Indigenising defence manufacturing

Written by Ajai Chowdhry | Updated: Apr 9 2014, 09:04am hrs
The data thrown up by the recent Stockholm International Peace Research Institute (SIPRI) report on global arms transfers is startlingIndias arms imports are almost three times as high as those of the second and third largest arms importers respectively, China and Pakistan. Between 2004-08 and 2009-13, the volume of Indian imports of major weapons rose by 111%. The fact that India is the largest importer of defence equipment is a cause for concern as it reflects on our failure to develop an indigenous defence manufacturing sector by effectively engaging the private sector.

The strategic and economic importance of self-reliance in the defence sector cannot be ignored. We need to focus on the immediate need to build a thriving domestic defence manufacturing sector. Few years ago, as part of CII, we had released a report jointly with Boston Consulting Group and had made some recommendations for this sector.

The government should set up a National Defence Manufacturing Commission under the PMO to directly monitor the key policies. This will help bring together the private sector, the government and the ministry of defence. The PM has stated in the past that private sector participation is essential for national security and it is critical to implement this.

The government should also enforce make or buy and make (Indian) classification for all flagship defence contracts and mandate that the prime contractor be an Indian entity. To ensure that technology gaps are overcome, this entity can be a JV between local and relevant global vendors. Eventually, more and more projects, even the smaller ones, should be brought under this.

Providing access to critical technologies available with research agencies is important. A royalty fee model can be developed, allowing private sector to commercialise these technologies. Skill up-gradation of defence manufacturing workforce is essential, focusing on both short-term actions to plug existing skill gaps and long-term initiatives to ensure projected skill requirements are developed. We must enable a support structure for up-gradation of defence manufacturing facilities (SME specific) and the government should set up an innovation fund of R1,000 crore for SMEs in the defence sector. This will help SMEs achieve manufacturing certifications like ISO and will help establishment of licensed defence units.

We need to revisit the current cap of 26% for FDI in defence production. If we can bring it up to 49% on a case-to-case basis, we can attract adequate participation of interested parties and ensure genuine technology transfers as a critical component for increasing FDI limits.

The ministry of defence announced Raksha Udyog Ratnas for the defence industry so that there are recognised organisations that work with the government. We need to identify such industry champions based on their managerial and technical capabilities, who would be the key drivers towards raising indigenous defence technological base and world-class manufacturing capabilities in India.

The private sector is estimated to contribute only 5% to the defence equipment market whereas defence PSUs account for over 20%. The remaining over 70% of our defence needs are met purely through imports. The equipment spending by the ministry of defence has increased at 20% over the last few years and is expected to continue growing. However, current procurement is largely dependent on PSUs. Defence production being focused in the public sector will not allow us to meet the rising demand and hence continue to push us towards imports. We need to reverse this trend of 70:30.

We must ensure as a nation that the private sector plays a bigger role in defence production as in other countries like the US. Even though the private sector has built capacity and proven expertise, it still continues to be out of the defence procurement net. This will not just help us increase efficiency and lower costs but also lead to creation of 1 million skilled direct and indirect jobs.

If India continues to import hundreds of billions of dollars worth of defence equipment over the next decade, we will end up pushing all these jobs to countries like US, Russia, Germany, China, etc, while India struggles to find employment solutions to hundreds of millions. With the buying clout India enjoys today, we must bring defence manufacturing to India and ensure that the job opportunities it creates stay in our country.

The author is founder, HCL