The country’s defence and industrial capabilities should be made to converge and not developed in silos.

 

The draft defence production policy 2018 calls for a vision to “make India among the top five countries in aerospace and defence industries”. Given the current state of affairs, this is indeed a pipe dream and should have the new Defence Minister, Rajnath Singh fully occupied to make it a reality. If India needs to move beyond a policy of strategic restraint to that of a rising global power, it must get its defence industrial base in order. Considerable progress has been made with the defence procurement and production policy in the last 10 years, but the operationalisation of these policies has been a mixed bag of success. Overall, the defence indigenisation and force modernisation programme continues to move at a snail’s pace. Over the last two decades, India has managed to develop its own fighter aircraft, artillery gun, main battle tank, cruise missile, air defence capability, warships, submarines of various types and anti-satellite capability, yet our country has to rely heavily on imports to augment its defence capabilities.

The DPP 2016 was a watershed event in procurement policy. Since then, the policy has undergone several iterations, incorporating industry inputs after extensive deliberations. Unless regulations that succeed policy and objectives are in sync, one does not see an easy way forward for the defence sector. As a start, the DPP must operate in tandem with the General Financial Rules (GFR) laid down by the Ministry of Finance. FDI in the defence sector continues to be a paltry US$5 million even after the limit was raised from 26% to 49% via the automatic route. Barring units where labour arbitrage is favourable to the foreign OEM (original equipment manufacturer) in the manufacture of parts and components, it has become evident that foreign OEMs are reluctant to provide transfer of technology for the manufacture of combat systems with core technologies, unless governments of their respective countries benefit from significant geostrategic leverage in the long run. No country is willing to part with technology that it has conscientiously honed for decades. The American F-16 fighter offer to India will be a case study in this trade-off.

The discharge of defence offsets has become an anathema of sorts and the results of the offset policy having been redrafted since inception have been underwhelming. There are issues with textual clarity related to the work share of the vendor and IOPs (Indian offset partners) that confuse OEMs, and the recent political storm created over the Rafale offset during elections has discouraged them more than ever. The foreign OEMs, much to their chagrin, also suffer from tunnel vision and tend to gravitate towards the usual suspects led by half a dozen large Indian corporates. India’s immense MSME sector, on the other hand, has a huge potential to provide IOPs with capabilities to hit the ground running.

In order to unearth existing and latent capabilities available in the A&D (aerospace and defence) sector, the Ministry of Defence (MoD) should fast track and provide financial support for the capability assessment programme mentioned in the draft defence production policy. Capability assessment programmes have been successfully implemented in more than 20 countries to promote MSMEs in the A&D sector. Our forces should also identify MSME units of their supply interest, adopt them and nurture them by going in for contracted production on a cost-plus basis under their supervision and not on tender. This must be a policy initiative to strengthen MSME, increase employment and foster rapid indigenisation.

The absence of equity deals and the lack of interest from the equity players is a clear indication that procurement continues to remain a challenge, as the timelines announced for a contract are rarely adhered to by the procurement agencies. Cancellation of RFPs, delays in trials and contract negotiations are commonplace. This does not augur well for equity players that are unable to factor such delays in their financial models or calculate a potential exit. Strict adherence to timelines is key for the success of all policy objectives laid down for force modernisation and indigenisation. The formulation of Qualitative Requirements (QR) for buy and make procedure should be distinct from each other and made on informed inputs and should be reflective of the scientific and industrial strength of the country and cost considerations by a highly-trained staff. It should be process driven and not based on best characteristics of all known equipment compiled from books and catalogues.

The level playing field continues to be skewed in the favour of DPSUs even now as MSMEs continue to struggle with the delay in payments, high interest rates and prohibitively expensive bank guarantees and ratings requirements during the bidding process. The innovation driven Make 2 procedure, where the burden of the cost of development falls entirely on private company has had its shortcomings in the form of a B++ credit rating, without which a participating company runs the risk of not getting selected. This is an absurd technicality, which discourages innovative start-ups, new businesses and must be done away with immediately. Innovation based programmes should follow a point based system of awarding contracts and not L1. The first right of awarding projects to the MSME with a threshold development cost of Rs 2-5 cr must be raised to Rs 5-10 cr, DPSUs (Defence Public Sector Undertakings) should not vie for projects that are in this category, just as in the case of OFB’s (Ordnance Factory Board’s) de-notification, this must be extended to DPSUs also. The bulk of the domestic orders or 90% out of the 40% that is procured domestically go to the DPSUs; this must change, with greater private sector participation.

The much vaunted “Make in India” in the defence sector is a 60-year-old relic of the past starting with the production of Soviet equipment, a build to print exercise under licence, which has failed to deliver any significant core competencies for the long run. Once the product reaches obsolescence, the production line shuts down and so does the skill set. There has been a lot of talk with recent successes in “Make in India” initiative, but a lot remains to be seen if the policy actually benefited the Indian partner monetarily. The grapevine suggests otherwise. IDDM (Indigenously designed developed and manufactured) products seem to have done better.

A&D manufacturing is not just about systems integration, but the overall development of an ecosystem that is involved from the raw materials stage. The shortage of raw materials technology involving special alloys, carbon fiber, resins, special chemicals, Nadcap testing facilities and the desired skillset has been a major limiting factor in the development of a vibrant defence industrial base. Many of these technologies can be found at various technology readiness levels in laboratories such as NAL, CEERI Pilani, ISRO and DRDO, awaiting commercialisation. This should be a major thrust area incentivised by the government to accelerate indigenisation of home grown core technologies.

Last but the not the least, the Ministry of Defence should announce special incentives towards the development of A&D ecosystems in the notified zones and parks and invest in the development of trial and testing infrastructure. Laboratories under the DRDO, CSIR and DPSUs should relieve some of their excess capacities for private sector use. Greenfield projects that include setting up of common testing facilities should be set up in notified areas such as A&D parks, so that their capacities are accessible to all private and non-private players and such facilities operating in remote locations are shifted close to existing A&D ecosystems. The newly set up defence planning committee should look into the policy and act as a catalyst to stimulate the notified A&D parks.

It is time that India’s force modernisation programme and national industrial development proceed hand in glove and not in silos as has been the case over decades.

Siddharth Sivaraman is Chief Business Officer, Andhra Pradesh Aerospace Defence and Electronics Park.

 

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