What Ails India’s Defence Industrial Complex?

What Ails India’s Defence Industrial Complex?

It has been over a year since Prime Minister Modi gave the call for ‘Make in India’ from the ramparts of the Red Fort on August 15, 2014. This caused a flurry of excitement in the industry. The Foreign Direct Investment (FDI) in defence too was raised from 24 to 49 per cent, with the Parliament approving that this upper limit of 49 per cent in defence be raised on case by case basis depending on the state-of-the-art technology offered including the offer of Transfer of Technology (ToT). There is a need to take stock of what changes have actually happened on the ground and what advantages have accrued to the Armed Forces.

Defence Procurement Procedure (DPP)

Though the call for “Make in India” was given by Prime Minister Narendra Modi on August 15 last year, the Defence Minister admitted on the sidelines of the Aero India held at Bengaluru in 2015 that the current DPP is “not conducive” to “Make in India” in Defence. This has remained the state over the past several decades despite annual in-house revision of the DPP in the Ministry of Defence (MoD) albeit media blitz claimed every time that each revised DPP had incorporated all that was required. Factually, only cosmetic changes were made in order to retain control by the incompetent and corruption ridden governmental defence-industrial complex, which resulted in India continuing to meeting 70 per cent of its defence requirements through imports. The 2011 DPP had made plenty of promises including review of ‘Make’ procedure, separate fund to resource public and private sectors, SMEs, academic and scientific institutions to support R&D for defence but all these promises remained largely unfulfilled.

The present government came to power in May 2014 but the new DPP is yet to be issued. The ten-member committee appointed by the MoD was to submit its report on July 31, 2015. Their task reportedly was to draft an easy-to-comprehend and industry-friendly procedure that would cut down chronic delays in defence procurements. The private industry’s apprehensions are continuing as year after year, the MoD has come out with DPPs with much fanfare but only with cosmetic changes retaining stranglehold of the Defence Research and Development Organisation (DRDO) that heads the defence-industrial complex in the public sector. The expansion of the DRDO with its seven technical clusters and a host of new appointments with enlarged manpower indicate that their hold may well get stronger despite the fact that countries producing modern defence systems have done so through private industry and not through DRDO-like state-owned set ups.

In April 2015, a draft offset policy was put into limited circulation by the MoD for comments by industry associations though it is not known who the recipients were. There is no doubt that defence offsets are incidental to the procurement and import of weapon systems and defence equipment. But these too are vital considering the massive voids in our military. It is obvious that plenty of imports will be required for many years in addition to “Make in India”, including to meet critical requirements to cover the interim period before we start fielding indigenous weapon systems and equipment. Additionally, our indigenous weapon platforms too would in all probability, need imports in

considerable quantum of components and parts, as we are doing for the Tejas, which has just been introduced into the IAF.

To this end, the offset policy is important and must be an intrinsic part of the DPP. So what comments were expected on the offset policy in the absence of the new DPP? Did the committee release the draft offset policy earlier by default or was it on purpose? If the new DPP is what the committee was tasked to draft, why not ask for comments of the draft offset policy together with the draft DPP? The question also arises whether we actually need a separate offset policy and why it cannot be part of the DPP itself because any mismatch would have obvious implications unless that is precisely intended. One wonders whether disjointed actions like these are on purpose; the games that the bureaucracy plays.

Hopefully, the new DPP should see the light of the day in the near future. The private industry hopes it will be a fair one. It should logically include meeting the requirements of the armed forces, providing a level playing field for both the public sector defence-industrial complex and the defence industry in the private sector with emphasis more on R&D with respect to the former and focused commercialisation by the latter encompassing both defence production and procurement, laying down clear division between the public and private industry, laying down how much in advance and in sufficient detail what products and technologies are required in what future timeframe by the military in order to provide sufficient and competitive time to undertake R&D and development, including the offset policy as an intrinsic part; defining the scale of funds for R&D to be provided for developing prototypes and beyond and define structures and organisations outside the MoD to implement the defence production and procurement policies. It is about time that we go in for a composite Defence Production and Procurement Policy (DPPP).

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Governmental Defence-Industrial Complex

The Ministry of Commerce and Industry acknowledges that 50 per cent of our military’s defence equipment is ‘obsolete’. Nothing can be more pathetic despite the sprawling governmental defence-industrial complex comprising the DRDO-DPSUs-OFs. To top this, the CAG reports over the years indicate massive across-the-board corruption, pointing out that 30 per cent of defence equipment produced indigenously is ‘sub-standard’. This has remained the condition despite Joint Secretary-level officers of MoD and DoDP on the boards of the DRDO, the DPSUs and the OFs.

Not without reason, a former diplomat who started his government career as an IAS officer in the MoD says his first briefing was to look for the defence acquisitions in the pipeline and how much money could be made. Obviously, this is the very reason why the military is being kept away from the MoD and the official defence-industrial complex. It is for the same reason that instead of a CDS as recommended by the Kargil Review Committee and follow-up GoM reports, a Permanent Chairman COSC without any operational powers is being appointed so that bureaucratic control by the MoD remains intact particularly in terms of defence procurements and defence production. The bifurcation of posts of the DRDO Chief and Scientific Advisor to Raksha Mantri sure was a good concept but appointing both incumbents with DRDO background has negated the advantage of checks and balances.

The fact remains that other than missiles and ISRO programs, we have little bright spots to show as part of indigenous defence production though the indigenous Dhanush gun has come up after sitting on the ToT of the Bofors gun for some 30 years. The induction of the Tejas is inordinately delayed. Take the case of the Kaveri engine, which was sanctioned in 1989 with probable date of completion of 1996, which was extended to 2009. In July 2015, the government further approved its continuation within the cost ceiling. The problems revealed are technological difficulties in developing engine system, non-availability of raw materials/critical components, lack of infrastructure/ manufacturing/test facilities within the country and non-availability of skilled/technical manpower in the field of aero-engine technology.

Engine development sure is not easy but then a project that was to be completed in 1996 has had to be given further extension 19 years later in 2015. Significantly, the expenditure incurred on the development of the Kaveri engine has already accumulated to Rs 2,101 crore. Now it has been decided to use the Kaveri derivative engine (dry engine) without the after-burner for powering the Indian Unmanned Combat Aircraft. Similarly, the aero engine developed by DRDO has not achieved the required thrust to power the Light Combat Aircraft (LCA).

A lot was in the news during A.K Anthony’s tenure as Defence Minister about his penchant of blacklisting firms even on anonymous complaints without recourse to alternative avenues to make up critical deficiencies. Recently, a Czech company manufacturing anti-mine boots for infantry personnel has been awarded nearly $3 million as compensation and refund of bank guarantee by an arbitration tribunal after the Ministry of Defence (MoD) was found to have rejected their product on the basis of a test that was in “violation of the contract”, indicating all is certainly not well at the MoD level, although this is perhaps the first time that a foreign military equipment supplier has managed to claim compensation from the MoD by contesting that its contract was wrongly terminated.

Under the present government, Rs 6,000 crore of the Defence Budget was surrendered in the last financial year. A former Vice Chief while in service was told by a friend in Defence (Finance) that they were required to submit a quarterly report on how much money from the Defence Budget they “can” surrender by the end of the financial year. A senior military veteran posted on social media that at the end of the financial year, the Under Secretary dealing with Ordnance procurement, wants the dealing Directorate to initiate a minute sheet recommending that the hundreds of crores of unspent money be given to DPSUs for procurement of raw materials against the pending requirements for next financial year – a most innocuous and innocent demand on face value.

In one particular financial year, he himself got a call from the JS (O) in MoD to initiate one such minute sheet. He, however, declined based on past observations of auditors that such funds provided in advance were not used to purchase raw materials; instead the money was used to purchase Bonds to earn interest for one year. Raw materials were purchased ‘after’ one year when the Bonds matured and interest earned was used for ‘private’ purposes. How very ingenious and cool! Try and calculate the interest on a one year Bond for say Rs 10,000 crore just for theoretical interest.

Bottlenecks

Some of the bottlenecks are common knowledge. The lack of a conducive DPP or shall we say, Defence Procurement and Production Policy (DPPP) is top of the ladder. What needs to be examined are the problems of the manufacturers; what is the market – only in India or are there other avenues? Who is available for JVs and whether the partner has got adequate infrastructure and technical expertise, if his is going to be the major contribution, how can he set up base – land facilities? In what timeframe can one obtain the required clearances and get cracking. In context of the latter, even the US has recently stated that the Modi government has not been able to get rid of the “red tape”. So, while there is much hype about $16 billion worth of ‘cleared’ deals, no Request For Proposal or tender has been issued.

What has Changed

In terms of private participation in defence production, the MoS (Defence) informed the Parliament in July 2015, that 287 Industrial Licences (ILs) had been issued and FDI amounting to $5.02 million had been received in the defence industry albeit details of actual investment made in respect of Industrial Licences was not available. He also informed the Parliament in a written reply that Defence Products List for the purpose of issuing Industrial Licences (ILs) under IDR Act had been revised to reduce the entry barriers for the industry, particularly small and medium segment; process of applying for IL and Industrial Entrepreneur Memorandum (IEM) has been made online.

The processing of extension of validity of Industrial Licence had been streamlined. A security manual for the Licensed Defence Industry has been issued obviating the requirement of an affidavit and the restriction of annual capacity in the IL for Defence Sector has been removed. Licensee has been allowed to sell the defence items to the Government entities under the control of MHA, PSUs, State Governments and Other Defence Licensee companies without the approval of the DoDP.

An advanced version of the NIC Code (NIC 2008) has been adopted, which is a highly contemporary industrial classification. All Indian industries (public and private) are subjected to the same kind of excise and custom duty levies now – level playing field. To promote private sector participation, particularly SMEs for defence manufacturing, Outsourcing and Vendor Development Guidelines for DPSUs and OFB have been circulated, mandating each DPSU and OFB have a short-term and long-term outsourcing and vendor development plan to gradually increase the outsourcing from private sector including SMEs, including vendor development for import substitution.

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The SOP for the issue of a No Objection Certificate for export of military stores has been simplified and put on the website. The list of military stores has been finalised and put in public domain to make the process transparent and unambiguous. The FDI policy for the defence sector has been reviewed and as per the revised policy, the composite foreign investment up to 49 per cent is allowed through the Government route (FIPB) and beyond 49 per cent with the approval of the Cabinet Committee on Security (CCS) on case-by-case basis wherever it is likely to result in access to modern and state-of-the art technology.

A Defence Exports Strategy outlining steps to be taken has been formulated and put up in public domain and preference to ‘Buy (Indian)’, ‘Buy and Make (Indian)’ and ‘Make’ categories of acquisition over ‘Buy (Global)’ category thereby giving preference to the Indian industry in procurement. There is no doubt that above measures are laudable but by no means do they address the bottlenecks discussed above holistically. With the entire hullabaloo, a measly FDI of $5.02 million should need serious examination as to what is wrong. If there have been any worthwhile changes, these appear to be happening in the aerospace industry with HAL also to undergo a revamp. But what would indicate our lackadaisical approach and slow pace is that a report submitted in September 2012 by a government appointed Expert Group for Strengthening and Restructuring of HAL has only recently been approved in 2015.

On the brighter side, global aircraft maker Boeing and Tata Advanced Systems Limited (TASL) have signed a pact to collaborate in aerospace and defence manufacturing as well as to tap into integrated systems development opportunities, including unmanned aerial vehicles. The collaboration, which is in line with the government’s Make in India initiative, will not only work in the domestic market but will also be for international markets. TASL plans to produce Chinook helicopter parts in India even before the procurement contract is signed with the Indian government. The government has already cleared acquisition of 22 Apache attack helicopters and 15 Chinook heavy-lift choppers at a cost of $2.5 billion.

Tata Advanced Materials Ltd (TAML) and TAL Manufacturing Solutions (TAL) are already supplying components to Boeing. TAML is providing power and mission equipment cabinets and auxiliary power unit door fairings for the P-8I long-range maritime surveillance and anti-submarine warfare aircraft and TAL is providing floor beams for the Boeing 787-9 and ground support equipment for the C-17 Globemaster III strategic airlifter. Hyderabad’s strong base of over 1,000 SMEs, coupled with IT firms catering to the aerospace segment, has proved to be a major draw for global aerospace giants. Boeing has already been working with Hyderabad-based Avantel on mobile satellite systems for the P-8I military aircraft and Cyient Ltd (formerly Infotech Enterprises) for many of its commercial airplane projects.

Indian Rotorcraft, a joint venture between AgustaWestland and Tata Sons have broken ground on a new helicopter manufacturing facility next to Hyderabad’s international airport to produce the Light Utility Helicopter (LUH), starting with the 8-seater AW 119KE both for the Indian and foreign markets. HAL has acquired 610 acres in Karnataka to establish a facility for manufacturing Light Utility Helicopters (LUH) and plans to commence production from April 2017, with annual production capacity of 60 helicopters. The Kalyani Group has entered into a Joint Venture (JV) with Israel’s Rafael Advanced Defense Systems to develop and manufacture a wide range of missiles, remote weapon systems and advanced armour solutions.Rafael will provide the JV technology to manufacture Spike missiles for the Indian armed forces, for which the government is slated to float a tender soon, and will also manufacture weapon systems and advanced armour solutions for Indian, as well as global customers. The group would broadly focus on four new areas — artillery weapons, anti-tank missiles, armoured vehicles and aerospace components.

Requirements

“Make in India” surely is the need of the hour but we need the right composite Defence Procurement and Production Policy integrating defence offsets. Over and above, we need the right attitude for facilitating business cutting out the red tape. The government needs to make a drastic departure from its earlier way of functioning. We need an urgent attitudinal change. The fact is that for the reasons discussed above, we have not been able to develop and optimise Private-Public Partnership in the true sense. As far as JVs are concerned, while foreign investors are eager to invest in the defence sector, India lacks the capacity to absorb the investment. This requires special attention. While, we forge ahead with Make in India, there is also the need to holistically look at our defence needs rather than focus only on sectors such as aero-space and big weapon systems.

The military needs urgent capacity building in network centric warfare. To that end acquiring C4I2SR capabilities and cyber warfare must also be given equal importance.At one time in history, India was leading in science and technology, mathematics, astronomy, navigation, medicines, surgery, education, you name it. We have fallen behind because we have been falling behind in terms of research and development. Our investment in Defence R&D is abysmally low compared to modern nations. According to official figures, the overall allocation to R&D in India to the DRDO is a mere six per cent of defence expenditure whereas successive parliamentary committees have recommended a minimum of ten per cent.

To make matters worse, our defence budget as percentage of GDP has been decreasing. The Indian defence budget dropped from 1.81 per cent in 2014-2015 to 1.75 per cent in 2015-2016. The economy of the country cannot flourish without adequate investment in defence. It needs to be borne in mind that due to utter neglect of defence over the past decade, the capacity gap between our military has widened exponentially. Many parliamentary committees have strongly recommended the defence budget to be pegged at three per cent of the GDP but little heed has been paid.

Similarly, Prime Ministers and Defence Ministers have been calling to enhance investments in R&D but neither the government nor the private industry has paid any heed. Technologically advanced nations the world over spend 2.5 to 3.5 per cent on R&D while India spends only 0.85 per cent. Unless these issues are zddressed, our defence needs in terms of state-of-the-art technology and weapon systems can hardly be met indigenously.

There is also a need to ensure that while development of indigenous weapon systems would take considerable time, the military’s voids in the meantime should not be allowed to go critical. We cannot afford to go slack on the imports that have already been approved. Case in point is the languishing deal of the Rafale fighter aircraft. During his visit to France, Prime Minister Modi salvaged the Dassault Rafale fighters deal by announcing the decision for outright purchase of 36 fighters in ‘ready to fly condition’.

However, the deal appears to have got bogged down for multiple reasons including our insistence that Dassault invest 50 per cent of the overall contract price as offsets in its domestic defence or internal security sectors. Unless quick political intervention resolves all issues, there may be further problems including pricing since Dassault Aviation is reportedly setting up production of the Rafale fighters from the current 11 to 16 per year but it already has orders of 26 fighters each from Qatar and Egypt with India third on the list.

It has been pointed out many times by scholars and strategists in the past that staffing of organisations dealing with defence acquisitions with specific specialists, trained manpower and ensuring continuity are key issues.

The defence of India is not only about establishing shop for indigenous development though vital. It is even more important to acknowledge that the system followed in the past decades has not delivered the way it should have and needs major corrective action.

That the Defence Secretary and the DG Acquisition are responsible for the pathetic state of equipping the Indian Military and have been the main culprits in all defence scams is unquestionable, no matter the cover ups.If the Defence of India is to improve there is no shortcut from bringing in military professional in higher defence structures including the MoD and the defence industrial complex at the design, planning and decision making levels.

(IDR)

 By Lt. Gen. (retd.) Prakash Katoch

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