'Make in India'

Indian manufacturing industry, which has been in a moribund state for nearly a decade now, seems to be looking forward for a bright future with a spirit of hope and optimism in the context of the Government led by Narendra Modi endorsing the “Make in India” initiative in a big way to turn India into a global manufacturing hub.

But even with this initiative, India will have difficult times catching up with China where manufacturing account for 31% of the GDP (Gross Domestic Product). But then a beginning has been made to give a boost to the manufacturing sector in the country as never before.

Not surprisingly then the Indian defence industry is more than keen to leverage the potentials of “Make In India” campaign to boost the production of high end combat equipment locally. Rightly and appropriately, R K Tyagi, Chairman of  India’s state owned aeronautical major, Hindustan Aeronautics Limited (HAL), is of view that  the Indian defence sector has the all potentials to help India meet 70% of its defence needs in a few years. “This could be achieved by making India, the hub of MRO (Maintenance, Repair and Overhaul) business by investing in research and technology processes and by focusing on the development of skills in 70 plus trades relating to the aerospace industry,”.  Tyagi is quite clear in his perception that the key to India’s defence self reliance and domestic production is held by the strides in innovative research and development (R&D). As such, he has called for increased funding for R&D for boosting the indigenous development of high end fighting equipment.

On another front, experts advocate that there is a need for the promotion of disruptive ideas within India on the lines of DARPA (Defence Advanced Research Projects Agency) under Department of Defense in the US, Phantom Works in Boeing or Skunk Works in Lockheed Martin. There is also a need to sustain and support the vibrant skill creation as a pre condition for defence self reliance. It reflects that all the endeavours for a meaningful research and development cannot succeed unless the country has a strong skill base.

Defence manufacturing hub

Of course, on his part, Prime Minister Narendra Modi has given sufficient evidence of his government’s unwavering commitment to the cause of defence self-reliance based on the creation of a resurgent military industrial complex. Indeed, Modi’s description of FDI as “First Develop India” is being seen as a huge opportunity for the Indian defence sector to strive for excellence in all aspects of defence production.

Modi has reiterated the need for India to position itself as a major global defence manufacturing hub with a view to turn India into a leading exporter of defence hardware from being a numero uno importer of combat hardware.

“There will come a day when we would be in a position to export the same equipment we are importing now. This will also be beneficial to the Indian economy,” observed Modi while inducting the largest indigenous warship INS Kolkata into the Indian Navy.

Modi’s thesis is that only the total mastery of cutting edge defence technologies would help India emerge as a major military power. “We need to give immense importance to the latest technology. This will help the nation. Why should we import defence equipment. We must be self sufficient. Why can’t we send our defence equipment to others?” wondered Modi. On the ground level, Modi Government is fully well aware of the need for a long term strategic vision to usher in defence self- reliance.

Going beyond creating conditions conducive to the domestic defence production, Modi Government should leave no stone unturned to make the import lobby enjoying right connection an irrelevant entity in so far as the defence acquisition is concerned. In fact, for long the powerful import lobby with “discrete backing” from a section of the services, politicians and bureaucrats had played havoc with India’s quest for defence self reliance.

In fact, the services have been quietly diluting the qualitative parameters in respect of imported hardware while pitching for stringent qualitative norms for the home grown combat equipment. DRDO (Defence Research and Development Organisation) Chief Avinash Chander is right in his observation, “Let us have a performance audit of both imported and indigenous weapons systems and comparisons.” He also stressed the need for benchmarking home grown products vis-a-vis imported equipment.

Indeed, some of the pro- active measures taken by the Modi Government without any loss of time provide a clear pointer to the  seriousness that the Indian government attaches to the defence self reliance in all its manifestations. By all means, a major policy decision that provides a thrust to the realization of advanced combat system locally pertains to the scarping of the controversial tendering process for the import of 197 Light Utility Helicopter (LUH) for which Eurocopter and Russian Kamov were competitors.

Ending speculation on the import these choppers designed for operations in the high altitude battlefield, Modi Government has cleared the way for the domestic production of close to 400 of these helicopters which are the veritable life line of the Indian defence forces operating in the higher Himalayan ranger. In one quick stroke, this landmark decision has given a big boost to the Indian military aviation industry.

Of course, HAL, which would in the lead for the production of these helicopters, would need to seek foreign assistance to produce these helicopters meant to replace the ageing fleet of Cheetah and Chetak. According to the Indian Defence Ministry sources, the “buy and make Indian” category under which the helicopters will be produced by HAL has all the potentials to generate a business worth around Rs 40,000-crore for the domestic industry. In the long run, it cannot but be a win-win development for the fledgling Indian defence industry. But then HAL would need to shed its “complacency and take it easy “attitude to realize this project without cost and time escalation and adhering to the highest quality standards.

Other initiative of the Modi Government that would infuse a new energy into the indigenous defence production is the clearance given to the induction of 118 home grown Arjun tanks into the Indian Army formations. Not to be left, behind the high powered Defence Acquisition Council (DAC) council also given a go ahead for the production of Self Propelled guns to be mounted  on the chassis of the Arjun tank.  By all means, this deft move clearly reflects a pro active doctrinal preference towards giving Indian Army a distinct edge in a shot lived war especially in the arid zones bordering on Pakistan. Indeed, home grown Arjun has been found to be far more capable than the imported Russian origin T-90.

Further recently, DAC, under the new Defence Minister Manohar Parrikar has cleared the long pending proposal to acquire 814 mounted guns of 155mm/52 calibre. Sources said a fresh Request for Proposal (RFP) would be issued for the procurement which will be open to public as well as private companies. The Indian private companies that are likely to make a bid for this project include L&T, TATA and Bharat Forge.

Prior to that, in July this year the Modi Government had taken a landmark decision that would enable the Indian private enterprise to enter the military aviation field in a big way.  This move that would restrict the development and production of 56 transport aircraft at an estimated cost of Rs 12,000 crore to the private sector entity to the exclusion of the state owned HAL. The private player would be allowed to tie up with a leading global aeronautical entity. This move clearly recognises the vital role that private sector could play in pepping up the defence and aerospace production sector in the country. On another front, the move also nullifies the bias that the government had shown so far towards public sector entities.

Increase in FDI

Perhaps the most striking initiative of the Modi Government towards providing a thrust to India’s defence manufacturing sector lies in the hike of FDI (Foreign Direct Investment) to 49% from the 26% in July this year. There is an optimism that this step will nudge global OEMs (Original Equipment Manufacturer) to bring in their investment and expertise through joint ventures with Indian partners. This, in turn, is expected to boost the technology base and manufacturing capability of the Indian defence production industry.

As pointed out by Modi, FDI cap was increased with the two fold objectives-to make India self reliant and to export fighting hardware to the rest of the world. The goal of self sufficiency and self reliance in defence production  has  eluded India so far  with the country meeting 70% of its defence hardware requirement through imports that has placed an intolerable burden on the balance of payment position.  

“This step (FDI hike) is important as it would bring more clarity to the procedures and it will encourage new entrants into the defence sector. The Indian defence industry is already at the bottom of the value chain and there is very less incentive for anyone to set up defence industry in India,” says Baba Kalyani, Chairman and Managing Director of Pune based Bharat Forge which is a leading player in India’s defence production sector. Commenting on the FDI hike, Air Vice Marshal (Retd) Arvind Walia, India Head of Sikorsky says, “49% FDI is a welcome step but if it goes to 51% and beyond, it will help build technologies here and train local talent and skills. Foreign vendors will bring in new business practices. Higher FDI limit will give us flexibility to take a call and provide the best solution”.

Significantly, the increase in FDI has also been accompanied by the relaxation of investment rules that would help the Indian private sector to play a more effective role in the defence production sector. For instance, the new norm has done away with the earlier stipulation that the Indian entity should have a 51% holding.  This new norm has helped Reliance Aerospace and Punj Lloyd to bag licence for defence production. For as per the earlier rule, both these Indian companies were not eligible for the licence. While the promoters of Reliance Aerospace had 45.3% stake, promoters of Punj Lloyd held a 37% stake. Significantly, in quick succession the Government has cleared as many as 19 proposals from large Indian industrial entities for defence production.

It was in 2001 that the tightly held defence production sector was opened up for private participation with the FDI cap in the sector fixed at 26%. And for long, the FDI flow into India’s defence sector had remained abysmally low. Even so, debate continues to rage over the increased FDI bringing in more foreign investment in defence production sector. For instance, Dhiraj Mathur of the consulting firm PWC (Price Waterhouse Cooper) India says, “Ultimately this does not make any material change and may not be enough incentive for foreign firms to bring in investment and proprietary technologies.” But the consensus is that even if a much higher FDI were to be offered, no foreign company will part with the latest technologies. The public sector perspective is that national interest has been upheld by keeping the controlling stake in defence joint ventures in the Indian hands. More importantly the Government should ensure strong IPR (Intellectual Property Rights) regime and related investment protection guarantee to nudge foreign enterprises invest in India’s defence sector.

Private sector

All said and done, the Indian private sector which has a very poor track record in investing in research and development is known for its poor technological base and a lack of precision manufacturing skill. Of course, this gap can be filled through tie up with foreign companies that are willing to bring in investment and relevant technological inputs. In this context, Tata Advanced Systems Ltd (TASL), a major player in India’s defence production sector has joined hands with RUAG Aviation to manufacture fuselages and wings for the Dornier 228 aircraft at its facility at the aerospace SEZ near Hyderabad. As it is, TASL has a strong focus on providing solutions in areas such as aerospace, defence, missiles, radars, UAVs and command and control systems. TASL has also set up 100% export oriented joint ventures with Sikorsky and Lockheed Martin at its facility near Hyderabad.

In another development of significance to Indian defence sector, Tata Power SED (Strategic Electronics Division) has entered into an agreement with Honeywell International to produce “TALIN” navigation system in India. As per this agreement, Honeywell would license the design and hardware to assemble, test and eventually build the production kits for the navigation system in India. This is considered a major step towards bosting domestic manufacture of vital defence technology system. The tactical advanced land inertial navigator or TALIN enables precision navigation for vehicles and artillery movement even where GPS satellite guidance is limited in far flung and difficult to access geographical stretches.

Tata Group companies which have identified defence and aerospace as major drivers of their growth over the next one decade are planning to band together to achieve a greater level of synergy. “It makes sense for large corporate groups to consolidate their defence business under one head because this helps in seamless planning, bidding and interaction both within and outside the group,” points out Amber Dubey, partner and India head of aerospace and defence at the consulting and market research firm KPMG. Dubey drives home the point “The quick clearance of the pending orders by the new government, the focus on domestic production along with the increase in FDI in the sector to 49% and the statements about making India an aircraft MRO hub are indicators that have filled the industry with optimism”

The potentials of small and medium sector industries could be harnessed for pepping up the defence production sector through a scheme of incentives and hand holding. Indeed, many of them are doing quite well on the export front. With some capital and technology infusion, they could easily be a most favoured part of the global supply chain. For instance, MKU Pvt Ltd, a private sector defence entity has won a contract from Ecuador for the supply of 40,000 body armour to enhance protection for its police force. MKU was selected on the basis of meeting all specifications and requirements as per the global tender.

To a large extent and for long, defence production sector in the country attracted a lion’s share of investment from the government. Till a decade back, India’s defence development and production   matrix had remained centred around 52 laboratories under DRDO, DPSUs and 40 units under OFB with a very minor and peripheral role for the private sector companies. However the track record and performance level of these state controlled entities remained much to be desired. Moreover, many of the defence equipment these entities took for production could not reach their logical conclusion for the simple reason that there was “no involvement and commitment” on the part of services. It is high time that services are persuaded to participate actively in the process of design and development of fighting equipment with the commitment to buy the end product.  

Providing benefits

But for the private sector Indian industries to expand their role in defence production, there should be sufficient level of support with incentives and tax holidays. Because most of the defence orders are quite small and cyclical in nature, the returns for the private sector are not that attractive. However, the biggest incentive for the Indian private sector keen to enter into defence production is the dismantling of the “Licence Raj” by Modi Government. The removal of entry barriers for private sector along with the increased layout for defence sector in the current year’s budget augurs well for boosting self-reliance in defence production. In a development of significance, Modi Government has done away with the requirement of industrial licensing for the manufacture of all defence products except 16 items in the negative list.

The creation of Indian military industrial complex, vigorously espoused by Modi Government could perhaps follow the example set by BrahMos Aerospace, the Indo Russian enterprise dedicated to build BrahMos supersonic cruise missile. For BrahMos Aerospace, by roping in Indian industries in both private and public sector, has successfully created a robust supplier base centred round a missile industrial complex. .

The message from Brahmos missile industrial complex is that the private public sector synergy could be fully exploited to create a strong indigenous production base for the defence sector. The time has come to look at the Indian industrial infrastructure cutting across private public sector jurisdiction as a holistic resources base to push up the defence production matrix.

Setting up of consortiums involving both Indian and overseas companies could be an alluring idea to take forward the scope of defence production in the country. For instance, Ashok Leyland, the Hinduja Grop flagship company has floated a consortium with the heavy engineering major L&T and the European land defence major, Nexter Systems to collaborate for the Mounted Gun System (MGS) artillery programme of the Indian Army. Under the agreement, L&T will act as the prime contractor while Nexter will transfer the final integration and production of the MGS artillery system in India to L&T. Ashok Leyland will produce the chassis for the systems. The partnership among the three companies is based on delivering the best solution and value to the Indian Army. The customization of the systems to fulfil Indian requirements will be done in cooperation between the three companies.

But then private sector entities in India are not known to invest in research and development which holds the key to develop high performance combat equipment suited to meet the diverse needs of the Indian defence forces. Here the Government should come out with incentive schemes to allure private sector to invest in R&D. The private sector should be incentivised to take up the challenge of developing the product from scratch. For in this way only the country can master the technology going into a product.

In the ultimate analysis, the Indian defence production sector would need to give a big boost to export to stay competitive in the long run. But then to achieve this objective a proper policy framework along with incentives should be in place. In this context, DRDO chief Avinash Chander says that the country would need to adopt a new “policy mechanism” to facilitate the large scale export of defence equipment.

The biggest advantage that India would derive in the defence export market is the “competitive and affordable price tag” of the Indian defence and aerospace products. The biggest problem ahead of DRDO, which was for long a whipping boy for all that went wrong with the Indian defence development and production scenario, is the attrition of human talent critical to support the quest for mastering the state of the art technologies going into the combat equipment.

But attaining self reliance would be a complex, challenging and time consuming process. India would need to overcome sixty years legacy of “sheer inertia, lost opportunities and shocking neglect” to build a thriving, self-reliant world class defence production base. It is here that the Modi Government could put its act together to accelerate the process to create a strong Indian military industrial complex.