New Delhi: Defence Minister Rajnath Singh recently announced an embargo on the import of 101 defence items to make India self-reliant in defence. This has been a timely order passed by the Ministry of Defence (MoD) after enough brouhaha was created by the Indian defence sector when the Indian Army and the Indian Air Force announced a slew of defence purchases post the Galwan incident in the North-East. This was a purchase under duress, and similar to what India experienced during the Kargil conflict. While such decisions give the end user and its nation a much needed short-term boost in morale during an ongoing standoff, these ad-hoc purchases during an emergency situation come at a premium where the costs are above and beyond price quotes based on a competitive bidding process. Panic-buying also sets in a general malaise of not doing much later to bolster defence preparedness as was the case post Kargil when the Indian armed forces were faced with critical shortages and rapid obsolescence of its ageing combat systems.
Off-the-shelf imports are generally cheaper than an indigenous programme — case in point, a Russia-manufactured Sukhoi 30 MKI is cheaper than the one manufactured by HAL. There are multiple reasons behind this: firstly, the hefty license fee to the Original Equipment Manufacturer (OEM), supply of critical parts and components for which there is no transfer of technology (ToT), and the purchase of raw materials such as titanium alloy which is practically free for Russian manufacturers due to its abundant local supply and the presence of factories that have been operating for decades. The acquisition cost can be offset to some extent by securing related or even unrelated work packages from the exporter for the domestic industry. Offset, or reciprocal trade, is a significant element of the international trade in defence equipment. The development of export markets for home-grown defence products leads to economies of scale where large sunk capital costs in establishing plants, equipment and training begin to operate at optimal efficiency, thereby reducing costs per unit.
The corporatisation of the Ordnance Factory Board (OFB) should be sped up or the behemoths should be gotten rid of
DPSUs should focus on technology development for private sector
In India the operationalisation of the offset clause in the procurement process remains way below the success rate. There are varied reasons for its failure such as lack of clarity in offset policy guidelines and inability of foreign OEMs to rope in their tier 1 or tier 2 sub-vendors to discharge the offset obligations on their behalf. There may be multiple reasons for the offset policies’ inefficiencies, but it is time that the MoD puts in place mechanisms to make the offset policy a dynamic document which can identify and address causes for delay or default by vendors on time. The DPSUs should stop being production houses and instead focus on technology development for absorption by the Indian private sector companies. It was absolutely discouraging to see DRDO’s offer of a mini UAV to the Indian Army when it should be offering a Predator-class drone to the Indian industry on a ToT basis. DRDO is an organisation established to design and develop strategic systems and not items that should be in the exclusive domain of the MSMEs. DRDO drone programmes have ended in abject failure.
The corporatisation of the Ordnance Factory Board (OFB) should be sped up or the behemoths should be gotten rid of. The small arms designed and developed by the OFB and displayed time and again at the DefExpo are an embarrassment. No organisation of repute, or disrepute for that matter, will buy such poor quality weapons. Defence production, except for maybe certain critical or classified items, must be in the hands of the private sector.
Once India is able to build and master critical technologies developed by its MSME units with core competencies and large private sector companies that rely on ToTs and JV with foreign OEMs, it will have to then secure a defence exports market to rapidly usher in economies of scale to bring down the price per unit such as Russia, US, Israel and China have done
Aatmanirbharta will come at a cost in short to medium term
‘Aatmanirbhar Bharat’ in the defence sector will come at a cost in the short to medium term. Once India is able to build and master critical technologies developed by its MSME units with core competencies and large private sector companies that rely on ToTs and JV with foreign OEMs, it will have to then secure a defence exports market to rapidly usher in economies of scale to bring down the price per unit such as Russia, US, Israel and China have done. India can learn a lesson or two from Turkey that has been a new entrant in the defence sector and has secured orders for the supply of advanced UAVs and combat helicopters in the export market. India’s arch enemy Pakistan also has a better military industrial base and has a reasonable defence export market. It not only manufactures main battle tanks such as the Al-Khalid, ballistic and cruise missiles, but also front line combat aircraft, the JF-17, built in collaboration with the Chinese. Apart from having a robust UAV programme, Pakistan is also self-sufficient in the production of small arms, light machine guns and ammunition of various types and calibre. All in all, Pakistan is remarkably self-reliant when it comes to its defence preparedness.
Accommodating all stakeholders in their entirety
At present, the Indian defence procurement system remains broken and continues to remain plagued by delays at all stakeholder levels, which also includes the Indian private sector, which at times has made tall claims with little to show for it. It’s been nearly 20 years since the Indian defence sector was opened up to private sector participation and while much has been achieved in terms of policy objectives, its operationalisation continues to lag on almost all fronts. The Defence Procurement Policy (DPP) document which lays down detailed procedures for acquisition has undergone many iterations over the last five years and continues to evolve. Adherence to timelines is one of the biggest impediments in the procurement process. Unless timelines are adhered to in the strictest sense, private sector companies will not be able to make financial commitments that are required for procurement and manufacturing. They will not be able to raise debt or equity from investors or banks for that matter. This is one of the main reason why defence MSMEs are unable to flourish in India as they are unable to furnish hefty bank or personal guarantees at the time of a bidding process. No bank in India has an aerospace and defence sector practice. It is important for the MoD, industry chambers and others to invite financial institutions such as banks, private equity funds and HNI’s to be part of the discussions related to platform acquisition, policy and regulation. It has taken more than 15 years to break the silo of DPSUs, and OFBs in which the defence industry operated for decades and now it must accommodate all the stakeholders in their entirety.
Every platform has got a first, second, third, fourth or fifth generation technology on which it is based, we have to remember that Indian industry in many cases will have to leapfrog to make its indigenous platforms close to the current technologies being offered by the leading OEMs
The Indian defence industry can only mature up to the point where the end user or the Indian military will allow it to do so. The Indian military will have to induct weapons supplied by the local manufacturers and they may at times may not be the best performing platforms compared with foreign platforms, whose OEMs have more than 100 years of experience, in some cases. Every platform has got a first, second, third, fourth or fifth generation technology on which it is based, we have to remember that Indian industry in many cases will have to leapfrog to make its indigenous platforms close to the current technologies being offered by the leading OEMs. The import embargo list should provide a fulcrum for the Indian military and the industry to make a good beginning. It should not be considered as a step back in time to the days of the License Raj.
Sivaraman is the Chief Business Officer of the Andhra Pradesh Aerospace Defence and Electronics Park. He has been a part of the CII defence team where he set up the Defence Advisory and Consultancy Services.
Disclaimer: This is an Op-ed article which first appeared in a special issue magazine of PSU Watch on Atmanirbhar Bharat. It was published on October 28. The opinions expressed in this article are the author's own. Defence Watch does not endorse nor support views, opinions or conclusions drawn in this post and we are not responsible or liable for any content within the article or for any damage or loss caused by and in connection to it.
(PSU Watch– India's Business News centre that places the spotlight on PSUs, Bureaucracy, Defence and Public Policy is now on Telegram. Join PSU Watch Channel in your Telegram and stay updated)