Make in India in Defence: From rhetoric to reality

By: | Published: July 22, 2015 12:42 AM

For Make-in-India to take off in defence production, we need to abolish state monopolies, support Indian private sector and ease the entry of global players.

The last two months have been an interesting roller-coaster for defence minister Manohar Parrikar. While his humility, IITian intellect, decisiveness and workaholic nature have been appreciated, his statements on imported Ganesha idols, cross-border ops, OROP and the ‘Andhra mirchi’ rose temperatures. His decision to avoid speaking to the media for six months is fantastic, since it may allow him time to focus on bigger problems—like converting Make-in-India from rhetoric to reality.

The two defence giants—the US and China—have contrasting manufacturing models, with dependence on private and government sector, respectively. Excellence in the US is driven by the capital markets and in China by the fear of instant retribution. The US allows fully owned subsidiaries of foreign defence companies such as Airbus, BAE, Saab, Rolls Royce, Elbit, etc, while China doesn’t.

There are similarities, too. Both the US and China have a fierce will to dominate the world through a robust economy and a strong military. Both draw heavily on experts from their industry, universities and the SME sector; and use sale of defence products as a strategic tool in diplomatic negotiations.

In the late 1970s, the Chinese realised that their defence industry was becoming a ‘golden rice bowl’—rich, yet begging for more. Undertaking radical reforms, they were the fifth-largest arms exporters by 1987 and, in 2014, the third-largest.

In contrast, India, with the third-largest military and the seventh-largest defence budget, is totally dependent on the West for critical equipment. Several parliamentary committees and experts have highlighted a shortage of fighter jets, helicopters, submarines, missiles, artillery, assault rifles and ammunition, etc. India’s battle-readiness vis-a-vis the China-Pakistan alliance is getting worse by the day. This needs to change.

DPP 2015: Panacea or hype?

The Defence Procurement Procedure (DPP) 2015 is being awaited with great excitement. Media reports hint that DPP 2015 may accept the private sector as ‘prime integrators’ in complex projects. There are also scary concepts such as capping private firms to one ‘strategic’ project each, disallowing cross-holdings and expecting indigenisation targets of 60-65% under Buy and Make (Indian) programme.

The DPP expert committee comprises retired bureaucrats and military officers with no representation from the private sector. Despite hints from Parrikar of going for the ‘jugular’, DPP 2015 could turn out to be a cosmetic improvement of the previous version. This doesn’t gel with the expectations that industry had from the pro-reform NDA government.

For real Make-in-India to happen, we need a bold three-pronged approach: abolish state monopolies, support Indian private sector, and ease the entry of global OEMs.

Abolish state monopolies

Many blame our current state on poor government support to DRDO and DPSUs, ‘import-obsession’ of the forces and dubious defence deals in the past. While some of it is true, the fact remains that the state monopolies have failed on most counts, barring a few exceptions. Monopolies breed complacency, mediocrity and arrogance. Parrikar, who suffered DRDO’s arrogance as a young entrepreneur, has lamented how they ‘treat the supplier as dirt’.

The private sector is the employer of India’s best engineering and scientific talent. Thanks to their pathological disdain for the private sector, DRDO and DPSUs have systematically sidelined this vast talent pool. Their aloofness is camouflaged under the term ‘national security’, as if DRDO and DPSU employees are the sole preserve of integrity and patriotism.

DARPA, the US equivalent of DRDO, led by Delhi-born American scientist Dr Arati Prabhakar, has just around 140 technical personnel and no labs. It depends entirely on American industry, universities, government labs and individuals for cutting-edge research for the mighty US forces.

The 52 labs of DRDO and the 41 factories of OFB need to be audited for their output and the feedback from the end-users—the forces. The top 5-10 labs and factories may be retained, while the rest should be privatised or shut down if there are no takers.

Strengthen Indian private sector

Creating a robust defence industrial base in India will require several attitudinal shifts.

1.Our target should be the global market and not just domestic. We have done that in the space sector, with Isro routinely launching satellites for the UK, France, Germany and Singapore. It’s tough but not impossible.

2.The armed forces leadership should identify 8-10 technologies critical to India. The list may include missiles, stealth systems, cyber-security, avionics, communication systems, electronic warfare, super-alloys, composites, etc. The rest can come off-the-shelf. China is pragmatic enough to use imported engines for its fighter jets, while working hard to develop its own. Their strategy of ‘import, innovate and export’ has worked wonders.

3.Allocate at least 10% of the defence budget to R&D. Every R&D project and manufacturing contract should be bid out, with nothing going to state entities on a nomination basis.

4.Consolidate orders instead of each service headquarter doing its own thing. Going for a common platform along with customisation for different end-users makes better commercial sense.

5.Create 4-5 world-class defence and aerospace manufacturing hubs. Provide 10-year tax holidays. Establish a Defence Industry Promotion Fund (DIPF) for seed-funding of MSMEs.

6.Lastly, the defence ministry should engage better with the private sector. In the West, military procurement is handled by professional consultants with deep knowledge of supply chain, manufacturing, finance and legal issues; under the supervision of their defence ministries. This leads to faster deal closure, better contracts, reduced project costs and lower risk of obsolescence. The Rafale fiasco is a good case in point.

Ease the entry of global OEMs

The superficial bonhomie displayed by visiting heads of states should not mask harsh realities. Most love India as an arms market and not as a partner. They won’t pass on the latest defence technology to India and create competition for themselves. Their objective is to maximise growth and employment in their country, not in India.

We negotiated offsets with the American, Russian, French, British and Israeli companies for different equipment on a piecemeal basis. Theypassed on ‘build to print’ capabilities to Indian companies, which adds limited value. Instead, India should have consolidated requirements and demanded setting up of complete assembly lines for 2-3 critical platforms. China did precisely that. It consolidated its future demand for commercial aircraft as a bargaining chip and convinced Airbus to establish an A320 assembly plant in Tianjin. There’s now a facility for components of the A350 at Harbin and an A330 completion centre planned in Tianjin. In parallel, China’s aerospace company COMAC is working hard on its indigenous C919 and ARJ21 commercial aircraft.

We have wasted a year on the pointless debate on FDI. The increase from 26% to 49% has yielded precious little. It needs to be raised to at least 74% to enable real high-tech investments. The ecosystem that will be created will allow Indian companies and professionals to learn, innovate and export back to the OEMs. Two decades from now, some Indian companies may rise to become competitors to global defence players. The time for ‘band-aid’ solutions is over.

(Assisted by Manuj Jain, manager, aerospace and defence, KPMG in India)

The author is partner and India head of Aerospace and Defence at global consultancy KPMG.

Views are personal

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