The Long And Winding Road To Make In India

India ranks fourth in an index that tracks global military power in terms of available firepower, armed forces personnel and diversity of weapons available. The criteria used in the rankings to determine military strength include natural resources, local industry, geographical features and available manpower. Incidentally, India is also the largest arms importer, accounting for close to 15 per cent of the global arms trade.

As a matter of fact, India’s arms imports shot up by 24 per cent between 2013 and 2017, going by statistics of the think-tank, Stockholm International Peace Research Institute. Domestic production of military hardware is at present confined to a cluster of nine defence public sector undertakings (DPSUs) and 39 ordnance factories, controlled by the Union Ministry for Defence, which together account for less than 40 per cent of the military hardware supplies of  the Indian Armed Forces.

The Draft Defence Production Policy (DDPP) 2018 strives to change the scenario. It aims to make the world’s fourth largest military power self-reliant in defence production as well. The DDPP attempts to create a policy environment to lure private sector players and global arms manufacturers to set up production bases for military equipment on Indian soil.

The draft policy identifies 13 sets of weapons systems, including fighter jets, helicopters, warships, missile systems, ammunition and explosives, land systems and electronics that could be developed and manufactured in India by 2025. Should the DDPP targets fructify, domestic production and sales of military equipment would be worth $26 billion by 2025, of which a fifth or $5  billion, would be for the export market. The DDPP also aims to make India a global leader in Artificial Intelligence and cyberspace technologies. In short, it strives for indigenisation of 75 per cent of defence production in half a decade, which provokes the poser: is it feasible?

Notwithstanding the mild tinkering with norms to speed up the acquisition process and the more liberal policy for private sector participation in defence production, the Make In India strategy has not quite paid off in this sector. The Make In India vision in defence production grapples with budgetary constraints, lacklustre policies, delayed implementation of projects and evasive foreign direct investment (FDI), among other issues.

Short range 
The Draft Defence Production Policy  (DDPP) 2018 envisions India among the world’s top five aerospace and defence manufacturers, in the league of global leaders like the United States, Russia, France, UK and China. To get there, established defence manufacturers in the country would have to gatecrash their way into the coveted club of the world’s top arms producers. Could this really happen in a timeframe of say, a decade?

Says Laxman Behera, Research Fellow at the Institute for Defence Studies & Analyses (IDSA) and author of Indian Defence Industry, “Suffice it to say that at present not a single Indian defence company figures in the list of the top-ten global companies, even though India counts among the top five military spenders in the world.” Behera points out that India’s largest defence equipment manufacturer, the Hindustan Aeronautics Limited (HAL), was ranked 35 in the list of the world’s top 100 defence companies of the US-based Defense News.



The publication ranked another large defence production unit in India, the Bharat Electronics Limited (BEL) at 59. “For them to climb from their present rankings to the top 10 or 15 would be anything but easy,” says Behera, “considering the huge turnover gap between Indian and major global companies as well as the pervasive technological backwardness of Indian entities.”

Policy-makers though, repose faith in the potentials of the DDPP 2018. “Nearly 65 per cent of the parts/components/subsystems have been delicensed and in a rough estimate, approximately $3 billion worth of defence items are being manufactured in the private sector,” points out Ajay Kumar, Secretary, Ministry of Defence.

The policy, he emphasises “envisages adding another $14 billion worth of production in a period of seven years, which translates into CAGR of 15 per cent approx. With the opening up of the sector and the thrust being given to the private sector, DDPP believes that these numbers are attainable.”  

Policy makers only woke up to the deep mess that defence production in the country was in as late as May 2001. The defence industry, which was till then reserved for the public sector, was opened up to the Indian private sector then.

Foreign Direct Investment in defence production ventures though, was restricted to only 26 per cent. The bar on foreign investment has since been lifted to permit 49 per cent stake through the automatic route and even beyond on a case-by-case basis depending on criteria like transfer of technology.  



The new DDPP aims to take India’s defence turnover to $26 billion by 2025 from Rs 55,894 crores in 2016-17. “In the past five years, the annual growth in defence production has been around seven per cent. To reach a turnover of $26 billion (Rs 1, 70,000 crore) – a three-fold increase by 2025 would require domestic production to grow by nearly 75 per cent to 80 per cent per year, which is overly ambitious,” says Behera. Arms exports from India peaked at Rs 2,059 crore in 2015-16. “To rise from that level to reach Rs 35,000 crore (a 17-fold increase) by 2025 is too much to ask for from an industry that has so far relied on technology imports for much of  its production,” he says.

Some misfires
Prospective defence equipment manufacturers waiting in the wings are now watching out for policy signals in the final version of the DDPP 2018. The Kalyani Group has been a major supplier to the Indian Army over the years. Babasaheb Kalyani, chairman of the group flagship, Bharat Forge, tells BW Businessworld that he is hopeful of a continuum in reforms.

“The need of the hour for the government is to continue with this momentum and introduce many more such encouraging steps which will give the right impetus to the private industry for establishing a vibrant defence industrial base in the country,” he says, adding, “DDPP 2018 is eagerly awaited by the industry, with hopes that it will remove the lacunae from its previous versions and further the cause of self-reliance and self-sufficiency in defence production.”

Some signals from the government have misfired. Take the ambitious P75 India project as a case in point. The $8 billion project for building six advanced submarines for the Indian Navy, was ostensibly awarded in keeping with the recently drafted Strategic Partnership policy, which promises to involve a private sector player as a ‘strategic partner’. The private entity is required to invest capital and develop infrastructure and skills for the long term. The P75 India project though, was awarded to the defence public sector unit, the Mazagon Dock Shipbuilders in preference to the private sector bidder, L&T which has a defence shipyard at Kattupalli in Tamil Nadu. The shipyard has been ready for operations since 2012, but continues to be a drag on L&T’s finances for lack of big defence orders. “The MoD should stick to the level-playing field between private and public sector companies,” says Behera.

The Defence Secretary points out however that the strategy for defence production in India strives to build on the existing strengths of the public sector, with a thrust on involving the private sector as well. “The Draft Defence Production Policy envisages infusion of new technology/machineries in OFB and the DPSUs to enable them to take up advanced manufacturing and development of futuristic weapons and equipment,” says Ajay Kumar. “In any industry, investment in continuous modernisation is an utmost necessity,” he points out, “otherwise the investment already made in the industry will go waste because of technological obsolescence.”

Meagre FDI
In a statement in the Lok Sabha, Minister of State for Defence, Subhash Bhamre, had announced that between April 2000 and March 2018, 41 FDI proposals worth $5.13 million (Rs 35 crore) had been approved for manufacturing defence equipment in the public and private sectors. During the tenure of the National Democratic Alliance government or to be more precise, between April 2014 and December 2017, only Rs 1.17 crore of FDI has flowed into defence production.

During the last financial year a paltry $ 10,000 (roughly Rs 7 lakh) of foreign direct investment trickled into military equipment manufacturing ventures. Foreign investors obviously have not found the prevailing policy framework conducive. (See graph on previous page.)

Says Amandeep Singh, Head – Defence at Ashok Leyland, “Under the policy, FDI up to 74 per cent under the automatic route is being allowed in niche technology areas. Land system technologies are usually left out of niche areas and focus is primarily on aerospace and electronics. Whereas several technology areas exist in the Land System, where there is currently a big gap like armouring higher than 300 HP Engines, Tracked Vehicle aggregates etc. These should be explicitly mentioned in the policy so that there is no ambiguity later on and lengthy approvals are not required.” Singh feels that extending the 74 per cent ceiling for FDI to all sectors of defence production would lead to critical technological gains for the domestic industry.
 
Laxman Behera suggests that “The best way to forge a partnership with foreign OEMS is through Buy and Make (Indian) procurement category where the role of integration lies with the domestic vendor with the OEMs providing technological assistance.”  Amber Dubey, Partner and India Head of Aerospace and Defence at the global consultancy, KPMG.  emphasises the need for an action roadmap. “MoD should identify five or six technologies, where it is critical for India to have complete control,” he says.  “MoD should then tailor its policies, technology transfer agreements, Offset programmes and budgets with a focus to master them in eight to ten years,” Dubey suggests, adding, “The rest can be sourced through imports.”

Ambiguous Offset Policy 
The nonchalance of foreign investors  toward Make in India in defence could be reversed by a sound Offset policy. Offsets’ discharge by foreign OEMs is a standard practice worldwide and have been leveraged by countries like Korea, South Africa and Brazil to create their own model. Since the 1970s Brazil has used Offsets to overcome technological barriers by effectively absorbing foreign capital, technological transfers and know-how. Aircraft manufacturer Embraer is the best example of what can be achieved through Offsets.

 Offset programmes could benefit defence manufacturing companies that need technology infusion, but the recent controversy over Rafale’s Offset discharge to Reliance Defence Limited (of the Anil Ambani group) may prove a setback. The Offsets clause in defence deals remains ambiguous. Rajib Kumar Sen, Economic Adviser, MoD, disagrees. “It is not true that Offsets have not benefited the Indian companies, but of course, there are issues in Offsets management related to delays, audit process and most Offsets discharge are through one avenue that is buying of goods and services,” he says. “However, we are trying to make it more effective and easy to implement,” Sen adds optimistically.

A distant dream? 
India’s capital expenditure for defence procurement is expected to be around $200-250 billion over the next ten years. So the roadmap for indigenising defence production is an exigency. Without it, private sector players could scarcely get board approvals for investments in defence production.

The draft policy seeks investments worth over Rs 77,000 crore by 2025, of which nearly Rs 70,000 crore will be investment for capacity addition in domestic production of defence equipment. Since FDI is a trickle, the envisaged expenditure will have to be funded from the defence budget, expected to be in the range of Rs 11,000 crore a year in the next seven years. “In its report to the Parliament, the Committee on Estimates noted that defence allocation amounting to 1.6 per cent of GDP was the lowest since India and China fought a war in 1962,” points out Amber Dubey.

The report of the Comptroller and Auditor General in 2017 mentioned that 55 per cent of the ammunitions of the Indian Armed Forces was below the Minimum Acceptable Risk Level and 40 per cent were at a critical level with a stock of less than ten days. “With operational expenditure taking away 66 per cent of the total defence budget for FY 2018-19, the amount left for new equipment purchases is a mere Rs 94,000 crore ($13.6 billion),” says Dubey. “This pales in comparison to China’s defence budget of over $160 billion, of which a significant portion goes into capital procurement,” he says.

The draft defence policy 2018 does endeavour to remedy the situation, but will it be able to woo investors chary of the policy environment? The drive for Make in India in Defence will remain a distant dream in the absence of a robust ecosystem.