India’s Growing Defence Industry Base

Like many developing countries in the world India has long aspired to be self-sufficient in defence production, for which New Delhi has over the years built a huge industrial empire.

1st Nov 2010


Like many developing countries in the world India has long aspired to be self-sufficient in defence production, for which New Delhi has over the years built a huge industrial empire. The industry now consists of nine Defence Public Sector Undertakings (DPSUS), 39-odd Ordnance Factories (OFs) and a small but growing private sector. In addition, there are 50-odd defence R&D labs under the umbrella of Defence Research and Development Organisation (DRDO) which is responsible for design and development of technologies for the armed forces. The Indian industry as a whole is responsible for production of a wide range of items such as fighter aircraft, frigates, submarines, tank, radar, ammunition and other defence-related items.

DEFENCE PUBLIC SECTOR UNDERTAKINGS


Among nine DPSUs, the Hindustan Aeronautics Limited (HAL), with a turnover of Rs. 114.57 billion (US $2.5 billion) in 2009-10, is the biggest defence company in India. Formed in 1964 by merger of Hindustan Aircraft Limited and Aeronautics India Limited, it has over the years evolved into a large aeronautics enterprise organised along four Complexes – Bangalore Complex, MiG Complex, Accessories Complex and Design Complex. The company’s primary area of activity is to design, manufacture and overhaul fighters, trainers, helicopters, transport aircraft, engines, avionics and system equipments. To date, the company had produced over 3400 aircrafts, 3600 aero engines, and overhauled 8320 aircraft and 27,803 engines. At present it is involved in nine major projects related to design and development and manufacturing. Design Projects include Intermediate Jet Trainer, ALH Weapon System Integration, Light Combat Helicopter (LCH) and Aircraft Upgrades (Jaguar, Sea Harrier); and manufacturing Projects include SU-30 MKI aircraft, Jaguar single seater, Advanced Light Helicopter (ALH), AJT Hawk, and Dornier 228. In March 2010, HAL was shot into prominence when its own designed Light Combat Helicopter made the maiden test flight successfully.

Since the defence offset policy was clearly announced in 2006 by the Indian Ministry of Defence, HAL has become a favoured Indian company among the foreign OEMs. To tap the offset-related work, the company has signed a number of MoUs with major international defence companies. Of significance is the MoU with Boeing, which is expected to accrue nearly US$1.0 billion worth of offset related work to HAL, by way of exports in aero-structures, components, avionics, forging and castings, accessories, etc. The HAL intends to position itself as a major offset partner for which it is investing in additional infrastructure and state-of the art manufacturing technology. The company is also forging partnership agreement with international companies with the objective of benefiting from foreign technology and finance. So far it has signed 10 joint venture agreements, including with BAE Systems (UK), Rolls Royce (UK) Edgewood Ventures LLC (US), RAC MiG (Russia), Snecma (France), and Elbit Systems (Israel).

In the coming yeas, HAL’s role as a major Indian defence supplier is going to increase. In addition to the ongoing projects that are underway, the company will be involved in two high-profile projects, with collaboration with India’s long-standing defence supplier, Russia: Fifth Generation Fighter Aircraft (FGFA) and Multi Role Transport Aircraft (MTA).

Bharat Electronics Limited (BEL), which was established at Bangalore in 1954, is the premier defence electronics company in India. It has nine production units and 31 manufacturing divisions across seven Indian states. In 2009-10, its turnover reached Rs. 52.19 billion. From the initial production of Transceivers for Indian Army’s radio communication equipment, the organisation has evolved to have 350 products to its credits, including high-tech products such as radars, sonars, communication equipment, electronics warfare equipment, opto-electronics, tank electronics, and components, among others. Recently it handed over the Artillery Combat and Control Systems, which it had developed in association with DRDO to the Indian Army. Some other products that were executed recently include High Power HF Communication Sets, Frequency Hopping VHF Transreceivers, UHF Handheld Radio, UHF Radio Relays, Upgraded Fire Control Systems, Shipborne and Airborne Electronic Warfare Systems. With a relatively stronger R&D base and close collaboration with DRDO, the company relies for about 75 per cent of its turnover on indigenous technology, and the rest 20 per cent on foreign technology.

With India’s increasing defence procurement budget and BEL’s equal business presence in all three defence forces, the company is poised to increase its product profile and turnover in the coming years. The company has in fact drawn an ambitious plan to double its present turnover to 100 billion by 2012-13. According to the plan, the major segments that would contribute increased revenue are radar, communications and electronics warfare. To achieve the target, it has set up Development and Engineering teams to work closely with the armed forces for certain major projects, including the Tactical Communications Systems, Battlefield Management System, Command Information Decision Support System, Future Infantry Soldier System and High Data Rate Multi-band Software Defined Radio. Besides, it has identified several new business areas such as nuclear power instrumentation, railway instrumentation, solar/clear energy solutions as the key to increasing its civil business. The company is hopeful that business from these new areas will result in additional annual revenue of Rs 5.0 billion.

Bharat Dynamic Ltd (BDL) was carved out from the Defence Research and Development Organisation (DRDO) DPSU in 1970 to function as a DPSU. It builds strategic and tactical missiles and allied equipments, either under the license or technologies supplied by the DRDO. Its license-manufactured products include Milan (France), Konkurs and Invar (Russia) anti-tank guided missiles (ATGM). The company got into prominence with the launch of India’s Integrated Guided Missile Programme (IGMP) in early 1980s, under the developmental guidance of DRDO. It has so far supplied to the Indian armed forces both the land and naval versions of Prithvi missiles (150 km and 250 km); and Agni I & II (700 Km and more than 2000 km). In addition to above, BDL is also involved in a number of other DRDO projects, such as K-15 (submarine launched ballistic missile, SLBM) and ASTRA beyond visual air-to-air missile. Among other underwater weapons system, BDL is engaged in productionisation of several items such as Advanced Light Weight Torpedo, Heavy Weight Torpedo (Varunastra) and Light Weign Mines. In 2009-10, the company sales turnover reached Rs. 3.22 billion

Among the four shipyards under the Ministry of Defence, Hindustan Shipyard Ltd (HSL) is the newest one. In February 2010, HSL was acquired by the Ministry of Defence from the Ministry of Shipping. Among the four shipyards, the Mazagon Shipyard Limited (MDL) is by far the biggest one, both in terms of turnover and product profile. Since 1960 when the shipyard set up as a dedicated public sector undertaking, it has emerged as the frontline shipyard, with capability of building warships, merchant ships and submarines. Its present underwater ship construction includes six Scorpene class submarines under the transfer of technology from France. It is to be noted that MDL is the only shipyard in India and among few companies in the world to build a submarine. Its present capacity is to build warships up to 6,500 tonne displacement and merchant ships up to 27,000 DWT. Till late 2008, MDL has made 196 ships and is currently making a total of 14 ships, including 3 frigates, three destroyers and six submarines for the Indian Navy.In 200-09, MDL turn over reached Rs. 2.71 billion.

Garden Reach Shipbuilders and Engineerrs Ltd (GRSE) was taken over by the government of India in 1960 to develop a second line of shipbuilding facility. It is the only shipbuilder in India and among few in the world, to have its own engineering and engine manufacturing division. The company’s products include frigates, ASW and missile corvettes, Landing Ship Tanks, fast patrol vessels, survey vessels, etc for the navy and coast guard.

Goa Shipyard Ltd (GSL), established in 1957 under the name of Estaleiros Navais De Goa, is the largest enterprise on the West Coast of India, employing about 1600 people. So far it has built and delivered 181 ships to navy, coast guard and private sector. The product range of GSL include 105 meter advance offshore patrol vessels, 90m offshore patrol vessels, 50m fast patrol vessels, missile boats, etc. The company has not performed consistently over the years, showing high fluctuations in its turnovers. The company also performs poorly in exporting its products. Recent data shows the company in last over a decade has been succeeded in bagged export orders for supply of three Harbour Tugs to Royal Navy of Oman. The company also relies heavily on the private sector for the construction of ships. In the defence sector, the private industry is involved up to 90 per cent for construction activities.

Mishra Dhatu Nigam Ltd (MIDHANI) was incorporated as a PSU in 1973 to achieve self-reliance in areas of special steels, super alloys, titanium alloys which form the core needs not only of the defence but of space and atomic energy programmes. In the defence sector, MIDHANI is responsible for indigenisation of technologies and products to support programmes such as T-72 and MBT Arjun, Kaveri engines (of LCA), Advanced Technology Vessels (India’s indigenous nuclear submarine), MiG, etc. In 2006-07, Defence and Space sector accounted for 75 per cent of its total suppliers.

BEML, which came into being in 1964, commenced its operation nearly one year later, with production of rail coaches and assembly of space parts at its Bangalore unit. The company with three product segments – Mining & Construction Equipment, Defence Equipment & Aggregates and Railway Rolling Stock, caters to the core needs of the industry (mining, irrigation, steel, cement, power plants, infrastructure, etc), defence services (trucks, diesel engines, and earth movers), and Railways. The defence sector, however, contributes much less to total sales, compared to its civilian business. In 2005-06, defence segment accounted for 32 per cent of total turnover.

ORDNANCE FACTORIES


India has 39 Ordnance Factories apart from two more that are in the offing. The factories are controlled by the Ordnance Factory Board which functions under the administrative control of Ministry of Defence. Employing nearly 105,470 people, the factories form the largest and oldest departmentally run industrial organisation and are responsible for manufacturing of, inter alia, arms, ammunitions, armoured vehicles, and ordnance stores required by defence forces, paramilitary forces, civil police, other government departments and also for civil customers. The 39 Ordnance Factories are divided into the following five operating divisions, based on the main products/technologies employed:

1. Ammunition & Explosives (A&E) – 10 Factories
2. Weapons, Vehicles and Equipment (WV&E) – 10 Factories
3. Materials and Components (M&C) – 09 Factories
4. Armoured Vehicles (AV) – 05 Factories
5. Ordnance Equipment Group of Factories (OEF) – 05 Factories

PRIVATE SECTOR


Compared to the public sector enterprises, the private sector companies are relatively new to India’s defence production. Until 2001, when the defence industry was liberalised, the private sector’s contribution to defence production was mainly restricted to supplying raw materials and parts and components. With the liberalisation of the industry, many private companies have however come forward, with some showing deep interest. According to the MoD, around 75 private companies have till date received 135 industrial licenses for production of a variety of defence systems and sub-systems. More significantly, these LoI/ILs pertain to some high technology items, including Armoured & Combat Vehicles, Radars, Electronic Warfare equipment, Warships, Submarine, Avionics, Military aircraft, Safety & Ballistic products, armaments and ammunition among others. In a clear indication of the growing capability of the private sector, the MoD is reportedly considering to award a contract for design and development of Army’s Future Infantry Combat Vehicle (FICV). The FICV contract whose value is expected to go up to Rs 500 billion, involves supply of around 2600 FICVs, beginning from 2018.

Since private sector is relatively new to defence production, it has taken routes of partnership and acquisition get into the higher league. There have been several partnerships between Indian private companies and their foreign counterparts. Of particular significance is the joint venture (JV) between the India’s Mahindra with UK’s largest defence company BAE Systems. The JV, with an initial strength of 50-60 people, plans to produce a range of armored vehicles. As regards acquisition of foreign companies, the same Mahindra Group acquired in December 2009, majority stakes in two Australian defence companies, Aerostaff Australia and Gippsland Aeronautics, signaling its entry into the defence and aerospace business.

DEFENCE RESEARCH AND DEVELOPMETN ORGANISATION


Formed in 1958, the Defence Research and Development Organisation (DRDO) is India’s premier defence scientific and technological agency responsible for design and development of state-of-the-art weapon system required by the armed forces. The organisation with over 30,000 personnel, including 7,000 scientists and 12,000 technical people has more than 50 laboratories “engaged in R&D activities in the field of aeronautics, armaments, missiles, combat vehicles, advanced computing and networking, electronics, opto-electronics, military engineering systems, life sciences, advanced materials, composites and underwater sensors/weapons, warship technology, etc.” Of these 50-odd laboratories, 5 are for Missile Systems, 12 for Electronic Systems, 3 for Materials Science, 6 for Aeronautical Systems, 4 for Combat Vehicles and Engineering, 10 for Life Sciences and 3 for Naval Systems. In addition, DRDO has two societies – Aeronautical Development Agency (ADA) and Society for Integrated Technology Applications & Research (SITAR). ADA’s primary role is to “undertake design and development of advanced technology aircraft”, where as that of SITAR is to design “digital components and devices required for various projects including high performance computing.”

PERFORMANCE OF INDIAN DEFENCE INDUSTRY


India has no doubt established a large defence industrial base, which continues to grow. However the performance of the industry in terms of meeting the armed forces requirements and enhancing self-reliance in defence production is not up to satisfaction. Except for low tech defence items and few advanced systems, almost all the big ticket items are imported from foreign countries, including the traditional supplier Russia, Europe, Israel and now increasingly from the US. A survey of India’s recent arms would amply justify to it. According to the 2010 report of the Congressional Research Service on Conventional Arms Transfers to Developing Nations, 2002-2009, India ranks second in the list of leading developing nations, with total arms transfer agreement valued at US$ 32.4 billion. During this period, New Delhi’s actual arms import stood at US$ 14.2 billion, behind China’s US$ 14.4 billion and Saudi Arabia’s US$ 31.5 billion. Some of the big defence items that India has contracted or is negotiating include T-90 MBT, Su-30MKI multi-role aircraft, Gorshkov aircraft carrier, Scorpene submarines, AJT Hawk, AWACS, C-130J Hercules, P-8I long range maritime reconnaissance aircraft and C-17 Globemaster. As regards self-reliance in defence production is concerned, it remains way below the set target. As per the “10 Year Plan for Self Reliance in Defence Systems”, which was formulated way back on early nineties, the self reliance index was to progressively increase to 0.7, meaning the import content of the defence procurement would be brought down to 30 per cent by 2005. However, as noted by the Standing Committee on Defence in a Report which was submitted to the Parliament, the self-reliance is hovering around 30-35 per cent. In addition, the Indian industry ranks very poor in the list of arms exporting nations, thus indicating its lack of competiveness in defence manufacturing.

There are primarily two interrelated factors for the poor performance of India’s defence industry. The first and foremost factor is the historical emphasis on imports, or license-production based on imported technology. This has not allowed the domestic industry to grow in confidence and establish itself as truly self-sufficient in defence production. The second factor is low investments in R&D, particularly involving defence technologies. This is reflected from the various official sources. According to Indian Ministry of Science and Technology, India’s overall R&D expenditure amounts to 0.88 per cent of the GDP, compared with more than 2 per cent of GDP in most developed countries. In absolute number, defence R&D for the year 2010-10 stands at Rs. 98.09 billion or merely seven percentage of total defence budget.

RECENT MEASURES TO ENERGISE DOMESTIC INDUSTRY


In addition to opening up defence industry, India’s Defence Ministry has also taken several measures to energise the domestic defence prosecution. Among the initiatives, the offset policy, which was announced in great details in DPP 2006, is a noted one. The policy which mandates a minimum 30 per cent offsets in arms contract valued Rs. 3.0 billion (US $67 million) or above, requires foreign suppliers to discharge their offsets in one of three ways: by executing exports orders from certified Indian defence enterprises; and by investing either in Indian defence manufacturing or R&D infrastructure. The Defence Ministry is hopeful the by the end of 11th Plan (2007-12), an order of US $10 billion worth of offsets would accrue to the Indian companies.

To energise the domestic industry, the Indian Ministry of Defence has also revised its procurement strategy. In 2006, it introduced an ambitious ‘Make’ category, with the primary aim to ‘ensure indigenous research, design, development and production of capabilities sought by the Armed forces’ in a given time-frame while utilising the potential of Indian industry. Under this procedure the OFs, DPSUs or private companies would compete for any project and based on their ability and capability, two agencies will be simultaneously selected for the development of the item on a level playing field and shared development cost. It is proposed that under the ‘Make’ category the Government would share 80 per cent of the developmental costs with the concerned agencies, including in the private sector. An Integrated Project Management Team (IPMT) would supervise and monitor all the activities throughout the process.

In its latest procurement revision in November 2009, the MoD introduced a new procurement category, ‘Buy and Make (Indian)’. Under this new category, supply order would be placed only on capable Indian companies who in turn will have to negotiate with interested foreign companies for technical and other production arrangement. It is noteworthy that the new category is different from another category, ‘Buy and Make’ which was introduced in DPP-2005. Unlike ‘Buy and Make’, in which the MoD negotiates with foreign suppliers for the technical assistance, in the ‘Buy and Make (Indian)’, it is the domestic industry which is responsible for all types of negotiation with their foreign counterparts for supplying items to the armed forces. By giving more responsibility to the domestic industry under the new procurement provision, the MoD hope that the domestic industry will gain in confidence and capability.

INDIAN DEFENCE INDUSTRY IN THE 21ST CENTURY


Post Cold War, the global defence industry has witnessed tremendous sign of restructuring, led by the merger and acquisition of companies in the US and Europe. In India the defence industry has so far remained unscathed from the global influence, because of the government’s continuous protective measures. Although the government has allowed the private sector along with foreign participation in defence production in a move to bring in competition within the industry and enhance indigenous production, the domestic industry as a whole is still far behind its counterparts in advanced countries. However, the continued emphasis on defence industrial reform could lead to progressive sophistication of the industry. Among other measures, the government needs to promote the private sector more vigorously, focus on competitiveness of the public sector enterprises, allow higher FDI in defence industry, and facilitate partnership between Indian and foreign companies, to stimulate domestic production.

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