“Expect 70% Indigenisation In Defence Even Before 2027”

Ashok Kumar Gupta, Secretary, defence production, says that government efforts had immensely incentivised private sector participation in manufacturing for the defence forces, pointing to the spurt in the licences issued between May 2014 and June 2016. Altogether 125 licences were issued in the span of the two financial years, compared to 217 licences issued between 2001 and May 2014. In a freewheeling conversation with Suman K. Jha, he discusses a range of issues, including the promises and challenges of the Make in India initiative in defence production.

Many consider the government set target of 70 per cent indigenisation in defence production by 2027 too ambitious. It is your target too, but is it achievable?
We would like to achieve it even earlier. A number of initiatives have been taken in this direction. We are on the right path. The country is now on the threshold of defence manufacturing under the Make in India initiative. It aims to reverse the current ratio between imports and indigenous manufacture of defence material, without adversely affecting the requirements, capability and preparedness of the Armed Forces. Achieving this will require equipping the country with the ability to design, develop, manufacture, integrate, test, maintain and upgrade defence systems we require.

India is in the midst of modernizing its Armed Forces and an estimated $250 billion will be spent on capital procurement over the next ten years. Moreover, in the new Defence Procurement Procedure 2016, ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy & Make (Indian)’ are the most preferred categories, which means that increasingly Request for Proposals (RFP) will be issued to the domestic industry. Foreign OEMs (original equipment manufacturers) can leverage domestic demand by tying up with domestic companies, either for collaborative R&D followed by production or through transfer of technology for production through joint ventures. Alternatively, they can set up their own manufacturing base here.

India plans to boost arms exports 20-fold to $3 billion over a decade. How are things shaping up?
Since the defence sector cannot survive on domestic demand alone, the government has taken a series of initiatives to boost exports. The list of military stores has been finalized and put in public domain to make the process transparent and unambiguous. The process of receiving applications for NOC (‘no objection certificates’) for exporting military stores and for issuing NOCs, is online to reduce delay and remove human interface. The Standard Operating Procedure (SOP) for issuing NOCs for exporting military stores has been revised and put on the website. Under the revised SOP, ‘end user certificates’ (EUC) do not need to be countersigned or stamped by government authorities for exporting parts, components, sub-systems etc.

A Defence Exports Strategy has been formulated and put in public domain, outlining the steps that need to be taken. In products in which capacity constraints exist, DPSUs have been allowed to export up to ten per cent of their annual production, so they may explore market opportunities outside the country. We are also in the process of forming an Export Promotion Body. Owing to these initiatives, exports have doubled over the last two years and crossed the Rs 2,000 crore mark.

What was the response to the new category, termed ‘Buy Indian (Indigenously Designed, Developed and Manufactured or IDDM)’ in the new Defence Procurement Procedure announced earlier this year? How important is this category?
The Defence Production Policy aims to achieve substantive self-reliance in design, development and production of equipment, weapon systems and platforms required for the defence services in the earliest possible time-frame. The ‘Buy (Indian-IDDM)’ category has been introduced in the Defence Procurement Procedure-2016 to pursue this policy and the Make in India initiative. It will also promote indigenous design and development of defence equipment. It is the most preferred category in capital procurement, which means that any vendor with indigenous design of a product being procured, will be given preference over other vendors.

You had zeroed in on 25 projects under the Make in India programme that were to be opened up for private sector participation. What is the progress so far?
Twenty one potential ‘Make’ projects have been identified by the department in consultation with Service Head Quarters (SHQs). These projects are a mix of small and big projects. The total acquisition value of these projects is estimated to be around Rs 18,000 crore. Feasibility studies by the respective Service Head Quarters is in progress.

In July, we had an interaction with industry at a seminar on these projects. On September 2, an Army specific seminar was held. These are part of the feasibility study in progress.

How is the defence segment of Make in India progressing? Which players have shown a concrete intent to Make in India?
A number of initiatives have been taken by the department to promote the Make in India initiative. The foreign direct investment (FDI) policy has been reviewed and in the revised policy notified in November 2015, foreign investment of up to 49 per cent is allowed through the automatic route. Investment beyond 49 per cent is allowed through the government route, in cases involving modern technology and for other reasons to be recorded.

The Defence Products List for industrial licences (ILs) under the IDR Act has been revised and most of the components, parts, sub-systems, testing equipment and production equipment have been removed from the list to reduce entry barriers to industry, particularly the small and medium segment of it. The initial validity of the industrial licence granted under the IDR Act has been increased from three years to 15 years, with a provision for further extension by three years on a case-to-case basis.

Offset implementation has been a major issue with foreign OEMS for doing business in India. The process of offset implementation has been streamlined. The preferential treatment given to defence public sector undertakings in excise and customs duties has been discontinued. Outsourcing and Vendor Development guidelines have been formulated and circulated to DPSUs and the Ordnance Factory Board (OFB) to promote participation of the private sector particularly SMEs in defence manufacturing, through a tiered ecosystem.

A Make in India portal for defence production was launched on December 21, 2015. The portal provides information on all policy and procedural issues relevant to defence manufacturing. The DPSUs and the OFB has been asked to identify items, in which startups can be involved in their development and production. For such items, the eligibility criteria for prior experience and turnover will be relaxed. This department is promoting National Skills Qualifications Framework (NSQF) compliant skill training through DPSUs and the OFB.

The DPSUs and the OFB have been directed to procure at least 20 per cent of required items from MSMEs as a government policy. A ‘Defence Innovation and Research Initiative’ (DIRI) is being formulated. The scheme will provide complete funding to industry, including startups, for innovation and technology development in areas relevant to the Armed Forces.

These initiatives have brought about a perceptible change in the mood of the industry, evident in the marked increase in licences issued. Compared to only 217 licenses issued between 2001 and May 2014, 125 licenses were issued from May 2014 to June 2016.

You have said that the private sector had an opportunity to pick up a 25 per cent share in defence production. Many private players have shown interest, but complain that they do not get orders from the principal player the government.

I mentioned that as DPSUs and the OFB intensify outsourcing, a substantial portion of their total turnover of Rs 50,000 crore, can be picked up by the private sector. For instance, if their overall outsourcing goes up by 20 per cent, an additional Rs10,000 of orders will flow to the private players. This is as far as Tier I, Tier II and Tier-III vendors are concerned.

As far as orders from the government are concerned, of the Rs 2.22 lakh crore of Capital Acquisition Projects approved by the Defence Acquisition Council (DAC) for procurement during the two financial years, 2014-15 and 2015-16, projects worth Rs 1.18 lakh crore (i.e. 53 per cent of the total value) are under the ‘Buy (Indian)’ and ‘Buy and Make (Indian) categories. The projects have been approved and are being processed. In all these cases ‘Requests for Proposal’ will be issued to the domestic industry.

According to one estimate, defence PSUs are sitting on huge advances, but are unable to deliver, given their systemic constraints. What’s the way out?
That is not correct. The advance payment clause is prevalent in all international arms procurement contracts, as they involve a long gestation period. Such advances meet working capital requirements. Financing working capital requirement through borrowed funds necessitates sharing confidential information with the lending agencies.

The focus of the department has been to create a paradigm shift in the working of the OFB and the DPSUs towards delivery of more platforms/weapon systems. This can be achieved by promoting participation of the private sector, particularly SMEs, for defence manufacturing. The department has, therefore, formulated the Outsourcing and Vendor Development Guidelines for DPSUs and the OFB, which mandate that each DPSU and OFB have a short-term and long-term outsourcing and vendor development plan, to gradually increase outsourcing from the private sector, including SMEs.

The OFB and DPSUs have also identified a list of items that they intend to develop and manufacture indigenously from Indian private companies. They have uploaded the list on their websites.

According to one report, just Rs 1.1 crore of foreign direct investmen has come into the defence sector in the last two years. What is the government doing to address the problem?
Several MoUs and agreements have been signed between Indian and foreign companies for joint ventures. However, the actual flow of foreign direct investment takes time. For the projects worth Rs 1.18 lakh crore approved in the last two years, RFPs will be issued to the domestic industry. Tie ups between domestic and foreign companies are already evident and these tie ups will get converted into joint ventures, as the FDI regime has been liberated to a great extent.

It has been more than a year since you took charge as Secretary (defence production). What were the challenges and the bright spots?
I would like to use the term opportunities, instead of challenges. I would consider the Make in India initiative of the government as the brightest spot of my tenure. The most noticeable thing I have observed is the change in mind set. There is a tremendous synergy between domestic producers, be they in the public sector or private sector, and the users, i.e. the Army, Navy and Airforce. There is regular interaction between the ministry, industry and the forces, so that indigenously manufactured items can be inducted. I can give a number of examples.

Tejas was inducted in July 2016, the Akash missiles got inducted in May 2015 and the Dhanush artillery gun is under user trial. The inaugural flight of the Basic Trainer Aircraft took place in June 2016 and all the naval platforms at present are being manufactured in India.

The value of production of the DPSUs and the OFB have gone up by 15 per cent in the last two years, because of a change in mindset that domestically produced platforms and equipment have to be encouraged. This is a big step towards attaining self-reliance in defence sector.

suman@businessworld.in;
@skjsumankjha