A Sukhoi Su-30MKI Air Superiority Fighter of the Indian Air Force

by Sandeep Unnithan

In February 15, the Indian Space Research Organisation's (ISRO) workhorse PSLV rocket thundered off a launch pad at Sriharikota, Andhra Pradesh, for a record-making mission. The rocket disgorged 104 satellites into space, 101 of them for foreign customers. Just the day before, on February 14, global arms firms had converged on Bangalore for the biennial four-day Aero India 2017 air show to display their fighter jets, helicopters and drones to the Indian armed forces, who are looking to buy military hardware worth over $100 billion over the next decade.

These two recent events, just a day apart and entirely unrelated, illustrate the gap between India's capabilities. Entirely self-sufficient as a space power yet utterly dependent on imported arms for its military power. India has the world's third largest military, and with a Rs 2.74 lakh crore defense budget this year, it is also the world's sixth largest spender on defense. However, nearly 60 per cent of its military hardware is imported. India has often held the title of the 'world's largest arms importer', and between 2012 and 2016, the country accounted for 13 per cent of all global arms exports. Figures tabled by the government in the Lok Sabha put the value of arms imports at Rs 82,496 crore between 2013 and 2016. Even as the government pitches for a permanent seat at the United Nations Security Council, it cannot but be aware of a cruel irony-it is effectively a net importer of security from four of the five permanent members.

The reason for these imports is a capacity and capability gap. India's defense production base - a vast, lumbering network of arms factories, shipyards and laboratories with 200,000 employees - is unable to meet the requirements of the military. India's Defense Public Sector Undertakings (DPSUs) will supply arms and ammunition worth Rs 57,000 crore this year, but this will be insufficient to meet the requirements of the armed forces. This gap is bridged by off-the-shelf imports, which do not result in technology gains for Indian industry. This was one of the main reasons that defense production was one of the 25 sectors identified by the Modi government's economic plan to boost the share of manufacturing in GDP to 25 per cent (from 16 per cent), and create 100 million additional jobs.


Make in India is easily the most comprehensive effort thus far to reverse such import dependence. In the past three years, the government has unveiled a slew of measures on this count, from opening up the defense sector to FDI of 49 per cent (and above in certain cases), to introducing an Indigenously Designed, Developed and Manufactured (IDDM) category to promote indigenous manufacture.

The challenges and investments required-to create technology, product development capabilities and infrastructure-outside the public sector are significant and hence will take time. Private sector involvement is minuscule at present, accounting for less than 5 per cent of the total defense pie. The government, therefore, has roped in private sector firms, hoping to transform them from second-rung players into independent defense entities capable of delivering defense equipment on their own. Over the past two years, the government has withdrawn the preferential treatment given to DPSUs, like excise and customs duty waivers, to create a level playing field with the private sector. While there is tremendous movement on the policy front, there is little implementation. At least three major contracts-for building landing platform docks (ships that can transport troops and military vehicles); for the development of battlefield management systems that allow mobile military formations to communicate with each other; and for constructing modern diesel-electric submarines-are yet to be awarded, though it has been over a decade since they were conceived.
The defense ministry says this is because it is yet to approve a key policy for strategic partnerships, recommended by a task force it appointed in 2016. The strategic partnerships call for the creation of joint-venture concerns between private sector firms and foreign partners in broad areas of defense platforms, networks, weapons and materials. After shuttling between the bureaucrats in the MoD, the file has now been sent to the finance ministry for another opinion-an example of what one private sector CEO calls "classic bureaucratic procrastination". "Bureaucratic apathy is among the biggest hurdles to the government achieving its Make in India targets," warns Laxman Kumar Behera, a research fellow who tracks military expenditure at the New Delhi-based Institute for Defense Studies and Analyses (IDSA).

Another significant obstacle to the government's Make in India policy is the lack of orders placed with the Indian private sector. At least 10 proposals, worth billions of dollars, that aim to equip the armed forces with modern infantry combat vehicles, communication systems, howitzers, helicopters and fighter jets, are still in the pipeline.

The requirements of the armed forces are enormous. An April 2013 study titled 'A Technology, Perspective and Capability Road map', prepared by the triservice Headquarters Integrated Defense Staff, assessed India's requirements for high technology military hardware, drones, precision weapons, radars, guns, sensors and aircraft at around $100 billion over the next 15 years.

Addressing a press conference at Aero India, Defense Minister Manohar Parrikar said the armed forces needed approximately 400 fighter jets and 800 to 1,000 helicopters over the next decade. "Our helicopter engine requirement in 10 years is 5,000, and we will need over 400 LCA (light combat aircraft) engines [as well], all these aspects open huge potential," he said. But until these orders are placed, these numbers are but pies in the sky.

According to Parrikar, his ministry's indigenisation targets are on course. "The target is 70 per cent indigenisation, as per the recommendations of the Dr A.P.J. Abdul Kalam committee. That will take four to five years. By the end of the term of this government, we should touch 60 per cent," he said (see interview).

This year's defense budget, however, registered a modest 5 per cent increase-barely enough to meet inflation. It was only 1.62 per cent of the GDP. "This is the lowest since the disastrous 1962 war with China when it was 1.59 per cent of the GDP, and grossly inadequate to meet India's growing military modernization challenges," warns military analyst Brig. Gurmeet Kanwal (retired). The next budget, the NDA's last before the onset of the 2019 Lok Sabha elections, is unlikely to be any different. "There is no clarity on whether what this government is doing is different from the previous government," says Amit Cowshish, former financial advisor in the defense ministry. "There is no clear-cut Make in India in defense. It's just a rehash of earlier policies with cosmetic changes." With stagnant budgets and orders caught up in red tape, the government's Make in India dream for defense runs the risk of remaining a slogan.

Over the past year, India's diplomats and military officials have tried to stall a proposed sale of 24 China-Pakistan made JF-17 'Thunder' jets to Sri Lanka. New Delhi's anxiety over the sale, and the reason why it has pitted its homegrown Tejas Light Combat Aircraft as an alternative to the China-Pakistan fighter jet, is grounded in Beijing's recent successes in gaining influence in India's traditional sphere of influence in South Asia. In 2014, China sold two second-hand diesel-electric submarines to Bangladesh, ensuring a toe-hold on India's eastern flank. India, whose navy has not acquired a new submarine in 17 years, had none to offer.

Such shortfalls may seem paradoxical in a country that boasts of one of the world's largest military-industrial complexes-comprising 41 ordnance factories, eight DPSUs and 52 research laboratories-producing everything from submarines to assault rifles.

But this impressive scale masks a Faustian bargain. Most of the equipment they produce is under licence from foreign firms. A 2014 in-house report of the Ordnance Factory Board (OFB) notes that close to 90 per cent of its Rs 13,500 crore turnover comes from technology developed outside the organisation.

The backbone of the Indian air force, navy and army is made up of nearly 250 Su-30MKI jets, nine Kilo-class diesel-electric submarines and over 2,000 T-72/ T-90 main battle tanks respectively. Russian original equipment manufacturers (OEMs) have given Hindustan Aeronautics Limited's (HAL) Ozar facility in Nashik the know how to assemble the Su-30MKI in India, and to the Heavy Vehicles Factory, Avadi, to assemble the T-90 tanks. But because they won't part with the 'know-why'-the product design, or the source code of a particular design (between 60 and 80 per cent of the value of a platform)-India cannot even upgrade the platforms without consulting the OEM, and is in a perpetual lock-in with the seller through the life of the product.

"Life cycle costs of a platform are the great multiplier," explains the CEO of a private sector firm. "For any platform, the life cycle cost (the product servicing and refurbishment) is between four and seven times the acquisition cost. This ensures huge profits for the manufacturer through the life of the product." This dependence continues over the life of the combat jet, the warship or the battle tank, and is the main reason arms sales have become an adjunct of foreign policy for global powers to cultivate clout.

Poor investments in research and development-the OFB, for instance, invests only 0.7 per cent of its budget in R&D against a requirement of at least 3 per cent-make the dependence permanent. A 2016 IDSA study, 'Indian Defense Industry-an Agenda for Making in India', notes that four of the nine DPSUs do not own a single patent or copyright. In comparison, airplane major Boeing claimed over 1,000 patents for a single program, the 787 Dreamliner.

It's not just platforms, however. DPSUs are critically dependent on imported components to make indigenous platforms. Over the past five years, state-owned aerospace monolith HAL imported 90 per cent of aircraft parts, components and raw materials.

A 2014 Comptroller and Auditor General (CAG) report found that the OFB had a miserable record of indigenisation-in two such examples, it managed only 59 of 78 codes for the main assemblies of T-90 tanks and could indigenise just 47 per cent of 84 mm rocket launchers imported from Sweden. India's eight DPSUs have an average productivity of around $67,000. This is one-fifth of the global average. The top five arms producing companies in the world have an average labor productivity of $370,000.

Delays by the public sector arms factories happen so often that the armed forces have to resort to emergency imports. In October, just days after the surgical strikes in Pakistan-occupied Kashmir, India's defense ministry initiated a massive off-the-shelf import of arms and ammunition from Russia and Israel, worth nearly $3 billion. The OFB had failed to meet the army's 2013 projections for Rs 40,771 crore worth of ammunition for five years between 2013 and 2019, necessitating the import.

With strategic partnerships paving the way for joint ventures between Indian and foreign firms, the weak link is slow decision-making in the defense ministry, which hands out the contracts. A private sector CEO mentions how private sector proposals take between nine months to a year to get approved because the MoD regards them with suspicion.

At the recent Gateway of India Geo-economic Dialogue, private sector panelists, particularly foreign defense companies, pointed to challenges like procurement issues and offset difficulties in India's defense sector. "Addressing these issues will be critical to developing India's own defense industrial base through Make in India," says Sameer Patil, fellow, National Security Studies at the Mumbai-based think-tank Gateway House. Private sector participation to boost indigenous content is a no-brainer. It could well be the government's hidden ace in its rivalry with China.

Among the cornerstones of ISRO's success has been involving the private sector in building rockets and the creation of a large vendor base that supplies key components for its space programme. ISRO's track record is instructive for its defense ministry counterpart, the Defense Research and Development Organisation (DRDO). This, as well as the government's decision to create a model for private participation in design, integration and manufacture has caused the DRDO and public sector enterprises to become efficient and aggressive, says Rajeev Chandrasekhar, Rajya Sabha MP and member of the parliamentary standing committee on defense. "Which is the real objective-because at least for the conceivable short to medium term, companies like HAL, BEL, BDL and shipyards like MDL will remain important vendors to our military preparedness," he says. The IDDM category, which the MoD's defense procurement policy seeks to encourage, is a rare category in India.

Both the LCA and the Dhruv Advanced Light Helicopter use imported engines. Apart from lightly armed patrol vessels, the DRDO owns the intellectual property for just two weapons systems-the Pinaka multiple rocket system and the Akash surface to air missile system, guided by the Rajendra radar system, both of which have been offered for export to Vietnam. Both these weapons systems were developed by public-private partnerships-the Pinaka launchers by a consortium of L&T and Tata Power SED; Akash by Bharat Electricals and Tata Power. The best example of public and private sector cooperation also remains India's best-kept secret. Three Arihant-class nuclear-powered ballistic missile submarines (SSBNs) are being constructed by a consortium of the Bhabha Atomic Research Centre, the Indian navy and private sector firms in Visakhapatnam. The lead ship of the class, the INS Arihant, was inducted into the navy last year. The indigenous SSBNs have achieved up to 70 per cent indigenous content. In sharp contrast, the much smaller Scorpene diesel-electric submarines, six of which are being licence-produced from France at Mazagon Docks, feature an indigenous content of less than 30 per cent.

DRDO's Advanced Towed Artillery Gun System (ATAGS) is being developed by a Tata-Bharat Forge consortium. When it is ready for induction, in five years, it will give the country a world-class 155 mm towed howitzer for export. The DRDO's 'Netra' AEW&CS, handed over to the IAF at Aero India, was developed at less than half the $241 million cost of the four Swedish Ericsson Erieye AEW radars sold to Pakistan and has tremendous export potential.

The defense industry is a monopoly at the same time-the government is the single largest manufacturer as well as the only buyer. The government has attempted to dilute its monopoly by introducing private players into defense since 2001, but its commitment to a level-playing field falls flat in the absence of orders.

For nearly a decade now, the MoD has debated over a stack of military orders that will add muscle to the machine (see graphic: Stuck in the Pipeline). The force multiplier effect of each such order on the country's industrial ecosystem will be tremendous. It will create thousands of jobs in the sector, particularly among MSMEs, which make up 80 per cent of India's private defense capabilities. One private sector official estimates that the combined Rs 1.2 lakh crore value of the three 'Make' projects-for an FICV (Future Infantry Combat Vehicle), the battlefield management system and the tactical communication system-would add one GDP point to the Indian economy and actually realise the government's Make in India dream.

Over the past two years, private sector firms Ashok Leyland and TATA Motors have nearly eliminated the monopoly enjoyed by public sector BEML's controversial TATRA vehicles. The two private sector firms have snapped up contracts for 1,694 HMVs worth Rs 1,284 crore for towing field artillery guns and for mobile rocket launchers. But without more such big ticket orders, private players can get easily crowded out of the defense space.

The orders are held up for various reasons. A recent order to produce 56 medium transport aircraft within the country, the first aerospace venture by the private sector, has been held up for over a year. This is because the MoD wants only 56 aircraft, but the sole bidders for the project, a Tata-Airbus consortium, wanted a minimum order of 100 to make the project viable. A Rs 20,000 crore project to modernize infantry by giving soldiers high-tech gear, including modern rifles, mineproof boots and wearable computers, has been stuck for over a decade. Private firms were to play a major role in this contract, believed to be delayed because of internal army issues.

The MoD, meanwhile, continues to hand multi-billion dollar deals to the public sector, without any competition. In two recent deals, Goa Shipyard bagged a lucrative Rs 32,000 crore order for building mine counter-measure vessels for the Indian navy while Hindustan Shipyard bagged a naval order for five fleet support ships at Rs 9,000 crore.

Soon after taking over as defense minister in November 2014, Parrikar commissioned multiple committees to assess the problems plaguing his ministry. Four out of eight of these committees dealt either directly or indirectly with his government's Make in India mission. The committees came back with a sheaf of recommendations, which led to policies for strategic partnerships in the private sector. However, at least one private sector CEO questions this model and believes it will mean replacing public sector monopolies with private sector ones. "In the short run,"he says, "they'll be beneficial to the armed forces as they will get an alternative supply source for hardware, but in the long run it won't bring the country any benefits as 49 per cent of the technology will still be in the control of a foreign concern. They control knowledge flow, and will block any new technology from coming up."

Turnarounds are not impossible. China, the world's largest arms importer a decade ago, is today the world's third largest arms exporter. Beijing achieved this by setting into motion a comprehensive multi-pronged policy beginning in the mid-1990s, where they acquired sensitive military technology and expertise, sometimes through dubious means, and absorbed it into local industry to create a range of defense equipment.

Technology absorption is where South Block's key technology tool, defense offsets, falters. The offset policy mandates that the foreign equipment seller buy 30 per of the value of defense contracts over $300 million from the local market. Last year, the MoD projected contractual offset obligations worth over $4 billion from its defense imports. Critical deficiencies in the policy as highlighted by India's CAG in a report to Parliament in November 2012-zero value addition, equipment transfer, invalid selection of Indian Offset Partner (IOP) and weak monitoring mechanism-are yet to be addressed.

But for Make in India to succeed, DPSUs need to be transformed. Measures suggested by the committees include corporatising them and giving them more financial autonomy, boosting R&D spend and laying out a road map to progressively reduce their dependence on imports. Experts say indigenisation of 50-60 per cent by 2027 is easily attainable; but only if the MoD's policy reforms are taken to their logical conclusion and implemented in letter and spirit. The question is, when.

Source>>