Over the last few months a number of defense deals that India was negotiating with international companies have come unstuck. In September 2016, India made a breakthrough in the Rafael deal, which was hanging in balance since 2007. India will buy 36 fighter jets from the French company, who will be under obligation to invest back at least half the contract value in India. In December 2016, we signed the Howitzer artillery guns deal worth USD 750 million with BAE Systems. In discussion since 2012, this deal now stands apart as it includes a significant Make in India component. This has been followed by yet another deal with Russia for S-400 air defence missile program. It also includes an agreement for Hindustan Aeronautics to manufacture the Kamov 226T helicopters.
These deals are noteworthy from two equally important standpoints: one, they enhance India’s capabilities to secure the homeland and two, they will strengthen India’s resolve to become self reliant in defence manufacturing. For a growing economy like India the challenges of securing the homeland are many. Despite India spending almost about USD 24 billion a year on procurements, our Forces have often complained of paucity of arms and ammunition. A large part of the total procurement budget is spent on expensive counter insurgency equipment such as bullet proof jackets, radio sets, vision devices, simulators etc.
With a view to improving our resources, becoming self reliant in defence manufacturing and eventually turning an exporter of defence equipment, the Government of India paid much attention to this sector over the last one year. Having included Defence as a strategic manufacturing sector under “Make in India”, the government has announced several initiatives to lower entry barriers and improve ease of doing business in the sector.
A very significant step in changing the course of India’s defence sector is the new Defence Procurement Procedure (DPP) notified recently. I believe that the revised procedures will provide more flexibility to industry players to undertake defence projects. An obvious shift from war time purchases to peace time development will ensure that companies plan and invest in such projects. If implemented the way it is planned, the new DPP can be a game changer for India’s defence procurement, create an eco system for defence manufacturing and build the defence supply chain. The “Indigenously Designed, Developed and Manufactured” (IDDM) category, added to DPP, will surely boost design and development of defence products and also ensure that end users “Buy Global” only after having considered all options of buying India made products.
In a huge departure from its existing structure, an industry largely dominated by Public Sector Undertakings and ordinance factories until recently, has been allowed 100% FDI. In the existing scenario the Defence PSUs and Ordinance Factories together outsource about 20 to 25% of their production requirements to private companies.
The new DPP throws open many opportunities for SMEs and start ups as well. Currently about 6,000 MSMEs are engaged in defence manufacturing. As the Government makes every effort to provide MSMEs a level playing field, this figure is expected to get a big boost. SMEs are increasingly being encouraged to shift from being vendors to becoming co-developers and co-manufacturers. With the 100% refund to the vendor in case of delayed procurement the government has demonstrated that it is really ready to walk the talk.
The Government’s well meaning inclination to encourage MSME’s in defense manufacturing is demonstrated by preference being accorded to them in certain categories. The availability of Government funding of up to 90% of R&D also augurs well for MSMEs wanting to make a foray in this sector.
Defence technologies generally operate at a much higher level than is prevailing in a nation. India thus needs to give a significant push to filing patents and developing indigenous technologies. The big challenge here is getting access to technologies to build upon. In the past, I have led several A&D Missions to the UK and Israel where several manufacturers have expressed their reticence to transfer sensitive defence technologies, unless they are in control of the contract.
The new DPP includes a number of clauses to encourage R&D and technology development. A number of Indian companies, including the Hi Tech Robotics Systemz Ltd, have taken significant steps to develop indigenous technologies. Robotics are expected to play a major role in defence in the years to come. For instance, our CBRN Robot co-developed with VRDE, Ahmadnagar (DRDO lab) can be used for saving lives of defense personnel in Chemical, Biological, Radiological and Nuclear warfare. At high altitudes the robot can be used for surveillance and also aid rescue operations.
Another concern that Prime Contractors often raise is their inability to build an ecosystem for defense manufacturing in India, if they do not get steady and consistent contracts. This continues to remain a concern for SMEs as well. Small companies do not have the wherewithal to sustain themselves on spurts of defence manufacturing contracts alone. While the defence sector has its own nuances, India can draw on its experience of building a thriving auto sector by creating an enabling ecosystem. From being a net importer of vehicles to becoming one of the largest manufacturers of auto components in the world, Indian automotive sector has come a long way in three decades.
The draft Defence Exports Strategy and the proposed Export Promotion Body will surely steer defense exports in the right direction. With DPSUs being allowed to export up to 10% of their annual production defense exports have crossed a figure of Rs 2,000 crore in the last two years.
While the DPP has addressed several challenges facing India’s defence manufacturing sector, effective deployment holds the key to its future. The path ahead is thus not without its challenges: Questions such as treatment of blacklisted suppliers still remain unanswered. The decision making process still leaves a lot to be desired. And, developing companies with requisite quality procedures to quickly migrate to manufacture of weapon systems continues to remain an issue. A big challenge thus is to equip manufacturers with the ability to design, develop, manufacture, integrate, test, maintain and upgrade defence systems required by the Armed Forces.
Though the Government has taken some key steps in boosting defence manufacturing in the country and the private sector is upbeat, the question remains how long will it be before India becomes a net exporter of defence equipment? Can defence manufacturing in India go the auto components manufacturing route? What will it take to change the mindsets of both the Government as well as the private sector towards creating an increasingly open environment in India’s Defence sector?