NA­TIONAL AGENDA: DE­VELOP A DE­FENCE IN­DUS­TRIAL BASE

Self-suf­fi­ciency or self-re­liance are terms that be­come mean­ing­ful only when a com­pet­i­tive and well spread out de­fence in­dus­try is al­lowed to flour­ish within the coun­try. En­cour­ag­ing big play­ers to as­sume OEM sta­tus and win con­tracts will also prove benef

SP's MAI - - FRONT PAGE - VICE AD­MI­RAL (RETD) ANUP SINGH

In its sixth edi­tion since in­cep­tion, the De­fence Pro­cure­ment Pro­ce­dure 2013 (DPP 2013) has, for the first time, pro­vided clar­ity on how in­di­geni­sa­tion is to be achieved. How­ever, while the ar­tic­u­la­tion of this long cher­ished dream of self-re­liance is in per­fect har­mony with ide­al­ism, the path to­wards its ac­com­plish­ment may not be as eas­ily achiev­able as the doc­u­ment aims through def­i­ni­tion.

Till re­cently, the busi­ness of pro­cure­ment did not con­sider the pri­vate sec­tor ca­pa­ble of, or “re­li­able enough”, to deliver req­ui­site hard­ware in terms of weapon plat­forms or spe­cialised sys­tems. This led to the busi­ness of ‘nom­i­nat­ing’ de­fence PSUs (DPSUs) for such pro­cure­ments that were in­tended to be pro­duced in­dige­nously. The risk of at­ten­dant time and cost over­runs in the case of new tech­nolo­gies was never given fore­thought and some­times even qual­ity of the fi­nal prod­uct was ques­tioned by the cus­tomer (the de­fence ser­vices). For decades there­fore we have con­tin­ued to rely on the im­port op­tion for most cap­i­tal pro­cure­ments while the In­dian pri­vate sec­tor waits in the wings to cap­ture some (at least some!) op­por­tu­nity to se­ri­ously com­pete and prove them­selves. They feel that they have, so far, not been con­sid­ered as part­ners in the busi­ness of de­fence pro­duc­tion in In­dia. What, then, is the an­swer to the busi­ness of true in­di­geni­sa­tion that could re­verse the cur­rent im­port – home-grown ra­tio of 70:30 to a sat­is­fy­ing 30:70 and will re­sult in con­spic­u­ous strate­gic ben­e­fits? With­out doubt, the an­swer lies in de­ter­min­ing the com­po­nents of, and es­tab­lish­ing a de­fence in­dus­trial base in In­dia.

First, one needs to un­der­stand the full mean­ing of this con­struct. When orig­i­nally coined the term de­fence in­dus­trial base (DIB) drew di­rect lin­eage from po­lit­i­cal sci­ence and im­plied a Govern­ment’s in­dus­trial as­sets that di­rectly or in­di­rectly pro­duced hard­ware for the armed forces. To­day’s def­i­ni­tion from the US mil­i­tary es­tab­lish­ment de­scribes this term as “the world­wide in­dus­trial com­plex that en­ables re­search and de­vel­op­ment, as well as de­sign, pro­duc­tion, de­liv­ery and mainte-

nance of weapon sys­tems, sub­sys­tems, com­po­nents or parts to meet US mil­i­tary re­quire­ments”.

In our case, how­ever, psy­cho­log­i­cally even now the term is taken to mean its orig­i­nal sig­nif­i­cance – that of be­ing the Govern­ment’s in­dus­trial as­sets or, the pub­lic sec­tor in­clud­ing PSUs and ord­nance fac­to­ries. Its gen­e­sis lies in the ini­ti­a­tion of the state-owned in­dus­try in the early 19th century when the East In­dia Com­pany es­tab­lished the Cos­si­pore Gun and Shell Fac­tory. Ev­ery ord­nance fac­tory that came up there­after added to the Govern­ment’s kitty of de­fence pro­duc­tion net­work. The chain of de­fence PSUs that sur­faced postin­de­pen­dence, served to strengthen the view that the only net­work of in­dus­tries that could be re­lied upon to sup­port indige­nous de­fence pro­duc­tion was the pub­lic sec­tor. In other words, the ‘busi­ness’ of de­fence was con­sid­ered as be­ing the sole re­spon­si­bil­ity of the Govern­ment’s es­tab­lish­ments as none else could be re­lied upon to deliver. This feel­ing has con­tin­ued to per­sist amongst all stake­hold­ers de­spite de­tails to the con­trary in con­sec­u­tive edi­tions of the DPP. Con­tents of the lat­est edi­tion have sought to change this per­cep­tion and make the pri­vate sec­tor an equal part­ner.

To say that the In­dian pri­vate sec­tor is ca­pa­ble of con­tribut­ing to high tech­nol­ogy needs of In­dia’s de­fence forces, would be an un­der­state­ment. An in­dus­try that has taken the world by storm from phar­ma­ceu­ti­cals to au­to­mo­biles and elec­tron­ics to in­for­ma­tion tech­nol­ogy, im­bib­ing cut­ting-edge tech­nolo­gies through joint ven­tures and pro­duce con­tem­po­rary weapons is cer­tainly not a tall or­der. To take stock of the na­tional po­ten­tial for de­sign, de­vel­op­ment, pro­duc­tion and sup­port of de­fence plat­forms and equip­ment, we need to clearly un­der­stand ca­pa­bil­i­ties of both, the pub­lic and the pri­vate sec­tors in In­dia.

De­spite be­ing amongst the top 10 mil­i­tary spenders in the world, In­dia has not pro­gressed in cre­at­ing a DIB to move to­wards as­sured self-re­liance. There­fore our an­nual im­ports still cost us be­tween five and six bil­lion dol­lars. There are two pri­mary rea­sons for this sit­u­a­tion. Firstly, one has to re­mem­ber that we missed the in­dus­trial revo­lu­tion. The other is the to­tal de­pen­dence on the pub­lic sec­tor for most of our indige­nous ef­fort. One has to con­trast this sit­u­a­tion with other large spenders – in both de­vel­oped as well as the de­vel­op­ing world. In all such coun­tries, large de­fence in­dus­tries sup­port na­tional needs and even earn for­eign ex­change through ex­port of De­fence equip­ment. In In­dia, on the other hand, de­fence re­quire­ments are met pri­mar­ily through a mix of im­ports and Govern­ment owned fa­cil­i­ties (PSUs/ord­nance fac­to­ries).

Each year, we spend be­tween 40 and 42 per­cent of our to­tal de­fence budget on equip­ment pur­chases/mod­erni­sa­tion. De­spite the ex­is­tence of nine DPSUs and 39 ord­nance fac­to­ries, the prod­ucts from these units meet only about 10 per cent of the to­tal an­nual mod­erni­sa­tion re­quire­ment of our de­fence se­vices. While some of these in­dus­tries pro­vide a few cap­i­tal goods, much of their pro­duce in­cludes am­mu­ni­tion and low-end stores. The three types of DPSUs that pro­duce true cap­i­tal prod­ucts are HAL; BEL/BDL/ECIL/BHEL, and, the de­fence ship­yards. There too, HAL has been en­gaged in “li­censed” pro­duc­tion of air­craft which be­gins in each project with CKD as­sem­bly and grad­u­ally moves to­wards in house pro­duc­tion with out­sourc­ing of some com­po­nents of air­frame/avion­ics from the mar­ket. Only some projects have had com­plete indige­nous pro­duc­tion of ma­jor items like en­gines, etc.

In the case of DPSUs, true trans­fer of tech­nol­ogy (ToT) is yet to be wit­nessed in any con­tract with a for­eign prin­ci­pal. Most con­tracts find only an “in­dus­trial ar­range­ment” thus leav­ing these PSUs at their ex­ist­ing thresh­old of tech­nol­ogy. The case of de­fence ship­yards, how­ever, is bet­ter. A bulk of the naval plat­form is pro­duced with indige­nous raw ma­te­rial and build-tech­nol­ogy that has been har­nessed through five decades of ex­pe­ri­ence. Thus, al­most 70 per cent of a ship by vol­ume is of indige­nous con­tent. How­ever, when it comes to value, al­most 35 to 45 per cent of the cost of a frigate or de­stroyer still gets spent on im­port of propul­sion sys­tems, most weapons, some sen­sors and spe­cial equip­ment.

Though, it must be em­phat­i­cally stated that the one con­spic­u­ous suc­cess story in the state-owned sec­tor is that of the con­ven­tional and strate­gic mis­sile ar­se­nal – de­vel­oped by DRDO and pro­duced by PSUs like the Bharat Dy­nam­ics Limited (BDL).

The pri­vate sec­tor has mainly been in­volved in sup­ply of raw ma­te­ri­als, semi–fin­ished prod­ucts, com­po­nents and spare parts to de­fence PSUs, ord­nance fac­to­ries, base work­shops of Army, base re­pair de­pots of Air Force and dock­yards of the Navy. Amongst the large pri­vate sec­tor de­fence play­ers are Tatas (TCS, Tata Mo­tors); Larsen & Toubro; Bharat Forge; Go­drej; HCL; Kir­loskar; Mahin­dras; Ashok Ley­land; Wipro. These are mainly in­volved in sup­ply­ing cus­tom­ized soft­ware, ve­hi­cles, ma­chin­ery in­clud­ing gensets and propul­sion en­gines (li­censed pro­duc­tion). None of them have yet en­tered into weapon – sen­sor de­vel­op­ment or spe­cialised en­gi­neer­ing items like in­dige­nously de­vel­oped propul­sion sys­tems. Why? Be­cause they haven’t got the op­por­tu­nity de­spite hav­ing got req­ui­site li­censes. Many times the rea­son points to the chicken and egg par­a­digm. The Govern­ment will trust a pri­vate player only on the ba­sis of past ex­per­tise or a proven prod­uct. The pri­vate in­dus­try can­not af­ford to set up an ex­pen­sive as­sem­bly line with­out or­ders/ as­sured re­turns.

Since enun­ci­a­tion of the first in­dus­trial pol­icy af­ter in­de­pen­dence up un­til the year 2002, mu­ni­tions, air­craft and war­ships were meant to be the exclusive pre­serve of the pub­lic sec­tor. It is only a cou­ple of years ago that the pri­vate sec­tor was per­mit­ted to en­ter (bid) ar­eas of mil­i­tary sys­tems/plat­forms. Yet, in 2005, the Stand­ing Com­mit­tee on De­fence had to record that de­spite 55 years of in­de­pen­dence; pro­cure­ment of cap­i­tal equip­ment re­mained re­liant on im­ports. Eight years later, the story is no dif­fer­ent and the in­her­ent in­er­tia may well keep it that way in the fu­ture as well, un­less full par­tic­i­pa­tion by the pri­vate sec­tor is wit­nessed soon. This is so be­cause de­spite open­ing up to the pri­vate sec­tor, a level play­ing field is not per­ceived by many hope­fuls in that sec­tor. Be­fore it comes to ten­der­ing in big ticket ac­qui­si­tions like war­ships or mis­sile sys­tems, many a times the pre­rog­a­tive of ‘nom­i­nat­ing’ DPSUs has (so far) been ex­er­cised. This trend neu­tralises com­pe­ti­tion and in­tro­duces time and cost over­runs caused by in­ad­e­qua­cies of the sys­tem. This mo­nop­oly has also meant that the pri­vate sec­tor has nei­ther had the in­cen­tive nor the op­por­tu­nity to in­tro­duce cut­ting-edge tech­nolo­gies – whether through ToT tie ups or through their own in­no­va­tion.

In the case of Naval or­ders, a few pri­vate ship­yards like Pi­pavav, Bharti and ABG have re­cently en­tered the busi­ness of ship­build­ing – but all in the non-weapon cat­e­gory, like off­shore pa­trol ves­sels (OPVs), Train­ing ships and yard craft. An­other in­dus­try ma­jor, L&T, has es­tab­lished exclusive ex­per­tise in sub­ma­rine con­struc­tion and in spe­cialised ves­sel con­struc­tion and holds prom­ise in war­ship con­struc­tion as well. The field of war­ship con­struc­tion does not re­quire an as­sem­bly line, but only ex­per­tise in in­te­gra­tion; there­fore it is eas­ier for ex­ist­ing commercial ship­yards to ven­ture into this field.

An im­por­tant as­pect of ne­glect of the pri­vate in­dus­try is that most of the intermediate and com­po­nent level sup­pli­ers fall in the cat­e­gory of medium, small and mi­cro en­ter­prises (MSMEs). Small and medium en­ter­prises play a vi­tal role in the eco­nomic de­vel­op­ment of any coun­try. But in ad­vanced economies they form the up­stream chain for sup­ply of parts to the orig­i­nal equip­ment man­u­fac­tur­ers (OEMs). In In­dia, since there are hardly any OEMs of com­plete weapon sys­tems or plat­forms, MSMEs have been ex­pand­ing in

num­bers – only as sup­pli­ers of com­po­nents, sub com­po­nents and spare parts for PSUs, ord­nance fac­to­ries and a few big com­pa­nies in the pri­vate sec­tor it­self. It is es­ti­mated that there are over 6,000 In­dian MSMEs “reg­is­tered” in this cat­e­gory – des­tined to sup­ply only sub­assem­blies as per the cur­rent trend.

A few large In­dian com­pa­nies have been granted li­cences for pro­duc­tion of weapon sys­tems and as­so­ci­ated equip­ment, but they have rarely had the op­por­tu­nity of bid­ding or win­ning con­tracts. Over­all, the large num­ber of MSMEs and a very few big play­ers ul­ti­mately con­trib­ute only 10 per cent of the to­tal turnover of the In­dian de­fence in­dus­try and an even smaller per­cent­age thereof, for mod­erni­sa­tion!

By mea­sure of value, our PSUs have the low­est per capita pro­duc­tiv­ity quo­tient. As per of­fi­cial sta­tis­tics in the year 2010-11, this value was as­sessed at only R 15 lakh per em­ployee per an­num for PSUs/ord­nance fac­to­ries as against R30 lakh be­ing the na­tional aver­age for our pri­vate in­dus­try. In fact some in­dus­tries like those en­gaged in elec­tron­ics and au­to­mo­biles have posted a near R40 lakh per capita fig­ure over the last few years. The start point, there­fore, for the pub­lic sec­tor to turn around, must be “doubling” of ef­fi­ciency! And since most of our de­fence in­dus­try (pub­lic sec­tor) per­tains to the mid to high tech­nol­ogy arena, with a lit­tle in­fu­sion of man­u­fac­tur­ing tech­nol­ogy and funds, this is not a dif­fi­cult propo­si­tion. The next step must be to lift the pri­vate sec­tor from sup­ply of only raw ma­te­ri­als/semi-fin­ished prod­ucts, parts and com­po­nents, to the sta­tus of OEMs—whether through JVs, tie ups or through indige­nous de­vel­op­ment. The third step should be quick and easy grant of in­dus­trial li­cences (a manda­tory re­quire­ment for de­fence ven­dors in In­dia) to en­cour­age new en­trants to launch their prod­ucts into the de­fence in­ven­tory. Cur­rently, ven­dors lament a near six to 18 months wait for a li­cence (some­times even de­nied af­ter a long wait), fol­lowed there­after by a hia­tus of or­ders which in many cases is al­most per­ma­nent! If sur­vival of the PSUs/ord­nance fac­to­ries is a fear, per­haps a PPP model can be in­tro­duced for some (only some) ma­jor pro­cure­ments over the next decade. But there­after all must be treated as in­de­pen­dent (equal) en­ti­ties. Hope­fully by that time, the PSUs should be­come as ef­fi­cient and as tech­nol­ogy hun­gry as their pri­vate coun­ter­parts. Pro­grammes ded­i­cated to skill upgra­da­tion of man­power must be in­tro­duced to pre­pare the large work­force in many PSUs and ord­nance fac­to­ries, for the work­shops and prod­ucts of to­mor­row.

The last cap of 26 per cent in FDI in de­fence pro­duc­tion was seen as a ‘neg­a­tive’ by many in the in­dus­try. The upgra­da­tion to 49 per cent is en­cour­ag­ing as a step in the right di­rec­tion for at­tract­ing for­eign cap­i­tal and ac­com­pa­ny­ing tech­nol­ogy from de­vel­oped shores. How­ever, many in the pri­vate sec­tor feel the FDI cap must have lib­eral ap­proval pro­ce­dures. Only then will FDI gen­er­ate in­ter­est in for­eign man­u­fac­tur­ers and prospec­tive In­dian part­ners. JVs can­not be es­tab­lished with­out lib­eral FDI regimes. And the eas­i­est route for im­bib­ing cut­ting-edge tech­nolo­gies is the FDI route. In fact, there is no harm in es­ca­lat­ing FDI limit even be­yond 49 per cent, depend­ing upon the item sought to be man­u­fac­tured, the terms and con­di­tions of the pro­posed joint ven­ture (if any), and like­li­hood of ex­port spin offs. There are, of course, voices within the pri­vate sec­tor that feel FDI should not be en­cour­aged for de­fence as it will di­lute the In­dian boards and make In­dian in­dus­try too de­pen­dent on for­eign part­ners. These voices are in a mi­nor­ity and will get muted by the overwhelming ‘ayes’ for lib­eral FDI in de­fence.

The pri­vate sec­tor should ac­tu­ally be lever­aged as a strate­gic as­set and helped in as­sum­ing full part­ner­ship (not just 10 per cent stake as at present). Af­ter all it is the pri­vate sec­tor that has pushed the econ­omy through ad­vanced man­u­fac­tur­ing, en­gi­neer­ing and world-class prod­ucts in in­for­ma­tion, com­mu­ni­ca­tion and telecommunication fields apart from be­com­ing a promis­ing man­u­fac­tur­ing hub with al­ready a lead in global pro­duc­tion of sev­eral types of ma­chines. In ad­di­tion the pri­vate sec­tor has made In­dia a leader in IT and ITES do­mains. This com­pli­men­ta­r­ity can be­come a cat­a­lyst for indige­nous de­vel­op­ment in de­fence re­lated tech­nolo­gies and in­vite for­eign part­ners’ in­ter­est.

At the mo­ment, there is neg­li­gi­ble ex­port po­ten­tial for prod­ucts made by the de­fence in­dus­try as they are not many items that evoke global in­ter­est. Once the pri­vate sec­tor de­vel­ops the ex­pe­ri­ence and har­nesses con­tem­po­rary de­fence re­lated tech­nolo­gies, these could be used for push­ing ex­ports. An au­to­matic spin-off would be a huge job cre­ation po­ten­tial apart from an or­gan­ised an­cil­lary/down­stream in­dus­try. Tai­wan and Turkey are con­spic­u­ous ex­am­ples as are de­vel­oped coun­tries of the West.

The De­fence Pro­cure­ment Pro­ce­dure was first is­sued in 2002 to stream­line the ac­qui­si­tion process and trans­form ef­fi­ciency and trans­parency of de­fence ac­qui­si­tions. It has been re­vised and amended in sev­eral it­er­a­tions since, the lat­est be­ing DPP 2013. The best way to re­al­ize the true aims of this edi­tion would be to have an “over­sight” Board or Com­mis­sion – com­pris­ing of a mix of in­de­pen­dent pro­fes­sion­als/econ­o­mists and se­nior De­fence Min­istry func­tionar­ies – to fre­quently re­view/au­dit and put in place cor­rec­tives.

Over the last few years, de­fence needs have been opened to the pri­vate sec­tor and for­eign in­vest­ment. The aim has been to bring about a ma­jor re­struc­tur­ing and de­vel­op­ment of the de­fence in­dus­try. Yet, there re­mains a huge un­tapped po­ten­tial of the pri­vate sec­tor. Look­ing at the vast net­work of de­fence PSUs and ord­nance fac­to­ries, one would think that their ca­pac­ity and work­force (nearly 1,80,000 skilled per­son­nel) should be suf­fi­cient to cater to most re­quire­ments of In­dian armed forces. How­ever, ca­pa­bil­ity of DPSUs and ord­nance fac­to­ries has re­mained in­suf­fi­cient to match the grow­ing de­mands of tech­nol­ogy. The rea­sons were cited in the open­ing para­graphs of this ar­ti­cle. De­spite hav­ing missed the in­dus­trial revo­lu­tion, we can still make up by ag­gres­sively re­ju­ve­nat­ing the pub­lic sec­tor through in­fu­sion of tech­nol­ogy by way of PPP tie ups and JVs. Surely, we are ca­pa­ble of much bet­ter out­puts and this coun­try de­serves the fruits of its true po­ten­tial – hid­den in the pri­vate sec­tor as well as in the pub­lic sec­tor, and, more im­por­tantly in the PPP model! Skill upgra­da­tion of the pub­lic sec­tor­work force is very es­sen­tial. The pri­vate sec­tor must be made full and equal part­ner in the de­fence in­dus­trial base. MSMEs must be en­cour­aged to par­tic­i­pate and get ac­tive mem­ber­ship of the sup­ply chain for prod­ucts. Lastly, half the bat­tle will be won if the process of ini­ti­a­tion of pri­vate play­ers is ac­cel­er­ated and made “mar­ket friendly”. Sin­gle win­dow clear­ances for ap­provals and li­cences must be in­tro­duced to en­cour­age those wait­ing to ob­tain in­dus­trial and/or weapon man­u­fac­tur­ing li­cences.

Na­tions ac­cord the high­est im­por­tance to build­ing a vi­brant DIB so that they achieve strate­gic au­ton­omy through po­lit­i­cal in­de­pen­dence, en­joy the eco­nomic ad­van­tage in pro­cure­ments and ob­vi­ate de­nial regimes in times of cri­sis. Self-suf­fi­ciency or self-re­liance are terms that be­come mean­ing­ful only when a com­pet­i­tive and well spread out de­fence in­dus­try is al­lowed to flour­ish within the coun­try. En­cour­ag­ing big play­ers to as­sume OEM sta­tus and win con­tracts will also prove ben­e­fi­cial in en­hanc­ing economies of scale through ef­fi­ciency of the shop floor. The an­swer clearly lies in un­leash­ing the la­tent and the con­spic­u­ous ca­pa­bil­ity quo­tient of the DIB which must list all pub­lic and pri­vate sec­tor play­ers ca­pa­ble of con­tribut­ing to the needs of In­dian de­fence forces.

Pi­pavav ship­yard with

world-class fa­cil­i­ties

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