Reforms Or Just A Rejig?

On May 16, the penultimate day of announcements over five days that unveiled the various measures as part of the Rs 20 lakh crore package to revive the Covid-stricken economy as well as to make India atmanirbhar (self-reliant), Finance Minister Nirmala Sitharaman created quite a buzz when she reeled out a series of action points to bolster Make in India in defence.  

The measures, which ranged from raising foreign direct investment in defence via automatic route from 49 per cent to 74 per cent and corporatisation of Ordnance Factories Board (OFB) to having a separate provisioning for domestic capital procurement in defence budgets and banning import of certain weapons and platforms, seemed to address quite a few longstanding demands of the sector. Or so it appeared. The markets too cheered the announcements with shares of companies with a defence play surging between 5-10 per cent. 

The big question, however, is: are these announcements mere policy tweaks or new reforms to boost self-reliance in defence? Do they address the fundamental issue of capability building for the Indian armed forces? There has been a long-standing demand for 100 per cent FDI in defence. The latest announcement only partially fulfils it. Even then, there is no guarantee that FDI inflows in defence, which totaled $8.82 million for the period April 2000 to December 2019 – the lowest among all sectors as per the list compiled by the Department for Promotion of Industry and Internal Trade of India — would rise dramatically.

Similarly, corporatisation of OFB, although a step in the right direction, does not really mean an overhaul. What really does look like making a material difference is the announcement on separate provisioning for domestic capital procurement in the defence budget — it will surely force some of our compulsive import-loving technology hyperbuyer to look within. As far as these announcements go, sceptics might argue that the draft Defence Procurement Procedure (DDP) 2020, which has been put out in the public domain for comments, also contains all the major changes announced so far. 

No hint of new reforms

What do the stakeholders have to say then? Jayant Patil, Chairman, SIDM & Whole-time Director & Senior Executive VP, L&T Defence says, “The package had a good amount of inputs on defence. There is a specific budget being carved out. We don’t know when it will get done. But once it is done it will be very significant. We import nearly 70 per cent of our needs. Some new announcements indicate that money will be found. Some of existing contracts are coming to light. We are all clear that a change can be made. The indications we are not getting are that of new reforms.” He goes on to add that so far there is no money in defence, and if there is no money, there is no business and no R&D. 

The money issue that Patil refers to is contained in the announcement on separate provisioning for domestic capital procurement in the defence budget every year. “There has been a lot of movement on the policy side but of course there has not been much movement on the Indian buying side. It is indicated that there will be money found, not sure when. Those who understand the DPP have it quite easy,” says Patil. 

The other key policy announcements are the time-bound defence procurement process and faster decision making for which Project Management Unit (PMU) will be set up to support contract management; realistic setting of General Staff Qualitative Requirements (GSQR) of weapons/platforms and overhaul of the trial and testing procedures.  Besides, import of certain weapons and platforms is not going to be allowed and these can only be purchased locally. 

Corporatisation of OFB 

Corporatisation of OFB is a welcome step as it will bring more professional oversight, functional and financial autonomy and accountability to the 41 factories, 13 ordnance R&D centres and nine ordnance institutes of learning under OFB. Despite the modernisation drive lately with computerised numerical control (CNC) and modern machines, manpower and output have remained an area of concern. The diffused responsibility for quality assurance and quality control between OFB and Directorate General Quality Control (DGQA) has not helped matters. 

Besides structural changes in management, joint ventures for technology infusion and better coordination with DRDO, OFB also needs to improve autonomy, accountability and efficiency in ordinance supplies. Factories are given production targets by OFB in consultation with the defence forces. Yet, production has consistently fallen short of targets. For instance, the factories were able to meet production targets for only 49 per cent of items in 2017-18.

Says Maj. Gen. Shashi Asthana, who interacted closely with ordnance factories (OF) during his 40 years with the Indian Army: “With corporatization, they (OFs) will have to compete with other corporate entities. Also, labour reforms are the need of the hour. I was into logistics as well and I noted that manpower was being wasted. No country in the world has become a major power with only the government’s efforts. Private sector is of utmost importance.”  

Liberalised FDI regime

On the face of it, increase in the FDI limit in defence to 74 per cent under automatic route is welcome and will help the sector in garnering fresh investment and technology, according to Patil, who also heads the defence industry lobby SIDM. The change seems to be in line with the new category of Buy (Global - Manufacture in India) under DPP that mandates buying only the minimum necessary quantity from abroad and making the rest in India. While the policy fine print needs to be seen for additional conditions, if any, it is expected that the OEMs will make the best use of the liberalised regime to expand their India footprint. 

The previous FDI policy had proved to be a no-show. In the last five years, when the FDI limit in defence was raised to 49 per cent from 26 percent through the automatic route in 2014, the defence sector attracted FDI of only Rs 1812 crore (see chart). Says Patil: “If there are no investments, there will be no business. So how will there be any R&D? Without R&D nothing will happen.” 

Defence Secretary Ajay Kumar, however, has a different take on the FDI numbers. “Only companies which require licence under the Industrial Act need government approval for bringing FDI and that too, only if the FDI exceeds 49 per cent. Other defence and aerospace companies do not require approval for bringing in FDI. Therefore, complete information on FDI flows in defence and aerospace is not available,” he told Businessworld during an earlier interaction. The cumulative FDI in the defence and aerospace sectors, he says, has exceeded Rs 3,134 crore so far. “Out of this, 34 companies in the defence and aerospace sectors have reported FDI of over Rs 1,812 crore since 2014,” he had said.

Despite the automatic route, security clearance will still be required. The increase in FDI limit to 74 per cent through the automatic route is, however, inconsistent with the proposed DPP 2020 provisions, whereby the definition of ‘Indian vendors’ requires entities to be owned and controlled by resident Indian citizens. With amendments being made to the FDI regulations, one expects the same should be reflected even in draft DPP 2020. 

Time-bound procurement and overhaul of the trial and testing procedures is another welcome announcement. What remains to be seen though is whether there would be any changes in what has been unveiled in the draft DPP 2020 or whether the FM’s announcement only sought to recapture what has been proposed under DPP 2020. 

Steps taken in the national interest towards bolstering ‘Make in India’ are also appreciated. Ban on imports of specified defence platforms and indigenisation of spares will help build a strong domestic industry. However, this shall only be possible if the government shows seriousness in implementation of these reforms. The Ministry of Defence must place orders on Indian industry with the same trust as the defence PSUs. Further, subsidiaries of foreign companies should be treated as Indian industry as they will be instrumental in ‘value addition/indigenisation in India’ and building economies of scale for Indian products to find way in global supply chain. 

Now all eyes are on the increasingly important office of Department of Military Affairs (DMA) which is tasked with releasing the list of products banned for import as it will largely shape up the tendering process for tomorrow. The MoD’s guidance on FDI conditions as well as notifications to accommodate the suggested changes to the draft DPP 2020 are also awaited. 

At the DEF Expo 2020, Modi announced the formulation of Long-term Integrated Perspective Plan (LTIPP) for 15 years – that is up 2035. Another version of LTIPP is called Technology Perspective and Capability Roadmap (TPCR).  TPCR 2018 is an improvement over the last one. But all together it does project the realistic approach as the system flaw and delays in procurement and indigenous development make such efforts theoretical. 

DRDO overlooked again

Amid big bang defence announcements, DRDO, on which the burden of building capability in defence rests, is often overlooked. Despite the government’s monopoly over defence R&D, DRDO has done some commendable jobs – India’s indigenous missile and radar technology along with home-grown LCA Tejas and its variants Mk-1 and Mk-2 stand out. But with a meagre outlay of 6 per cent of the total defence budget, or about Rs 19,000 crore, DRDO is pretty much constrained. China has been spending about 15-20 per cent on R&D. The result is there to see in terms of capability gaps.  

Says Air Marshal Shirish Deo, Vice Chief, IAF (retd.) referring to money issues: “There is no revenue right now. There is a very distinct category of goods now. General development will take place here. Now we have to make systems here to prove our worth. Every company outside is worried about the bottom line. The companies will invest here, provided there are no strict policies. Some research is definitely needed. China, for example, took failure in their stride. R&D is not possible in the best form when we are afraid of failure. There has to be a passion for engineering.”

So how will India become self-reliant? We only need to look at India’s space and atomic energy sectors, which have become world-class thanks to private sector participation and a budget that is 10-15 per cent of the total defence budget. What’s needed is a predictable policy and regulatory environment for the defence sector and turning DRDO into many functional and autonomous centres of excellence. No sooner, we will be proud of Indian Space Research Organization ISRO does. Indigenization is the key responsibility of Department of Military Affairs (DMA), headed by CDS General Rawat while determining indigenous feasibility is the job of DRDO, and budget oversight is with MoD. Together, it is time to call for the capability roadmap.