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LOOK BEYOND DEFENCE-EXPOs TO OPTIMISE PRIVATE ENTERPRISE IN DEFENCE PRODUCTION

A significant take away in the defence-expo was the preliminary understanding between foreign OEMs and the Indian public as well as private industrial houses for forging  alliances in the field of aerospace high technology weapon system and military logistics services and defence. Taking the process forward beyond the conceptual frames to deal with real world market practices squarely. The author analyses—

The din of yet another defence expo is gradually taking a back seat while self adulation by the government machinery for organizing a successful national event from all account continues. However, the situation on the ground seems to have improved marginally from the state as it was seen in aftermath of the previous defence expo at Goa two years ago. Despite India being the most attractive market for arms sales, there has been hardly any significant FDIs by the foreign vendors as well as any major contribution by the indigenous industry as regards to supply of weapon and equipment. It goes to prove that there are environmental mismatches to do business in India which, obviously, are out of tune for foreign vendors as well as Indian private sector. It, therefore, needs an introspection.

A probable reason for such a state lies in lack of strategic culture and requisite politico-military synergies due to the absence of exposure to the matters military amongst the macro managers. As a consequence, the national security is not handled by the powers to be with the kind of seriousness it deserves. To further aggravate the situation, the government has been involved in the business of arms since last six decades which should have been best avoided after initial formative years.

The Government continues to be the planner, financier, innovator and manufacturer of weapons and equipment with monopolist policies, leaving a little cushion for the private sector in an unfair market situation. In consequence, Persisting failures to come up with cutting-edge technologies and high-quality products has resulted in strategic vulnerabilities in absence of accountability of institutions and individuals entrusted with providing with structural strength to the Armed Forces.

As a result, India as on date is the fifth largest military spender after the US, China, Russia and Saudi Arab accounting for 12% of global sales of military hardware. We have spent $ 75 billion in arms deal over last 15 to 16 years. Contracts worth Rs 1.3 lakh crore have been inked with foreign vendors since 2014, whereas 120 contracts worth 1.7 lakh crores have been concluded through indigenous sources out of which 90% acquisitions would be from 5 DPSUs, 4 shipyards and 41 ordinance factories leaving only 5% share of the private companies. The public sector model in present day economic matrix is out-dated, hence needs a transformational synthesis of manufacturing structures and processes. The answer lies in the privatization of the defence industry and strengthen it so as to make it fully responsive and in sync with the global corporate practices, albeit in a gradual manner.

In order to make privatization of defence production a success story, there is a need to create a level playing field to beat the competition from well-entrenched public sector as well as foreign OEMs. It is a function of the financial viability of the private enterprise through cutting edge technology, credit assurance, long-term demand, optimal purchase commitments ,industry-friendly policies & procedures and flexibility to operate in open national as well as international markets. Out of above, the biggest challenges as on date are the acquisition of the state of art technology and a market-friendly procurement mechanism in full resilience with operational requirements of the Armed Forces so as to ensure qualitative edge over the adversary.

The seriousness and sincerity of the government to take the national mission forward was reflective in encouragement and support shown to the private industry by announcing large number of incentives to the new entrants. A significant take away in the defence-expo was the preliminary understanding between foreign OEMs and the Indian public as well as private industrial houses for forging strategic alliances in the field of aerospace, high technology weapon systems and military logistics services. These big ticket joint ventures, when implemented, are expected to create large number of ancillary units to serve the offset obligations in the initial stages which can further be expanded to form a robust defence production industry in the country.

Towards this end, the government has declared two defence industrial corridors namely ''Chennai to Bangalore'' and '' Agra to Kanpur''. The scope of the policy has a focus on encouraging private enterprise who have tremendous talent amply proved in non military domain making Indian economy to graduate from regional to international standards. A new procurement procedure has also been initiated which is expected to further make it easy for private companies to join the defence production bandwagon. However, despite all the marketing exercise as seen in the defence-expo, the approach of the government still seems to be cautious and needs much more to be done so as to open up to the apparently restrictive environment in order to align the private sector to contribute meaningfully to the national cause.

The indication of no preferential or protectionist policies favourable to Indian private industry by the defence minister in the defence expo has dampened the enthusiasm of few private entrepreneurs. They obviously missed out the underlying philosophy that there would be no dilution in quality content for equipping the Armed Forces in order to make their businesses to flourish. So, it would be an open competition with equal stakes for all and they have to be prepared to meet the challenges as regards to the quality of the equipment. Yes, what government is willing to do is to help out the new entrants by way of subsidies in R&D, consultancy, finances and miscellaneous structural synergies to offset the perceived disadvantages to venture out in a new business domain.

Looking at the sensitivity of the matter, the government is trying to bring in a paradigm shift in their ''Make in India'' campaign by way of pragmatic approach to achieve a long term vision to enhance national power in all its manifestations. The team leaders have reset and repositioned the national priorities to exploit the in-house leverages to boost the defence production and affiliated organizations. In this industrial matrix, the public sector would continue to provide core industrial inputs alongside selected private industries as competitors, thereby enhance the quantity as well as the quality content of the product and services.

Unlike government financed and protected public sector, the edifice of private sector is profit maximization for which they invest, innovate and struggle to create a niche for their product so as to survive in the dynamics of open market. Unless there is a reasonably assured market and optimal profit generation, they are unlikely to venture out in a maiden business line. It is therefore, essential for government to facilitate fair market conditions by creating level playing field for private players to enter the defence production.

Amongst the incentives to foreign vendors, FDI up-to 49% through automatic route and up-to 100% in case of selected high sensitive technology equipment has been introduced. The offset clause has been increased from 30% to 40% of the project value so as to provide incentives to the Indian industry seeking joint ventures with foreign OEMs. Besides this, government plans to provide financial support for research and development to private sector depending on merit of each proposal. The current DPP encourages the Indian companies to tie up with multiple foreign OEMs to field their equipment in response to RFPs, albeit with provision of transfer of technology once contract is signed.

The new policy on strategic partnership with the foreign OEMs entails facilitating joint ventures between selected big Indian business houses with the foreign multinational companies. Reliance, Mahindra & Mahindra, Tata, L&T, Bharat Forge etc have been considered for entering into strategic partnership with the manufacturing giants in the fields of air crafts, ships, submarines, missiles, artillery guns and the like. These companies, in initial stages, are likely to assemble the equipment in India and expand their activities gradually.

Few of these foreign OEMs may have reservations in transfer of technology for joint ventures as it impacts on their own future businesses. Therefore, it may not be a sensible idea to insist on the technology transfer in all the cases. The terms of references to include higher offset obligations, commitment to meet our requirements and employment of Indian work force may be more acceptable to them instead of parting with their core competencies. Incentives of higher FDI may be linked to above parameters and willingness of transfer of technology, based on merit of each case.

Apropos, it may be pragmatic not to insist on preconditions of technology transfer in all the cases initially. It may be better to permit foreign OEMs to establish turnkey projects as being suggested by a foreign visiting dignitary with an idea of ''Make for India''. It would provide much needed structural strength to our defence production with foreign capital. A network of ancillary units will also develop to support the production line benefitting small and medium enterprises, generating direct as well as indirect employment.

India in such an arrangement would be benefitted by cutting down expenditure on weapons due to competition and also reduction in logistics and after sale services costs. Moreover, eventually the technology and techniques would be known to Indian workforce over period of time. To be fair to foreign OEMs, even they need to have a reasonable degree of confidence in Indian systems and their own profitability prior to transferring the technologies.

Since the Indian private companies do not have adequate experience in arms manufacturing, it may be worth trying clubbing selected public sector companies along with the nominated private companies as strategic partners for joint ventures with the foreign OEMs. It would optimize capabilities of public as well as private sectors as regards to infrastructure, engineering support, skilled manpower, finances, market dynamics, managerial interface and operational viability of the enterprise.

The Joint ventures with the foreign OEMs is the key to the structural buoyancy of the private sector in present day Indian context. We may have to accommodate the interests of the foreign OEMs as of now as they have the technology, the most essential ingredient for manufacturing weapons and warlike stores. Pragmatic and bold initiatives are needed to reduce our military vulnerabilities, thereby enhancing our ''strategic pull'' in the contemporary world community.

In Indian context, manufacturing of high-technology, high-secrecy, big-ticket strategic equipment certainly needs government interface, wherein public sector companies along with private partners would be better bet than leaving it purely to the private enterprise. Such an arrangement may also take care of security concerns of foreign countries as regards to transfer of their cutting edge technology as Government of India would be one of the stake holders.

The biggest fear of the private sector is the competition with the DPSUs who enjoy advantages of assured capital at zero borrowing rates, well established manufacturing chain, experienced skilled manpower & management and above all a assured purchase of their product. Whereas the private sector has none of it, hence, expecting them to compete with the public sector is an impractical proposition. They need to be given certain advantages till the time they get stabilize in their new business line.

To start with there is a scope of procurement of common use products available in the open market at competitive rates from the private enterprises. To do that, separate RFPs exclusively for private sector may be floated to make up the short fall of production capacities of the ordinance factories in the initial stages. Once the satisfaction level of this model is achieved, the concerned ordinance factories may be assigned new product lines so as to utilize their structural capabilities and skilled manpower. Clothing, shoes, general stores, dual use optronic and electronic equipment etc. may be considered in this category.

High demand and Low technology weapon & equipment like optronics, communication equipment, vehicles, BPJs and ammunition etc would be suitable product lines for the private enterprises. The DRDO, OFB and DPSUs may share their designs with the selected private companies who have essential infrastructure as their manufacturing partners. Besides above, permitting private companies to export the surplus production of the warlike stores after fulfilling laid down internal obligations would be a big incentive to the private sector. The concept of GOCO (Government owned and corporate operated) as a test case in running the Army Base Work Shops once validated may be used for other logistics oriented services and government owned factories.

Subsequently, privatizing selected DPSUs and ordinance factories would be an appropriate step to infuse better management practices to draw economies of scale. This can be done by sale of the public sector units to the private business houses with their existing infrastructure and man power in fully operational state.

The present procurement procedure is too complex and complicated and does not infuse confidence amongst private sector and foreign vendors who are used to fast track liberal ways of seeking and conducting business. It needs to be simplified for 'ease of doing business' by aligning it with corporate sector practices. The concept similar to ''Single Window Clearance'' already in vogue in other sectors may be looked at with appropriate changes as regards to special requirements of the defence sector. There exists a scope of simplifying the entire procurement mechanism thereby facilitating a level playing field in sync with international practices so as to motivate private sector as well as foreign vendors to join our national efforts.

The government should gradually switch its role from a controller to a facilitator even in defence production like it has done for other industrial sectors. To do that, there is a need to further simplify the present DPP with their undue emphasis on centralized control and labyrinth of procedural spirals. Permitting fair market competition is right recipe for encouraging the private enterprise to venture into field of defence production. Gradual privatization of public sector to the extent possible would be the right policy in the longer run in Indian context

To do above, we have to take the process forward beyond the conceptual frames as highlighted in the defence expos and deal with the brass-tacks of real world market practices squarely. Given the appropriate support, Indian private sector has potential and capabilities to achieve the national aims and objectives. Indian Diaspora is doing wonders in the field of defence production in their adopted countries across the developed world, then where is the doubt in capabilities of our private enterprise with similar DNA. What they need is an inspiring leadership and a facilitating business environment so as to be confident to say ''Difficult we will do, but miracles would take little time''.

The author is former Director General of Infantry, Indian Army and can be contacted at rameshwar.yadav@gmail.com .Views expressed are personal.

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