The Indian army faced its moment of truth in Kargil in 1998. It was caught totally unprepared when large scale intrusions by the Pakistani elements were detected in May 1998. Decade long counter-terrorism operations had shifted the focus of the army away from its primary task of defending the country against external aggression. Kargil War found the army ill-equipped for conventional war in high altitude areas with extreme climatic conditions. For such a challenge, it was neither psychologically oriented nor possessed the necessary wherewithal. Shortages of essential arms, equipment and ammunition were alarming. The country still remembers the statement made by the then Army Chief, Gen VP Malik on 23 June, “We will fight with whatever we have.” It was an admission of grave vulnerability as every single item was in short supply. With a single sentence, he exposed the abysmal state of indigenous defence production and the gross incompetency of the procurement regime.
The government was rightly concerned. Soon after the war, it constituted a committee of ‘Group of Ministers on National Security’. In its report, submitted to the Prime Minister on 26 February 2001, the committee suggested the creation of a separate and dedicated institutional structure to undertake the complete gamut of procurement functions to inject a higher degree of professionalism and reduce delays. Consequent to the acceptance of the report, a new acquisition set-up was created in the Ministry of Defence (MoD) in October 2001. Broad guidelines for the formulation of a new defence procurement procedure were also issued. Need to achieve self-reliance was duly emphasised. The said procedure has been undergoing periodic revisions.
The question that begs answer is whether the measures initiated after the Kargil War have borne fruits. Has the state of indigenous defence industry improved? To what extent has India achieved self-reliance in defence production, thereby reducing its dependence on imports? Is the modernisation of the Indian armed forces taking place as per the plans? This article attempts to examine all the facets of the above posers.
Indian Defence Industry: a Saga of Criminal Neglect
Defence industry comprises of all industrial undertakings engaged in the production of hardware and services for use by the defence forces. Founding of Gun and Shell Factory at Cossipore in 1801 is generally considered to mark the establishment of the Indian defence industry. India had 16 ordnance factories producing low-tech items at the time of the Independence. Additional factories came up in due course and India has 39 of them now. In 1954, Bharat Electronics Ltd was established as the first Defence Public Sector Undertaking (DPSU). Currently, there are nine DPSUs under MoD, including four shipyards.
- The Industrial Policy Resolution of 1956 divided industry into three parts:
- Schedule A: Basic industries which are the preserve of the state, including defence and heavy engineering.
- Schedule B: Industries in which private industry was allowed to operate.
- Schedule C: All other industries.
As defence was put under Schedule ‘A’, it became an exclusive reserve of the public sector. After a long gap of 35 years, manufacture of components, assemblies and sub-assemblies was thrown open to the private sector in 1991. It took MoD another 11 years to allow the private sector to participate in defence production. A policy directive was issued in January 2002 allowing 100 percent private equity with 26 percent Foreign Direct Investment (FDI). Subsequently, the Department of Industrial Policy and Promotion issued detailed guidelines for the issuance of licence for the production of arms and ammunition.
The Department of Defence Production (DDP) was set up in 1962, in the aftermath of the Chinese aggression to create a self-reliant and self-sufficient indigenous defence production base. It deals with matters pertaining to defence production, indigenisation of imported stores, equipment and spares. Its functioning suffers from acute conflict of interests. It controls all DPSUs and the ordnance factories. All ploys are tried to ensure regular flow of orders to the public sector units. The private sector is kept at bay through cleverly introduced provisions of nominating public sector units for major contracts. Thus, the nation remains deprived of the technological prowess acquired by the private sector and its enormous potential remains untapped. Most knowledgeable observers consider DDP to be primarily responsible for the current pitiable state of the indigenous defence industry and regard it as the biggest impediment in India’s quest for self-reliance.
The government is fully aware of the fact that the goal of self-reliance will remain a pipe dream unless full potential of the private sector is harnessed. A number of well-intentioned policy initiative have been taken towards that end during the last two decades. Yet, the ground situation has not changed. Even today, all major orders are grabbed by the public sector and the private sector continues to be a peripheral participant with the production of some low-tech items and indigenisation of components. In 2004, the government constituted a committee under Mr Vijay Kelkar to, inter alia, examine and recommend modalities of integration of the user, MoD and the Indian industry (both private and public) in the acquisition process and defence production. The committee made many innovative recommendations, to include establishment of a professional acquisition agency (like the DGA of France) and nomination of select private sector industry leaders as ‘Raksha Udyog Ratnas’ (RURs), to be treated at par with DPSU for all defence acquisition purposes, including receipt of technology for undertaking licensed production. Selection for RUR was duly carried out in 2006. As the government could not overcome the resistance put up by the public sector, it decided to abort the scheme.
Another noteworthy recommendation of the Kelkar Committee related to the projects entailing indigenous development under ‘Make’ procedure. It was duly incorporated in the Defence Procurement Procedure (DPP) of 2006. DRDO was to concentrate only on projects requiring sophisticated technology of strategic, complex and security-sensitive nature. Responsibility for developing ‘High Technology Complex Systems’ was assigned to the Acquisition Wing. To start with, two major projects, i.e. Futuristic Infantry Combat Vehicle (FICV) and Tactical Communication System were initiated for indigenous development. Both were to get government funding support to the extent of 80 per cent. The balance 20 percent was to be contributed by the PAs. Production agencies were duly shortlisted after much uncertainty. However, both the projects have made little headway and remain embroiled in bureaucratic impediments and doubts about ownership of intellectual property rights.
Launch of ‘Make in India’ Mission
Mission ‘Make in India’ was formally launched on 25 September 2014. It aims at persuading indigenous and foreign companies to invest in manufacturing in India by making it an irresistible destination, both for capital and technological investments. To start with, 25 sectors of economy have been identified and defence manufacturing is one of them. With a view to align and delineate DPP towards the achievement of the objectives of ‘Make in India’, an expert committee under Dhirendra Singh was constituted by MoD in May 2015.
In an innovative suggestion, the committee suggested that a conceptual ladder be evolved to correspond to progressive development of competence level in the defence industry, from the very basic level of repair and maintenance to the level of acquiring ability to design, develop, manufacture and test systems. Different stages in the ladder were to be correlated with various categories in the capital procurement. The committee also recommended higher indigenous content across all defence purchases.
The committee was of the view that the objectives of ‘Make in India’ could never be achieved without integrating the private sector. For that, two types of well defined partnership models— depending upon the strategic needs, quality criticality and cost competitiveness—were advocated. In the case of platforms of strategic importance, ‘Strategic Partnership’ model was suggested to create capacity in the private sector on a long term basis; over and above the capacity and infrastructure that exists in the public sector. The committee identified six segments for the purpose.
Consequent to the receipt of the recommendations of the expert committee, DPP-2016 was promulgated with effect from 01 April 2016. The procedure has adopted a three-pronged approach to support ‘Make in India’ initiative — institutionalisation, streamlining and simplification of the procedure to promote indigenous design, development and manufacturing of defence equipment, platforms, systems and sub-systems; refinement of the ‘Make’ procedure to ensure increased participation of the Indian industry; and enhancement of the role of MSMEs.
Creation of a new category called ‘Buy (Indian-IDDM)’ with overriding preference over all other modes of procurement is certainly the most radical change. It refers to the procurement of products from an Indian vendor meeting one of the two conditions — products that have been indigenously designed, developed and manufactured with a minimum of 40 percent Indigenous Content (IC) on cost basis of the total contract value; or, products having 60 percent IC on cost basis of the total contract value, which may not have been designed and developed indigenously.
‘Buy (Indian)’ category comes at the second place. It refers to the procurement of products from an Indian vendor, having a minimum of 40 percent IC on cost basis of the total contract value. Next in the priority is ‘Buy & Make (Indian)’ category. It implies initial procurement of limited quantity in fully formed state from an Indian vendor engaged in a tie-up with a foreign OEM, followed by indigenous production in a phased manner through technology transfer. ‘Buy & Make’ category refers to an initial procurement of equipment in fully formed state from a foreign vendor, in quantities as considered necessary, followed by indigenous production with transfer of critical technologies.
More importantly, DPP-2016 has streamlined the ‘Make’ procedure that aims at developing long-term indigenous defence capabilities. The revised‘Make’ procedure seeks to address the multiple objectives of self-reliance; wider participation of Indian industry; impetus for MSME sector; sound implementation; transparent execution and timely induction of equipment. Successful development under this scheme would result in acquisition with indigenous design and development. There are two sub-categories of ‘Make’ route. Projects under ‘Make-I’ will involve government funding of 90 percent. Usually, these projects will involve a development period of not less than three years. Projects under‘Make-II’ will involve prototype development of equipment or their upgrades, or their sub-systems with a focus on import substitution, for which no government funding will be provided for prototype development purposes.With a view to provide impetus to MSMEs, DPP-2016 directs that preference be given to them for ‘Make-1’ and ‘Make-2’ projects costing less than Rs 10 crore and Rs 3 crore respectively for prototype development.
A Reality Check
The government has been earnestly trying to make mission ‘Make in India’ a success. A number of far-reaching decisions have been taken to encourage indigenous production. FDI norms have been liberalised. Validity of industrial license has been increased from 3 to 15 years with a provision for further extension. Offset threshold has been raised to Rs 2,000 crore, thereby freeing a large number of contracts from the encumbrances of offset obligations.
Most significantly, to kick-start ‘Make in India’ mission, MoD has announced that 23 fresh projects will be taken up under ‘Make-I’ and ‘Make-II’ sub- categories. In a complete departure from the past practices, MoD has also indicated the likely quantity requirements and the time lines. It will certainly help industries to take well- informed investment decisions. The range of products is highly varied; and includes thirteen projects for the army, six for the navy and four for the air force. It is a path-breaking initiative and provides a unique opportunity to all companies to enter the sector and establish their credibility. If this initiative proves successful, MoD will be encouraged to widen the scope further by adding more complex projects.
MoD’s initiatives have generated visible euphoria. Both the public and the private sectors are excited about the business prospects. The defence public sector has already recorded 20 percent growth, increasing its turnover from around Rs 43,000 crore to Rs 51,000 crore. OFB has earned acclaim for developing Howitzer Dhanush from the Bofors drawings. An initial order for 114 guns has been placed, providing a big boost to the indigenous capabilities. First consignment of six guns was handed over to the army in April 2019. OFB has also been tasked to manufacture AK 203 rifles, the latest version in Kalashnikov series with Russian collaboration at Amethi. Other defence undertakings are equally keyed up. Things are looking up for them as well: HAL is going to manufacture Kamov (Ka-226T) helicopters with complete technology transfer.
As regards the private sector, all major players are eagerly gearing up for the anticipated business opportunities. L&T has already procured Rs 4,500 crore order for 100 pieces of K9 Vajra-T 155mm/52 calibre tracked self-propelled (SP) Howitzers, developed in partnership with Korea’s Samsung. L&T is also going to manufacture Lakshya-1 (pilotless target aircraft) and develop Lakshya-2 with DRDO. It is also eyeing refit and upgradation of Russian Kilo class submarines at its shipyard at Kattupalli.
Tata Group has 14 group companies in the defence sector. Tata Motors have bagged a repeat order to supply 619 6×6 High Mobility Vehicles, in addition to the earlier order for 1,239 vehicles. It has also tied up with Bharat Forge and General Dynamics to develop FICV. Whereas modernisation of infrastructure of 67 air fields is already being undertaken by Tata Strategic Division, Tata Sons is joining hands with Airbus Industries to manufacture medium transport aircraft.
Reliance Defence Limited has 11 subsidiaries in niche defence segments. Ma-hindra Defence Systems is collaborating with BAE Systems of the US for the manufacture of a total of 120 M- 777 Ultra Light Howitzers. Furthermore, an agreement to produce medium and heavy lift helicopters is being finalised with Airbus. Bharat Forge is fast emerging as a serious player in the defence sector. It is partnering many Indian and foreign companies to develop and manufacture guns and fighting vehicles. In addition, it is planning to build AD systems with SAAB. There are numerous other companies like the Dynamatic Technologies, TVS Logistics and MKU that are participating aggressively in defence production.
The government has demonstrated its earnestness and determination to make mission ‘Make in India’ a success. A total of 34 joint ventures have been approved for manufacturing defence equipment and 50 companies with industrial licenses have commenced production. Most of the proposals that were being processed for procurement from abroad have been aborted. They are being reinitiated for manufacture in India.
The Way Forward
Geographically, India is located in the centre of a highly volatile environment and knows that it has to be militarily strong to safeguard its national interests. It is also aware of the fact that no nation can feel secure without self-reliance is defence production. Therefore, neglect of the Indian defence industry is inexcusable. Radical measures must be initiated to set the things right.
To start with, the government must show sincerity in integrating the private sector. Public sector companies possess huge infrastructure; experience in systems integration with imported technology; trained engineering and manufacturing manpower; and access to defence research facilities. On the other hand, private sector companies excel in management, marketing and financial skills; are innovative and market driven; and have experience in component and sub-assembly manufacture. A well- blended fusion of both will result in synergizing their respective strengths through economies of scale and prove mutually beneficial. See Illustration below.
The above categorisation should be dynamic in nature and reviewed periodically. Maximum items should be in the open competitive list, especially those being imported. Even in areas earmarked for public and private sectors, a relationship of associate functioning can be profitably established.
There is a need for an effective institutionalised interface between the MoD, the services and the private sector for regular interaction at the policy making level. Presently, the government is unaware of the capabilities and potential of different private sector companies. On the other hand, many private sector companies have the capability to manufacture the whole range of defence requirements but do not know whom to approach to ascertain details.
Indigenous production should be given purchase and price preference, thereby providing incentive to foreign companies to collaborate with Indian companies for production in India. Any nation that covets FDI in defence has to tailor its policies to position itself as the most irresistible destination. Foreign investors are not enthused by India’s FDI policy. They consider it to be highly dissuasive and irrational – a foreign investor is expected to invest his resources and technology in a venture where he has no significant control while the venture is bound by strict capacity/product constraints, has no purchase guarantee, no open access to other markets (including exports) and where preference may be accorded to the local public sector. It is time India revisits the policy to assuage the apprehensions of the investors.
In addition, the government should pay heed to five critical recommendations of the Dhirendra Singh Committee – corporatization of the management structure of the Ordnance Factory Board; merger of shipyards under MoD into one corporate entity (retaining the yard facilities in their present geographical locations but working under one single management); expeditious implementation of the strategic partnership scheme; and creation of an independent agency to oversee the complete gamut of activities related to defence industry and procurements.
Defence business is a painstaking affair and results will be visible only after a long gestation period. In the interim, the government must remain wary of unscrupulous elements and not let the well-intentioned ‘Make in India’ mission degenerate into an ‘Assemble in India’ sham. That shall be highly detrimental to national interests.
Major General Mrinal Suman retired from the Indian Army in 2003. He is India’s foremost expert in defence procurement procedures and offsets and currently heads the Defence Technical Assessment and Advisory Service of Confederation of Indian Industry. This article first appeared in the July August issue of India Foundation Journal 2019.