Indian Defence Industry Poised to Grow

The major highlight of recent amendments to the Defence Procurement Procedure 2008 (DPP 2008) is that of encouraging the domestic industry to actively participate in defence production. The encouragement assumes greater importance considering the “shameful and dangerous” aspect of India’s self-reliance in defence production. As a matter of fact, despite the 50 year-stated goal of achieving 70 per cent self sufficiency in defence equipment production, less than half of it has so far been achieved, resulting in annual outflow of a significant amount of foreign currency and potential vulnerability in terms of critical dependence on others in crisis situations. It is this undesirable state of affairs that the current modifications in the rules of engagement, as brought out in amended DPP 2008, have tried to reverse and, in turn, make India “truly a world class” defence manufacturing nation. These amendments, which came into effect on November 01, 2009, need careful analysis to see how they would impact on India’s defence industrial base.

The first and foremost amendment with respect to development of an advanced indigenous defence industry relates to the way the Ministry of Defence (MoD) procures defence capital equipments/platforms, worth billons of dollars each year (approximately $8.5 billion in 2008-09). Until now, all the procurements were categorised under three broad headings: ‘Buy’, ‘Buy and Make’ and ‘Make’. The first one has little to contribute towards indigenous industrial efforts, as most of the advanced items under this category are in the form of direct import without any involvement of the domestic industry. The latter two have however direct bearings, with the last being the harbinger of India’s progress towards the manufacture of high technology complex weapons systems, albeit through a rigorous and expensive research and development (R&D) efforts. Under the ‘Buy & Make’ category, the government imports some numbers and the remainder is manufactured within India, with the MoD negotiating with foreign vendors for transfer of technology to an approved Indian agency for production. The middle path not only saves time in terms of doing away with time-consuming and costly R&D efforts but also ensures self-reliance through indigenous production of foreign technology. It also provides opportunities for Indian companies to form partnerships with foreign companies.

Good intentions notwithstanding, the ‘Buy & Make’ procedure has proved to be a very difficult proposition. It is primarily because of greater involvement of the MoD in finalising technology transfer agreements with foreign companies, which should have ideally been left to the domestic production agencies to negotiate based on the merit of their technical, financial and other bargaining strengths. As experience shows, technology transfers were mostly in the form of transfer of engineering skills for production of non-critical items, with foreign vendors not parting with critical components. Besides, as foreign companies were more interested in supplying items directly from their own domestic production centres, they were not compelled to form partnerships with Indian companies.

Acknowledging the above deficiency in the procurement procedure, the amendment has rightly introduced a new category called ‘Buy & Make (Indian)’. Under this new category, a supply order will be placed only on capable Indian companies who in turn will have to negotiate with interested foreign companies for technical and other production arrangement. This will give Indian companies an opportunity to explore a combination of alternatives, the best of which will be selected by the MoD. At the same time, foreign companies, which would play an indirect role under the new provision, would be compelled to set up joint venture with Indian companies, for a simple reason that it is only through the JV that they can sell their products. To obviate the possibility of Indian companies becoming a trading centre for foreign companies, the MoD has rightly mandated that the indigenous content, in value terms, of the product supplied under the new category should be at least 50 per cent. This would ensure that only serious Indian players with a long term vision of becoming true defence manufactures come into the business.

The second amendment vis-à-vis enhancing domestic defence production relates to information sharing with Indian industry. Earlier, Indian companies, especially private players, were constrained in terms of not having their advance R&D, production, financial and managerial plans, given the absence of information contained in the long term requirement plans of the armed forces. Now with the Indian government deciding to ‘widely publicise’ a public version of the Long Term Perspective Plan covering a 15 year technology perspective and capability roadmap of the defence forces, the Indian companies can have advance planning in their requisite strength areas. At the same time a window of interaction, opened via the amended DPP, will provide Indian companies and industry associations an opportunity to interact with and convince the acquisition functionaries that their products are superior compared to imported ones.

If the above amendments incentivise domestic companies to enter defence production, the government has also made it clear that it wants a competitive environment in defence industry. This has also been partly reflected in the amended Offset Policy which has been in force since 2005. The inclusion of an ‘Option Clause’ in the offset policy would henceforth allow foreign vendors to change offset partners – though not the offset component and value – midway through the contractual period in “exceptional cases”. The cases would however most likely arise when an Indian partner faults in its contractual promises. The clause would ensure that the company cannot take it for granted once it is selected as an offset partner. The fear of being replaced by another company in case of failure would not only put a question mark on its credibility, but will motivate it to improve its competitiveness to avoid eventual embarrassment.

The amendments to DPP 2008 augur well for the Indian defence industry. Considering that India’s cumulative defence procurement budget would be over $50 billion in the next five to six years, it provides tremendous opportunity for the industry. The industry now needs to have a firm plan, in terms of collaboration with foreign partners, investment in key areas of strength and also a strong resolve to make India truly self-reliant in defence production.