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Emerging Eco-System In Defence Production

Asit Mehta

The present Government's  deliberate, cautious and methodical approach to Re-Design the whole Eco-system in Defence Production with the 'MAKE  IN  INDIA' vision needs to be industry friendly, as so far the Eco-system, was definitely neither private sector friendly, nor conducive to let them play a pro-active role on their own…

In the past the Indian Defence industry including R&D as well as the Manufacture, remained confined solely within the Government and Public sector, resulting in a total monopolistic situation, complacency and thereby forcing India to be perennially import-dependent. Resultantly the private sector not only lost interest and remained alienated & aloof to the needs of the Armed Forces, but also deprived the Government of innovativeness, competitive spirit & originality. On the subject of self reliance, if we take into account only the direct purchases, it may appear that there has been an increase in the share of domestic procurement in comparison to the procurements from the foreign sources, but once the 'indirect defence imports' like subsystems bought from foreign companies by the public sector entities, DPSUs, OFBs and DRDO are included the actual foreign imports and their percentage share are much higher.

The above index clearly shows that although self-reliance has increased from the levels of the 1990s, but, it has been more or less static in the last 3-4 years barring the slight improvement in the indigenous content in 2011. The Indian public and private companies still lack technology, expertise and skills till date. The technologies received under the Transfer of Technology (ToT) programmes are still not being absorbed fully. In other words, the Eco System in Defence production so far, was definitely NOT private sector friendly, NOR conducive to let them play a pro-active role on their own. A strong and vibrant defence industry would have given us both, the economic as well as strategic clout on the world platform.

India is anticipated to spend around $130-$150 billion on defence modernization in the coming decade. While this makes India one of the largest and lucrative defence markets in the world, but, as a nation we need to cease this opportunity that it offers and fully exploit it for the benefit of local defence industrial base of the country. This will not only improve India's self-reliance and indigenization in defence production but will have a multiplier effect by way of helping in saving the much required foreign exchange, building technological capacity, creating employment and building of new skills.

The present Government has adapted a very deliberate, cautious and methodical approach in its efforts to "Re-Design" the whole Eco-System in Defence Production.  Their intent is to give a level playing field to all the players without any preference or bias, and to reverse the skewed ratio of Imports vs Domestic Product/Technology. While some of the initiatives so far taken up have just started exhibiting early results, some of them may have long Gestation period, and would be manifest and visible only over a longer period of time.

Issues and Concern

The key issue is to devise a strategy to get rid of the dubious distinction of being the biggest importer of Defence Products in the world and simultaneously, re-vitalise and synergise our own industry to be a part of Global Supply Chain. This can only be achieved by having a strong R&D & Industrial base of our own, thereby qualify and merit to be called an OEM, and by encouraging & enabling the private industry to not only come at par with the Govt/Public sector but also form a strong partnership with the OEMs and contribute to this noble national aim. The other concern is about channelizing the skills and skill development, leading to confidence in Defence Production, which is lacking at present. Towards this end the Govt has given a very potent &  powerful clarion call 'MAKE  IN  INDIA', which needs to have a very industry friendly Eco-System in Def Production.

Approach

In its rightful wisdom, the Government has envisaged, and decided to adapt, a multi-pronged strategy, encompassing all the stakeholders, such as, the Min of Defence, Min of Commerce & Industries (DIPP), Min of Finanace, the Armed Forces, Private industries etc, and moved along following lines:

  • Review and revamp all existing policies and procedures, especially those which are considered to be inhibiting /retrograde in nature
  • Synergize inter-ministerial interactions and dovetailing each other's core strengths  for faster and agile decision making
  • Ensure pro-active policies and steps to invite and ensure enthusiastic and willing participation by the so  far neglected private sector  Large as well as MSMEs.
  • Laying emphasis on time-bound projects and tasks.
  • Decentralizing decision making and adaption of result oriented approach.
  • Reducing/simplifying procedural hurdles, thereby Fast-tracking of actions.
  • EMPHASIS on a transparent system, eliminating “Trust Deficit “culture.
  • Close monitoring and regular review of progress on all above fronts.

 

Emerging Eco System

Having established and put in place a roadmap based on above approach, following tangible and visible initiatives have been taken by the Government in recent past:

  • The anomalies in excise duty/custom duty have been removed to establish a level-playing field between Indian private sector and the public sector.
  • The FDI up to 49% is allowed through automatic route. Beyond 49% would require the approval of the CCS on case-to-case basis.  Besides, the restrictions such as single largest Indian shareholder to hold at least 51% equity and complete restriction on Foreign Institutional Investor (FII) existing in the earlier policy have also been removed to facilitate investment in the sector.
  • To promote the participation of private sector, particularly SMEs in defence manufacturing, Outsourcing and Vendor Development Guidelines for DPSUs and OFB have been formulated which mandate that each DPSUs and OFB to have a short-term and long-term outsourcing and vendor development plan to gradually increase the outsourcing from private sector including SMEs. It also includes vendor development for import substitution
  • Public sector has been advised to jointly co-develop systems with private industries.
  • The Defence Products List has been revised and most of the components, parts, sub-systems, testing equipment, and production equipment have been removed from the prohibited List, to reduce the entry barriers for the SMEs.
  • Process of applying for Industrial Licence (IL) and Industrial Entrepreneur Memorandum (IEM) has been made completely online.
  • The initial validity of the Industrial Licence granted under the IDR Act has been increased from 7 years to 15 years.
  • The 'Security Manual for Licensed Defence Industry' has been issued.
  • Restriction of annual capacity in the Industrial License for Defence Sector has been removed.
  • Licensee has been allowed to sell the defence items to the Government entities under the control of MHA, PSUs, State Governments and Other Defence Licensee companies without approval of Department of Defence production.
  • Recognising the need for promotion of defence exports to make the Indian defence industry economically sustainable; Defence Exports Strategy has been formulated and is put up in public domain.
  • Preference to 'Buy (Indian)', 'Buy & Make (Indian)' & 'Make' categories of acquisition over 'Buy (Global)' category, thereby giving preference to Indian industry in procurement.
  • Companies having Industrial License for a product will automatically be issued RFP for the same.
  • Important changes have also recently been announced towards liberalizing the Offsets provisions.
  • Setting up of Defence & Aerospace Parks and SEZs by select State Governments with strong all round incentives, including fin assistance and soft loans
  • Issue of guidelines and directions to open up the T & E (Test and Evaluation) facilities including the use of firing ranges, of the DRDO, DGQA and the Services by the private sector and process to be followed thereto.
  • A new interactive portal “www.makeinindiadefence.com” announced on 22 Dec 2015 by the Min of Def to facilitate the Indian industry.

Other important steps under consideration by the MoD for implementation to attract the private sector are:

  • DPSUs & OFB to identify core & non-core strategic sectors to be outsourced.
  • Upgrade existing technology base by JV with competent private industries.
  • Support private sector in R&D.
  •  8-10 Make projects to be floated every year.
  • TPCR (Technology perspective and Capability Roadmap) to provide complete information for the benefit of potential vendors.

SQRs (Services Qualitative Requirements) to be realistic and within reach.

  • Introduction of 3rd party inspection by agencies of national repute with separate protocol.
  •  Govt to support  industries on long term basis
  • The minimum IC threshold for Buy (Indian) and Buy & Make (Indian) categories is likely to be revised to 40% and 60% respectively. For Make category, Minimum IC for prototype stage may be revised to 40%. Categorisation Committee is likely to be empowered to give specific recommendations for lower or higher IC threshold for the total contract value.

The Upside

  • Though, the final goal is still far away, yet there is ample evidence as of now, that the effort of Government and the chain of activities put into motion have started showing optimistic results: 
  • 90% AoN during last two years have been given to Indian industries.
  • Compared to 2010-11, when barely 50% of all procurement approvals were in the largely indigenous “Buy (Indian)” and “Buy and Make (Indian)” categories, their share has gone up to 86 per cent in 2013-14 and 94 per cent in 2014-15.

The committee on DPP has recommended three models for the Indian industries:

  • Strategic Partnership for Tier-I industries.
  • Developmental Partnership for Tier-II industries.
  • Competitive Partnership for SMEs.

The primary focus of strategic partners would be to support sustainability and the incremental improvements in capability of platforms through technology insertions over their lifetimes. Thus the important key competence, required by such partners is likely to be:

  • Competence in system engineering
  • Supply chain management to manage life cycle support;
  • Companies that are looking for assured revenue streams based on such long term partnerships, rather than those who could prefer one off contracts from time to time.

The Indian partner will be free to form consortium of Indian industries and collaborate with foreign OEMs.

Liberal governance

The DPSUs and the OFs are the major providers of defence weaponries/equipments to the defence forces and continue to dominate domestic defence production and Research & Development (R&D) facilities in India. Over the years, these undertakings have grown both in size and as well as in their portfolio of items and have acquired integration capability through license agreements for tanks, ICVs, missiles, frigates, submarines, aircraft and electronic devices, however, have not been able to innovate for technology upgrades or to absorb technology for in house production of major subsystems or any major hi-tech subsystems or carry out significant upgrades on their own completely.  For even upgrade and life cycle support the country had to resort to imports and the import contents have been increasing. OFB's new role will encompass design, development, bulk production and life cycle sustenance equipment. DPSUs with the liberlisation process of the Govt, will have to become competitive to survive in the emerging eco-system.

Parity to Private Sector

The Indian defence private sector now has the technological capabilities to undertake manufacturing required for the sector and they somewhat have proved their capabilities in the past especially if we consider the Naval segment where the country has successfully achieved higher degree of indigenization. The best example that substantiates the role of Indian private industries, is in developing the Artillery Gun Systems on their own and that too without any assurance of an order from the Government. The opportunity has encouraged Indian defence companies such as TPSED, Bharat Forge and L&T to develop with JV and collaboration. All of these systems under development are NATO design and can use our indigenous ammunition. The cost of Gun developed indigenously is likely to be almost 50% Cheaper than the import cost.

The Government is taking initiatives to encourage the private sector to participate in future acquisition programmes and ensure a fair competition in tendering and selection process.

Technology infusion

Private sector employs technology to overcome competition by lowering production cost simultaneously improving product quality and service levels.  Keeping this in mind, thus, bringing the defence programmes under 'Buy and Make (Indian)' and 'Make' categories will prove to be beneficial for the Indian vendors and in turn for the development of a robust Indian indigenous defence industry.

 Under the 'Make (Indian)' category, for instance, only domestic companies will compete and subsequently design and develop equipment for which the Defence Ministry will fund 80 per cent of the development costs, so the companies would not feel burdened with regard to huge investments in developing a system. The promised 8-10 Make Projects being floated by the MoD will strengthen the technological base of our industries further.

The present taxation structure does not encourage foreign OEMs to set up final assembly and integration facilities in India if the end customer is a domestic entity (Government or non-Government) in the aerospace and defence sector. However, the Expert Committee has fully supported the proposal to grant ERV (Exchange Rate Variations) protection to the Indian vendors. A level-playing field to private players will allow them to tie up with foreign manufacturers to develop certain equipments based on the requirement of users, create eco- system where the public and private sector can work together and call for a "complete revamp" and re-orientation of DRDO to allow active participation of the private sector in R&D.

Skill Absorption

One of the main challenges to the Indian defence industry is the shortage of a skilled workforce. The development of skills in the defence industry needs a guided and wholesome approach between the Government, Industry and academia intuitions to integrate their objectives together and develop an organized framework. Need to look at pool of trained ex-servicemen retiring from the defence services every year. The Govt has taken a bold step to boost the skill development and launched a National Skill Development Mission in Jul 15 under the newly formed Ministry of Skill Development and Entrepreneurship (MSDE) to achieve the vision of 'Skilled India'.

The new Defence Production Policy is likely to synergize and enhance the national competence in producing state-of-the-art defence equipment within the price lines and timelines that are globally competitive. Need to adopt viable approaches such as formation of consortia, joint ventures and public private partnerships etc. within the Government approved framework. The Academia, Research and Development Institutions as well as Technical and Scientific Organizations of repute have to get involved for achieving the objective to strengthen the eco-system of defence industrial base. Private sector must be involved in all future defence programmes as they have proved their mettle and international competitiveness in the past decade, and some companies like TATA, L&T, and Mahindra etc have already been working in high technology space manufacturing for decades. With the number of Make projects coming up and the competition, industries should be ready to meet the toughened requirements on indigenous competitiveness.

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