRIJAN portal to facilitate indigenisation and the establishment of two Defence Industrial Corridors, one each in Uttar Pradesh and Tamil Nadu[7].

Revisiting the Defence Acquisition Procedure

The Ministry of Defence has always been pro-active in promulgating policies encouraging the growth of the defence manufacturing base in the country, promoting indigenisation and meeting the requirements of the Armed Forces. However, regrettably, implementation has been found wanting. At the turn of the century, it was decided to streamline the defence procurement process through an institutionalised mechanism to ensure transparency, probity and above all timely procurement. This led to the promulgation of the first Defence Procurement Procedure (DPP) in 2002. Since then, this document has undergone numerous iterations (2005, 2008, 2011, 2013, 2016 and the latest in 2020, now renamed the Defence Acquisition Procedure). The document has grown from 141 pages (DPP 2005) to a humungous 657 pages (DAC 2020). These well-intentioned improvements over the years have led to it becoming increasingly complex in its understanding, interpretation and implementation.  This is primarily because successive iterations have rarely been a result of any meaningful internal audit of the existing procedure as newer categories of acquisition and procedural terms and conditions have been added without adequately analysing the success, or lack of it of the existing ones.

To illustrate the point, MoD introduced the ‘Make’ category in DPP 2006 with the intention of developing indigenous capability in some core areas. Amongst the first programmes announced with great expectation was the plan to build an indigenous FICV (Future Infantry Combat Vehicle) with active participation from all the leading private players including MSMEs. Other programmes included a nation-wide Defence Communication Network (DCN) and a Battle Management System (BMS). The FICV programme was cancelled after a few years which led to industry incurring considerable losses on its investment. While the larger players were able to absorb this, it was the MSMEs which bore the brunt. Subsequently, a revised ‘Make’ procedure was reintroduced and since then it has continued to evolve. In the DAP 2020, ‘Make’ has been subdivided into Make 1,2 and 3. It is too early to assess the effectiveness of this but the bottom line is that the Indian Army is no closer to getting a FICV today than it was 15 years ago.

Similarly, in a bid to encourage indigenisation, the degree of indigenous content required in various categories has been on the rise. However, this has rarely taken into account either industry’s technology constraints or its appetite to make costly investments either in R&D or in Transfer of Technology (TOT) without any assurance of an adequate return on its investment.

In 2006, MoD introduced the concept of Offsets and issued detailed guidelines. As per this, all Buy Global contracts above Rs 300 crore had to have an Offset element of at least 30%.  The aim was to ensure the induction of cutting-edge technologies. These guidelines met with limited success and were revised in 2016 with the contract value being raised to Rs 2000 crore and multipliers being added to attract technology. However, this too did not give the required boost.  In the DAP 2020, offsets have been waived for procurements through the G2G or the US Foreign Military Sales (FMS) mechanism. This has virtually sounded the death knell for any useful offsets because most big-ticket items come via this route. In fact, with the increase in the indigenous content in most procurement categories, offsets have become more or less redundant and could perhaps be dispensed with.

The MoD claims that the DAP 2020 has been developed keeping in mind the shortcomings of its previous iterations and has included inputs from all stakeholders including foreign and domestic industry. Many new provisions have been added, including the leasing of equipment, encouraging foreign industry to manufacture in India, incentivising technical innovation and providing an impetus to MSMEs and start-ups for developing disruptive and cutting-edge technologies. Timelines to process acquisitions have been tightened with due accountability to reduce procedural delays etc.

The Defence Acquisition Procedure as the very term suggests is a procedure that provides the guidelines for defence procurement and is not a set of rules carved in stone. Hence, in certain cases, a degree of flexibility should be available to ensure timely induction of an essential capability.

The reason this does not happen is because of a glaring anomaly in the country’s higher defence organisation wherein the Armed Forces  headquarters, who are the final users of the equipment and have the knowledge, the expertise and the experience are not an integral part of the Ministry of Defence; they are in fact attached offices which limits their participation in the decision making process to being the ‘repository of technical information and advise the department on technical aspects of question dealt with by them’.[8] This is hardly conducive to effective or efficient decision making on matters of national security.

The Indian Ministry of Defence is manned by a large and complex organisation of generalist bureaucrats drawn from all departments of the government for limited tenures, more often than not with no background knowledge of matters pertaining either to national security, the armed forces or the technological complexities of defence equipment. Thrust into appointments where they have to take decisions on issues, they know very little about, they often raise queries and seek clarifications on matters which highlights their ignorance and lack of professionalism. Even a single frivolous query can lead to delays of a few months at times and if they keep getting raised by different departments and at different levels this to-and-fro can go on for years, as indeed it does with consequential effects on defence modernisation, combat preparedness, committed liabilities, budget allocations etc. The irony of the Indian MoD is that the Armed Forces have perhaps the least representation in any of the departmentts of the MoD.

In the absence of the professional knowledge to evaluate equipment on the basis of a weighted matrix, the MoD bureaucracy has perpetuated the myth that the lowest bid (L1) is the best criterion for selecting an equipment. It has a mistaken belief that this leads to cost savings whereas in reality it is leading to just the opposite. A weighted index with realistic expectations would deliver better and speedier results. Cost is an important factor in defence procurements the world over but the decision is based on more sophisticated methods of price discovery to select the best their Armed forces require, unlike India which chooses the cheapest. Unfortunately, despite this being common knowledge, little has been done to address this in successive DPPs including the DAP 2020.

Perhaps the most major criticism of the complex Defence Procurement Procedure is that hardly any big-ticket item has been procured via the DPP route. In the past two decades all helicopters, aircraft, ships, submarines and artillery guns procured from abroad have come through the G2G/FMS mechanism. The MMRCA was one programme which followed the DPP till the declaration of the L1 bidder. However, this could not be taken to its logical conclusion for a host of reasons and the Government finally had to resort to a G2G arrangement with France for these aircraft under very different conditions and prices than had been determined via the laid down procedure.

Widening the Defence Industrial Base

It has now been two decades since the defence manufacturing sector was opened to the private sector. However, it has been largely restricted to a network of Defence Public Sector Undertakings (DPSU) which work directly under the MoD’s Department of Defence Production (DDP). This limits the manufacturing capacity in the country and leads to importing equipment to meet the requirements of the Armed Forces. This dependence on imports not only contradicts the Government’s avowed aim of indigenisation and self-reliance, but also creates a strategic vulnerability which it cannot afford. Indian industry has made remarkable progress in other strategic areas like space technology, atomic energy and missile development. A vibrant MSME culture has been the fountainhead of innovation and has contributed significantly in these. However, the defence sector has been unable to replicate this success to the same extent.  This has led to capacity and capability gaps in the country’s defence preparedness. These can be effectively addressed by energising the country’s vast public sector network and creating an enabling environment to encourage private sector participation. There is a perception, and not without reason, that there is an ‘us’ versus ‘them’ syndrome where the ‘us’ (Defence PSUs) have always enjoyed a playing field that is heavily skewed in their favour and thus have a distinct advantage over the ‘them’ (private industry). The MoD’s Department of Defence Production must dispel this belief with policy initiatives that translate into tangible outcomes.

Energising the Public Sector

India’s vast network of public sector undertakings has the unenviable reputation of being inefficient, bureaucratic and lacking the agility to adapt to change. This is often attributed to the lack of incentive in the absence of a competitive environment since they benefit from the preferential treatment by the government. This is especially true of the DPSUs which continue to get most contracts by nomination. Despite this, the DPSUs have fallen far short of expectations in delivering quality products on time and within cost.

One of the success stories in the Indian defence sector has been indigenous shipbuilding which is mainly the preserve of the public sector. For over five decades, the indigenous construction of ships and submarines has been undertaken mostly at the five public sector shipyards, four of which (MDL Mumbai, GSL Goa, HSL Visakhapatnam and GRSE Kolkatta) are under the MoD while CSL Kochi is under the Ministry of Shipping. However, these shipyards, despite their inability to deliver any major platforms in time or within cost have rarely been penalised. This story is not limited only to the shipyards but is also echoed across other DPSUs that have thrived in a non-competitive captive market.

In the current system it is the MoD which defines the requirement and places an order to the MoD for equipment to be manufactured by the MoD at a price decided by the MoD which is then sold to the MoD while ensuring that the MoD does not incur a loss, the delays in delivery and cost over-runs notwithstanding. This internalisation of the ecosystem encourages inefficiency, is counter-productive and is a major anomaly in the system.

However, it would be unfair to single out the only the DPSUs for blame; the stifling oversight of the MoD greatly limits their autonomous functioning and is perhaps another reason for their lack of incentive and innovative spirit. They have the skilled manpower, the desired infrastructure and many decades of rich experience in their core area of expertise. Perhaps a phased privatisation of the DPSUs would make them more competitive and efficient because it would give them the financial and functional autonomy to optimise their core strengths, trim the flab and optimise productivity. However, since this is unlikely to happen at least in the near future, they could, for a start be delinked from the Ministry of Defence and like other industries, be placed under the Industry Ministry. They would then have to compete with private industry in a more level playing field than exists at present and would energise them to realise their full potential.

Defence is a strategic sector where certain critical programmes need MoD/Armed Forces oversight because of the sensitive technologies involved and the demands of national security. Tier 1 and Tier 2 vendors in the private sector are already supporting the DPSUs in sensitive and strategic programmes. India’s private sector has also more than proven its worth, capability and maturity and is operating successfully in a globally competitive environment. Hence MoD oversight can be incorporated into contracts awarded to the private sector as well. Citing MoD oversight as an excuse for nominating DPSUs is not a justifiable argument. This oversight in sensitive programmes can be extended to the private sector, which is fully cognisant of the importance of security.

Some of the recent policy initiatives of the Ministry of Defence give rise to optimism that the private sector is being encouraged to become an integral and important part of the defence industrial ecosystem. Initiatives like the Strategic Partnership model which was introduced in the 2016 edition of the DPP “to institutionalise a transparent, objective and functional mechanism to encourage broader participation of the private sector, in addition to capacities of DPSUs/OFB, in manufacturing of major defence platforms” [9] in the manufacture of submarines, aircraft, helicopters and armoured vehicles is a very positive step in the right direction. Two important and long overdue programmes are currently being progressed under this model – Project 75(I) for the indigenous construction of six conventional submarines and the other for the induction of 111 Naval Utility Helicopters (NUH). It is perhaps too early to comment on this model as it is still at a very early stage but for it to be successful, the MoD’s flexibility and agility to adapt will be critical.

Another encouraging development has been the dissolution of the 220-year-old Ordnance Factory Board with its 41 factories now restructured as seven DPSU clusters based on the Union Cabinet’s decision on 16 June 2021. Corporatisation of this behemoth was long overdue and had been recommended by various committees over the years. It is hoped that this restructuring will lead to more efficient functioning in a cost competitive defence manufacturing environment.[10] However, despite a clarification in Parliament that the terms and conditions of the work force as Central Government employees will continue to be protected, the Unions expressed their dissatisfaction and it required legislation to prevent them from striking work.[11] The corporatisation of the OFB has been a very progressive step and its success will be keenly observed.

At present it seems unlikely that the MoD will allow its DPSUs either to be privatised or get eclipsed by the private sector but it is encouraging that the MoD is willing to admit that the DPSUs “…continue to enjoy a commanding role based on various forms of governmental support over the past decades…”[12]. It also acknowledges that the “active involvement of the private sector in the manufacturing of major defence equipment will have a transformational impact. It will serve to enhance competition, increase efficiencies, facilitate faster and more significant absorption of technology, create a tiered industrial ecosystem, ensure development of a wider skill base, trigger innovation, promote participation in global value chains as well as exports.”[13]

Enabling the Private Sector

India’s security requirements over the next few years requires a synergistic approach to defence manufacturing. India’s private sector, both large and small, is keen to be a part of the defence manufacturing ecosystem. Indian MSMEs have been contributing significantly as sub-suppliers to DRDO and the DPSUs and the Indian entrepreneurial spirit is driving a vibrant start-up culture keen to showcase their skills in harnessing disruptive technologies.

However, despite two decades having elapsed since the private sector was permitted to participate in defence manufacturing with the aim of widening the defence manufacturing base in the country, it has not been able to get the necessary traction and remains less than optimally utilised for various reasons, not least being the lack of both encouragement and a conducive environment.

The fate of the private sector in warship construction is reflective of this. Of the four private sector shipyards which invested large sums in developing warship building skills, three have become insolvent partly because of their inability to deliver but more so because of MoD’s reluctance to allow them to develop their capability. The irony is that while the DPSU shipyards despite building ships for over five decades are unable to deliver ships either on time or within cost and are not penalised for it, these fledgling private shipyards did not get similar support.

Many of India’s leading industrial houses have taken impressive initiatives and made considerable investments in this sector. It is now for the government to develop an enabling policy framework to leverage their skills by ensuring a level playing field, supporting their efforts in the initial stages, and providing some reassurance of an adequate return on their investment. The Government’s production and export policy has set an ambitious defence production target of USD 25 billion by 2025 including exports worth USD 5 billion.[14] The emerging security challenges in the next decade or so with two belligerent neighbours constantly sniping at our heels will require India to accelerate and augment its capacity and capability development. This will only be possible with the private and public sector working closely together to widen the country’s defence-industrial base towards meeting its requirements and the laid down targets.

It is important that in addition to equipping its own armed forces, the defence industry should also be able to export military hardware to friendly foreign countries. Defence exports provide military and diplomatic leverage and are an important source of revenue generation to support the internal requirements. Diplomatic leverage is an important consideration for an emerging power like India to retain its edge in its strategic sphere of influence. India is ranked within the top 25 countries in defence exports but its share is actually less than 0.2%. The recent contract worth USD 375 million signed with the Philippines for the Brahmos missile is a significant breakthrough and more such contracts should follow.[15] The MoD should also ease the procedure to ensure that Indian industry, whether public or private is able to operate with the requisite flexibility in a competitive international market.

India recognises that technology infusion requires industry to collaborate with foreign OEMs; it has been repeatedly highlighted that Indian and foreign OEMs should set up Joint Ventures and Special Purpose Vehicles which includes both, a manufacturing and a R&D element. To facilitate this, the Government has been steadily increasing the FDI limits in the defence sector which is presently at 74% to make the Indian defence industry an attractive proposition investment destination and then take advantage of cost advantages to manufacture in India and export to other countries in the region.

Conclusion

India’s defence manufacturing is poised on a transformational cusp. Many of the impediments of the past which retarded progress in the past are being addressed. The MoD has set ambitious targets for indigenisation and its recent policies are aimed at revitalising this sector with a focus on innovation, technology development, exports, enhancing existing capacity and improving efficiencies in defence manufacturing. Restructuring within the MoD towards improving efficiency and quality is an encouraging development. The entry of the private sector also bodes well for the future. However, there are still areas where the pace of change could be accelerated. The emergence of India as a defence manufacturing hub not only to meet its own security requirements for India but for the entire region will depend on the MoD’s ability and inclination to walk the talk in ensuring that its progressive policies are implemented in both, letter and spirit.

Author Brief Bio: Commodore Anil Jai Singh is the Vice President of the Indian Maritime Foundation. The views expressed are personal.

References:

[1] PM launches ‘Make in India’ global initiative. www.narendramodi.in/pm-launches-make-in-india-global-initiaitive-6644

[2] Make in India: List of sectors, Objectives and Budget Allocation (jagranjosh.com).www.jagranjosh.com/general knowledge/list-of-sectors-covered-under-the-make-in-indi-plan-152635017-1

[3] www.sipri.org/sites/default/files/2021.03/fs_2013_at_2020pdf. Trends in international arms transfers, 2020 (sipri.org)

[4] Draft Defence Production & Export Promotion Policy – DPEPP 2020 | Department of Defence Production (ddpmod.gov.in). www.ddpmod.gov.in/dpepp

[5] Ibid

[6] Ministry of Defence Press Release on Union Budget 2022-23 dated 01 Feb 2022

[7] Ministry of Defence Press Release on Manufacturing of Defence Equipment dated 04 Feb 2022

[8] Slide 1 (mcrhrdi.gov.in)

[9] Chapter 7, Defence Acquisition Procedure 2020.Pp 479.

[10] Explained: Dismantling the Ordnance Factory Board | Explained News,The Indian Express.

[11] Home | Directorate of Ordnance (Coordination and Services) | Government of India (ddpdoo.gov.in)

[12] Chapter 7, Defence Acquisition Procedure 2020.Pp 479

[13] Ibid.

[14] Draft Defence Production & Export Promotion Policy – DPEPP 2020 | Department of Defence Production (ddpmod.gov.in)

[15] In a first, India to export BrahMos missile to Philippines – The Economic Times (indiatimes.com)

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