Create Defence-Industrial Giant

http://www.newindianexpress.com/columns/Create-Defence-Industrial-Giant/2014/08/22/article2391250.ece

By Bharat Karnad

Published: 22nd August 2014 

Prime minister Narendra Modi extolled “Made in India” products from “satellites to submarines” in his Independence Day address. A day later he demanded that “Instead of having to import even small things...India...become an exporter of [military] equipment over the next few years”. And, he exhorted foreign countries and companies to “make in India”. Rendering the country self-sufficient in armaments, it turns out, will help India emerge as workshop of the world manufacturing all kinds of quality goods economically. But it will require the PM to do to the Defence Public Sector Units (DPSUs) overseen by the ministry of defence (MoD) what he did to the Planning Commission—utilise their resources more effectively.

At the core is a fact that cannot be glossed over: DPSUs are deadweight. Despite outputting some 800 combat aircraft and thousands of jet engines not an iota of any of the technologies, for example, have been absorbed let alone innovated over the past 60 years by Hindustan Aeronautics Ltd. Indeed, DPSUs haven’t progressed much beyond assembling platforms from imported kits achieved during the Second World War when Harlow PC-5 and Percival Prentice trainer aircraft, trucks, and mortars were mass-produced for the Allied armies. In this context, the indigenous HF-24 supersonic fighter developed from scratch in the 1960s seems an aberration. It is because the DPSUs have stayed stuck at the screwdriver technology level that the department of defence production in MoD has evolved a procurement system willy-nilly funnelling billions of dollars to foreign vendors with minimal transfer of technology (ToT). DPSUs neither ingest foreign technology nor let the private sector benefit from it.

How much the ToT provisions are eyewash and how much the military procurement system favours imports and enriches foreign countries may be gauged from a few facts. Firstly, the technology transfer content in deals is not required to be divulged by the foreign vendors until after the bids are in and a supplier chosen! This empowers the vendor to restrict the technology it chooses to transfer, usually basic stuff related to the platform—a ToT threshold DPSUs are comfortable with. As prime buyer India doesn’t use its leverage to squeeze state-of-the-art technologies out of the suppliers, is uncommonly generous in forking out huge sums at the outset, and tolerates delays in delivery and non-transfer of technology. Hence, gains from indigenisation even from the offsets policy are minimal. It leads to imports of high-value packages being locked into long-term deals. Dassault, for example, will supply 30% of the advanced avionics amounting to over $10 billion of the $30 billion plus contract for the full duration of the Rafale programme.

Secondly, ostensibly because of foreign currency fluctuations foreign suppliers are not held to the cost-figure in their winning bids, even as Indian bidders who may buy technology from abroad and refine it here are! Foreign suppliers are thus incentivised deliberately to underbid to win contracts and then to raise the price at the price negotiation stage without incurring any penalties. The French firm, Dassault Avions, originally offered the Rafale combat aircraft with comprehensive ToT for $10 billion. But after winning the tender, it increased the cost to over $30 billion and the MoD did not blink! This skewed system is bolstered by the military’s preference for foreign, especially Western, hardware. India, consequently, is routinely relieved of monies and Indian private sector companies are prevented from winning procurement contracts.

The extant system has evolved around the fact that the remit of the Defence Production Secretary as the guardian of DPSUs is to ensure their order books are full. Because DPSU capability is limited to licensed manufacture, procurement deals centre on it. Committees chaired by ex-bureaucrats, the most recent one by Vijay Kelkar, are periodically constituted to recommend revamp of existing protocols and procedures but without disturbing the dominance of DPSUs. This is akin to leaving a cancerous tumour intact while fiddling with the tissues around it! In the event, documents such as “Defence Procurement Policy-2013” are meaningless.

But how can competition and profit motive, the two great drivers of any vibrant industry, be injected into the defence industrial and military procurement spheres? The solution lies in eliminating the spurious distinction between public and private sectors and meshing their resources and capabilities. It was outlined in a 1999 paper by me to the technology review sub-committee in the first National Security Advisory Board. Keeping in mind the need to amortise sunk costs in building up impressive laboratories and physical facilities for R&D and weapons testing under DRDO (whose “chalta hai” attitude was decried by the PM) and production facilities in innumerable DPSUs and ordnance factories, I proposed that all these installations, some 50-odd, be divided into two nearly equally capable defence R&D and manufacturing combines and be led as commercial enterprises by two of the most ethical and industrially versatile business houses—Larsen & Toubro and Tata.

These two combines, subsuming the capacities of L&T and Tata, would pay the government rent for the DRDO centres/DPSUs/ordnance factories in their group and royalty for the technology, software, and hardware outputted by them. They’d bid for all weapons contracts with funds being provided by MoD to develop prototypes, and the winner determined by a transparently conducted run-off. What technology is procured from where under what financial terms, and which foreign or local firms are associated on which project, would be the sole concern of the combines. It will hasten the globalisation of Indian industry.

Such a scheme, besides creating a world-class defence-industrial complex and arms exporter, will rid the procurement system of its most serious ills—the inclination to import, endemic corruption and influence-peddling, the self-defeating lowest tender (L-1) process, production orders in small tranches that undermine economies of scale, and the bans on commercialising imported technology and exporting military products. Integrating private and public sector skills and wherewithal, inducing competitive pricing, and rewarding performance will increase labour productivity and efficient resource-use resulting, say, in the Kolkata-class destroyer being produced not in 8-9 years but the international industry standard—three years. Unsurprisingly this “out of the box” proposal is collecting dust.

The author is professor at the Centre for Policy Research and blogs at www.bharatkarnad.com