Self-sufficiency in defence production can be achieved by mastering cutting-edge technology
Maj. Gen. Mrinal Suman (retd)
Indisputably, India’s defence industry is in a pitiable state. Even after seven decades of Independence, India continues to remain wholly dependent on imports for high-tech defence systems. Worse, it has acquired the dubious distinction of being one of the top two importers of conventional weapons in the world.
Prime Minister Narendra Modi in his address at Aero India on 18 February 2015 declared that his government was focusing on developing India’s defence industry with a sense of mission and it was at the heart of the ‘Make in India’ programme. Mission ‘Make in India’ was formally launched on 25 September 2014, aiming to persuade Indian and foreign companies to invest in indigenous manufacturing.
To start with, two major measures were announced for the defence sector. One, many components of defence products list were excluded from industrial licensing requirements and dual use items having military as well as civilian applications were deregulated.
Two, FDI cap under the automatic route was raised from the earlier 26 per cent to 49 per cent composite (includes all kinds of foreign investments). In addition, the government declared its willingness to allow even 100 per cent FDI for modern and state-of-the-art technology on case to case basis. Even the upper limit for portfolio investment and investment by Foreign Venture Capital Investors was also raised to 49 per cent under the automatic route. Unfortunately, the above steps have failed to enthuse foreign investors.
Centrality of Technology
Technology is the engine that drives the growth of a country’s industrial prowess. Self-sufficiency in defence production can never be achieved unless cutting-edge technology is mastered. Reinventing the wheel is no solution. The only viable route is to import key technologies and thereafter use them as jumping boards for developing higher technologies indigenously. Many of the present-day technology majors were seeking technologies from others a few decades ago. India has to follow the same path.
According to the World Intellectual Property Organisation, technology pertaining to industrial production is ‘systematic knowledge for product manufacture and service provision’. There are two vital components of the definition. One, it is knowledge that is systematic in its evolution, delineation and description. For, it is only then that it can be intelligently implemented and purposefully exploited. Two, it should facilitate product manufacture and service provision. For that, it must cover the complete gamut to include engineering and manufacturing details for fabrication, assembly, test and maintenance.
The term ‘technology’ does not convey know-how in absolute terms. It denotes a package of multiple sub-technologies that go into the making of a product or a defence system. As most defence manufacturers are systems integrators, sub-technologies belong to different producers. Unfortunately, this aspect does not get the attention it deserves and mistakenly, technology is always treated as a single entity. This results in skewed decision making and wasteful import of sub-technologies that are already available within the country.
To hasten the pace of technology development, India must obtain select technologies from abroad. Import of technologies must be need-based and not availability-based. It is absolutely imperative that the complete process of selection, transfer and absorption of technology is carried out diligently and closely monitored. It should be for the Defence Research and Development Organisation (DRDO) to identify required technologies. Ideally, priority should be accorded to the technologies on which DRDO has been working for long but without satisfactory pace of progress. It will be easy for DRDO to draw full advantage through smooth absorption. Critical knowledge gaps can thus be filled with imported incremental technology, thereby accelerating development of the defence systems. Further, well-absorbed technology must act as a platform for indigenous development of higher level technologies. If every subsequent technology has to be imported, it does not contribute to the technological skills of the country.
For India, ‘Buy and Make’ route has been the preferred route for most of the large quantity contracts. However, technology transfer under ‘Buy and Make’ is a myth that is being perpetuated with total disregard to the ground realities. What the foreign vendors provide are rudimentary drawings to assemble equipment. Indigenous production is limited to the assemblage of imported sub-assemblies and components to deliver fully built units to the services. In the process, India gains nothing as regards technological know-how.
Take the case of T-series tanks – India has been producing them since early Seventies, yet our competence to improve upon the imported know-how is pathetic. When T-55 became obsolete and needed replacement, India had to rush abroad for T-72 tanks with technology transfer. Even after manufacturing hundreds of T-72 tanks, India could not master the technology or improve upon it. It was again Russia that provided T-90 tanks to replace the ageing fleet. If every time India has to resort to import of newer versions, technology infusion means little. Even in the case of essential spares, India has never achieved self-reliance. Every foreign vendor ensures that India remains dependent on him for critical spares and upgradation kits.
Wresting of Needed Technology through Leverage
As is well-known, no country is ready to part with its latest technologies with others without due coercion. India is expected to spend up to USD200 billion on defence procurements in the near future. Such a massive purchasing power provides India with an effective leverage to force the foreign sellers to share their advanced technologies with India. There are four ways of acquiring technology from foreign sources – outright purchase at a negotiated price; through the FDI route; against offsets; and by offering policy incentives.
As regards the first route, cutting edge technologies are never for sale. At times, some countries offer dated technologies at reasonable price to strengthen foreign relations and military ties. However, their utility is highly limited. No country can hope to usher in a technological revolution with such technologies. Hence, the option of buying technologies is not a feasible one and is not discussed further.
FDI Route: FDI is not just a question of getting funds, but access the latest technologies as well. FDI pre-supposes a long-term commitment and lasting relationship between the foreign and the local entity. FDI sets in motion a chain reaction wherein FDI upgrades local technology which, in turn, attracts more FDI with higher technology and the cycle goes on. This is of vital importance to the defence sector which is highly capital intensive and undergoes rapid obsolescence of technology.
FDI is a need-based concept. The host nation needs funds and technology for its accelerated growth while the prospective investors are guided purely by economic considerations. Therefore, any country that covets FDI has to position itself as the most lucrative FDI destination by evolving an investor-friendly policy, streamlining procedures and allaying all apprehensions of the prospective investors.
With its huge shopping list, India is ideally placed to project itself as the most lucrative FDI destination for defence industry. Disappointingly, foreign investors consider the policy with 49 per cent FDI limit and associated restrictions – strict capacity/product constraints, no purchase guarantee and no open access to other markets (including exports) – to be highly dissuasive. It is imperative that India revisits the policy with an open mind, providing sufficient autonomy with minimal bureaucratic control. For, they are not ready to part with their closely guarded technology unless they have adequate control over the enterprise. This is the primary reason for India’s failure to attract FDI.
Strangely, many feel that allowing foreigners to set up fully owned factories in India poses a threat to Indian security interests. How can imports be more reassuring than production in India? Furthermore, India can safeguard its interests by retaining the right to take over the factory in times of national emergencies. Such a clause can be embedded in all licenses. Most nations do that. Indigenous production of defence equipment is always more beneficial than imports. It creates jobs in the country, saves outflow of foreign exchange, ensures continues supplies, assures maintenance support, develops clusters of ancillary industries, permeates latest production/managerial practices and introduces testing methodologies. The host country has nothing to lose.
Through Offsets: All nations seek offsets that are in consonance with their national needs – either to meet an urgent economic need or to fill a critical technology void. It is not the type of offset but its relevance that matters. Offsets carry a cost penalty of 10 to 20 per cent. Hence, it makes sound business sense only if the trade-off results in extraordinary economic or technological gains. Countries that strive to develop indigenous industry seek technology through offsets to bridge the gap. More than 35 per cent of all offsets worldwide relate to technology transfer.
Transfer of technology is rightly called the engine that drives offsets. India can force industrially-advanced countries to share their latest technologies through the powerful leverage of offsets. Strangely, India did not accept technology against offsets till the issuance of the Defence Offset Guidelines in August 2012. Worse, India has abdicated the right to select methodology, fields and offset programmes in favour of the vendors, thereby rendering India’s needs inconsequential. As is expected, foreign vendors opt for programmes that cost the least and are easy to fulfil – India’s needs do not matter to them at all.
It will not be incorrect to state that India’s defence offset regime is in a total mess. It suffers from major infirmities and cannot contribute to the growth of the indigenous industry. There is an urgent need to take a fresh look at all facets of the policy. Attractive multipliers should be applied to key technologies to provide necessary incentive to vendors to earn higher offset credits.
India should follow two-quote system. Technology to be acquired against offsets should be duly included in the tender documents. Vendors should be asked to submit two separate commercial quotes – one with the stipulated offset package and the other without any offset obligation. Such an approach will have twin advantages. First, vendors will be forced to reveal the offset cost-overhead being charged by them, thereby facilitating value-for-money evaluation. Secondly, with bids without offset package, inter-se cost appraisal would become easy.
Once technically acceptable vendors are shortlisted and their commercial quotes are opened, lowest fully compliant vendor should be identified as the ‘lowest bidder’ based on quotes without the offset package. Thereafter, a reality check should be carried out to determine whether seeking the demanded offset package makes economic sense or not. The government may find it more prudent to carry out procurement without offsets.
Policy Incentives: In every major trade deal, interests of buyers and vendors are always at variance. Whereas India seeks critical technologies for indigenous production, commercial considerations are the prime motivation for the foreign investors. Reconciling the two, demands adroit handling of the conflicting interests. Equally importantly, the government should formulate a system of motivational incentives to channelise foreign inflows into the technologies that are considered to be of critical importance.
The incentives could also be in terms of price and/or fiscal incentives like tax breaks/holidays. Like most nations, India should support indigenous producers by giving them purchase and price preference. Concurrently, foreign producers who focus on technology infusion and upgradation of indigenous industrial base should be given incentives for collaboration with Indian companies. Further, all help should be provided to ensure economic viability of enterprises. Import of dual use technology should be encouraged for economies of scale. It benefits other segments of the economy as well.
Another practical way of developing indigenous industry is through the progressive increase of the local content in all products. The Dhirendra Singh Expert Committee has recommended that the floor level of indigenous content in individual cases be increased during the categorisation process on the basis of past experience. In addition, the committee is of the view that the minimum level of indigenous content specified for each category should be upwardly revised every two years, along with the biennial review of the Defence Procurement Procedure (DPP).
DPP-2016 rightly mandates that ‘Buy (Indian – IDDM)’ be accorded highest priority. This category refers to the procurement of products from an Indian vendor meeting one of the two conditions: products that have been indigenously designed, developed and manufactured with a minimum of 40 per cent Indigenous Content (IC) on cost basis or products having 60 per cent IC on cost basis which may not have been designed and developed indigenously. Other categories, in decreasing order of priority, are ‘Buy (Indian)’, ‘Buy and Make (Indian)’, ‘Buy and Make’ and ‘Buy (Global)’. In addition, ‘Make’ category aims at developing long-term indigenous defence capabilities. By laying down the above order of priority for procurements, the government has declared its resolve to give preference to indigenously manufactured items, thereby enticing foreign companies to participate in ‘Make in India’ mission. This single measure will go a long way in effective exploitation of India’s leverage.
The Way Forward
With deft exploitation of its huge leverage and innovative policy initiatives, the government will be able to convince the foreign companies to manufacture in India. Once their concerns are addressed and apprehensions are allayed, India will witness a metamorphic change in its defence production capability, with corresponding reduction in dependence on imports.
Implementation of the measures to boost indigenous production must be entrusted to the professionals who are fully conversant with modern technologies and are aware of the latest management tools and techniques to administer multi-faceted and multi-agency programmes. For that, an independent nodal body should be established to oversee the complete gamut of defence production and acquisition process. The body should debate, analyse and select the route to be adopted for indigenous production of critical systems, albeit depending on factors like quantity, economic viability, urgency, criticality, indigenous capability and acceptable timelines.
Given its favourable geo-political position, India must strive to be a hub for global outsourcing and become a key link in the global supply chains. That is essential for the success of India’s ambitious mission ‘Make in India’ to upgrade the local industry from the current pedestrian levels to technological excellence. As ‘Make in India’ in the defence sector impacts the national security imperatives critically, it deserves focussed treatment. The current drift has to be arrested. To kick-start the indigenous defence industry, the government will have to initiate bold, drastic and innovative measures. To start with, the much-awaited Strategic Partnership Scheme should be implemented earnestly and scrupulously.