Make in In­dia: Non-starter in de­fence?

SP's MAI - - FRONT PAGE - [ By Lt Gen­eral P.C. Ka­toch (Retd) ]

Prime Min­is­ter Naren­dra Modi’s call to US com­pa­nies to par­tic­i­pate in the In­dian de­fence sec­tor has gen­er­ated plenty of eu­pho­ria. This is not very dif­fer­ent from the Prime Min­is­ter sig­nal­ing another boost to in­di­geni­sa­tion prior to em­bark­ing on his trip to Ja­pan; ear­lier decision to man­u­fac­ture medium level mil­i­tary trans­port air­craft in In­dia re­in­forced by decision of man­u­fac­tur­ing light util­ity he­li­copters also in In­dia in­stead of im­port­ing them.

But the proof of the pud­ding lies in its tast­ing. Take the call for in­vest­ments in non-de­fence sec­tor. Re­tail and all are fine but what else? Drive from Sonepat to Am­bala along the na­tional high­way and ex­pe­ri­ence the dozen plus half-built fly­overs ly­ing in state of ut­ter ne­glect for past three years caus­ing ex­treme hard­ship to pub­lic forced to take di­ver­sions and no one, least of all the Na­tional High­ways Au­thor­ity of In­dia (NHAI) in par­tic­u­lar is ac­count­able. Then you have politi­cians in states like in West Ben­gal de­stroy­ing the Tata in­fra­struc­ture to man­u­fac­ture Nano cars in the state and hav­ing won the elec­tion through such crim­i­nal acts, ask­ing for in­dus­tri­al­ists to set up in­dus­try in the same state. Con­versely, in China if any for­eign di­rect in­vest­ment (FDI) project is cleared by the Chi­nese Gov­ern­ment there is no scope for hur­dles any more. Have we cre­ated the same set up in In­dia? And, this has lit­tle to do with dif­fer­ent po­lit­i­cal par­ties rul­ing at the Cen­tre and state, ex­am­ple be­ing the dozen plus de­funct and half com­pleted fly­overs be­tween Sonepat and Am­bala with Congress rul­ing at both the Cen­tre and state. So, tak­ing a cue from China, un­less we can com­pre­hen­sively stream­line our sys­tem and change our labour laws, even de­vel­op­ment in non-de­fence sec­tor would be er­ratic.

But let us get back to the de­fence sec­tor. With ref­er­ence to our de­fence equip­ment, the Min­istry of Com­merce and In­dus­try states:

De­fence equip­ment cur­rently held by us is 50 per cent ob­so­lete.

Pro­por­tion of state-of-the-art equip­ment also needs to grow from its cur­rent level of 15 per cent to 30 per cent.

Cur­rent cy­cle, in­clud­ing ac­qui­si­tions drafted un­der the longterm in­te­grated per­spec­tive plan (LTIPP), is ex­pected to in­clude pro­cure­ments worth $100 bil­lion by 2022. So the pic­ture is not very rosy.

As per a survey un­der­taken by the Con­fed­er­a­tion of In­dian In­dus­try (CII) De­fence Di­vi­sion con­ducted by KPMG, ap­prox­i­mately 62 per cent of the com­pa­nies be­lieve that the In­dian mar­ket is an at­trac­tive propo­si­tion for for­eign de­fence com­pa­nies owing to In­dia’s large pro­cure­ment plans.

Above is hardly sur­pris­ing though the over­all pic­ture is hardly rosy. In fact, the sur­prise should be why only 62 per cent and not more num­ber of com­pa­nies want to invest in the de­fence sec­tor in In­dia? How­ever, this not­with­stand­ing the point to note is that th­ese 62 per cent com­pa­nies are in­ter­ested on the ba­sis of In­dia’s ‘large pro­cure­ment plans’. We have a glut in tech­nol­ogy in­clud­ing crit­i­cal voids, for which FDI and joint ven­tures (JVs) are must. Our me­dia head­lined re­ports last year when the US of­fered us tech­nolo­gies in 10 odd fields. Log­i­cally, one can­not ac­cept state-of-the-art tech­nolo­gies from any coun­try in­clud­ing the US but then pos­si­bil­i­ties fluc­tu­ate with the rapidly chang­ing geopo­lit­i­cal scene. Head­ing the US side dur­ing the launch of the In­dia-US De­fence Tech­nol­ogy and Trade Ini­tia­tive (DTTI) at New Delhi in Septem­ber 2013, the US Deputy Sec­re­tary of De­fense Ash­ton B. Carter (now re­placed by Frank Ken­dall) had said that US tech­nol­ogy and ex­ports con­trol ar­eas were be­ing looked at so that In­dia has the same sta­tus as the ‘clos­est al­lies’ of US, for the US sys­tem to op­er­ate on a timescale con­sis­tent with the needs for the In­dian side to make de­ci­sions, aim be­ing to take the Indo-US de­fence re­la­tion­ship to the next level and help In­dia raise the in­di­geni­sa­tion of its de­fence sys­tems. We also have strate­gic part­ner­ship with many other coun­tries as well. The bot­tom line is that even in the event we do not get the top-of-the-line tech­nol­ogy, we still can get the next best. There­fore a joint ven­ture with trans­fer of tech­nol­ogy (ToT) is the route to in­di­geni­sa­tion. Of course, coun­tries like China and her two nu­clear talons (Pak­istan and North Korea) ex­cel in re­verse en­gi­neer­ing and ex­ploit dual-use tech­nol­ogy in or­der to leapfrog tech­nol­ogy with­out in­hi­bi­tions of in­tel­lec­tual prop­erty rights and global norms.

Why in the present con­text ‘Make in In­dia’ in the de­fence sec­tor, de­spite all the hoopla, is non-starter be­cause we have:

Not yet fa­cil­i­tated the right level of FDI.

Not stream­lined the De­fence Pro­cure­ment Pro­ce­dure (DPP) for it to ab­sorb for­eign tech­nol­ogy.

The de­fence sec­tor is not lu­cra­tive enough for for­eign com­pa­nies. For starters, while rais­ing FDI in de­fence from 26 per cent to 49 per cent, did we ex­am­ine why with 26 per cent FDI in de­fence in the last 14 years, we could at­tract just less than $5 mil­lion FDI (just 4.34 per cent). A day after 49 per cent hike in FDI was an­nounced, Ul­rich Grillo, Pres­i­dent, Fed­er­a­tion of Ger­man In­dus­tries hav­ing met the De­fence Min­is­ter, told re­porters that Ger­man in­dus­tries would not like to invest in In­dia since with 49 per cent FDI they would not have con­trol over sell­ing the prod­ucts. Will global mil­i­tary air­craft man­u­fac­tur­ing firms go for JVs in In­dia with only 49 per cent FDI? A quick survey should tell us they will not. It is not with­out rea­son that the Depart­ment of In­dus­trial Pol­icy and Pro­mo­tion (DIPP) of the Min­istry of Com­merce and In­dus­try has been rec­om­mend­ing 74 per cent FDI in case of ToT in cut­ting-edge and 100 per cent FDI in case of state-of-the-art tech­nol­ogy. After all th­ese rec­om­men­da­tions must have been made with due de­lib­er­a­tions and need to be taken se­ri­ously con­sid­er­ing the Min­istry of Com­merce and In­dus­try would log­i­cally have much more ex­per­tise in the is­sue com­pared to the Min­istry of De­fence (MoD), and more sig­nif­i­cantly be­ing out­side the in­flu­ence of the arms mafia that works against the vi­tal need of in­di­geni­sa­tion.

The sec­ond ma­jor hur­dle is the DPP which in its present shape is not at­trac­tive enough for pri­vate in­dus­try and more im­por­tantly

If for­eign in­vestors are not at­tracted to invest in In­dia and share de­fence tech­nol­ogy, we will con­tinue to take re­course to im­port whole weapon sys­tems

not con­ducive enough to fa­cil­i­tate and ab­sorb for­eign tech­nol­ogy be­cause it has ig­nored time re­quired by for­eign firms, ac­com­mo­date pro­ce­dure of con­cerned coun­try for ex­ports, re­quire­ment of gov­ern­ment to gov­ern­ment ne­go­ti­a­tions, as re­quired and the like. This is de­spite the yearly pro­pa­ganda of hav­ing ‘sim­pli­fied’ the DPP, done in-house in MoD. Agree­ably, some im­prove­ments have been made but th­ese are far from ad­e­quate. Whether this has been hap­pen­ing by de­sign (cour­tesy arms mafia op­posed to in­di­geni­sa­tion) or de­fault is dif­fi­cult to gauge but the de­fin­i­tive at­mos­phere of to­tal un­ac­count­abil­ity and un­con­cern points to the for­mer. FDI and DPP are in­ter-re­lated. Rais­ing limit of FDI to only 49 per cent and with­out a DPP to fa­cil­i­tate ab­sorp­tion of for­eign tech­nol­ogy will en­force sta­tus quo in terms of arms ex­port. Is­sue of re­cent reg­u­la­tions re­lax­ing re­quire­ment of li­cence to pro­duce a large num­ber of com­po­nents and sub-sys­tems re­quired in fight­ing equip­ment other than heav­ier bat­tle­field man­age­ment sys­tems (BMS) like tanks, ar­moured ve­hi­cle, air­craft and war­ships, and re­lax­ing con­trol on the dual-use items with both de­fence and civil­ian ap­pli­ca­tions are wel­come steps. There is en­cour­age­ment in R&D too, ex­am­ple be­ing that for de­vel­op­ing pro­to­types for a BMS for the Army, gov­ern­ment will foot 80 per cent of the costs. How­ever, the bot­tom line is that In­dian firms do need for­eign in­vest­ments and for­eign tech­nol­ogy, which will not come till we ad­dress the FDI and DPP.

With the poor state of our de­fence-in­dus­trial com­plex, the need of the hour is to make it un­am­bigu­ously lu­cra­tive for in­vestors. There is no denying the fact that In­dian firms need FDI and for­eign tech­nol­ogy. For­eign firms would in­deed want to go for JVs with In­dian com­pa­nies but for this we need to:

Se­ri­ously look at DIPP rec­om­men­da­tions of 100 per cent FDI in case of for­eign part­ner will­ing to make avail­able state-of-the-art tech­nol­ogy and 74 per cent in case of the ToT that is not cut­ting edge.

In­stead of mak­ing some more cos­metic changes to the DPP, it would be pru­dent to re­view the DPP by an in­de­pen­dent body (prefer­ably non-gov­ern­ment aided think tank) in­te­grat­ing rep­re­sen­ta­tives from mil­i­tary (users), MoD, DRDO, DPSUs, OF, pri­vate in­dus­try (both In­dian and for­eign) in 30 to 45 days.

In­ject pro­fes­sional mil­i­tary ex­per­tise at all lev­els in MoD and sim­i­larly at all lev­els of con­trol and man­age­ment in DRDO-DPSUs-OF, be­ing the users.

It is sig­nif­i­cant to note that in 1995, a Re­view Com­mit­tee headed by Dr A.P.J. Ab­dul Kalam had set the goal of 70 per cent self-re­liance in de­fence sec­tor by 2005 but to­day in 2014 (19 years later) we are still just about 30 per cent self-re­liant. As im­por­tantly, achiev­ing self-suf­fi­ciency can­not be looked at by merely open­ing up to pri­vate sec­tor while ig­nor­ing the dire need to re­struc­ture the MoD and the DRDO-DPSUs-OF etc. De­fence Pro­duc­tion (MoD) Joint Sec­re­taries and Sec­re­taries of MoD be­ing on the Boards of all PSUs has not helped. To add to this are the startling facts in the Comptroller and Au­di­tor Gen­eral (CAG) re­ports of re­cent years in­di­cat­ing heavy cor­rup­tion in DRDO; crores of ru­pees gone down the drain and years lost. Now that the 70 per cent self-suf­fi­ciency tar­get has been pushed to year 2020, in­dige­nous de­fence in­dus­try in con­junc­tion for­eign com­pa­nies has to play a ma­jor role, as would the FDI since the to­tal es­ti­mated prod­ucts re­quired would be to the tune of $80-$100 bil­lion, since by the end of the Four­teenth Five Year Plan, the cu­mu­la­tive cap­i­tal ex­pen­di­tures over 2012–27 are pro­jected to ex­ceed $235 bil­lion. If for­eign in­vestors are not at­tracted to invest in In­dia and share de­fence tech­nol­ogy, we will con­tinue to take re­course to im­port whole weapon sys­tems.

Prime Min­is­ter Naren­dra Modi re­leas­ing the brochure at the in­au­gu­ra­tion of the “Make in In­dia”

in New Delhi on Septem­ber 25, 2014

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