Striking the right partnerships for Indias defence

A foreign policy expert writes exclusively for 'India Investment Journal' on how the Indian government can create the right environment to help translate global interest in India's defence sector into collaborative ventures. A major element in the Modi government's flagship Make in India programme is the development of the indigenous defence industry, particularly in the private sector. This is essential in view of the fact that India has emerged as the largest arms importer and import dependency for military hardware has gone up to nearly 70 per cent. Growing Opportunities India's current defence budget is approx $40 billion and about a third of it is earmarked for capital acquisition for the Services and the Defence Research and Development Organisation (DRDO). The cumulative capital expenditures during the 15-year period of 2012-27 (covering 12th to 14th Five Year Plans) are projected to be above $ 235 billion and 80 per cent of this will go for platform acquisitions. To meet a target of 70 per cent self-reliance implies building a defence industry worth $100 billion. [caption id="attachment_9733" align="alignleft" width="352"]

40701033 - 8 inch howitzer of the cold war[/caption] The actual numbers may be higher because currently, the Services are complaining about the high rate of obsolescence in their inventory. In 2015, the Standing Committee of the Parliament had expressed concern that instead of the recommended ratio of 30:40:30 (between state of the art, current and obsolete equipment holdings), the position had deteriorated to 15:45:40! It also recommended that the defence budget should be approx 3 per cent of the GDP. Currently, the defence budget together with pensions, works out to 2.26 per cent only. In addition, there will be additional investments via the Defence Offsets Policy. This policy was first announced in 2005 and requires the foreign vendor to invest 30 per cent of the indicative cost in the Request for Proposals (for contracts greater than Rs 300 crores earlier and now relaxed to Rs 2,000 crores) in defence, civil aviation, internal and coastal security sectors. The objective here is to improve the domestic R&D base and contribute to developing an internationally competitive defence industry integrated into global supply chains. Till 2012, offset contracts worth $4.3 billion had been signed; by 2027, the value of offsets is expected to cross $ 20 billion. New DPP Announced Earlier this year, the Defence Ministry announced the new Defence Procurement Procedure with specific provisions aimed at stimulating growth in the domestic defence industry. In addition to the categories of Buy (India) and Buy and Make (in India with transfer of technology), a new preferential category of Indian Designed Developed and Manufactured (IDDM) equipment has been created. It means that indigenously designed equipment with 40 per cent domestic content or externally designed but with 60 per cent indigenous content will be a preferred acquisition category. FDI in defence sector has also been liberalised. Currently, foreign investment up to 49 per cent would be processed under the automatic route. Higher levels of investment will be dealt with on a case by case basis, depending on the technologies involved. Manufacturing of small arms and ammunition has been brought into the FDI regime. Equity inflow up to Rs 5000 crores no longer needs CCEA approval. Government has also put out a list of defence items that are covered under licensing; in other words, anything not mentioned (and this category covers a wide range of dual use items) can be manufactured without applying for a licence and will not be subjected to the 49 per cent FDI restriction. Given the enormous potential, it is natural that the global defence industry is interested in the Indian market. The challenge for the Modi government is to create a policy environment which can help translate this interest into launching a number of collaborative ventures. Some JVs in the private sector have already been launched with positive results. Tatas have signed up agreements with Sikorsky, Lockheed and Airbus; Reliance has tied up with dassault and Boeing; L & T has tie ups with Raytheon and Airbus for avionics and EW systems; Mahindra has inked agreements with Lockheed and BAe. In addition, a number of MSMEs have also been actively exploring cooperation opportunities. Need for a Partnership Approach The defence sector was opened up to the private sector only in 2001. Till then defence industry was dominated by the 41 Ordinance Factories, nine defence PSUs and the fifty plus DRDO laboratories. With about two lakh employees, the ordinance factories and the defence PSUs have a modest turnover of $ 8 billion. Functioning in a protected environment meant that these organisations did not need to compete and the MoD too did not bring in adequate specialisation in terms of technology assessment, costing and acquisition management. Today, when the demand for state of the art weaponry requires a different level of systems integration, it is vital that these processes be revised if we have to bring in greater indigenisation. So far, FDI in the defence sector has been negligible - less than $7 million. A new kind of expertise needs to be brought in to speed up decision making procedures. Specialised audit teams that can evaluate life cycle costs need to be built up. In addition, nurturing domestic industry also needs a degree of hand holding by suitably qualified teams consisting of representatives from the Services, technical experts and audit experts. These teams have to work over a sustained time frame in order to build trust. For a number of years, there has been talk of developing Strategic Partnerships which requires working on a cost plus basis, an area where MoD has yet to build up expertise. The challenge is there but then the opportunities are also enormous. What is needed is a spirit of partnership between the industry, the Services and the Defence Ministry and the creation of a level playing field which will also encourage transparency. Rakesh Sood was a senior Indian diplomat who has served as Ambassador to France, Nepal, Afghanistan and to the Conference on Disarmament in Geneva. He was former PM's Special Envoy for Disarmament and Non Proliferation issues. He served as then Prime Minister's Special Envoy for Disarmament and Non-Proliferation issues until 2014.