While pushing the case for Atmanirbhar Bharat Abhiyaan, there exists a need to address those areas where India should aspire to develop and possess national systems and sub-systems

by Pushan Das and Angad Singh

The economic circumstances confronting the government in times of COVID-19 has set the scene for an urgent tightening of the India’s military modernisation. Nirmala Sitharaman’s announcements reaffirm the government’s commitment to sustain and strengthen Indian defence manufacturing, design and support capabilities as the quantum of funds allocated for capital expenditure or modernisation contract for the foreseeable future.

The majority of announced decisions are not new, and are policy amendments the Ministry of Defence (MoD) is, or should already have been actively working towards. Indigenisation of spares, faster procurement, streamlining trials and testing, and less ambitious General Staff Service Qualitative Requirements (GSQR) have all been mooted or tried out with varying levels of success in the past. Similarly, corporatisation of Public Sector Undertakings have been pursued without the breakthrough results one might have expected from more radical changes like privatisation.

These new defence procurement policies or preferences potentially have a series of economic consequences. When a defence platform is manufactured, depending on how much of that contract is manufactured domestically by the firm and its sub-contractors, the government receives tax revenues from those employed and the companies involved.

Foreign Direct Investment

74% Foreign Direct Investment (FDI) under automatic route is a positive policy amendment, although perhaps a little late in coming, given the likely drop in overall defence capital spending. The decision will effect the controversial “Chapter-7” in India’s Defence Procurement Policy (DPP), where the rules had restricted a foreign manufacturer’s stakes to 49% in a partnership. This created a plethora of issues around the willingness of these companies to share the latest technologies to IPR issues.

While issues around the highest-end sovereign IPR can never be solved, even with 100% FDI, but for any company on the fence regarding business in India, with commercial (as opposed to state-owned) technology on offer, this is a good way not only to enter the Indian market but to build economies of scale around global production. This is of particular importance since Indian defence contracting has proven time and again that it simply cannot generate the volumes to sustain an industry.

How this increase in FDI in the automatic route will effect existing preferred categories of defence procurement, like ‘Indian Indigenously Designed Developed and Manufactured’ or Indian-IDDM, remains to be seen and may require significant policy amendments to existing procurement procedures. In Indian-IDDM it is currently proposed that any order will require at least 50% indigenous content if the design is indigenous in addition to development and manufacture, an increase from 40%from the DPP 2016. Or under Buy-Indian category with an indigenous design and manufacture, the required percentage of indigenous content will be 50% or 60% if product has not been designed and developed indigenously. 

Negative List

While a ‘negative list’ for imports makes sense, the Department of Military Affairs (DMA) and the Ministry of Defence (MoD) will have to go about framing such a list with careful consideration, because these sort of lists once formalised are incredibly difficult to roll back or circumvent even in cases of dire need. The list will need to take into consideration the entry barriers in the form of required knowledge, skills and capital required in domestic development and manufacture of major defence systems, such as missiles, aircraft, warships, and even armoured vehicles.

The provision for the list to be periodically revised (and presumably expanded with each revision) makes sense and is a positive policy decision. However, a smaller list of ‘negative’ items to start with and expanded over time will be important, so as not to inadvertently hamstring present or future military planning.

This crucial list while favouring “Make in India” also needs to make provisions to analyse and compare the cost premium and consequent potential decrease in output delivered in implementing such high levels of indigenisation in the procurement of platforms. In the past, the DRDO in many acquisition processes has claimed the wherewithal to meet military requirements regardless of its capability to make them.

India lacks several core sub-systems manufacturing capability, production expertise, resulting in many of the systems being developed and produced for the first time in India. Consequently, the history of indigenous development in India is replete with examples of mismanagement, time delays, late-stage design modifications and cost escalations. The Light Combat Aircraft produced by Hindustan Aeronautics; Air Independent Propulsion (AIP) systems for the Indian Navy’s Scorpene submarines; and the acquisition of a weapons locating radar for the Army before Kargil, form part of a long list pointing to the risks associated with the development sub-systems and platforms afresh.

Key to managing the risks associated with domestic development, manufacturing and the ‘negative list” will be the realistic formulation of the SQR, something Nirmala Sitharaman has called for as has the Chief of Defence Staff, Gen Bipin Rawat. SQRs lays down requirements of the equipment, preliminary specifications, as well as the maintainability and quality requirements.

Erring On The Side of Caution

While pushing the case for Atmanirbhar Bharat Abhiyaan, there exists a need to address those areas where India should aspire to develop and possess national systems and sub-systems. And comprise in areas where India needs to import expertise and be an intelligent customer using its bargaining power to be able to import intelligently and acquire the requisite transfer of technology needed to promote domestic capacity.

A special budget for indigenous procurement and a separate one for imports doesn’t make sense. Procurement must be based on capability, not some arbitrary notion of how defence spending should be split between foreign and domestic. Also raising FDI to 74% is at odds with such a budgetary split, as an non level playing field will discourage FDI.

Rhetoric in favour of self sufficiency in weapons manufacturing and development are not new and the government must not throw caution to the wind given India’s long list of programs that have failed to deliver. The proof of the pudding will clearly be in the implementation of these policy amendments and reforms and not merely in announcements.