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Defence Production Policy

9th June 2011

D. Raghunandan

India’s high profile and big ticket procurements of military hardware have been grabbing headlines of late, especially after the announcement of the short-list for the much awaited multi-role combat aircraft deal. These form part of India’s recent and quite frenetic acquisitions aimed at rapid upgradation of its military capability which many regard as having been dangerously degraded over the years due to poor planning, inordinate delays in decision-making and enormous slippages in indigenous development and delivery.

 

Efforts to rectify these problems have taken two broad directions: first, foreign acquisitions especially of high-end hardware and second, attempts to put together a new system expected to facilitate more strategic planning as well as more timely and appropriate equipping of the defence services in the future, particularly through an upgraded defence industrial base in India.

 

Over the past decade or so, when foreign acquisitions have been predominant in the absence of credible indigenous alternatives, considerable attention was paid to reforming procurement processes. These are widely seen as being plagued by delays, dissatisfaction of the armed forces at mismatch between requirements and provision as regards both quality and timeliness, lack of transparency and corruption. Many of the recent acquisitions have come about through new procedures now institutionalized as Defence Procurement Policy (DPP), redrawn several times since 2002 culminating in its latest version DPP 2011. With India now economically better placed and emerging as globally one of the largest markets for military hardware, an important part of the reformed procedures has been the requirement for foreign vendors to “offset” substantial proportions of 30-50 percent of their orders through indigenization of production. The offsets policy seeks to ensure not only that a sizeable chunk of defence procurement expenditure is incurred within India but also, hopefully, that indigenous capabilities would get enhanced and advanced technologies absorbed.

 

Many commentators including the present writer, however, have long been pointing out that these longer-term, strategic goals of building advanced technological capability and self-reliance in the defence sector in India cannot be addressed solely through a Procurement Policy whose main thrust, obviously, is acquisition especially from abroad. Whether in response to such criticism, some of which has also come from important sections of the defence services and the Indian defence industry, or with other motivations and objectives, the government for the first time ever declared a Defence Production Policy (DPrP) (see http://mod.nic.in/dpm/DPP-POL.pdf).


Pushing the private sector While announcing finalization of the new DPrP in end-2010, although it was officially released in January 2011 along with a revised DPP, Defence Minister A.K.Antony declared that the DPrP had become necessary because "a nation aspiring for membership of the Security Council, a place on the high table of the nations, still depending heavily on foreign countries for supply of defence equipments is not good for us." India is estimated to import about 70 percent of its defence supplies, but even this does not reflect its dependence on external suppliers. Almost all of India’s strategic and high-value assets are imported. Even in respect of hardware assembled or part-manufactured in India through technology transfer, such as the Sukhoi-30 MKIs or the Hawk Trainers, critical materials or components are imported. One can have as much as 95 percent indigenization of production in money terms, as achieved in many items under license manufacture in the past, but that remaining 5 percent, even though a tiny fraction in value terms, could be critical without which the equipment could not be made or maintained. External dependence is obviously a major problem in military equipment in which vulnerability to foreign vendors stopping supplies for one reason or another is greatest when they are needed most, in times of conflict.The DPrP in its opening paragraph therefore rightly emphasizes that “Self-reliance in Defence is of vital importance for both strategic and economic reasons and has therefore been an important guiding principle for the Government since Independence. Accordingly, Government have over the years assiduously built up capabilities in Defence R&D, Ordnance factories and Defence PSUs…” Equally clearly, though, the desired goals have not been achieved, leaving one to wonder why India did not have a DPrP for so many decades and, if it has introduced one now, what will be new about it as different from the practice followed hitherto albeit without an explicit policy document?


One major new dimension prominently highlighted in the DPrP is an enhanced role for the private sector. Thus, “Government will endeavour to build up a robust indigenous defence industrial base by proactively encouraging larger involvement of the Indian private sector in design, development and manufacture of defence equipment.” The DPrP also seeks to “create conditions conductive for the private industry to take an active role in this endeavour; to enhance potential of SMEs in indigenization and to broaden the defence R&D base of the country,” with Government promising to help industry overcome “any issue which impacts, or has the potential of impacting, the competitiveness of the Indian defence industry in comparison to foreign companies.”


The very question of the desirability of a large military-industrial base in the private sector remains an important one and has not been adequately debated in India. It is one thing to have private industry taking on sub-contracts for manufacture of components or sub-assemblies, as indeed has been successfully done in several areas such as missiles, ship-building and special materials. But it is quite another to have complete weapons systems being designed and built in the corporate sector, with all the attendant pressures on security policy and foreign policy, not to mention competitive pressure and potential subversion of public policy as regards procurement of this or that system, all well-known perils of the military-industrial complex highlighted by then US President Eisenhower as far back as the early ‘60s. Are there not enough scams in India already?


There is also the question, again not subject to adequate scrutiny, of whether the Indian private sector indeed has or can develop the ability to undertake R&D in the defence sector. Even in other industries, the record of even the largest Indian corporates as regards R&D has been very poor, with almost all the quite pitiful 1 percent of GDP spent on R&D coming from the State sector and other public funded institutions.


Abandoning defence R&D Problem is that Government thinking as reflected in the DPrP seems to assume that manufacturing capability in Indian industry, especially in the private sector, is the same as technology absorption and will automatically lead to capabilities in R&D. Nothing could be farther from the truth.


The Defence PSUs have for long been manufacturing defence equipment under license. And yet this has not translated into sound design development capability, as clearly reflected, for example, in the Light Combat Aircraft (LCA), Main Battle Tank (MBT) and other projects. The result will be the same for the various India-based manufacture or assembly undertaken through the offsets route which will widen the production base in Indian industry, whether state or private sector, and raise its technological level but is unlikely to translate into absorption of new technology or to the next higher step which is the capability to independently design and develop new high-tech systems. In fact, the offsets policy has never been implemented with a strategic objective of technology absorption and design-development capacity building. Indeed, under pressure from foreign vendors, the offsets policy has been continually diluted such that it now remains an instrument mainly of domestic expenditure and some manufacture within India, which too may or may not result in transfer of the technology being acquired.


The offsets clause now permits foreign vendors to undertake the required 30 percent of domestic manufacture in products unrelated to the one being sold. This provision was introduced to assist those transactions where the equipment being procured, while of high dollar value, was in such small numbers that setting up facilities for production or even assembly or sub-assembly was simply not feasible. For instance, it may be very difficult to set up dedicated facilities to meet offset provisions for just 10 Boeing C-17 Globemaster very heavy lift transporters whose value would be over $4 billion. It is very likely therefore that Boeing would seek to meet offset requirements by sub-contracting some work related to Boeing passenger aircraft which are in service in India and globally in large numbers. But this should be done as an exception on a case-by-case basis rather than as a blanket provision as per current offset provisions under the DPP 2011. Under extant provisions, if India had opted for Boeing’s F/A-18 fighters, Boeing could have avoided any technology transfer, which was eminently possible for an order involving 126 aircraft, by adopting a similar offset arrangement involving, say, manufacture in India of doors for passenger aircraft. India would have obtained the dollar value of the required offsets but would not have acquired even manufacturing capability leave alone any design-development capability.


The tragedy is that the DPrP does not address this problem at all. Instead, it reflects the Government virtually having given up on the indigenous development option. The DPrP only makes pious promises to “put in place [policies] to encourage the OFB [Ordnance Factories], DPSUs and the Private Sector to strengthen their research and development wings”, to “set up a separate fund to provide necessary resources to public/private sector including SMEs as well as academic and scientific institutions to support research and development,” and to ensure that in technology transfer, the Department of Defence Production will “ensure that appropriate absorption of technology takes place in the Indian industry [and] thereafter, successive generations… will be developed in the country.”


This broad policy framework has been in place for several decades, even if not in a written document specific to the defence industry, but implementation, monitoring and oversight have been extremely poor. Nor has lack of money been the main hurdle for goal-oriented R&D, considering that the LCA and MBT Projects have seen cost overruns of over 10 times original estimates! DPrP should have put forward concrete measures for planning, implementation and monitoring of mission-mode research and development programmes through institutional mechanisms that ensure meeting of requirements and time-schedules of the user services. But DPrP does noting of the kind. No serious effort is made to improve the performance of the state sector Defence PSUs and R&D establishments, and all talk of encouraging R&D in the private sector is just so much hot air, it being clear that the private sector can and will do very little R&D in the high-tech high-risk defence sector.


Towards Dependent Capability? Serious questions therefore arise about the Government’s intentions regarding building indigenous capability in defence technology. There are repeated assertions in the DPrP that the overall yardstick for either indigenous R&D or procurement will be the “aim of ensuring that our forces have an edge over our potential adversaries at all times,” underlining that “in case of delays in the realization of the projects, the corresponding proposal will be processed as per the Defence Procurement Procedure and the option of ‘Buy’ shall be followed.” No doubt, the defence services have on many occasions had to suffer from lack of equipment due to inordinate delay in development and delivery of systems from the state-sector establishments and, as argued above, concrete steps re needed to overcome this deficiency. But the DPrP gives an easy way out for those preferring foreign acquisitions and for those wanting to stymie indigenous design-development efforts.


And if all this were not enough, a major push is being given to raising limits on Foreign Direct Investment (FDI) in the defence industry in India. At present there is a cap of 26 percent on FDI and even large Indian corporates who have entered the defence sector such as Tatas, Mahindra & Mahindra and Larsen & Tubro support the continuance of these restrictions, even if as a protectionist measure. But the Commerce Ministry has formally circulated a dangerous proposal suggesting that all restrictions be lifted and 100 percent FDI be permitted in defence industries! The argument is that foreign manufacturers, being reluctant to transfer sensitive technologies and hence seeking alternative routes to meet offset obligations, would be more forthcoming if 100 percent foreign-owned subsidiaries based in India were to undertake the manufacture or assembly. Even if the issue of foreign corporates being thus granted full control in critical areas of national security is set aside, and the Commerce Ministry certainly does not seem to care about this, this would only ensure that advanced defence technologies are kept within protected foreign-owned enclaves in India.


On the face of it, the announcement of the DPrP seemed to suggest that Government is keen on a systemic overhaul of both procurement and indigenous technological capability in defence equipment. But a closer examination of the new policies, as well as the concrete actions and other parallel policy pronouncements, suggest that the UPA-II Government is virtually abandoning the goal of self-reliance in defence-related technologies.

 

 

 

 

 

 

 

Last Updated on Thursday, 09 June 2011 07:23