qtech_logo_t

The Changing Dynamics – Defence Industrial capability

Some of the credible measures taken by Govt are sign of changing dynamics for defence industrial capability.

The year 2001 looked as the game changer for Indian industries when the government opened up the defence industries for them, to meet the national objective of indigenization and self-reliance. However, the industries neither got the level playing field with PSUs nor got any firm commitment from the government. Then there were the procedural wrangles, blacklisting of firms and government's apathy towards the cause, nothing much moved and we remained 70% import country. India spent some $6 billion last year on weapons imports. Today indigenization as a concept will need to involve capability enhancement and development, increasing know-why, design and system integration rather than having numerical targets. Self reliance in defence is most critical part of defence manufacturing policy of India. A cross comparison of Arms import by China and India shows that Chinese have reduced their import to one sixth, where as Indian import of defence equipment has increased by over 50% during same period. The self reliance index during the period has shown a negative trend and import dependency has increased.

1
The present government's manifesto promising “increase the R&D in defence, with a goal of developing indigenous defence technologies”, as well as the “fast tracking of defence purchases” and number of steps taken by them in last few days gives an indication that they mean it. The steps in this direction are liberalizing the foreign direct investment rules for defence industries and  in that regards, the India's Department of Industrial Policy and Promotion has circulated a discussion document that proposes allowing up to 100 percent Foreign Direct Investment (FDI), in defense production, the note also suggested allowing 100 percent FDI in manufacturing of state-of-the art equipment,  a cap of 49 percent for investments which do not involve transfer technology and a 74 percent ceiling in such cases where the foreign investor is ready to share technology know-how, however, the government has recently permitted FDI upto 49%. Other steps being, prioritizing “Make” category acquisitions over other categories like “Buy & Make (Indian)”, easing the IL issue policies, allowing manufacturers to build more defense components without licences thus making it easier for Indian firms to partner foreigners.

The majority status of the present Govt has also made major arms countries to make a beeline for India for business. In this direction U.S. Assistant Secretary of State Nisha Biswal was first to arrive in New Delhi and then was French Foreign Minister Laurent Fabius to close the two stalled deal with India worth at least $40 billion, if implemented in full. These are: (i) the MMRCA (Medium Multi Role Combat Aircraft) deal involving 126 fighter aircraft; and (ii) the six units of a nuclear power plant at Jaitapur in Maharashtra with a combined capacity of 9900 mw. Each project's full cost currently is $20 billion which will inevitably be pushed up with the passage of time. U.S. Senator John McCain, is also due in India sometime next week, whose Arizona constituency includes weapons makers such as Boeing and Raytheon, has told the Senate that Washington should seek to bolster India's economic and military rise., Britain is also likely to send in Foreign Secretary William Hague and finance minister George Osborne soon. Russia, for years India's top weapons supplier, sending Deputy Prime Minister Dmitry Rogozin to visit the new government in Delhi two weeks ago.

The challenges are truly exhausting. Industrial Licenses for defence products are granted by Department of Industrial Policy and Promotion (DIPP). Till now, it was not readily apparent whether an Industrial Licence is required or not since defence products and arms are variously defined in a host of notifications such as the Arms Act, the Indian Trade Classification (Homogeneous Series) (ITC (HS)) of DGCIS, Ministry of Commerce. The National Industrial Classification Code, issued by the Department of Statistics. In Foreign Trade Policy, dual-use items have been given the nomenclature of Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET). Exports, necessary to meet offset obligations, are governed by the Foreign Trade Policy and such export is either prohibited or is only permitted under a licence and is controlled by DGFT. The DPP 2011¸ promulgated by the Ministry of Defence, also compiled its own list of defence products and services for offset purposes. In April 2013, the MoD having taken cognizance of the difficulty in the licencing process promulgated a list of defence products which is by and large the Wassenar Arrangement Munitions list.

The fact is that there is no alignment between these several lists and these diversities pose great difficulties to Indian industry. Business operations in the defence sector are conducted either through Licenced Production, Sub-Contracting, Joint Ventures or Foreign Technology Collaboration Agreements, apart from local start-ups. Norms for JVs are issued by DIPP vide Circular 01/2013. FDI matters are handled by the Foreign Investment Promotion Board (FIPB). Foreign Technology Collaboration Agreements are dealt by the RBI. Sub-Contracting matters are subject to Advance Licencing, Excise and Customs law.

Although the Indian defence opportunity is significant, the volumes are still inadequate for the Indian private sector to make economically viable and sustainable business cases for investments. Schedule 2 of ITC (HS) gives the Export Policy Regime. Under the Foreign Trade Policy 'export of Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) shall be permitted only against an export licence unless export is prohibited or is permitted without licence subject to fulfillment of conditions, if any, as indicated under/against any specific category or item. Provisions of Chapter IV A of the FT (D&R) Act,1992 as amended in 2010 shall apply to the export of SCOMET Items. In essence the issue of export of defence goods should be re-examined and most products and services re-classified as either restricted or free. In such re-examination Article 7 of the Arms Trade Treaty provides valuable guidance. A separate negative list of countries and equipment should also be introduced as prohibited for exports in the Foreign Trade Policy. This would bring clarity to Indian industry on the total business potential of investments in the aerospace and defence sector, considering opportunities that may be available in other countries. The DGFT also needs to be more transparent and approachable.

Recently, the DIPP  and the MoD (Ministry of Defence) have taken a slew of steps to further promote defence manufacturing in India. The details are as under:
Press Note 3, 2014 from DIPP, provides a revised list of those products that require an Industrial License for manufacturing. Any product not on the list does not require a license. It has also been further clarified that all 'dual use' products do not require an Industrial License. OEMs, which are in talk with the Indian companies for offsets or otherwise are requested to insist for an Industrial License only if it is required according to the revised list.

A  Security Manual for the Industrial License has been published by the DDP in Jun 14, for the companies who wish to apply for IL or already have one, have to now implement the security measures applicable to their setup as laid down in this manual. The defence manufacturing sector has been divided into three sections, A; B; C with Category A being the most stringent and Category C being the least. Indian companies already having an IL or propose to have one, are to carefully go through the Security manual and take the necessary steps to implement the applicable provisions.
Press Not 4, 2014 from DIPP, has intimated the use of NIC-2008 instead of NIC-1987 for all applications including an application for an Industrial License.

Obtaining a defence IL has been a difficult task as the industries were not clear about the product code to be applied, which would simultaneously satisfy both the MoD for licensing procedure and OEMs for offset programs. For example the applicant is required to apply as per NIC codes 1987, despite the list has been revised in 2008. NIC codes make no distinction between items for civil or military use. The revised list (see table) of defence equipment published recently is likely to streamline the issuance of industrial licences, and encourage new entrepreneurs in the sector. This will also make defence participation, at least at the component and sub-system level, easier and faster and there should be now no ambiguity on the fact that 'dual use' items do not require a License and neither do 'services' as it is not a part of the revised list. The revised list has following four categories:

•    Tanks and other armoured fighting vehicles.
•    Defence aircraft, space craft and parts thereof.
•    Warships of all kinds.
•  Arms and ammunition and allied items of defence equipment; parts and accessories thereof.

This is the second iteration that has been made by the DIPP to rationalize the defence products list. The revised list has been drawn from the ITC-HS coding list which is used by the DGFT to track; register India's foreign trade. The comparison of the revised list with Munition list is as per the table. It can be noticed that though the list is modeled on Munition list but not aligned with it as per the list of Wassenaar Arrangement.

Comparison of Revised List of Defence items and Munition List

Revised list for IL  as Per ITS(HS) Code                 Munition List

ITC(HS) CodeCategoryDefence Items IncludedBroad Comparison with Munition ListCategoryRemarks
 93.01 to 93.07  Tanks and other armoured fighting vehicles - Ground vehicles, as follows:-
(a) Ground vehicles namely tanks and other military armoured/armed vehicles and military vehicles fitted with mountings for arms or equipment for mine laying or the launching of munitions includes all tracked and wheeled self-propelled armoured and non-armoured weapon systems and trailers for towed and static weapon systems.
(b) Other ground vehicles namely all-wheel drive vehicles capable of off road use which have been manufactured or fitted with materials or components to provide Ballistic protection to level III (NIJ 0108.01, September 1985, or comparable national standard or above) with mountings for arms or equipment for mine laying specially designed for military use.
(c) Amphibious, hovercrafts and deep water fording vehicles for military use.

- Cryogenic and superconductive equipment especially designed or configured to be installed in military vehicle.

 ML-6

ML-20

 Ground Vehicles & Components incl AFVs
Cryogenic and superconductive equipment
1. Following Items not found
ML-5 – Fire Control
& Warning Equipment.

ML-7 – Chemical, Biological & Radioactive agents

ML-18 – Production Equipment

2. Defence Items not aligned with Munition List which is as per the Wassner Agreement for the export of arms and ammunition internationally.

3. The ITC(HS) Code, the Defence Item List and ML List  needs to aligned 

 87.10  Defence aircraft, space craft and parts thereof  “Aircraft” including but not limited to helicopters, “lighter-than-air vehicle”, “Unmanned Aerial Vehicles” (UAVs), Remotely Piloted Vehicles (RPVs), autonomous programmable vehicles, unmanned lighter than air vehicle (to include all variety of manned and unmanned airborne vehicles – includes target systems, loitering missiles, drones, balloons, blimps, aerostat, parachutes, paragliders, ground effect machines, air cushion vehicles/hovercraft, UAVs and launchers, designed for military application).  ML-10  Aircraft, UAV, aero engine & aircraft equipment Same as above
 88.01 to 88.05 Warships all kinds  -Vessels of war (surface or underwater), other surface vessels (Fitted with automatic weapons having a caliber of 12.7 mm or higher, CBRN protection, active weapon countermeasure systems), special naval equipment, antisubmarine/ torpedo nets, hull penetrators and connectors “specially designed for military use”.
-Air Independent Propulsion (AIP) systems (nuclear/conventional) for marine applications.
 ML-9  Vessels of war surface & underwater Same as above
 8906.01 Arms and ammunition and allied items of defence equipment; parts and accessories thereof  -All Rifle & Smooth-bore weapons and other arms, automatic/Semi-automatic or pump action type weapons, Weapons using case less ammunition, Silencers, special gun-mountings, weapons sights, signature reduction devices and flash suppressors to include rifles, carbines, revolvers, pistols, machine pistols, multi barrel rocket, machine guns, guns, rocket, cannon & missile systems –used on land, ships & shore based and airborne, howitzers, mortars, anti-tank weapons, projectile launchers, military flame throwers, rifles, recoilless rifles.
-Ammunition and fuze setting devices including the
following:
(a) Safing and arming devices, fuzes, sensors and initiation devices;
(b) Power supplies with high one-time operational output;
(c) Combustible cases for charges;
(d) Submunitions including bomblets, minelets and terminally guided projectiles.
-Bombs, torpedoes, grenades, smoke canisters, rockets, mines, missiles, depth charges, demolition charges, demolition-devices, demolition kits, aircraft missile protection systems (AMPS), “pyrotechnic” devices, cartridges and simulators (i.e. equipment simulating the characteristics of any of these items), specially designed for military use. “Energetic materials” and related substances includes all explosives like primers, boosters, initiators, igniters, detonators, smoke bomb, colour signals, propellants and pyrotechnics, oxidizers, binders, plasticizers, mobomers, additive scuopling agents, Precursors and other related ammunition.
-High velocity kinetic energy weapon systems and related equipment:
(a) Kinetic energy weapon systems specially designed for destruction or effecting mission abort of target;
(b) Specially designed test and evaluation facilities and test models, including diagnostic instrumentation and targets, for dynamic testing of kinetic energy projectiles and systems.
-Directed Energy Weapon (DEW) systems, related or countermeasure “equipment and test models” as follows:-
(a) “Laser” systems specially designed for, destruction or effecting mission, abort of a target;
(b) Particle beam systems capable of destruction or effecting mission- abort of a target;
(c) High power Radio-Frequency (RF) systems capable of destruction or effecting mission abort of target;
(d) Equipment specially designed for the detection or identification of; or defence against, systems at (a) and (c) above.
(e) Physical test models for the systems, equipment and components, specified under this head.
(f) ‘Laser protection equipment (e.g. eye and sensor protection)’.
-Electronic Equipment used for electronic counter measure (ECM) and electronic counter countermeasure (ECCM), surveillance, intelligence, Command and Control systems, Global Navigation satellite systems (GNSS) jamming equipment. Data processing, storage and transmission security equipment, identification and authentication equipment (including identification Friend or Foe and non-Cooperative Target Return Identification systems), guidance and navigation equipment’ Troposcatter-radio communications equipment’ and Military Information Security assurance systems and equipment (like cryptographic devices including military Cryptographic key management and Cryptanalytic systems), communication equipment, frequency modules and secrecy devices, specially designed for Military use.
-Armoured or protective equipment as follows:-
(a) Constructions of metallic or non-metallic materials, or combinations thereof, specially designed to provide ballistic protection for military systems
(b) Body armour or protective garments of level III (NIJ 0101.06, July 2008 or national equivalent and above).
-‘Specialised equipment for military training’ or simulators specially designed for training in the use of any firearm or weapon.
-Imaging or countermeasure equipment, as follows, specially designed for military use:-
(a) Recorders and image processing equipment;”
(b) Image intensifier equipment;
(c) Infrared or thermal imaging equipment;
(d) Imaging radar sensor equipment;
(e) Countermeasure or counter-countermeasure
equipment
-Miscellaneous: Concealment and deception equipment specially designed for military application, including but not limited to special paints, decoys smoke or obscuration equipment and simulators, and Metal embrittling agents.
 ML-1

ML-2

ML-3

ML-4

Ml-12

ML-19

ML-13

ML-15

ML-14

ML-17

ML-11

ML-8

 Arms & Amn less than 20mm caliber

Arms & Amn more than 20mm caliber

Amn & Fuze

Bombs & Torpedoes

High velocity kinetic energy weapon systems

Directed Energy Weapon (DEW) systems

Armoured & protective equipment

Imaging or countermeasure equipment,

Specialised equipment for military training

Miscellaneous Equipment

Electronic Equipment

Energetic materials and related substances

  Same as above

The Government's move to designate defence products for licensing purposes is also essential for export control. The Wassenaar Arrangement which regulates the international transfer of conventional weapons and dual-use technologies with Munition List a clear designation of defence products. Though, the list of defence products is clearly modelled on the Wassenaar Arrangement munitions list, but is far less detailed, generic, and needs to be more specific e.g. energetic materials and related substances include all explosives, which covers a large number of commercial, non-military-grade products. The detailed listing should consider specifying military grade, detonation velocity, maximum density, detonation pressure etc as this will be required for the SCOMET List. The Indian Government is expected to become a member of this global non-proliferation agreement along with Nuclear Suppliers' Group, Australia Group and the Missile Technology Control Regime, and the alignment likely to be step in that direction.

Maj Gen (Retd.) Dr. Bhupinder Yadav

Maj Gen (Retd.) Dr. Bhupinder Yadav

Comments are closed.