Make in India in defence production do not result in savings
Mohammad Asif Khan
On 5 March 2024, defence minister Rajnath Singh launched the Acing Development of Innovative Technologies with iDEX (ADITI) scheme at DefConnect 2024 in New Delhi. This scheme aimed to bolster the Make in India initiative by supporting startups focused on defence technologies. With a budget of INR 750 crore and grants of up to INR 25 crore for research and development, the initiative sought to enhance India’s indigenous defence production through increased financial backing and structured support, fostering innovation and domestic manufacturing.
In recent years, the Indian government has implemented various policy measures and investments to boost the Make in India initiative in indigenous defence manufacturing. These measures have yielded significant results, reaching USD 2.5 billion (INR 20,915 crore) in the fiscal year 2023-24, as revealed by the Economic Survey 2023-24 presented by finance minister Nirmala Sitharaman in the Lok Sabha. However, this push for indigenisation has inadvertently increased the cost of production for certain weapon systems by a hefty 30 to 40 per cent.
India’s Make in India initiative, launched in 2014 by Prime Minister Narendra Modi, aimed to transform India into a global manufacturing hub. While the initiative spanned various sectors, a significant focus was placed on bolstering the nation’s domestic defence manufacturing capabilities. The primary goal was to reduce dependency on foreign arms suppliers and build a robust indigenous defence industry. However, recent analyses indicate that this initiative has inadvertently increased the cost of certain weapons system’s direct procurement from foreign vendors.
Technology Transfer Costs
A core component of the Make in India initiative involves collaborating with foreign original equipment manufacturers (OEMs) to facilitate technology transfer. This process, while essential for building indigenous capabilities, incurs substantial costs. Indian companies, often inexperienced in complex defence manufacturing, require extensive technical assistance and training from foreign OEMs. These services translate into licensing fees, technology transfer costs and profit margins for foreign companies, ultimately inflating the final price of weapon systems.
The Su-30MKI fighter jets provide a clear example of these costs. Initially purchased from Russia, these jets were later produced domestically under license. The technology transfer involved significant expense. According to reports, the cost of manufacturing each Su-30MKI in India is significantly higher than importing them directly. This increase was due to technology transfer fees, training costs and the need for continuous technical support from Russian experts.
Indian companies, often new to complex defence manufacturing, require extensive technical assistance and training from OEMs. This expertise translates into licensing fees and technology transfer costs, which can drive up the overall price of the equipment. For instance, the Rafale fighter jet deal included a substantial Make in India component, necessitating Dassault Aviation to invest in Indian defence manufacturing. This involved setting up production facilities, training Indian engineers and transferring technology, all of which added to the overall cost of the jets. Similarly, the joint venture between India and Russia to produce AK-203 rifles in India faced increased costs due to the expenses associated with establishing the manufacturing plant, training Indian personnel and ensuring quality control to meet the standards of the original Russian design.
Economies of Scale
Economies of scale play a crucial role in the defence procurement process, significantly impacting the cost and efficiency of weapon systems production. Established foreign vendors often have the advantage of producing large quantities of specific weapon systems, which allows them to spread the fixed costs of production over a larger number of units. This results in a lower per-unit cost, making their products more competitive in the global market. In contrast, ‘Make in India’ projects frequently involve smaller production runs, particularly for niche weapons, which can lead to higher prices due to the inability to achieve similar economies of scale.
One of the primary reasons established foreign vendors can achieve economies of scale is their extensive experience and established infrastructure. These vendors have been producing weapon systems for many years, allowing them to refine their production processes and achieve greater efficiency. For example, companies like Lockheed Martin and Boeing in the United States have been producing fighter jets and other advanced weapon systems for decades. Their long-standing production lines and established supply chains enable them to produce large quantities of these systems at a lower cost per unit. This is in stark contrast to newer manufacturers in countries like India, where the defence industry lacks the same level of experience and infrastructure.
Another factor contributing to the economies of scale for established foreign vendors is their ability to secure large orders from multiple countries. These vendors often have a global customer base, allowing them to produce weapon systems in large quantities to meet the demands of various nations. For instance, the F-35 fighter jet, produced by Lockheed Martin, is used by several countries, including the United States, the United Kingdom and Japan. The large production runs required to meet the demands of these countries enable Lockheed Martin to spread the fixed production costs over a larger number of units, resulting in a lower per-unit cost. In contrast, make in India projects often cater primarily to the Indian armed forces, limiting the potential for large production runs and economies of scale.
The impact of economies of scale on the cost of weapon systems can be illustrated through specific examples. The cost of producing a single weapon system unit can be significantly higher when production runs are small. For instance, the cost of producing a single Tejas fighter jet, developed under the Make in India initiative, is higher than the cost of producing a single F-16 fighter jet by Lockheed Martin. This is because the production run for the Tejas is relatively small, with only a limited number of units being produced for the Indian Air Force. In contrast, the F-16 has been produced in large quantities for several decades, allowing Lockheed Martin to achieve economies of scale and reduce the per-unit cost.
Furthermore, the fixed costs associated with setting up production lines for weapon systems can be substantial. These costs include the expenses related to building and maintaining manufacturing facilities, acquiring specialised machinery and equipment and training the workforce. When these fixed costs are spread over a smaller number of units, as is often the case with Make in India projects, the per-unit cost increases. This is because the fixed costs are not sufficiently amortised over a large production run. In contrast, established foreign vendors can spread these fixed costs over a larger number of units, resulting in a lower per-unit cost.
The challenges faced by Make in India projects in achieving economies of scale are further compounded by the need to develop indigenous capabilities and technologies. Developing advanced weapon systems requires significant investment in research and development (R&D), which can be a costly and time-consuming process. Established foreign vendors often have the advantage of leveraging existing technologies and expertise, allowing them to achieve economies of scale more quickly. For example, the development of the Tejas fighter jet involved extensive R&D efforts and collaboration with foreign partners, which added to the overall cost of the project. In contrast, established foreign vendors can build on their existing technological base and achieve economies of scale more efficiently.
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