‘Make in India’, is indeed the flavour of the season and a natural fallout of the Indian Prime Ministers’ thrust in this direction. This has always been the Utopian dream of our founding fathers since independence. From five Central Public Sector Enterprises (CPSEs) since independence, their numbers have increased to over 250 today, with the objective of achieving self-sufficiency in goods and services, and also meeting socio-economic commitments, creating employment and ensuring faster economic growth. As of now, India has 41 OrdnanceFactories (OFs), the oldest being from 1787, and nine Defence Public Sector Undertakings (DPSUs). These are the prime production agencies for the nation’s defence requirements. However, despite the fact that the defence manufacturing output revenue of the DPSUs and OFs is collectively over Rs 41,000 crore, India still continues to import over 70 percent of her defence requirements, and is today the world’s largest arms importer with the tenth largest defence spending world-wide. India also proposes to spend approx. USD 100 billion over the 12th and 13th five-year-plans on military procurements and modernisation. Witha defence budget of USD 17.4 billion and USD 23.4 billion in capital and revenue respectively in 2013-14, India is eyed the world over as the most lucrative defence market.
Presently,the DRDO and the DPSUs and OFs, which have order books that extend beyond 10-15 years, are not in a position to meet all the aspirations of our armed forces in the desired time frames. There is hence a need to build up our defence R&D and industrial base in quick time as also involve the private sector and academia in defence manufacturing. In the interim, the government proposes to continue with import of weapon systems and technologies for our armed forces to maintain their cutting edge vis-a-vis our adversaries. More importantly, the DRDO, DPSUs, and OFs, with a combined strength of over 1,80,000 employees, ranging from talented scientists to highly-skilled labour, have still not been able to gain the confidence of our armed forces nor fulfil their defence needs.This article seeks to examine why we are in this state and suggests a way forward to improve user satisfaction and defence preparedness.
Lack of a Strategic Vision
Time is of the essence and is always at a premium. The armed forces, rightfully so, desire to have the latest and the best, but ‘by yesterday’! However, due to a lack of a strategic vision in defencerelated matters, discontinuity in defence planning and a play safe attitude of ministers and bureaucrats,defence procurements have been mostly through knee-jerk reactions. With ambiguities in the Request For Proposals (RFPs), belated amendments to them, and no clear-cut policy on arms dealers and middlemen, defence contracts have often ended up getting challenged at various stages and foreign OEMs (original equipment manufacturers) have been blacklisted at the drop of a hat, pushing back procurement schedules. Orders were consequently placed on DPSUs/OFs as a fallback. Without adequate advance notice, DPSUs/OFs were also left with very little time to buy land, create infrastructure, skill-train their manpower, absorb newer technologies and develop their vendors, resulting in production delays and bringing them a bad name. Though lip service was paid to private sector participation in defence production, stringent licensing norms and preference to the DPSUs for production and transfer of technology (TOT), deprived them of a level playing field.
Ministry of Defence (MoD) has taken major corrective measures in the recent past by formulating a Long Term Integrated Perspective Plan (LTIPP) 2012-27, a broad vision document based on which a Technology Perspective Capability Road Map (TPCRM) 2010 and 2013, has been published. Also, with the issue of the Defence Procurement Procedure (DPP) in 2005 and subsequent amendments up to 2013, and Defence Production Policy 2011, greater clarity on the way forward has been achieved. By clear enunciation of the government’s long term vision and objectives of selfreliance, robust private sector participation including Micro, Small and Medium Enterprises (MSMEs) and expansion of the indigenous R&D base, the Indian defence industry is now poised to take a big leap forward.
MoD is one of its type in the world, in that it is manned by a motley lot of ‘generalist’ bureaucrats with no previous exposure to the armed forces and their functioning. MoD also has hardly any representation from the armed forces. As a result, there was no long-term vision for developing the defence industry. Decision-making was delayed and decisions were made by bureaucrats disconnected from ground realities, resulting in severe setbacks in defence preparedness, and unduly long delays in modernisation/procurement programmes, further compounded by frequent allegations of corruption. There is a need to totally revamp the architecture of MoD by ensuring major representation from the armed forces, and through lateral induction, on a tenure basis, of eminent scientists and specialists in various defence-related fields like international law, IPRs, contract management, financials, etc. to ensure greater practicality and speed in decision-making with higher efficiency and greater transparency.
96 CPSEs including most DPSUs have been categorised as Maharatnas, Navratnas or Miniratnas based on criteria like corporate governance, turnover, profits etc. giving them some financial and managerial autonomy to conduct business. However, there is still a restrictive environment for the DPSUs with much of the decision-making being done at the MoD level, resulting in frequent delays and missed opportunities. Public Enterprises Selection Board needs to induct professional chairpersons with proven track records in their respective fields for these defence undertakings and thereafter, leave all decisions to the CMD and Board of Directors, except in cases where national/strategic interests are involved.Corporate governance norms now stipulate the presence of independent directors and government nominees on all boards of DPSUs/OFs. Authority with responsibility should be the new ‘mantra’.
Funds for Modernisation
Post-independence, due to limited availability of government funds and foreign exchange, modernisation of DPSUs/OFs was sluggish and piecemeal. Due to limited orders, there were not enough internal funds with DPSUs. Post-liberalisation in 1991 with the economy opening up, the budget of the armed forces also shot up sharply and, flush with funds, larger orders could now be placed on DPSUs and OFs so as to make up outstanding critical deficiencies in arms, ammunition and weapon systems. Consequently,
modernisation/upgradations and capacity expansion of DPSUs and OFs commenced at a faster pace through a mix of government funding, projectbased funding and from internal accruals. Whereas capital investment was only Rs 3,000 crore in the 11th Plan, it has swelled to approx. Rs 19,000 crore in the 12th Plan. With larger orders and better availability of funds, DPSUs were also in a position to develop and widen their vendor base through investment inMSMEsresulting in higher quality through greater competition.
PSEs were raised for socio-economic development, to meet social responsibilities and as a means of employment. However, lax labour laws and the socio-political compulsions of reservations for different strata of society has resulted in inefficiencies affecting competitiveness. Also, with the widening gap in compensation packages vis-a-vis the private sector, hiring and retaining talent is a major issue. There is a need to review labour laws and set up a Compensation Committee to periodically review the compensation structure of DPSUs/OFs to ensure equitable balance with the private sector as well as inter-PSUs itself.
DPSUs were primarily dependent on the DRDO and foreign OEMs for technology transfer. Hence, insufficient attention was paid to in-house R&D. As a result, the DPSUs merely became assemblers of weapon systems with not much attention being given to in-house R&D, technology and skill upgradations, and lifetime sustenance of weapon systems. With the thrust on self- reliance, MoD directed that all DPSUs will compulsorily spend a portion of their net profits on in-house R&D. Consequently, as against Rs 700 crore R&D spend in 2006-07 by the DPSUs and OFs, the figure has now almost doubled to around Rs 1545 crore. Much more however, needs to be done on this score.
Functioning of DRDO With more than 530 ongoing R&D projects and a Rs 15,282 crore budget,the 7800 scientists in 52 laboratories across India have their hands full. Though the DRDO has achieved spectacular success in some areas like strategic missiles under the IGMDP, ambitious indigenous programmes like the MBT Arjun, Light Combat Aircraft Tejas and Nag ATGMhave each taken between 30-40 years from the drawing board to delivery/operational clearance. Consequently, they have not been able to win the trust and confidence of the nation and the armed forces. DRDO needs a structural revamp with focus purely on co-design, co-development and testing of futuristic weapon systems with cutting edge technologies, by partnering with foreign OEMs, private sector, and academia from IIsT, IISc, IIsIT and universities. A successful start was made in 1998 with the production of the BrahMos cruise missile, an Indo- Russian JV and, in 2007, with joint design and development of the FGFA and Multi-Role Transport Aircraft. Production post-TOT should be left to the DPSUs/OFs and the private sector which, in turn, will help strengthen the defence industrial base.
Though more than 100 Indian companies were issued over 200 letters of intent/ industrial licenses for manufacture of defence-related items based on the recommendations by MoD to the Department of Industrial Policy and Promotion (DIPP), the private sector has unfortunately not seized this opportunity, except for a few major players like Larsen & Toubro, Mahindras, Birlas, Tatas, Walchandnagar Industries, Bharat Forge, etc. With easing of licensing norms, and the freedom to manufacture dual-use items, much headway can be made by the private sector, including MSMEs. Over time, with greater confidence in our capabilities, industrial licensing should be done away with entirely, except in areas of critical technologies of a strategic nature.
Public-Private-Partnership (P-P-P) Earlier, first preference was always given by the MoD to DPSUs for TOT from foreign OEMs and for major defence projects, largely on nomination basis. The private sector was always looked at with suspicion and with some scepticism. However, with easing of licensing norms and the need to provide a level playing field for all as enunciated in the DPP and Defence Production Policy, the feasibility of establishing joint ventures between DPSUs, the private sector and with foreign OEMs has increased manifold. With increase in the FDI limits from 26 percent to 49 percent, foreign OEMs will also be more willing to invest in and transfer modern technologies to Indian companies. Over a period of time, as the MoD gains more experience and expertise in managing international contracts, FDI limits should be increased to 100 percent, except in strategic areas. The consortium approach for joint design, development and production will also see greater participation of stake holders.
Vendor Development and Offsets
Except for a few major players, Indian industry was not forthcoming to participate in defence related projects, primarily due to the large investments involved, protracted time for development and with no assurance of a minimum order quantity. Also, the DPSUs/OFs and Indian industry were not adequately geared up to absorb large orders involving high technology and skills. With the introduction of 30 percent defence offsets in the DPP for all procurements exceeding Rs 300 crore, and 30 percent indigenous content being prescribed in the Buy (Indian) category, huge opportunities exist for the Indian industry, including the over 6000 MSMEs to absorb the offsets by proving their production capabilities and reliability to the foreign OEMs. As a collateral benefit, one is likely to see major initiatives being taken by industry in modernisation/ upgradation of existing facilities, creating more infrastructure, development of skill-sets, and greater employment of labour which will go a long way in making us self-reliant.
Government’s policy on arms exports has at best been ambivalent. Though exports are permitted to countries not on the negative list, it is only after meeting our own defence requirements. Inadequate thought has been given to the goodwill arms exports would generate and the long-term dependence on India of third world countries and those in the Indian Ocean Region who need weapon systems in small numbers to meet their limited security commitments and who look up to India as a role model. Also, with India becoming a major player over the years in production and export of arms and armaments, it will bring in much-needed foreign exchange which could be re-invested within the defence industry for R&D, to speed up modernisation and upgradation, as also reduce our defence burden.
The PMs vision and desire for “Make in India” is laudable. Over the past few years, a number of steps have been taken by the government to make the procurement of weapon systems more transparent and incident-free and to provide a level playing field for all stake holders in the defence industry. With the issue of the DPP, LTIPP, TP and CR, offset policy, Defence Production Policy, etc and with easing of licensing norms, greater clarity on the Government’s views on the wayforward is now discernible. It is up to the DPSUs and industry to grab the opportunities and deliver on their commitments, with requisite quality, quantity and timeliness with a major thrust on indigenous R&D. Ultimately, with a robust, self-reliant defence industrial base in place, India would, in the next two decades surely find its rightful place in the sun.
Major General Ravi Khetarpal, VSM was commissioned in the Corps of Electronics & Mechanical Engineers (EME). He is a former Chairman & Managing Director of Bharat Dynamics Ltd, Hyderabad, a Mini-Ratna Defence PSU.