Background

In 1956, the revised Industrial Policy Resolution reserved the arms and ammunition industry with the public sector and the ordnance factories set up under the British rule became the core group of industries. India focused on its capability to indigenously produce equipment with little technical know-how, leaving the advanced equipment requirements to be addressed through imports.

Reverses in its conflict with China in 1962 and the embargo imposed by the USA on the export of arms to India post 1965 war with Pakistan gave an impetus to India’s defence industry. This also heralded an era of defence ties with the Soviet Union, and, to this day, bulk of requirement of advanced weapon platforms has been supplied by the Soviet Union/Russia. India even commenced manufacturing of equipment, albeit by way of license. Although the nation received advanced weapons, manufacturing/assembling via the license route led to stagnation in India’s domestic capabilities in terms of research, development and production.

Towards the onset of the 21st century, India opened its doors to liberalization and progressive economic reforms. The private sector was given access to the defence industry and introduction of the ‘Make’ type of procurement in the Defence Procurement Policy (DPP) 2006 allowed the industry to develop and produce advanced defence equipment. However, lack of focus and funding for research and development (R&D) in the public sector, coupled with absence of an enabling eco-system for flourishing of foreign direct investment (FDI) and the private sector, prevented India from building its indigenous defence capabilities. Thus, India continued its reliance on import of advanced weaponry.

In an attempt to boost domestic procurement, the Government changed the order of preference in procurement under DPP 2013, making it a preferred choice to develop, design or manufacture defence equipment indigenously. Apart from simplifying the licensing policy and providing a level playing field to the private sector vis a vis the public sector, DPP 2016 introduced Buy (Indian IDDM)) and B uy and Make (Indian) categories of procurement to promote the ‘Make in India’ initiative.

Industrial Overview

India has the third largest armed forces in the world, however, has remained the world’s largest importer of major weapons with 13 per cent share in the global import of arms. In 2015, India was recognized as the seventh largest military spending nations, after USA, China, Russia, Saudi Arabia, France and UK. In 2019, India moved up to the third largest military spending nations in the world.

Public Sector. India has a huge defence industrial base with 41 Ordnance Factories under the Ordnance Factory Board (OFB) and nine Defence Public Sector Undertakings (DPSUs), collectively forming the public sector component. In addition, the Defence Research and Development Organization (DRDO) have over 50 laboratories under its aegis.

Private Sector. The sensitive and strategic nature of the defence industry was cited often to thwart the entry of private sector in defence, and, its contribution was restricted to supplies of raw materials, semi-finished products, parts and components to OFB and DPSUs. However, post liberisation, and the relative lacklustre performance of the public sector, led the Indian defence industry to open its gates to private sector. Since then the private sector has performed remarkably well, and today, the private sector is an integral part of the defence industry. Notable players in India’s private defence sector are the Tata group, the Mahindra group, Bharat Forge and L&T. Large defence projects are witnessing increasing private sector involvement. Examples are the development of the B attlefield Management System (BMS), Pinaka Rocket Systems and the Avro Replacement Programme. Various global defence companies like Airbus, BAE Systems, Lockheed Martin, Boeing, Israel Aerospace Industries, Raytheon and Dassault have increased their investments into India by the way of joint ventures with the private sector.

Strategic Partnership Model. To harness the strength of private industry and to foster Government Private Sector partnership, DPP 2016 introduced the Strategic Partnership Model to develop strategic weapon systems. These will be created over and above the capacity and infrastructure that exists in Public Sector units. Strategic Partners from the private sector would be identified to become partners with the MoD in their deliberations under Government to Government negotiations with foreign Original Equipment Manufacturers (OEMs) for collaboration in production. However, procedures for identification of strategic partners with the private sector need to be streamlined.

iDEX Initiative and Start-ups. The Government has earmarked funds for innovations under the iDEX initiative with the aim of trying to bring together innovators with public and private sector industry and the Armed Forces to find new technology solutions. Plans are also afoot to fund at least 250 defence start-ups over the next five years in seeking new technologies for providing a cutting edge to the Armed Forces. This is a good development but whether these start-ups will be ‘unofficially’ forced to tie up with DPSUs or given free hand to tie up with private sector industry and the Armed Forces will be important.

Defence Corridors. In pursuance to the budget speech of 2018-19, the Government decided to develop two defence corridors, one in Uttar Pradesh and the other one in Tamil Nadu. Subsequently, six nodes have been identified for Uttar Pradesh Corridor and five for Tamil Nadu Corridor. Although sops have been offered to the public and private sector to set up manufacturing units, the progress has been slow, since, assured orders for defence items is the primary driving force for investments to materialise.

Concerns

India, aspiring to be a world power, has long harboured a dream of possessing a technologically advanced and self-sufficient defence industry. While its economic power has expanded, and its technological prowess in certain areas such as nuclear, space and information technology has grown, it has not been able to create a globally competitive defence industry. Consequently, India is still saddled with a bloated, noncompetitive, non-responsive defence industry, capable of producing technologically inferior military equipment, and that too never on time and mostly exceeding their original cost estimates. The result is that India still imports 70 per cent of its defence requirements and the armed forces continue to grapple with the outdated, vintage and obsolete weapon platforms.

Periodic CAG reports point to sub-standard products, exorbitant prices, inability to meet demands of the Armed Forces, as also rampant corruption which is hardly possible without complicity of the Department of Defence Production (DDP) and MoD officials. Ironically, both MoD and DDP lack defence specialization and accountability. Government’s decision to turn the OFB into a public sector corporate for increasing exports, selfreliance, and latest technologies and innovations announced in May 2019 appears to have run into rough weather.

Role of Micro, Small and Medium Enterprises (MSMEs). Many OEMs including the OFB and DPSUs are offloading manufacture of components and subassemblies to MSMEs, but shortage of skilled manpower is forcing MSMEs to employ mix of semi-skilled and unskilled workers, which has resulted in low productivity. The ‘Skill Development’ program is unable to meet the requirement of skilled manpower of MSMEs. Unfortunately governmental focus on MSMEs appears to have diminished despite all the talk about their importance and future contribution towards India becoming a super power.

Make in India – a reality check. The Government’s ‘Make in India’ policy and increase in the FDI cap was seen as a major step to revitalise the defence industry. Accordingly, a number of committees under retired bureaucrats were set up by the government to review the problems being faced, and recommend suitable solutions to improve the business environment in India. However, very little has changed on the ground, be it the negative fiscal environment (including taxation), the lack of infrastructure (roads, water and power) and antiquated labour laws. The biggest challenges to ‘Make in India’ policy are:

• Decision making in defence procurement is bureaucratic whose primary focus is adherence to procedures and not on the end product. Like the Atomic and Space sectors, Defence procurement needs to report directly to the Prime Minister.
• The existing R&D infrastructure is antiquated with severely constrained design capability and limited support, both scientifically and financially. It continues to suffer from low investment, concrete plans and timelines for execution. What India needs is a research and development institution like the Defence Advanced Research Projects Agency (DARPA) in the USA.
• Complete side lining of the Indian private sector by DRDO, OFB and DPSUs in design, production and maintenance. Continued reliance on licensed production has compromised the domestic competence and capability to develop a product from scratch. Moreover, the monopoly enjoyed by these entities has bred complacency, arrogance and incompetency. With increased competition from the private sector in terms of productivity, resources and capacity utilization, the public sector needs to be completely overhauled and corporatised.
• Foreign OEMs have developed sensitive and strategic technologies over several decades, investing billions of dollars. It is a fallacy that these can be handed over to India without a majority control.

Conclusion

For improving defence manufacturing and becoming self-reliant in the near future, a lot will depend on how this sector is handled in terms of management, accountability, politicized unions, strikes, work culture, output and transforming limited successes to the required across the board excellence.

With global defence spending experiencing a slowdown in the last few years, global defence firms have increased focus on seeking growth opportunities in markets such as India. Armed with substantial budget, and an executive will to integrate the domestic industry with its global counterpart, the Indian defence industry has placed itself on a trajectory of growth and challengedriven production. Like every industry, the success of the defence industry will largely depend on efforts to maintain a conducive eco-system for all stakeholders and a robust framework for effective implementation of the reforms.