Indian Private Sector in Defence

Issues Details: 
Vol 10 Issue-3 Jul - Aug 2016
Page No.: 
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Examining the emerging opportunities for the defence sector emanating from India’s quest to achieve self-reliance in defence
Air Marshal Anil Chopra, PVSM, AVSM, VM, VSM (Retd)
Saturday, July 23, 2016

The ‘Make in India’ campaign is being aggressively led by Prime Minister Modi personally. Defence imports not only take away large chunks of foreign exchange but also perennially put the nation at the mercy of foreign powers. India currently also has the dubious reputation of being the largest importer of defence equipment. For any country to be a global power, it has to have a strong indigenous defence industry. To promote indigenous design, development, and production many measures have been initiated. The most important is the release of new Defence Procurement Policy DPP-2016 on 02 April 2016 at the Defence Expo 2016 in Goa. The FDI in defence production which was allowed up to 49%, in a landmark move has been cleared up to 100% if the project brings state-of-the-art technology. Also cleared are investments up to 24% by foreign institutional investments, and there is no longer a need to have a single Indian investor with at least a 51% stake. A ‘Make in India’ defence manufacturing summit and global CEO conference was chaired for the first time by Defence Minister in February 2015. 1055 defence related companies and  224 delegates from 48 countries participating in Defence Expo in Goa end March 2016. Revamping Defence Research and Development Organisation (DRDO) and coordinating private sector participation are other great initiatives. Big private industrial houses like Reliance, Tatas, L&T, Mahindras, Bharat Forge and others have come into defence manufacturing in a serious way. PM Modi’s thrust is to increase share of manufacturing from the current level of 15 per cent of Gross Domestic Product (GDP) to 25 per cent. Defence will be a significant area. India’s target is to reduce defence exports to initially 40%.

Industry Friendly Defence Procurement

Defence acquisitions are not standard open market commercial procurements, and have unique features such as supplier constraints, technological complexity, foreign government regulations, denial of technology, high cost, and geo-political ramifications.DPP-2016 was formulated to achieve enhanced self-reliance in defence manufacturing, facilitate ‘Make in India’ and also simplify/rationalise various aspects of procurement. It covers the operational context, acquisition categories and plans under various ‘Buy’ or ‘Make’ categories, procedure for defence-ship-building and also the Fast-Track procedure. Concept of strategic-partnerships is proposed to be clearly defined. Often defence procurements get linked to kick-backs, and therefore, there was a need for transparency, probity and public accountability. Also a balance needs to be maintained between expeditious procurement, high quality and cost-effectiveness. Proposal is to leverage the indigenous manpower and engineering capability, and consolidate design and manufacturing infrastructure within the country. ‘Make’ procedure encourages increased participation of the Indian industry, especially MSMEs. The DPP also encourages quicker decision making and ensure level-playing field while keeping self-reliance as a key aim.

‘Buy (Indian indigenously designed, developed and manufactured – IDDM)’ and ‘Buy (Indian)’ are key provisions. ‘Buy & Make’ essentially is initial procurement of equipment in Fully Formed (FF) state followed by indigenous production through Transfer of Technology (ToT). Buy Indian or IDDM must have at least 40% indigenous content. Make portion of the contract has to be minimum 50%. Ministry of Defence will spell out 15 years Long Term Integrated Perspective Plan (LTIPP), the 5 years Services Capital Acquisition Plan (SCAP) and Annual Acquisition Plan (AAP) for clarity. “Strategic partners” will be cleared for big ticket projects. The target is to kick off one or two projects under the strategic partnership model by end 2016. A new “penalisation provisions” policy will replace the earlier reflexive “blacklisting” of arms vendors suspected of wrongdoing with a more appropriate range of penalties. Foreign vendors would not be allowed to get away with paying bribes. The IDDM would encourage defence industry to shift from licensed manufacture into the high-tech realm of designing and developing defence equipment. The “Make” procedure will see the government reimbursing 90 per cent of the development cost. There is also greater assurance for defence industry to recover its costs. After successfully developing a prototype, if the vendor does not get an order, even his 10 per cent expenditure would be refunded. CII has appreciated the opening to small and medium enterprises (SMEs) and it is bound to spur more design development activities within the country. Many of the licensing needs have been dispensed with and export clearances are virtually on line.Hope private industry will go beyond pussy-footing their entry because of high investments coupled with uncertainty.

Defence PSU Challenges

There is no doubt that for any country to be a global power, it has to have a strong indigenous defence industry. We are in a dismal state in defence production. India’s DRDO, Ordinance Factories (OF) and Defence Public Sector Undertakings (DPSU) like Hindustan Aeronautics Limited (HAL) were in place in initial years after independence. Yet 69 years later India imports around 70 per cent of its military hardware. Mostly we are just a foreign licensed-production house. The case in point is the manufacture of MiG series, Jaguar and SU -30 MKI fighters; Avro & Dornier light transport aircraft, and Chetak & Cheetah helicopters. Aircraft production quality has often been in question. Many aircraft accidents have been attributed to HAL’s quality control. High import content makes India vulnerable to supply lines being chocked at inappropriate times. Low investment in R&D; socialistic work force with low productivity; generalist bureaucracy controlling and deciding technical activities; grown from the ranks and often fatigued PSU higher management; and lack of initiative and drive to achieve results have made DPSUs inefficient. Aviation specific, LCA is over thirty years behind schedule and only two aircraft handed over recently; Intermediate Jet Trainer (IJT) has serious technical problems; Basic Trainer Aircraft (BTA) has just come out of the production hangar. The Russia led Fifth Generation Fighter Aircraft (FGFA) and Medium Multi-role Transport Aircraft (MTA) joint programs are facing delays and unacceptable design and development cost escalations.

Private Sector – India’s Hope

Over 30 percent scientists in US space agency NASA are reportedly Indians. If we can succeed in our space and nuclear programs and have high manufacturing standards in Cars and motorcycles, and are world leaders in software development we can do the same in defence production. Privatisation of DPSUs is the way. Embraer of Brazil is a successful model to emulate. Private sector was allowed 100 percent participation in defence production in 2001.Of India’s defence market 70% is through imports, 25% with the Defence PSUs and remaining 5% with private partners. DPP 2016 will now ensure level playing field for the private sector vis-à-vis the DPSUs and the foreign original equipment manufacturers (OEMs).Russians will build Kamov 226 Light Utility helicopters in India. BrahMos tactical cruise missile is a successful joint venture with Russia and ready for export. We have great success in ship-building both through public and private sector shipyards. Tata Power and Larsen & Toubro manufacture Pinaka

multi-barrel rocket launchers. L&T was involved in developing the hull for a nuclear submarine for the Indian Navy, Tata Power is handling modernisation of air field infrastructure for IAF, and Reliance has consolidated into an active aerospace, shipping and homeland security conglomerate. Mahindra’s are already making small aircraft and selling in Australia and elsewhere. EADS unit Cassidian plans to make India a hub for large number of defence products that are locally manufactured and also offer technological value. GE has a huge India presence. BAE’s US arm plans to shift Howitzer assembly to India. There is also a large MRO market which can create R&D base for engineering services.

In 2012, Centum Group, a Bangalore-based defence electronics company was selected to supply to French defence solutions provider Thales. It is now cleared to supply directly to any of the 70-plus Thales sub-groups.  In 2011, Tata Power Strategic Engineering Division (SED) - won a $186 million contract from the Indian Army to manufacture two electronic warfare systems to be deployed in mountainous regions beating Israeli firm Elta. Tata Power SED has secured orders for Pinaka Multi Barrel Rocket Launcher, Akash Army Launcher and Integrated EW System for the Indian Army and the Akash Air Force Launcher for the Indian Air Force. During the June 2015 Paris Air show Indian conglomerate, US$ 16.9 billion, Mahindra Group bagged a large aero-components production contract and will manufacture a variety of metallic components for several Airbus aircraft. Mahindra Aerospace’s will deliver in excess of a million parts per annum. Bharat Forge is aiming to become a major player in the artillery and specialised vehicles segment. Several small companies - such as Dynamatic Technologies, Avasarala Technologies, DefSys, Ravilla and Taneja Aerospace - have of late acquired advanced technological capabilities. Dynamatic Technologies makes assemblies of vertical fins for Sukhoi 30 MKI fighters. Samtel electronics makes SU-30 Head Up Displays and other electronics. Indian companies have global opportunity not only due to cheaper skilled labour, but have also developed the ability to manufacture accurately to specifications, particularly in aerospace, metalworking and electronics. Meanwhile, Industry also awaits rationalization of the tax structure that will promote value-addition in the country. It is time to assure industry of some orders. 

World Aviation Sector Realities

Two major manufacturers Boeing and Airbus control bulk of the civil aircraft market; half a dozen players control business jet market; Lycoming makes more than 50 per cent of world’s engines for small propeller aircraft; there are only 5-6 jet engine manufacturers; only three countries have reasonable access to stealth technology. The transfer technology contracts are most difficult to interpret and implement. There have been Transfer of Technology clauses in many Indian contracts but physically nothing significant has been transferred. India has been unable to leverage its high imports on this count. No one wants to share ‘up-end’ technology even for money. With limited access to technology alternative means will have to be found. Soviet Union and China rode to aviation success by reverse engineering Western aircraft designs. Joint-ventures are the only interim option for India. USA and Russia have traditionally given high priority to research institutions, and China earmarks US$ 25 billion for Defence R&D every year. Many countries have allowed FDI in defence but kept the ‘ultimate’ veto share. In France, UK and Germany,FDI in defence industry requires government approval. USA puts restrictions on any FDI in any type of industry if it can threaten its national interest. Notwithstanding the apprehensions, India has now taken a welcome step on this count.

Way Forward

DRDO and Defence PSUs need to be made efficient and answerable and in the long term privatised. Meanwhile, position well paid professionals to head important projects. India has to find more funds for R&D. Till we get our technological prowess, there is a need to take steps to leap frog by collaboration with industry partners from within and outside the country. In addition to the economic benefits, increased jobs, improved capability and the development of critical technology, indigenisation would ensure India has ready access to the best available defence equipment. Since the launch of the ambitious ‘Make in India’ initiative, 46 licences have been issued in the defence sector to produce items including light armoured vehicles, artillery weapon systems, UAVs and underwater systems. Private players have also been given industrial licences to produce electronic warfare systems, air defence weapons, and armoured panels for helicopters among other items. The immediate aim is to attract global companies to undertake the manufacture of their products in India. India will need about 200,000 skilled people in the defence and aerospace industry in 10 years. Large number of qualified ex-servicemen may be trained and employed. Foreign companies can use India as an export hub like it happened in auto sector. There is considerable opportunity at sub-system levels in aero structures, avionics, and actuation and control. Most analysts have opined that India needs to allocate at least 2.5% of GDP; up from current 1.67% for at least next ten years to bridge the gap. PM Modi wants to reduce defence imports by at least 20%-25% through domestic production. Indian industry is good at small component manufacture, electronics, software, heavy engineering, sheet metal work, high quality milling and these needs to be harnessed. Time to act is now lest India misses the bus again.

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