Historically, India has always favoured the public sector over the private in areas of defence production. The government’s 1948 industrial policy resolution reserved a major portion of industrial capacity for the public sector including arms production. In 1956, the revised policy placed munitions, aircraft and shipbuilding industries in public sector under the control of the Central Government, preventing private sector production. We now have 41 ordnance factories (OF) and nine Defence Public Sector Undertakings (DPSU), employing close to 2 lakh personnel, as also substantial capacity in research, through the Defence Research and Development Organisation (DRDO). In terms of workforce size, India compares favourably with countries like the UK and France, which are among the largest producers of defence related products in the world. In terms of output, however, the story is distressing. Indigenous production accounts for just about 30 percent of India’s defence needs, the balance coming from imports – not a happy state of affairs for a nation aspiring to be a major player in world affairs.
Today, India is tagged as the largest arms importer in the world. As per the Stockholm International Peace Research Institute (SIPRI) report on global arms purchases, released in 2016, for the five year period 2010-2015, India was the world’s leading arms importer, accounting for 14 percent of total global arms imports. The only silver lining, if it could be called one, is that for the year 2015, Saudi Arabia has wrested the top spot from India, which is reflective of the current turmoil in West Asia. Russia remains India’s top supplier, with a market share of 70 percent. The US too, is now becoming a major source of arms supplies to India.
A major reason for the high level of Indian imports is because India’s arms industry has so far largely failed to produce competitive indigenously designed weapons. Obviously, reforms were required in the entire defence industry eco system, and a first step in this direction was taken in 1998, when the government set up six task forces to assess and consider the involvement of the private sector in defence production. The government accepted the recommendations of the task force to allow private sector participation in defence production to complement the efforts of the public sector but with a caveat – the interest of the OF and DPSUs would be protected. Accordingly a comprehensive document, the Defence Procurement Procedure (DPP), was formulated in 2001, which has been revised innumerable times since then. The aim was to expedite procurement, ensure probity and achieve self reliance. As none of these aims were achieved, the present government set about looking at the entire issue de novo, which has resulted in the revised DPP 2016. We now have reforms being pushed forward to allow for up to 100 percent FDI in the defence sector, subject to certain conditions.
The reason for giving such a detailed background is to highlight the fact that opening up the defence sector in India has not been an easy road to traverse as over the years, legacy attitudes, stranglehold of the bureaucracy, vested interests of the public sector as well as other entrenched groups and an anti reformist arms lobby which flourished through state patronage – all had evolved deep tentacles in the Indian system which had to be unshackled. In this context, a major recommendation of the Dhirendra Singh Committee, formed to review the defence procurement procedure, was to identify select Indian private sector defence manufacturers as “strategic partners”. These companies would play central roles in developing “complex and strategic systems” within the country, or receive technology transferred from foreign suppliers in large defence contracts. The aim was to create private sector capacity on a long term basis, over and above the capacity of the public sector units, to spur efficiency and greater indigenisation. A committee set up thereafter, under the chairmanship of Mr V.K, Aatre, former scientific advisor to the Raksha Mantri, submitted its report which suggested 10 segments in two groups from which strategic partners would be selected. The selection process proposed is a stringent three step process, involving both financial and technical norms that the applicant companies must satisfactorily meet in order to be considered for final section.
Foreign Experience
The idea of having strategic partners from the private industry is however neither revolutionary nor new. In many countries across the globe such as the U.S. and France , such models have been in vogue for quite some time. The U.S. defence industry which is also the world’s largest is dominated by five large globally renowned private defence companies based in the US – Lockheed Martin, Northrop Grumman, Raytheon, Boeing and General Dynamics. Here, the U.S. Department of Defence (DOD) interacts with private industry through the National Defence Industrial Association (NDIA). A highly integrated structure has been evolved to interact with the countries’ defence establishment as well as policy makers. In Britain, the role of its defence industry has widened and it now provides equipment as well as a wider range of products and services to its forces. This marks a change from yore when historically, European countries owned and controlled their indigenous defence manufacturing units. In South Africa, a Defence Advisory Council (DAC) coordinates the involvement of the private sector in domestic arms production. The South African Government actively supports the drive to export South African defence–related products, dedicating State resources to maintain the country’s defence export infrastructure. Australia’s defence industry comprises an important part of Australia’s wider national economic and industrial capacity, dealing primarily with shipbuilding and repair; aircraft assembly, modification and repair; electronics and computing; vehicles and clothing. Turkey, which had an insignificant defence industry till the 1960s, took several steps in the 1970s and 80s to initiate the development of a modern defence–industrial base. Here, the Undersecretariat for Defence Industries (SSM) established by the government, reorganised and integrated existing industry to satisfy defence related needs. Today, Turkey is a significant player in the global defence markets. The above examples simply amplify the necessity for India to integrate private industry to cater to India’s defence needs and also to potentially become a major arms exporter in the years to come.
Indian Concerns
The Kelkar Committee set up in 2006 had also proposed the integration of the private sector into defence production through ‘Raksha Udyog Ratnas (RuRs) or Industry Champions’ to empower large private sector companies as “system integrators”. However, the then UPA government did not implement the proposal because of the opposition from trade unions of defence PSUs and ordnance factories. The present proposal to have strategic partners was initially opposed by the private industry. While broadly liking the idea, the industry was critical of the task force’s recommendation of restricting each strategic partner to a single strategic system. This was felt to be restrictive, which could in turn have an adverse impact on their overall investment and growth plans. The private companies were also opposed to the proposal to ban strategic partners from cross holdings in another strategic partner company and to seek government permission for any material change in their share-holding structure. Some smaller firms expressed concern that they would be left out of the selection process. There was also a view that guaranteeing a particular project to a particular company was reminiscent of the return to the old ‘licence raj’. It would create monopolies, lead to charges of crony capitalism, and could breed inefficiency and make private firms just another version of public sector units, as concerned companies will be reimbursed their expense and would also get a fixed profit.
Much of these fears arise out of the fact that the Indian economy has been a controlled entity for long and any change is inevitably looked at with trepidation. However, these concerns have been dealt with and now, all companies have broadly accepted the concept of the model. The industry has recommended certain tweaks and changes in the selection criteria and segments, but the idea of the Strategic Partnership has been found to be acceptable. Suggestions from the industry include allowing more than one Company per segment subject to market size and the splitting of groups to enable more partners.
The Strategic Partnership model is a necessity, if India is to become a major producer of defence related weapons and equipment. It marks a major shift in policy, which was pacifist and distrustful of defence exports. Also, with the public sector having to compete with the private sector, it is hoped that the sloth which characterised the functioning of the DPSUs and the OF will gradually diminish over time. Hopefully, some of the unproductive units amongst them will also close down, due to the pressure of market forces. The Strategic Partnership model is an idea which should have been executed along with the opening up of the Indian economy in 1990. However, it is better late in coming than never
