There is a distinctive buzz about Prime Minister Modi’s new campaign for “Make in India”. The thrust is to increase share of manufacturing from the current level of 15 per cent of Gross Domestic Product (GDP) to 25 per cent and create additional employment opportunity of ten million per year. This has led a few cynics to observe that, “There is a lot of sizzle but where is the steak?” Columnists such as Swaminathan Iyer are of the view that “Make in India” is only an outcome and not a policy while Governor of RBI Raghuram Rajan is of the view that the government is putting too much of thrust on export-led growth and should give primacy to “Make for India”. Discerning writers such as Debasis Basu however, feel that what is germane to the debate is the “cost of doing business” in India.
The defence services account for nearly Rs 2.29 lakh crore of the Central Government Budget…
Defence manufacturing came out of the stranglehold of Public Sector Undertakings-Ordnance Factories (PSU-OF) monopoly with major liberalisation in 2001 with 100 per cent private sector participation and the recently announced 49 per cent in Foreign Direct Investment. Policy footprints such as the Defence Procurement Policy (DPP) 2013 have created a level playing field for the private sector. The Defence Production Policy 2011 aims at higher self reliance in critical technology and the Offsets Policy 2012 which seeks to leverage our big arms’ acquisition to bring in state-of-art technology, and long term partnership with Original Equipment Manufacturers (OEMs). The Self Reliance Index of our defence acquisition, however, remains at a wobbly 30 per cent despite spasmodic policy posturing to improve indigenisation.
Defence industry is a subset of a nation’s concern to ramp up manufacturing capability. The capability of our defence industry in terms of value addition, self reliance in critical technology and policy initiatives so far and their impact needs to examined and a possible synergy between “Make in India” policy and defence industry capability needs to be brought about.
Defence Manufacturing and Challenges in Self Reliance
The defence services account for nearly Rs 2.29 lakh crore of the Central Government Budget which is nearly 2.5 per cent of the GDP and 13 per cent of the Central Government expenditure. The trend of allocation to revenue and capital acquisition schemes is given below.
Table 1: Service/Department-Wise Break Up Of Defence Expenditure (Rs. Cr.). Source: Annual Report 2013-2014, MOD
It would be worth to note that while the increase in the revenue allocation roughly matches with the wholesale price escalation, the capital acquisition budget has witnessed significant growth of around 20 per cent per year, far outstripping the overall trend of increase in defence expenditure. Capital Acquisition constitutes nearly 40 per cent of the defence budget of which the value of production of the Defence PSUs and the OFs account for the following:
Table 2: Value Of Production And Value Addition Psus And OFB (Rs. In Crore). Source: Annual Report 2013-2014, MOD
It would be seen from the above that while the average yearly increase in Value of Production (VOP) of Defence PSUs is around five per cent per year, in case of the OFs it is only two per cent. It would be interesting to note that the value addition of different defence PSUs varies between 23 per cent and 57 per cent; it is very high, about 85 per cent, for OFB. PSUs such as HAL and MDL show a poor level of value addition as they are largely system integrators while Midhani and BDL have contributed handsomely to indigenisation. The higher indigenisation in case of OFBs is largely attributable to the low end technology.
Historically, India has been availing of technology through licence agreements from Russia and a smattering of Western countries. The exceptions are some of the missile systems, small arms and their ammunition and tanks where technology has been indigenously developed by the Defence Research and Development Organisation (DRDO). The Light Combat Aircraft (LCA) Tejas with Final Operational Clearance (FOC) will hopefully be a major “Make in India” platform. It must be mentioned that indigenisation has effected a substantial reduction in cost of the systems due to India’s labour arbitrage, good facilities and fairly well-trained labour force. The following table brings out the cost savings of a few major products through the Transfer of Technology (ToT) route.
Table 3: Indigenisation & Cost Savings through ToT. Source: Table prepared by Author based on data obtained from DPSUs/OF
Self-reliance trends in defence acquisition present a dismal picture. A committee under Dr APJ Abdul Kalam, the then Scientific Advisor to the Raksha Mantri, had recommended that India should ramp up this quotient from 30 per cent (1995) to 70 per cent by (2005). The following table, however, brings out how the Self Reliance Index has remained sticky at around 30 per cent.
Table 4: Total Acquisition and SRI: Trends. Source: Table Prepared by Author based on data obtained from Ministry of Defence
The principal reason for this state of affairs is our poor design capability in critical technologies, inadequate investment in R&D and our inability to manufacture major sub-systems and components. The Transfer of Technology route has provided India with the know-how without providing the clue for know why. It is due to this that even for an upgrade of the systems, defence PSUs are critically dependent on the original licensors. A case in point is the SU-30 upgrade where the Russians often hold HAL to ransom.
The following table brings out the gaps in critical technology of different systems.
Table 5: Critical Technology & Gaps. Source: DRDO, BEL and HAL
From the table above, it would be seen that the major deficiency in terms of capability is in the areas of propulsion, weapons and sensors. Some of the critical technologies where progress made by the DRDO has been abysmally poor are Focal Plane Array (FPA), Active Electronically Scanned Array (AESA) Radar and Stealth Technology. India is presently engaged in the design and production collaboration with Russia for a Fifth Generation Fighter Aircraft (FGFA), that will have stealth features.
India is presently engaged in the design and production collaboration with Russia for a Fifth Generation Fighter Aircraft.
Procurement, Production and Offsets Policy in Retrospect and Their Impact
The Defence Procurement Policy 2013 envisages higher preference to Buy (India), Buy and Make (India), and Make options over the earlier thrust towards Buy (Global) or the import option. It ostensibly looks at creating a better level playing field between the Public and Private sector with greater impetus towards indigenisation. A major departure from the previous policy is allowing the private Indian industry to avail of ToT which was earlier the exclusive domain of DPSUs/OFs. The policy also encourages Joint Venture with OEMs. Prime Minister Modi’s “Make in India” campaign has added another category to Defence Acquisition though it would include cases coming under the panoply of ‘Buy and Make’ and ‘Make’ where technology is indigenously developed.
The Offset Policy guidelines (2012) have for the first time allowed ToT through the JV or through non-equity route. It has also allowed multiplier for critical technology areas such as FPAs, Nano Technology-based sensor, fiber laser technology and THZ technologies.
The Defence Production Policy (2011) aimed at achieving substantive self-reliance in design, development and production of critical sub-systems by forming consortia, JVs by involving academia and R&D institutions. It also promised to set up a defence technology fund to support public, private sector as well as academic and scientific institutions for pursuing high-end research. The impact of all such policies on FDI inflow, export, augmentation and long term partnership has been quite disappointing for reasons enumerated below.
Value addition in the global value chain for India was only one per cent in 2009 as against nine per cent in China and Germany…
The OEMs for setting up business in India in partnership with public/private players want to have a major say in the management of manufacturing. While the announcement to scale up the FDI limit from 26 per cent to 49 per cent in the last budget has been a step in the right direction, it is unlikely to enthuse reputed global manufacturing houses to set up manufacturing bases and bring in front-end technology though some Joint Venture intents have been evinced for companies like the Tatas. On the other hand, countries such as China and South Korea have become major manufacturing hubs in aeronautics and ship building technology by being very liberal in their FDI policy and providing high modicum of ‘Ease of Doing’ business compared to India.
Besides the FDI policy, inadequate investment in R&D and lip service to technology funding by making a token allocation of Rs100 crore to Defence Technology Fund in the last budget is adequate commentary on our lack of seriousness in the area of Research and Development. The allocation to DRDO remains sticky – around six per cent of defence expenditure though successive parliamentary committees have recommended a minimum allocation of ten per cent. Private sector giants such as the Tata, L&T and Mahindra and Mahindra invest less than one per cent of their turnover in R&D unlike in countries such as France where corporate organisations invest more than ten per cent in R&D. It would also be interesting to note that the overall allocation to R&D is significantly lower (0.85 per cent) in India compared to advanced countries which spend in the range of 2.2 per cent to 3.5 per cent. The following table would bring out the trend.
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Written by Sushant Singh | Updated: October 13, 2015 8:03 am
Defence manufacturing has been identified as a priority sector in Prime Minister Narendra Modi’s flagship ‘Make in India’ scheme. While the nomenclature has come into vogue last year, indigenous defence manufacturing has been a rather unsuccessful quest for decades.
Notwithstanding some initial steps by the NDA government — such as increasing the FDI limit to 49 per cent — a lack of clarity on policies from the defence ministry has constrained the progress on ‘Make in India’. Defence minister Manohar Parrikar had promised the revised Defence Procurement Procedure (DPP) by April but it is now expected to be released in December. A new DPP will be the starting point for any meaningful action on ‘Make in India’ in defence.
In the last five years, India has been the world’s top arms importer with a 15 per cent global share of imports. Nearly 50 per cent of the capital acquisition budget is spent on imports. This excludes many “indigenous” items assembled by Ordnance Factories (OFs) and Defence Public Sector Units (DPSUs) where a high percentage of raw materials and sub-systems are imported.
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In 1995, a committee under APJ Abdul Kalam, the then scientific advisor to the defence minister, had recommended that India should improve its indigenisation content from 30 per cent to 70 per cent by 2005. Although no official data exists, the self-reliance in defence production is still estimated to be less than 35 per cent.
About 90 per cent of domestic defence manufacturing is currently done in the public sector, by the 9 DPSUs and 39 OFs. Since 2001, when private participation was allowed in defence sector, 222 letters of intents and industrial licences have been issued to around 150 firms. Of these, only 46 firms have commenced production so far.
Globally, 80 per cent of components, aggregates and assemblies of complex weapon systems and aircraft are made by MSMEs. In India, more than 6,000 MSMEs are currently supplying components and sub-assemblies to the DPSUs, OFs, DRDO and private firms. The defence manufacturing sector currently employs more than 2 lakh people in India. This size of military industrial workforce is similar to nations like the UK and France, which are the top defence manufacturers.
India allocated 1.74 per cent of its GDP towards defence spending in FY16 and is among the top 10 countries in the world in terms of military expenditure. Approximately 40 per cent of the defence budget is allocated for capital acquisitions, which mainly goes towards imports from foreign suppliers. Between 2007-08 and 2014-15, defence budget more-than-doubled from Rs 92,000 crore to Rs 2,22,370 crore, growing at an average rate of 12 per cent per annum. The capital budget also more-than-doubled from Rs 37,461 crore in 2007-08 to Rs 81,965 crore in 2014-15.
Despite the sustained expenditure over the last decade, the equipment profile of the armed forces is in an alarming state. While the desirable equipment profile, as per the defence secretary’s testimony to Parliamentary Standing Committee, early this year is 30:40:30 (30 per cent state-of-the-art, 40 per cent current and 30 per cent nearing obsolescence), experts estimate the current profile to be 15:45:40. The Defence Acquisition Council (DAC), chaired by the defence minister, has approved procurement of equipment for more than Rs 1,17,830 crore during the UPA-II regime. Another Rs 1,50,000 crore worth of approvals have been given by DAC under the NDA government.
A modelling of 35 selected projects cleared by DAC, along with their likely dates of induction — from 2012 to 2023 — has been done by a foreign manufacturer. It shows that defence ministry will need $40 billion for just these 35 purchases. This translates into a 7 per cent rise in capital budget in real terms. While the capital acquisition budget has risen in absolute terms in the last few years, it has hardly seen any increase in real terms.
The government policy now aims to achieve 70 per cent indigenisation in defence products by 2027. This translates into an Indian defence market of Rs 87,000 crore by 2022 and Rs 1,65,000 crore by 2027. It presents a huge opportunity to the DPSUs, foreign manufacturers, Indian private players and MSMEs. But the question is of resources. Defence production needs heavy investment over a long period, so as to bring in modern technologies with low economies of scale. Unlike other sectors, defence industry is a monopsony in which the single buyer, the government, is also the authority laying down procurement policies. This makes active government support essential for private defence manufacturers, a fact borne out by the experience of countries — the US, Israel, Brazil and France — where private defence industry has flourished.
Under ‘Make in India’, the government has to actively support the creation of a private defence industrial base. The government will have to fund research and development, provide a low-interest regime to reduce capital costs, provision specific tax benefits, assure consistent sectoral policies, place firm orders and encourage exports to achieve economies of scale.
For policies to create synergies rather than controls, it is essential that the government creates internal capacity for defence acquisition and manufacturing. While the Pentagon has 12,000 cost engineers on its rolls, the defence ministry has none. The structure and the organisation of the ministry, particularly the department of defence production, which is responsible for DPSUs and OFs, puts private sector at a disadvantage. If form has to follow function, the ministry will have to be restructured to promote private players.
Most of these suggestions form part of the deliberations of experts committee chaired by Dhirendra Singh, which submitted its report on amendments to DPP-2013 to the defence minister in August. Of the 43 recommendations made, 15 directly pertain to ‘Make in India’ while the rest concern the DPP. These recommendations on the DPP also have a direct impact on indigenous defence production. The future trajectory of Make in India in defence will be determined, to a great extent, by the action taken by the Centre on the Dhirendra Singh committee.
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