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Will ban on import of defence items stimulate indigenous production?

It is difficult to say that the import ban lists will succeed in achieving the objectives. Similar objectives set in the past, did not yield the desired results for a variety of reasons relating to MoD domain.

Taking everyone by surprise, the Department of Military Affairs (DMA) notified a list of 101 items last August declaring that their import would be progressively banned by the end of December 2025. Encouraged by the customary approbation of the Indian industry, it promised to notify another list. Delivering on its promise, DMA released the ‘Second Positive Indigenization List’ of 108 on May 31 with the ostensible and long cherished objective of promoting self-reliance and defence exports. Going by the media reports, a third list is already being prepared.  The ban on the listed items is to come into effect in a phased manner from December this year to December 2025, which coincides with the end-year of the first list. This means that the overall import of as many as 209 items would be banned by December 2025.

The items included in the second list include sensors, simulators, weapons systems, platforms such as helicopters and next generation corvettes, air-borne early warning and control (AEW&C) systems, tank engines, medium power radars for mountains, medium range surface to air missile (MRSAM) systems, and, of course, ammunition. Likewise, the first list also contained some high-technology weapon systems like artillery guns, assault rifles, sonar systems, transport aircraft, light combat helicopters (LCH), wheeled armoured fighting vehicles (AFVs), apart from less-complex systems and components.

The ban on import of 80 of the 101 items included in the first list and 49 of the 108 items in the second list is to come into force in December 2021. In effect, what it means is that 129 of the total 209 items covered by the two lists will not be permitted to be imported after 2021. This looks impressive, but closer scrutiny exposes the superficiality of idea underlying notification of these lists.

Many of the listed items are already being manufactured, developed, or trial evaluated in India. The Defence Acquisition Procedure 2020 (DAP-2020), and before that the Defence Procurement Procedure 2016 (DPP-2016), requires priority to be given to procurement of indigenously designed and developed equipment under the Buy (Indian Designed, Developed and Manufactured) category. Consequently, even in the absence of the two lists, the Ministry of Defence (MoD) would not have been able to import the items that are available, or can be easily manufactured, in India.

The fact of the matter is that this somewhat radical step of notifying the items whose import shall not be allowed after the stipulated dates is likely to be no more helpful in promoting ‘Make in India’ in defence than the similar steps taken in the past, even though the earlier steps did not envisage ban on imports.

Analogous steps taken in the past and the DMA lists

In 2013, Headquarters Integrated Defence Staff (HQ IDS), now reporting to the Chief of Defence Staff who doubles as DMA’s secretary, had issued a Technology Perspective and Capability Roadmap (TPCR). This document listed the technologies and capabilities required by the armed forces over the ensuing fifteen years.

The objective of TPCR 2013 was ‘to provide the industry an overview of the direction in which the Armed Forces intend to head in terms of capability over the next 15 years, which in turn would drive the technology in the developmental process’. For a variety of reasons, TPCR 2013 proved to be of little help in propelling indigenization.

Five years later, the second TPCR 2018 was promulgated with the intention of driving ‘the technology development process that the industry may like to pursue’ and to guide it ‘in planning or initiating technology development, partnerships and production arrangement’.

In many ways the TPCR 2018 was more industry-friendly than the earlier TPCR as it contained brief particulars of specific projects, expected life of the equipment, likely procurement quantity, and broad parameters and preferred technologies that the equipment was expected to conform to. The industry requires such details to plan investment in Research and Development (R&D), collaboration with foreign technology partners, and acquiring production capabilities.

The TPCR 2018 was subsequently supplemented by a list of Make-I and Make-II projects for development of prototypes and upgrades of various equipment/ systems/ platforms or their sub-systems/assemblies/sub-assemblies/components, primarily for import substitution. This was also an effort to encourage innovative solutions for indigenization. While all Make-I projects entail government funding, no such funding is available for Make II projects.

Despite the absence of government funding for Make II projects, the Indian industry evinced a lot of interest in taking up the projects. While the outcome of this effort is not known as MoD has been somewhat evasive about it, going by the fact that India continues to be among the top importers of arms, it will not be unreasonable to conclude that the TPCR 2018 also did not serve the intended purpose.

It would be fair to argue that three years is too small a period for the TPCR of 2018 to start showing results. The point, however, is that there has been no objective assessment of the outcomes of the past initiatives or logical explanation of why it was considered necessary to ban imports.

Looking back, the purpose of both the TPCRs and the list of Make projects was to sensitize the industry about the future needs of the armed forces so that it would be ready to meet the demand as and when MoD decided to issue the tender for procurement of the listed items. This is also the underlying objective of the DMA lists which begs the question what is so different about the ban imposed by the two lists. There is no clear answer to this.

MoD’s expectations from the ban

The press note issued when the first list was released said that it offered ‘a great opportunity to the Indian defence industry to rise to the occasion to manufacture the items in the negative list by using their own design and development capabilities or adopting the technologies designed and developed by Defence Research and Development Organization (DRDO) to meet the requirements of the Armed Forces in the coming years.

The press note accompanying the second list echoes similar sentiments, saying that not only ‘does the list recognize the potential of local defence industry, it will also invigorate impetus (sic) to domestic Research & Development by attracting fresh investment into technology and manufacturing capabilities’.

The note goes on to say that the Defence industry ‘can gainfully utilize this golden opportunity to build robust Research and Development facilities, capacities and capabilities to meet the futuristic requirements of the Armed Forces’ and that it ‘provides an excellent opportunity for ‘start-ups’ as also MSMEs which will get tremendous boost from this initiative.’

It is difficult to say what gives MoD the confidence that notification of the lists will succeed in achieving the objectives while the same, or at least similar, objectives set in the past, did not yield the desired results. For a variety of reasons, MoD’s confidence seems questionable.

Bare bones information inadequate

If anything, the DMA lists are more ambiguous than TPCR 2018 and the list of Make-II projects which, as mentioned earlier, contained broad specifications, anticipated quantities, and some other details, apart from the particulars of the nodal officer for each project.

Many industry insiders candidly admit, albeit informally, that more information is required than what the DMA lists and the TPCRs provide, for their companies to decide whether to invest in acquiring the capability for designing, developing, and manufacturing indigenous substitutes for imported equipment and platforms, to be sold to the MoD in a competitive environment.

Take, for example, ‘Sarvatra Kavach’, whose import will be disallowed after the end of the current calendar year. It defies imagination how a company can make a business case for developing this equipment in the absence of any other detail, unless it already possesses inside information about the project, or can somehow obtain it.

Even if such information is available, or obtained, it could be risky to act on it. Armed forces are known to be fickle and highly ambitious about the specifications. The industry cannot be expected to make risky investment decisions based on the surmise about what those specifications could be.

Uncertain business case for investment by the industry

Absence of, or even ambiguity about, the specifications is not the only imponderable. At least two other factors are important. One, there must be some clarity about the likely number/quantity of items likely to be procured. It is not enough, for example, to say that import of ‘next generation corvettes’ will not be allowed after December 2021. To generate interest, it must also be made clear as to how many corvettes are likely to be procured.

Two, the industry wants assurance that firm orders will be placed for the banned items and an indication of the timeframe within which the Request for Proposal (RFP) will be issued. Despite all the promises made in DAP-2020, assurance of firm orders remains the elephant in the room, as the procurement decision depends on several other factors, such as availability of funds.

As for the likely timeframe within which the RFP may be issued, neither the Services nor the MoD can make any prediction. As a matter of fact, there is no guarantee that MoD will procure the listed items as soon as the ban kicks in or, indeed, those items will be procured at all. It remains to be seen if despite these imponderables, the lists would trigger a race for acquiring capabilities to participate in the competition to meet the Services’ demand in an indeterminate future.

Confusing message to the foreign suppliers

Interestingly, while the lists are being projected as a game changing measure, MoD has kept its line of communication open with the foreign companies. For example, as per the first list import of Assault Rifle 7.62x39mm will not be allowed after December 2021. Attempts made by the MoD in past to acquire it from abroad have failed on account of the requisite specifications, apart from several other unknown reasons.

At one point, the MoD was looking for a 7.62x39 mm rifle whose calibre could be changed to 5.56x45 merely by switching its barrel and magazine. No global manufacturer could meet this requirement. Unless these specifications are made pragmatic, it is unlikely that the Indian industry would be able to deliver such a magical indigenously designed and developed rifle after December 2021, when the ban comes into effect.

Since this may not be possible, the foreign rifle manufacturers will continue to pin their hopes on the MoD procuring assault rifles under an appropriate procurement category that allows rifles to be manufactured in India with ToT from them. However, there is no way for them to tell whether this is likely to happen. Such uncertainties create lack of transparency in the procurement system instead of contributing to ease-of-doing business.

Where’s the money?

Lastly, an important question to ask is if sufficient money is, or likely to be available, for procuring the banned items from the Indian industry. An e-book issued recently by the MoD claims that Rs 72,000 crore have been set aside for procurement from the domestic industry. Two points need to be made about this claim.

One, this is not an additional grant to the MoD, over and above Rs 1,35,060 crore allotted for the Services’ capital expenditure during the current financial year (2021-22). This amount is Rs 77,182 crore less than what the Services had asked for. Two, it is not known how much of the amount earmarked for domestic purchases would go towards payment of committed liabilities and procurement from the Defence Public Sector Undertakings (DPSUs) and the Ordnance Factory Board (OFB).

It would not be wrong to say that not much amount may be left for new procurements, whether from the Indian industry or abroad.  Some experts are pinning their hope that the non-lapsable modernization fund will be set up soon, as recommended by the fifteenth Finance Commission. However, going by the details of the proposed mechanism, it will take five years to top up the fund to the recommended limit of Rs 1,88,000 crore. Meanwhile, the financial constraints may endure.

More importantly, as per the Commission’s recommendations, bulk of the money will have to be transferred from the Consolidated Fund of India (CFI) to the non-lapsable fund. This completes the circle, as all funds, whether by way of budgetary allocation or transfer to funds like the one proposed for defence, come from the CFI, which has been problematic in the past.

With the economy taking a hit because of the pandemic and demand from health, infrastructure and other sectors going up, it would be ambitious on MoD’s part to depend on the non-lapsable fund to finance big-time procurements of the banned items from the Indian industry.

Assumption of readiness of the industry: Self-goal

To conclude, the assumption underlying the ban orders is that the equipment answering the cryptic description given in the lists but meeting the yet-unknown elaborate specifications that the Services may come up with when the RFP is issued, will be available. This, as pointed out earlier, may not necessarily be possible. In such a situation, MoD will be left with no option but to waive the ban and look for outright purchase from abroad or consider ToT arrangements with foreign companies. This could be highly embarrassing.

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