India’s Defence Production Policy

Over recent years India has created a vast defence industrial base which presently consists of 40-odd Ordnance Factories (OFs), nine Defence Public Sector Undertakings (DPSUs), 50-odd R&D labs and a small but growing private sector. The industry as a whole is responsible for producing a vast variety of items, ranging from small arms and ammunition all the way through to tanks, fighter aircraft, warships - plus radars and other electronic items. Although long overdue, the Indian Ministry of Defence unveiled in early 2011 the first ever Defence Production Policy (DPrP), intended to give a focussed direction to industry. The policy document, which came into force since 1st January, lists four broad objectives: (1) “to achieve substantive self reliance in the design, development and production of equipment / weapon systems / platforms required for defence in as early a time frame as possible”; (2) “to create conditions conducive for the private industry to take an active role in this endeavour”; (3) “to broaden the defence research and development (R&D) base of the country”; and (4) “to enhance potential of SMEs [Small and Medium Enterprises] in indigenization”. To achieve these objectives the policy document has included various enabling provisions, with the broader aim to create a self-sufficient domestic defence industry that would be able to meet most of armed forces’ hardware requirements.

27th Oct 2011


 India

 India’s Defence Production Policy

 Laxman Kumar Behera / New Delhi

Over recent years India has created a vast defence industrial base which presently consists of 40-odd Ordnance Factories (OFs), nine Defence Public Sector Undertakings (DPSUs), 50-odd R&D labs and a small but growing private sector. The industry as a whole is responsible for producing a vast variety of items, ranging from small arms and ammunition all the way through to tanks, fighter aircraft, warships - plus radars and other electronic items. Although long overdue, the Indian Ministry of Defence unveiled in early 2011 the first ever Defence Production Policy (DPrP), intended to give a focussed direction to industry. The policy document, which came into force since 1st January, lists four broad objectives: (1) “to achieve substantive self reliance in the design, development and production of equipment / weapon systems / platforms required for defence in as early a time frame as possible”; (2) “to create conditions conducive for the private industry to take an active role in this endeavour”; (3) “to broaden the defence research and development (R&D) base of the country”; and (4) “to enhance potential of SMEs [Small and Medium Enterprises] in indigenization”. To achieve these objectives the policy document has included various enabling provisions, with the broader aim to create a self-sufficient domestic defence industry that would be able to meet most of armed forces’ hardware requirements.

The DPrP’s first objective of enhancing self-reliance in defence production reiterates the Defence Ministry’s long-standing policy goal of achieving indigenous production up to a value of 70 per cent. At the same time, the DPrP has expanded the scope of self-reliance. Previously this was quantified in an index, reflecting the domestic share in total procurement expenditure. The weakness of the previous index was that it was focussed exclusively on domestic production, including those based on imported technology. As a consequence, the index was often inflated when India undertook mass production of high-value systems (such as tanks and fighter aircraft) with technical assistance from the foreign suppliers. Evidently, the exaggerated index was not the true reflection of self-reliance as the domestic industry lacked capability in design and development and even in the ability to upgrade items that they produced under technology transfer. This led to a situation of perpetual dependence on foreign original equipment manufactures (OEMs), either in the form of direct import, or import of technology or otherwise. The DPrP has tried to rectify this weakness by expanding the scope of self-reliance to include not only the production but also the domestic capability in design and development – the later two being the crucial factors from self-reliance point of view.

To attain this crucial objective of self-reliance, the new policy document has made certain changes, staring from the planning level. The DPrP has mandated that based on the approved 15-year Long Term Integrated Perspective Plan (LTIPP) of the armed forces, equipments “required 10 years so down the line, will be by and large developed / integrated / made within the country.” If Indian industry is not in a position to deliver the equipment in required time and as per the specification and quality, then the system would be procured from foreign sources. However justification has still to be given, explaining the nature of weakness of domestic industry, the “urgency and criticality of the requirement” and also the “the time taken in the procurement and delivery from foreign sources vis-à-vis the time required for making it in the country.” The justification is meant to ensure that the domestic companies is not put at an odd vis-à-vis their foreign counterparts, and also to find out key areas of weaknesses afflicting the domestic industry. As regards eliminating the domestic industrial weakness, the DPrP is categorical in saying that “efforts would be made in progressively identifying and addressing any issue which impacts, or has the potential of impacting the competitiveness of the Indian industry in comparison to foreign companies.”

Until the new issues are known, the DPrP has identified some key areas for facilitating domestic industry, especially the private sector’s greater involvement in defence production – the second objective of the document. From procedural point of view, the policy document intends to simplify the “Make” category of the MoD’s Defence Procurement Procedure (DPP), which provides Indian companies a key responsibility in terms of design, development and production of ‘high technology complex system’. However, the “Make” category, despite its best intention, has so far proved largely unsuccessful because of procedural complexities vis-à-vis other categories (such as “Buy”, and “Buy and Make”). As result, very few items have been categorised under this heading. The simplification of the category is intended to put the “Make” category at par with other categories in terms of procedural rigour so that domestic industry is not prevented from undertaking design and development of complex defence systems because of rigid procurement procedures.

In addition, the document has also urged the Service Headquarters (SHQs) to “exercise due diligence” while laying down the operational and technical parameters of equipments (known in India military parlance as qualitative requirements or QRs) for the items to be developed / produced by the domestic industry. The emphasis on QRs to facilitate domestic development / production is a marked shift from the current practice, where the domestic industry, particularly the private sector, is hardly consulted when the parameters are laid down. This has often led the industry to complain about the Services ignoring their capability in selection of equipment. In case of “feasibility and practicality of the QRs” in relation to the domestic industrial capability, the DPrP has now mandated that the SHQs would take into account the capability of the domestic industry while preparing their operational and technical parameter of weapons system they want to procure. This in turn suggests closer cooperation between the armed forces and the industry for exploring indigenous solution.

To enable the domestic industry to meet the armed forces’ requirement, the DPrP has also given importance to synergy among the various domestic players, including academia and R&D institutes as well as technical and scientific organisations. To harness synergies, the document is categorical that “all viable approaches such as formation of consortia, joint ventures and public private partnerships” would be examined for enabling the domestic industry to meet the armed forces’ requirements within the timelines and price that are globally competitive.

At the same time, the document has also emphasised on ‘incremental changes’ and technology absorption by the industry. The incremental approach is to allow the industry time to move on technological ladder, progressing from Mk-I to Mk-II and so on. This is intended to serve both the operational requirement of the armed forces and at the same time allow the industry to mature on the technological front. In case where the industry is involved in production with technological assistance from foreign OEMs, the industry is mandated to absorb the necessary technology. For this, the document has made four organisations responsible: Department of Defence Production (DDP), Defence Research and Development Organisation (DRDO), Headquarters Integrated Defence Staff (HQ IDS) and SHQs. These organisations will be “involved in identification and evaluation of requisite technology” and further ensure that “appropriate technology transfer takes place in the Indian industry.

Recognising the importance of R&D for defence industrial development, the DPrP has made a key announcement to promote and broaden research activities across defence industry, including in SMEs – the third and fourth objectives of the policy document. A ‘separate fund’ has been promised to be set up for promotion research in “cutting edge technology.” In addition, the document also promised to bring in policies that would “encourage the Ordnance Factory Board (OFB), Defence Public Sector Undertakings (DPSUs) and the private sector to strengthen their R&D wings so that constant up-gradation and improvement in systems under manufacture is possible.”

Weaknesses of DPrP
The positive features and intentions of the first ever DPrP notwithstanding, the document however suffer from certain inherent weakness. The first weakness of the policy document lies in its ambitious goal of self reliance and that too in a ‘substantive’ manner in respect to design, development and production. The document does not mention the specific areas of self-reliance to be achieved over a period of time. The ambitious goal of self-reliance however does not commensurate with India’s overall technological strength, and particularly R&D efforts. In terms of overall technology, India is way below the advanced countries, particular, US, UK, France and Russia. In contract to these countries which spend over 10 per cent of their defence budget on R&D, India’s total R&D spending as accounted for by the DRDO, the premier R&D organisation under the Defence Ministry, amounts to only six per cent. In absolute terms DRDO’s budget which is presently around US$2.2 billion is far less compared to R&D budget of advanced counties. The Indian private sector, which is very keen to join the defence industry, also does not spend much on R&D. Given that R&D constitutes the core of defence industry, the self-reliance target of India would remain under pressure unless the heavy investment is made on key technologies. The DPrP has remained silent on this aspect.

As regards promoting R&D, the DPrP is also not clear as to how to promote research activities within the industry. Presently R&D spending by the industry is meagre, both in public and private sector. In the public sector, except for few DPSUS, particularly the Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL), which undertake a decent in-house R&D, no other public sector enterprises are seriously engaged in in-house design and development. It would have been better if the DPrP had mandated these enterprises to spend certain portion of their revenue or profit on R&D.

Promoting R&D in the private sector is even more complex since the government can not dictate it to spend a certain portion of its revenue / profits on R&D. Moreover if the government decides to fund their R&D efforts, there are still difficulties in identifying the companies for such funding and also working out the detailed mechanism for funding. The identification problem is mainly because the government has no formal record of private companies who are engaged in defence production. In the above situation, the selection of companies for R&D funding is a real difficulty as seen in the process for designating few Champions in the Private companies, forcing the government to go slow on the process.

Lack of Level Playing Field to Private Sector
Although the DPrP has made a bold statement of “proactively engaging larger involvement of the Indian private sector in design, development and manufacture of defence equipment”, the statement is not backed by the reality on the ground. At present, the private sector faces many a problem in graduating towards becoming a system integrator like the ones in the public sector. Unlike the DPSUs or the OFs which are leaders in their respective domain areas, the private sector is still searching for their own sphere of influence. The most serious effort to designate some private sector companies as Raksha Udyog Ratnas (RURs) or Champions in certain categories have met with difficulty and a list has so far not announced. The intention of RUR was to treat certain private enterprises at par with the public sector undertakings, which would facilitate their entry into production of major defence items. In the absence of that, the private sector is forced to play a second fiddle where as the pubic sector enterprises bag big defence contracts on nomination basis. It is critical therefore to identify key private sector companies in select areas of defence production and nurture them over a period of time. For this the MoD needs to announce the list of RURs at the earliest.

Cosmetic Emphasis on QRs
Although the DPrP has emphasised on feasibility of QRs with respect to domestic defence industrial capability, it does not mention the specific mechanism for such efforts. Unlike in other counties, where QRs are prepared by an integrated, professional agency, in India the task is performed by the individual Service Headquarters. The QRs prepared by the SHQs are often found to be unrealistic vis-à-vis the capability of the domestic industry, leading to import of all types of major systems from foreign OEMs. This happens because there is no institutional mechanism to consult the industry at the time of preparation of QRs. The DPrP has although passively mentioned that the SHQ would take due diligence, it is not clear how the diligence would come about. As the best international practice in QR formulation shows, the due diligence comes only when a professional body is entrusted with the task, which could closely work with the industry to find the most cost- effective domestic solutions to the armed forces requirements.

Lack of Mechanism to Monitoring Self-Reliance in Defence Production
The DPrP has made a significant announcement that the Defence Minister will “hold an annual review of the progress in self reliance that has been achieved during the year.” However in the present scheme of things there is no institutional mechanism which would facilitate the Defence Minister to review such progress. The existing format of the Defence Ministry’s budget does not provide a clear indication of domestic share in the overall procurement budget. The procurement data is mixed in numerous procurement sub-heads, and each sub-head is scratchy about the precise level of indigenous contribution. To facilitate the review of progress of self-reliance, it is therefore prerequisite to have separate heads for procurement from domestic sources.

Conclusion
Although long overdue, India’s Defence Production Policy is a credible effort in many ways. It has clearly brought out the direction in which the domestic industry would operate to meet the material requirements of the armed forces. It has also brought the key areas of improvement in the existing policy framework to support higher indigenous defence production. However, the policy in the existing form lacks certain clarity, especially with regard to specific areas of self-reliance; quantum of investment and mechanism for R&D funding in the industry; industry’s role in QR formulation and the like. If the required clarity is brought out in the revised version - which the MoD has promised - it will provide greater impetus to India’s defence industry. Words 2356
 

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