Wednesday, 30 September 2020

“Make In India” Challenges In Defence Production

By Air Mshl Dhiraj Kukreja
Updated: February 12, 2020 11:43 am

The colonial years, prevented India from joining the Industrial Revolution, the effects of the delay can be seen even today. To keep a large nation as ours going, with hostile neighbours, it is crucial for the country to have a strong and well-equipped military, ever ready to foil any ill-intentions. India did attempt to gain what had been lost during the colonial days, and did achieve success in many fields, but reached a plateau in gaining independence in defence production, the reasons for which are many.

Indigenised defence production is a major factor that provides strategic autonomy to a nation, thereby adding exponentially to national security through 24×7 defence preparedness. Military supplies are of high-value

the world over, considering the specialised and highly controlled nature of the defence industry. Indigenisation provides security flexibility to a nation, by reducing reliance on external sources and frees a nation from peripheral pulls and pressures, be they political or otherwise.

The vibrant defence industrial base of DPSUs, OFs, and R&D, that existed earlier, exists even today, but does not produce the wanted results. Can India usher in an era of transformation and self-reliance in defence production with the Prime Minister’s call for ‘Make in India’, supported by the introduction of new policies of increased FDI and Joint/Strategic partnerships? Can India shift from being import-dependent to a global exporter in its own right? The answers to these questions and more, can be found only if one examines all facets of the problem; the author would make an attempt though the emphasis may flow on to the aerospace sector, having been a ‘man in blue’. Notwithstanding my tilt, the story is the same with the entire defence industry and the lack of interest and prioritisation equally affects not just the three arms of the military, but the para-military and police forces as well.

 

The Aerospace Industry in India

Production in the aerospace industry has a long gestation period and is technologically intensive, involving many ancillary industries of the nation. Hindustan Aeronautics Limited (HAL), the Goliath of aviation industry in India, has a turnover of about Rs 15000 Cr, a R&D corpus that comprises of 10 per cent of its profits, and has 14 types under license production and 15 types of aircraft through in-house R&D, to its credit. As per Dr RK Tyagi, a former Chairman, HAL (speaking at a Seminar on ‘Energising Indian Aerospace Industry’ in 2014), HAL has a workforce of about 34000 workers, and is a ‘Navratna’ company since 2010; it has a vendor base of about 2400 and has more than 2000 designers on its payroll. It also claims to have a more than 60 per cent indigenous content in the much-delayed Light Combat Aircraft (LCA), has collaborated with about 20 academic institutions, and about 150 industries for its production, of which about 80 are in the private sector. However, even with such impressive figures, it has not been able to satisfy the modernisation needs of the IAF! No surprise then that the Air Force and other Services are compelled to take their shopping-list outside the country!

HAL also has the reputation of being the largest of aerospace companies in Asia, but with hardly any customers outside the country; the IAF, and other Services, are its ‘captured’ customers. Rather than move ahead by holding hands of the Armed Forces, the continuous storm of controversies with all the three Services refuses to abate. The IAF though not fully satisfied with the LCA, had no option to reject it outright; the Indian Navy is also not satisfied with the sea-going version of the Advanced Light Helicopters; the Indian Army wishes to purchase the Light Utility Helicopters (LUH) from outside the country, either due to the long delays by HAL or poor product quality. In spite of its turnover and size, the HAL has not very much to show, though the former Chairman may have had different statistics to present.

No aerospace company in the world today, worth its reputation, attempts to cover all aspects of aerospace activity, as HAL does; it is engaged in an endless list of activities ranging from design, development, manufacture, repair/overhaul, and upgrade of aircraft, helicopters, engines, accessories, avionics, structures for aerospace launch vehicles, integrated systems for satellites and industrial/marine gas turbine engines. Technologies in the aerospace industry are so widespread, that it is almost impossible for any single company to be self-contained, irrespective of its size; it is vital to have cross-linkages to be energetic, adept, and cost-effective. Yet, HAL attempts to do just the opposite! Why is this sorry state of affairs been permitted to exist?

India’s development after independence was boosted through major contributions in the fields of science and technology by organisations, such as the CSIR, DRDO, and ISRO. Notwithstanding their contributions, the Armed Forces have had to rely on imports to meet their requirements for new military hardware. Even as India is in the seventh decade of independence, there is no major change in the situation. The Indian Army is short of the basic boots and gloves for its soldiers in the Siachen, not to mention the replacements for war fighting equipment, such as a combat rifle. The Air Force is looking to augment its operational and strategic capability with the purchase of the Rafale. These scary situations are not because of shortage of funds or the lack of capability to produce, but because of the delays involved due to misplaced priorities, and the old technology.

Challenges Facing the Aerospace Industry

The technologies used in defence production, and more so in the aerospace industry, are very complex and expensive to develop and integrate, normally being at the high end of the spectrum; a fact not well comprehended by many who have to take the final decision on the files. The word ‘technology’ is often loosely used, without an understanding that it comprises of a number of hard and soft elements, which have to be figured out together to gather an all-inclusive picture. The hard elements include materials to be used, design documents, manufacturing and assembly infrastructure – available and required –  and more such issues; these, however, do not complete ‘technology’ on their own. The soft elements too are numerous and are inclusive of human skills, attitude and aptitude to absorb knowledge and new practices, teamwork, potential and skill to handle new equipment, leadership, and application of new management processes. This package of the hard and soft elements is a part of ‘technology’, whenever one talks of technology expansion or technology absorption.

The deficiency of a technologically advanced and an internationally competitive industry has greatly impacted India’s efforts in the aerospace sector. Whatever little the aerospace industry has designed and produced in the past is reminiscent of the Fiats and Ambassadors, which monopolised the automotive segment in the country for long. A rapid modernisation of the Indian industry in general has taken place in the last twenty years or so, but not in the aerospace sector; it has lacked the requisite impetus and fervour, so needed to service domestic force-modernisation requirements. Just as the DPSU-bureaucratic combine (one wishes to use the word ‘nexus’) has flourished over the years, the ever-increasing demand and resulting reliance on foreign supplies has continued too; indigenous defence equipment production caters to only 30 per cent of the demand!

While the call for indigenisation has been getting stronger over the years, the aerospace industry has been stuck in the comfort zone of ‘licence production’, with support from the bureaucracy, which has almost always insisted of including a clause of ‘Transfer of Technology’ (ToT) in contracts. Little does the bureaucracy realise that a ToT gets the country only modern production techniques, but does not help in getting new technology to assist in design and development, the need of the hour; the Intellectual Property Rights (IPR) would continue to remain with the original manufacturer (OEM). It is only now that the vibrant call of “Make in India” has shaken all concerned – bureaucrats, DPSUs, and the private sector – out of their laissez faire and projects with state-of-the-art technology are on the anvil through joint ventures (JVs).

Inadequate privatisation is another important cause for the present ‘vegetative state’ of the aerospace industry. The conglomerate of the Ordnance Factories and other DPSUs may take the credit of having encouraged medium and small entrepreneurs, but only as tier-3 and tier-4 suppliers. There are not many, or any, tier-1 or tier-2 suppliers. Successive governments have been hesitant to implement policy changes announced earlier; the rationale when laying down the First Industrial Policy of 1948 was to give importance of a statutory legislation by the Industries (Development and Regulation) Act of 1951, and a decision taken to keep the defence industry under government control, considering its critical importance to national security, and hence, the country’s need to be self-reliant in this sector. Accordingly, the GoI invested heavily in setting up the massive empire of DPSUs and DRDO, the capacities of which match the biggest, and in some instances, even the best of the world, but the output is nowhere near world standards.

Focus on Government Policies

The Prime Minister is quite sure in his mind that India needs to upgrade its security preparedness, considering its not-too-friendly neighbourhood and the menace of insurgency within the country. The “Make in India” plan conforms to his vision and affirms his reputation of being a pro-growth leader.  There is agreement that the manufacturing sector needs an impetus, for the economy to surge ahead. Studies have indicated that even a meagre 20 per cent reduction in imports can create additional 100,000-plus high-skill jobs in India.  If the domestic procurement were to be increased from the present 40 per cent to 70 per cent, in the coming years, the output of the defence industry would double. A robust industrial infrastructure can enhance investment, increase manufacturing, support Micro-Small-and-Medium Enterprises (MSMEs), improve the technology levels, and hence, contribute towards the overall economic.  Some essential steps were needed to be taken to ensure success in this field; mere words, either by the Prime Minister, or by the RM, cannot turn around the industry.

On November 10, 2015, an announcement unveiled a new framework of regulations for Foreign Direct Investment (FDI) in as many as 15 sectors of the industry in India, defence manufacturing included. Additionally, there has also been an effort to improve the system to enhance the ease of doing business in the country. Prior to announcing these latest measures, the Government had already initiated certain steps in 2014. First, a list of items requiring an industrial licence was published in June 2014.  Second, also in the same month, a security manual for licensed defence industries was notified.  The third step was two months later, when the limit for FDI was increased to 49 per cent from the then 26 per cent, with a proviso that should there be access available to state-of-the-art technology, then a higher limit of FDI could be permitted.  The last policy was amended to include FDI of up to 49 percent under the automatic route, with no riders; any further higher investment would still, however, have to be cleared by the Foreign Investment Promotion Board (FIPB).

With the large money at stake, an investor carries considerable risk; it, therefore, it is normal that the degree of control that the investor can exercise is important for him. With 100 per cent ownership, there would be total and unconstrained control leading to the ability to take any decisions considered correct for the business enterprise. A 51 per cent investment would allow working control for daily functions and oversight of the venture; anything less, and the partner in the JV could stall passage of special instructions. The difference between 26 or 49 per cent FDI is, therefore, not much for an investor, apart from the amount of profits that can be repatriated.

To streamline the acquisition process, the Defence Procurement Procedure (DPP) was put in place in 2002; it has, thereafter, been subjected to seven major reviews during the last 13 years! Even before all the players understood an amendment, it was already under re-examination, thus causing extended delays in an already long and tiring process. It is now once again under re-evaluation. An expert committee under Shri Dhirendra Singh made recommendations, which can be grouped under four sub-heads: conceptual ladder for ‘Make in India’ mission; amendments to DPP 2013; integration of the private sector; and lastly, some supplementary issues which otherwise fall outside the purview of the DPP.

While it goes to the credit of the Ministry of Defence (MoD) to have made the recommendations public, it did not accept all recommendations, so as not lose its stranglehold on the acquisitions process, as can be seen even when the CDS has been appointed, yet the Defence Secretary has the final say in capital acquisitions.

Effects of Delays

Future conflicts will not necessarily be symmetric; on the contrary, the conflicts will be asymmetric, or even dissymmetric, though the potential for a full-blown conflict will continue to exist. The adversaries can be either state or non-state actors, but with a common factor – both will have access to high technology. The IAF is on a steep growth trajectory, as are the other Services. The dilly-dallying, the ‘hurdles’ in the acquisition process, the indecisions, however, are proving costly, not just for the IAF, but for the other Services too. The operational squadron strength of the IAF has had a steady southward trend. The Army has been crying itself hoarse for tanks, armoured vehicles, helicopters, assault rifles, and even for small, but important items, such as bulletproof jackets, gloves, and ballistic helmets, while the Navy is short of submarines, helicopters, and armament to protect its fleets on the high seas.

The delays and indecisions are a phenomenon unique to the GoI, irrespective whether the decision concerns national security, has the requisite funds available, and a Committee of the GoI itself recommends the item for purchase. A decision, if a new layer of indecision can stall it, then it will be stalled! How long does it take for a government to procure bullet-proof jackets for its soldiers, an item that is easily available off-the-shelf? A few weeks perhaps, but in the case of India, it seems that even a decade is too less! Similarly, the case for procurement of the Rafale; the Medium Multi Role Combat Aircraft (MMRCA) had been languishing in the files for almost 10 years since it was first asked for by the IAF; the aircraft, will finally fly in the Indian skies only by the middle of this year. So is the case with the Navy and its Scorpene submarines. It has reached a stage that some Commanding Officers of regiments in the Army have begun purchasing items like bulletproof jackets and helmets through the welfare funds available at their disposal!

 

Can India Do It?

Are the Indian Armed Forces asking for the moon on their path of modernisation and enhancing their operational potential, or are they justified in their demands? If this question was asked to a professional, or even a nonprofessional, the answer would be in favour of the Armed Forces. All the Services would like to go the indigenous way to decrease dependence on a foreign nation, which can stop or delay delivery of critical items at a crucial time, but it is just not happening.

The new policies promulgated in the recent past are supposed to provide the necessary thrust to India’s quest for self-reliance. The new production policy has clauses in it to support indigenisation and upgrading of technology. Nonetheless, has this not been the focus ever since independence? Sadly, implementation of earlier policies in letter and spirit has been found wanting; public-private partnerships (PPP) in defence production have been recommended by the many committees that have been formed thus far, but to no avail.

The way ahead is to place accountability for every rupee spent of public money, not just to make a noise in Parliament, but to ensure that national security requirements are met in totality. In all indigenous projects, be they in the manufacturing or in the R&D sector, there has to be accountability for every month of time overruns and demand of cost overruns. There has to be a clear realisation plan, as to which organisation is to do what, timelines for approvals, and detailed project reports. The private sector needs to be involved through synergy with the public sector and the users, with the DPSUs/DRDO seeing it as partners and not competitors. Protective policies favouring the DPSUs and OFs need to be amended by removing taxes which are 41 per cent higher if made in India!

For India to attract foreign investors in defence production, an attractive business destination should be in place to give a secure ambience to the investors.  For that, policies need to be fine-tuned to provide freedom of action to the JVs that have now begun to form, to respond as per market dynamics. The investor would like to have adequate control over the use of his funds, sufficient freedom of action to increase/decrease production capacity, and have access to markets to ensure commercial viability, through economies of scale. Towards this end, India needs to have a relook at its defence exports policy.

India’s defence exports have been terribly low over the years; defence exports during 2010-2012 were just $183 million, which the former defence minister, Shri AK Antony, had himself termed as “woefully meagre”; a new policy for export of defence products is now in place, which is a major shift. Not only is the sale of military equipment to foreign nations to be given a boost, but a structure has also been proposed, for India to finance purchase of Indian arms by countries, which may need financial assistance.  Amplifying the new strategy, for both commercial and military diplomatic gains, the document specifies for the establishment of a new Defence Export Steering Committee (DESC), along with a National Defence Export facilitation body.  It, however, needs to be seen whether the Policy is faithfully implemented for economic, military, and diplomatic gains, as it envisages, or would the old mindset of questioning every deal through the lens of suspicion, would continue.

 

Conclusion

The world over, nations have a system in place that respects priorities and processes that deliver accountability to hasten decisions, especially in matters relating to national security. India witnessed an example of rapid decision-making after the 13/11 attacks in Paris in 2015. Do we have it in us, or is it the best India can do, to promulgate new policies, amend some old ones, and live with a system that sleeps over decisions that concern operational preparedness of the Armed Forces?

One hopes, there will be some circumspection in this regard. The myopic view of those who inhabit the corridors of power should not hamper the growth and modernisation plans that concern national security. Processes have been initiated, and more are in the pipeline, but the medicine must be administered in the right doses, with due care.

An increase in FDI, new policies in manufacturing and export, a new DPP document, are initiatives in the right direction, to encourage indigenous defence production. The creation of a favourable environment, the change in the thinking, shaking off the lethargy in various government organisations, are some of the other processes that need to be accelerated, if the slogan of ‘Make in India’ is not to remain a mere slogan.

The Government needs to display a sense of urgency, for the security of the nation is at stake!

 

By Air Mshl Dhiraj Kukreja

(Air Mshl Dhiraj Kukreja is an alumnus of National War College, USA, having the unique distinction of being the first IAF officer and only the fifth from the Indian Armed Forces, to have undergone a post-graduation course in “National Security Strategy”.)

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