Get serious about defence manufacturing at home

Amitabh Kant

Jan 15 2015 

Part-4

Excerpts from the presentations at the Roundtable on National Security Key Challenges Ahead organised by The Tribune National Security Forum in collaboration with the Indian Council of World Affairs See also www.tribuneindia.com

India can never be a secure nation till it does not grow at rapid rates of 9-10 per cent per annum, year after year, for the next three decades to be able to create jobs for its very young population. India has grown at this rate for a relatively short period, but it needs to do this for three decades. Manufacturing is a crucial issue and compels a very strong component of our GDP. Today, it is stagnant at around 16 per cent. It must go up to 25 per cent. 

Other than manufacturing is how we manage our process of urbanisation; because in the next four decades, we are going to see 70 crore people move from rural areas to urban. Every minute, 30 Indians are moving away from rural areas. How we manage this in a planned, sustainable manner will be extremely critical for India. But when we touch on the aspect of defence manufacturing, we need to know that India is the world's largest importer of defence equipment. We import 70 per cent of our defence equipment. In the next several years, we will be importing close to $140 billion worth of equipment. In addition, we will be importing about $110 billion worth of homeland security equipment. These are the key challenges. 

This government, after coming to power, has taken a series of measures to encourage domestic manufacturing in defence, one of which is key in terms of deregulating almost 55 per cent of the items on the defence category list. These have been removed and one can now go and manufacture after taking approval from the RBI. The challenges of deregulation and de-licensing have been undertaken by the government. Secondly, it has allowed the FDI to go up from 26 to 49 per cent; you can go up further to 100 per cent under certain conditions. One of the most critical things was that the earlier government had restricted it and said we will not allow FII to come in at all. And, therefore, a number of projects were held up because every single manufacturer across the world always has some FII component. This government has allowed it through the automatic route; in defence, you can go up to 24 per cent. In fact, in the last three to four months, we have cleared almost close to 44 applications where no licence may be required. We have also cleared 21 applications held up for various reasons. So, there is a huge amount of buoyancy as far as manufacturing within India is concerned. 

Manufacturing constraints

A number of Original Equipment Manufacturers (OEMs) from abroad are looking at manufacturing in India, but having said that, there are several constraints in defence manufacturing for various reasons, one of which is simply the lack of preparedness within our Defence Ministry and the armed forces headquarters. The Government of India has adopted the “Make-in-India” programme, which is similar to what in the US is called the Defence Advanced Research Projects Agency (DARPA) programme. What this programme envisages is that you will handle the private sector manufacturer, you will support him with research and development, you will do integrated planning, you will do intellectual property development within India. Over the last six-seven years, only two major programmes have been rolled out under this. One is the Future Infant Combat Vehicle, and the second is the Tactical Communication System. 

In both these programmes, you need integrated project management teams to handle the private sector and both programmes have suffered high costs and gestation delays because of the constant changes in the integrated project management teams, people with inadequate knowledge, and lack of continuity. If you keep changing every two-three years, when you need six-seven years to develop the project, you will never be able to make defence equipment in India. Hence, first and foremost, you need integrated project management teams that are going to be there for the life of the projects. Short-term project management teams, ad-hoc changes, lack of knowledgeable people won’t do. You need men of the highest vision, with the highest technology skills, men of great capabilities to steer these projects through their life cycle. 

Secondly, India should roll out about 30 more projects, not two, which is what it has done in the last five-six years. India needs to burst out of the long-term integrated project plans prepared by the armed forces. You need to look at what is the plan for 2012 through 2027, pick out 30 to 35 big-term ideas, put long-term perspective planning around it and see that these get manufactured in India. This requires a big vision, big perspective, big canvas, and unless that is done, defence manufacturing will be very difficult to do in India. 

We need to prepare feasibility reports by the integrated defence staff headquarters; you need projects, concepts that are already identified, and you need to really push them hard. It is very important to pick up these projects and monitor them in a time-bound manner. 

Resources for R&D 

The third point is that defence procurement is essentially monopolistic and oligopolistic in nature and so you need to put in a lot of resources in R&D. You need to amortise that cost over a long period of time. You need a life cycle cost of technologies, you need to evaluate them over a long period of time and you need very specialised agencies to evaluate these projects. 

If you want to become a great defence manufacturer, you need to give the private sector an equal footing, you need to produce not for India alone, but for global markets, and that can only be done by your private sector. You need to handle them, you need to really enhance partnership with the private sector and that the Defence Production Ministry is incapable of doing at the moment. Therefore, you need to create an agency that will strengthen and give the private sector an equal footing. 

The US has a defence cost audit accountancy agency, which has 14,000 persons, all of whom sit in the offices of the OEMs. All the big military industrial complexes that you have seen emerging are all based on a cost-plus mechanism. It is not based on L1, so let us just forget L1. It is a very compact cost audit accounting system based on a plus-plus model and the Defence Ministry does not have a cost audit accounting strength. Unless you do not strengthen that, you will never be able to strengthen your private sector. If you keep going on L1, you will never be able to build it. You need to say, you need to create national champions. You need to say I want to have 25 big defence manufactures in India, private-sector driven, identify them, create them into national champions, boost cost accountants and create great national champions who would become your great defence manufacturers and drive India’s defence manufacturing. If that does not happen, it will be very difficult to do this.

Diplomacy has to play a very critical role. Defence manufacturing is technology-related and many countries do not pass on technology. It is when you do defence procurement on a long-term basis that diplomacy has to play a very critical role to enable the transfer of technology to take place. You can have the most liberal FDI regime, but you will not gain from it unless the Defence Ministry works very closely in tandem with the Ministry of External Affairs to enable the technology to be shifted. 

The final point is that it is not just about manufacturing in the long run, it is also about manufacturing at very competitive rates, and to be able to make defence a very, very efficient industry. It requires a lot of work to kickstart projects and a lot of capacity-building within the armed forces headquarters and the Defence Ministry. It requires unleashing of new projects so that India can become a very credible military industrial complex. Great power status can never come till you do not become a great defence manufacturer, and defence manufacturing requires a huge amount of hard work, rather than merely allowing FDI.