Building a credible and self-reliant Defence Industrial Base
A nuclear armed nation with the third largest Armed Forces guarding over 15000 km of land border and 7500 km of coastline, India rightly seeks strategic autonomy by establishing a strong Defence Industrial Base (DIB). The contradiction that challenges this quest is that we continue to be the largest importer of weapons and defence equipment (nearly 70%). This status persists even after opening up the defence industry to the private sector in 2001 and on a regular basis releasing well drafted policies, procedures, regulations and high powered committee reports to bring in self-reliance and indigenization.
The present Government gave a clarion call “Make in India’ and released procurement procedures to bring about an environment for a vibrant DIB. However, if a comparison is made of procurements effected in the 5 year block 2013-2017 with the previous block 2008-2012, imports have increased by 24%. This implies ‘Make in India’ so far has been sluggish and the Government has failed to vitalize defence industry and supply cutting edge war fighting arsenal to the Armed Forces (over 60% of Army’s in-service equipment is in vintage category).
The Indian Government is seeking to develop a robust defence industrial base by revising procurement and production policies, further liberalising Foreign Direct Investment (FDI) regulations, promoting greater collaboration between DRDO and international defence manufacturers with Indian private sector and identifying defence corridors. Though the creation of a vibrant DIB will not occur overnight, the efforts have to overcome challenges that have thwarted successive Government’s mantra of self- reliance and indigenization. The fundamental challenges hampering efforts are defence management, insufficient budgetary resources, and bringing in established private sector from the fringe as lead integrators of major weapons/platforms. (90% of the manufacturing is controlled by public sector)
There are critical bottlenecks in Defence Management, particularly when it comes to staffing, informed knowledge of military, technology, global military industrial dynamics, production processes and strategic leverages. The Armed Forces are highly professional and attuned to threats and capability development needs, but they lack policy influence. The dearth of expertise often results in disproportionate emphasis on acquiring new technologies which can only be obtained from abroad in the form of outright buy of systems/platforms and at best built to print through licensed manufacturing. This pattern is one of the major reasons for consistent 70% imports.
The success of DPP 2016 and Defence Production Policy 2018 (DPrP 2018) is in its implementation. The existing diffused and multiple MoD structures defy synergy. There is no single point accountability. The processes are duplicated at all levels and the culture is to find faults rather than facilitate. Out of the 144 deals in last 3 years, only 8 to 10 % fructified within stipulated time period. MoD needs to back up the change in thinking in the new procurement and production releases with inclusive reforms in defence management, especially procurement structures.
The key is accountability and ownership. It must address 3 main root causes:
• Requirements are over specified and not prioritized.
• Costs and schedules are consistently underestimated.
• Budget is not balanced to acquisition programmes/ plans.
Interface between Stakeholders
• Blurred roles and accountabilities.
• Lack of transparency and accurate financial data.
• Uncontrolled and un costed changes to requirements.
Difficulty in Planning and Executing ‘Make in India’ Projects
• The Defence Procurement Board and Defence Production Board have overlapping roles. The present structure lacks synergy especially in MAKE projects and DRDO Design and Developed projects under Para 72 of DPP 2016. These should be the prime routes to acquire systems/platforms. As of date not a single MAKE project has reached any degree of maturity. These Boards need complete restructuring to improve acquisition and life cycle sustenance capabilities.
• Management and information tools/systems are inadequate.
• Difficulty in posting and retaining specialist staff to meet organizational needs.
Suggested Macro Procurement Model
A macro procurement model is suggested below to be adopted:
• The Apex body to draft the Security Directive which should contain a chapter on “Defence Requirement and Budget Document”. This should be analysed by the Defence Board for implementation. The Defence Board should comprise the Raksha Mantri, RRM, Chairman COSC (preferably permanent), Defence Secretary, CISC, Secretary Defence Finance and the SA to RM. The IDS, suitably reorganized with Subject Matter Experts (SMEs) should largely provide the inputs. The Defence Minister should then issue Defence Minister’s Operational Directive and Budget Document.
• The Defence Minister’s Operational Directive and Budget Document would be analysed by the first respondent (Generators and Developers), namely the three Services and HQ IDS. Respective Capability Development Enterprise (CDE) of each Service and IDS should do the analysis of the base document. The CDEs would comprise a composite body of Subject Matter Experts (SMEs). The Services will have to transform their existing Procurement and Support organizations into planning and enabling CDEs. The Army presently has 3 PSOs, 14 Directorates and over 200 SMEs occupied in Capital and Revenue procurement. This does not include ad hoc trial teams set up field formations. They are committed but not suitably organized and integrated with other enablers to deliver. The star rating of procurements and life cycle support in the Army is at best one and a half.
• The first responder after analysing the “requirement and budget” document containing the national defence requirement and budget availability over the next 10 year plan, would send the proposed solution to the Defence Board. The Defence Board would then appraise the proposed solution by the Services. Thereafter, the “agreed solution and budget” document by the Defence Board would be passed to the ‘Enable and Acquire’ vertical.
The ‘Enable and Acquire’ vertical would be the most vital executive arm of acquiring the services requirements and life cycle sustenance. It can be designated as Defence Acquisition and Support. Headed by a Secretary, this vertical will combine multiple functions of acquisition, production and life cycle support, upgrades and exports. It will be very carefully structured and populated with composite SMEs to engage experts on need basis, more importantly from the defence industry and think tanks. This vertical will thus be suitably mandated, staffed, empowered and accountable.
A broad structure is illustrated below:
The Parliamentary Standing Committee on Defence has acknowledged that the defence budget 2018-19 is inadequate and barely caters for inflation. Much has been commented on the current year defence budget by uniformed officers handling the budget and experts. The capital budget allotment is barely enough to cater to committed liabilities, inflation and taxes. Against the projected need for Rs 44572 Cr, Army has received Rs 26815 Cr. The Navy needed Rs 35695 Cr and got only Rs 20003 Cr. Air Force will have to do with Rs 35770 Cr against its need for Rs 77694 Cr. Defence Ministry is increasingly falling short of funds for modernisation. There is less than 10% incremental hike in allocation for modernisation. A number of projects identified under ‘Make in India’ may have to be foreclosed due to inadequate budget. Likewise, the portion of revenue budget set aside for keeping the equipment at high operational mission readiness levels, life cycle sustenance through periodical interventions, upgrades and large scale joint exercises with troops is less than desired.
The irony of defence budgetary pain is that the allotment every year is not enough at the BE stage and yet funds are surrendered at the RE stage. Maximum money is consumed under revenue expenses towards pay, allowances and infrastructure. Today, the Army consumes the maximum under revenue, being manpower heavy. The other Services will also feel the revenue burden once the Navy gets its compliment of ships, it has reflected in its LTIPP and the AF gets the projected 44 Squadrons.
Budget for modernisation with maximum manufacturing in Indian DIB will happen if under the restructured MoD, the Defence Board under the RM, after the Security Directive from the Apex Body headed by the PM, issues a precise defence directive. The directive should address urgent right sizing of the Armed Forces, prioritize the budget for procurement and back the Enabler vertical for timely induction under Make in India. This should be then war gamed.
Integrating Private Sector in Defence Industrial Base
The start point for sustained success in revitalizing defence industry in India is structural reforms in MoD and ample funds as expounded in preceding text. The foundation principle thereafter for manufacturing weapon systems in Indian defence industry is locating military potential in private sector capabilities. This basically implies building of civil sector capabilities for meeting military needs ensuring coordinated development of civilian and defence economies.
Currently nearly 90% of manufacture of major weapon systems is being done in Defence Public Sector Undertakings (DPSUs). Of these, except for naval platforms which are built to design, the rest are largely under licenced production (build to print). Reputed private industrial houses have been on the fringe for last 16 years. Not a single MAKE project has taken off as per timelines. MSMEs as Tier 3/4 suppliers exist largely to supply DPSUs/OFs with uncertainties of future supplies and hence most of them have not modernized their production lines. With no assurance of orders, private industry is not likely to invest in a modern assembly line. Some entrepreneurs who did invest in setting up production facilities are languishing without orders. A case in point is an ammunition manufacturer in Nagpur who bought ToT of in-service ammunition from DRDO, set up a global standard manufacturing facility and is capable of supplying high quality ammunition. However, since our own armed forces are yet to buy the same, international sales are denied to the company as a consequence. Such situations are highly avoidable.
For the Indian DIB to firm in, the defence industry should be categorized as follows:
• Ship Building • Aviation • Combat Vehicles • Artillery and AD Guns • Small Arms • Missiles • IT and Communication
• Ammunition • Unmanned Systems • NBC Systems
Follow up Actions
• The above categories should then be broken down into sectors. For example Aviation category will have fixed wing combat, transport aircraft and rotary wing sectors.
• Carry out an independent audit of requirement of armed forces, production capability and capacity production of industry (private and public), design and development status of DRDO efforts under Para 72 of DPP 2016, response to EOI issued to foreign OEMs for bringing technology and manufacturing processes in India.
• Shut down non- performing units. Do not invest any additional funds in DPSUs/OFs in sectors where private industry with capital raised through FDI/FII is ready to step in. Underperforming DPSUs/OFs should either be disinvested or be run on PPP model. The location of above category of industry and identified sectors should be linked to industrial corridors.
• Modify the strategic partners section in DPP 2018.
To demonstrate that defence industry is not just a sound economic option but a strategic imperative to minimize dependence on imports and infuse self-sufficiency in defence manufacturing, the government should act now. The low hanging reforms which can be acted upon on fast track could be structural reforms in MoD. Fast track identification of combat rifle/carbine/LMG under Buy and Make is a must and we should set up a manufacturing unit in the private sector. Once a State-of-the-Art SA manufacturing unit with auxiliary suppliers stabilises, many derivatives of SAs designed and developed by DRDO and start-ups will come into the market.
In the aviation category, production line for identified helicopters to replace Cheetah/Chetak helicopter should start rolling. MBT ARJUN MK2 could be made in HVF premises by a private manufacturer through open bidding. ATAGs being designed and developed by DRDO under Para72 along with a private partner , should get the prototypes assembled from production line, for extensive field trials, rather than getting them assembled on the factory work floor. Private explosive industry should be given orders where they hold ToT. Thereafter they should supplement the OFs, create surge capacities in the country and reduce storing of WWR and export.
If the Government has the will, it should structurally reform the MoD, invest/obtain investments by removing unpredictability, give manufacturing orders, and harness indigenous R&D wherever available without getting bogged down in getting technology which will rarely be transferred. Even after 70 years of independence we are colonised by foreign OEMs in defence arsenal needs. It is high time we free ourselves.