Make in India: Non-starter in defence?
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