What is wrong with India’s Defence Industrial Policy?

The above question arises in the context of publicly known government plans of arms procurement amounting to over $64 billion1 as part of the modernisation programme of the armed forces. The majority of these acquisitions will obviously be from abroad and will be concluded in the next five years or more. This was why the recent Indian DEFEXPO was a mega event for major international defence companies. At the same time, the quantum of India’s defence exports has all along been negligible;2 much less than that of Israel, South Korea or even of Singapore3, though some of their exports could be technically called ‘trading’. What then has been the problem with India’s defence industry policy, assuming there is such a policy?

Defence industrial policy in the initial years after independence was guided by the simple phrase called ‘self sufficiency’. This was subsequently modified to ‘self reliance’ in defence production and has become a matter of varied interpretation. While for some it means the ultimate objective of complete non-dependence on imports for defence hardware, for others it means selective self-sufficiency in certain critical technologies. And for some others it is a simple reduction in the ratio of imports to indigenous sources of supply to the armed forces.

However, one can say that India’s defence industrial policy broadly consists of three components: (i) maximisation of indigenous manufacturing and production (ii) License production of what could be obtained from abroad and (iii) direct purchase of those equipment not covered by the other two categories but considered essential for ensuring security. Another important unspoken element was that everything, whether indigenous production, license production or direct purchase, was done within the government set-up in line with the general industrial policy. The recent policy change, of course, demonstrates the intention to involve the private sector in defence R&D and production through licensing and the indirect opening of the defence industrial sector to foreign companies through equity participation and the offset arrangement.

The moot question is: was there something wrong with the past policy objectives? On the face of it, the policy components and objectives appear quite sound and logical for a country like India. In simple terms, it means that indigenous production should be maximised; what could not be produced indigenously should be produced under license arrangement; and those that could not be obtained through these two routes should be acquired by direct purchase. A sound policy indeed. But the soundness of a policy has to be judged from tangible outcomes. Arguably, the problems might not have been in the contents of the policy per se. It is due to the nature defence technology and limitations of vision as embedded in the policy.

The policy objective was essentially to substitute imported equipment with indigenous production in the hope of attaining ‘self-sufficiency’ or ‘self reliance’. Unfortunately, the security imperatives of a country translated into defence equipment are like ‘moving targets’. Neither the technological capability of the defence sector nor its policy instrument as highlighted above was able to catch up with the targets. The increasing quantum of defence imports from year to year, the country’s inability to upgrade the imported equipment held for significant period under license production, and, indirectly, insignificant defence exports amply testify to this situation. The general industrial policy wherein defence items and their productions were kept strictly within the government set-up further compounded the problem. In this context, two aspects of the policy – indigenous production and license production, merit detailed analysis.

Maximising indigenous production would imply more than one thing. It would mean meeting the quantitative requirements in terms of the existing demands of the armed forces for equipment or items at any point of time. It would also mean increasing the varieties of items and equipment required by them. Most importantly, it would mean the ability to meet the challenges of supplying their ever-changing demands of technology specific equipment and items. India’s defence industrial policy has conspicuously failed in this respect. In fact, the implication of this policy is that the country should be able to indigenously produce the challenging demands made by the armed forces. Its logical extension is that defence research and development efforts have to be strengthened through policy focused research and development and adequate resources allocations thereto. It is a known fact that the defence research and development organisation has 50-odd laboratories and establishments. However, its lack of focused research and development is equally well known, though of late it has been able to achieve break-throughs in certain strategic technologies. Moreover, its budgetary allocation has been quite modest even within the overall defence budget4 and until recently it was part of ‘Army Demand’. In fact, the Parliamentary Standing committee on Defence recommended that defence R&D budgetary allocation should be at least 14 to 15 per cent of the total defence budget so that indigenous production to imports in the ratio of 70:30 could be achieved.5 This recommendation was in line with the projected target of the report of the self-reliance committee entitled ‘10 year plan for self reliance in Defence systems’.6 But the fact remains that there is no evidence of adequate policy back-up to attain this desirable but difficult goal. The DRDO does not seem to be suffering from lack of funds per se since only 8 to 10 per cent of its total budget is reported to be spent on fundamental research.7 Perhaps, the solution to this issue lies somewhere else.

How about production under license, another important pillar of the policy? The normal assumption is that production under license would enable the country not only to acquire the capability to produce a particular equipment or product but also help it gain the technical know-how for subsequent upgradation and further technological innovations. For the last fifty-odd years, India has been producing a number of defence equipment under license. Good examples in this regard are the Vijayanta tank and the MIG series of fighter aircraft. But this does not seem to have helped in the development of the Arjun Main Battle Tank and the Light Combat Aircraft. Moreover, India has not even been able to upgrade8 certain fighter aircraft held and operated for a long time by its armed forces. Thus, the above assumption is definitely not correct.

A closer examination of license production arrangements reveals certain interesting features. License production arrangements are more of an ‘institutional framework’ under which various types of contractual agreements could be entered into between the supplier and the buyer. It is not necessarily a proven mechanism of technology transfer as such. It may envisage the setting up of a simple production line or facilities in the buyer country for assembly of the finished parts and components for the final finished product. In such cases, hardly any technology transfer takes place and the supplier does not part with any technical know-how. In fact, the supplier agrees to sacrifice only a small portion of his economic interest. It is also not possible to discern under these circumstances whether the supplier has compensated itself for this marginal loss by way of increasing the cost of the technology or equipment and components thereof. On the other hand, there could be a situation where license production involves an intensive process of technology transfer within and beyond the physical production of the equipment in the host county. This is rare rather than routine. The truth of the matter is that since technology is know-how, it is the function of human understanding. The focus of active mechanisms, implicitly or explicitly, is people. However, the truth is that no foolproof prescription could be given for the effectiveness of technology transfer.9 It all depends on the nature of technology to be acquired. Perhaps, India has learnt it by the hard way the limitations of licence production for attaining the objective of self-sufficiency or self-reliance in defence production.

The fact that defence technology needs long term investment, its obsolescence is high and economies of scale are difficult to attain unlike in other areas of civilian technology are well known. This is essentially because higher capability tends to drive downward the scales of production. In the context of a limited number of customers, this trend is more regressive. On top of this, contrary to logical expectation, the production of the next generation of an equipment or of a different variant does not bring down the cost of the equipment. It has been the British experience that a new generation could cost between one and a half times to four times of the previous variant.10 This is due to the fact that production of the next generation is not a simple straight line trajectory work but involves the integration of various systems, which sometimes may involve a number of companies and agencies, that were not partners earlier.

This leads to the conclusion that the policy of maximising indigenous production without a strong R&D policy back-up would not bring tangible results. License production is more of an economic compromise between the supplier and the buyer, and it does not and cannot bring about significant technology transfer without an inbuilt specific and suitable mechanism. Every country at one point of time or the other will attain a saturation level when it comes to supplying certain categories of equipment for its armed forces. Therefore, the ultimate defence industrial policy goal must be to foster defence exports without which it is difficult to sustain the economic base of a country’s defence industry.

India’s defence industrial policy seems to be lacking in all these important ingredients. Since the industrial base has to be sustained for technological and economic reasons, exports are an essential element of defence industrial policy. This is why many countries and their companies are aggressively competing in the global defence market for exports under different arrangements including license production. It is reported that way back in 1995, the United States government spent more than $7.6 billion in subsidy to help export defence equipment to sustain the economic base of its defence industry. It is a matter of fact that strategic depth in defence production can be increased only by aiming at being ‘internationally competitive’ through the policy objective of defence exports. In the absence of such an approach, India’s defence industrial policy is unlikely to take off in the foreseeable future.

Notes

• 1. This amount is a rough estimate based on media reports. See, for example, Defence & Technology, March/April 2008, pp. 20-21.
• 2. As per SIPRI 2005, India’s total defence exports from 2001 to 2004 were $44 millions, against the total corresponding import of $8.526 billions.
• 3. From 2001 to 2004, the defence import and export figures in US Dollars for Israel were: imports 1675, Exports 1290; for S. Korea: imports 2755 and exports 313; and for Singapore: export 1441, exports 73.
• 4. It hovers around 5 to 6 percent of the total defence budget.
• 5. Report of the Standing Committee on Defence (2006-07), 14th Lok Sabha, p. 18.
• 6. ibid, p. 3.
• 7. Ibid, p. 17.
• 8. If the country has gained under license production, it is in the areas of maintenance, repair and overhaul (MRO). The capability to upgrade is much more technology-intensive for which there is little achievement to be proud of. Upgradation lengthens the life of the equipment and increases its capability and reliability in changed circumstances.
• 9. Ronald D.McLaurin, “A case study of supply side,” in Kwang-II Back, Ronald D. MCLaurin and Cheng-in-Moon, ed., The Dilemma of Third World Defence Industries, CSS-Inha University, Westview Press, 1989, pp. 64-65.
• 10. British Hawk Mk 1 is reported to have cost one and a half times more than its earlier version Gnat MK1, and Harrier GR1 four times more than its earlier generation Hunter F6. Roger Hutton, “Technical Innovation in the U.K. Defence Sector,” in Ian Bellany and Tim Huxley, ed., New Conventional Weapons and Western Defence, Frank Cass, London, 1987, p .43.