India’s defence sector was always in need of a strategic partnership with private players. What then, took it so long? Here is a guess.
After two years of the hectic deliberations, the Defence Acquisition Council on Saturday finally cleared the broad contours of the ‘strategic partnership’ mode of defence manufacturing. Proposed by the Dhirendra Singh Committee in its July 2015 report and developed through extensive stakeholder consultations with Indian industry, the model is aimed at revitalising the country’s military industrial complex through long-term strategic participation of the private sector.
As per an official statement released by the Ministry of Defence, the policy is expected to be implemented in a few selected sectors to begin with – fighter aircraft, helicopters, submarines and armored vehicles – with one private player involved in each sector.
But, wait.
What has triggered the formulation of this policy?
For one, lack of an efficient military-industrial complex that can deliver on time and with quality. For another, policy paralysis of successive governments, most of which were marred either by vested interests or by legacy baggage.
Failure Of The Existing Military-Industrial Complex
Although India has one of the largest state-owned defence industrial complexes, with over 52 defence laboratories under the Defence Research and Development Organization (DRDO), nine defence public sector undertakings and 39 ordnance factories under the Department of Defence Production of the Ministry of Defence, the country is dependent on imports for over 70 per cent of its arms.
Therefore, it is the lack of efficiency in military industrial ecosystem more than anything else that forces India to import arms.
A report by Parliamentary Standing Committee on Defence presented in Parliament on December 22, 2014, had criticised DRDO for ‘chronic inefficiency’ and delays in executing numerous programs. This observation isn’t new. Quite visibly, all big-ticket plans undertaken by the state-led complex in India have either ended in failure or have delivered, if at all, after significant delays and cost overruns.
For example, consider the Light Combat Aircraft Tejas, which was inducted into the Indian Air Force recently and is yet to receive a Final Operational Clearance. The jet, which should have ideally been ready for induction in the early 2000s, remained under development for over two decades. In 2016, then Defence Minister Manohar Parrikar identified “shoddy coordination” between MoD agencies as the cause of the delay in LAC’s development. The delays are not entirely the DRDOs fault here though, it must be remembered.
The story of India’s indigenous Main Battle Tank (MBT) Arjun isn’t different. It brings out another shortcoming in India’s defence manufacturing model – lack of involvement of armed forces in the development of equipment.
The Arjun MBT, despite having outperformed the T-90, has failed to become the back-bone of the armored force due to its high weight, an element of design that could have been adjusted had the agencies been involved in designing and the end user of the equipment, the Indian Army, coordinated.
Lack of competition from the nascent private sector has only fueled these attributes.
Another important cause for the failure of existing military industrial complex is the lack of capacity and capability. For development of modern systems that the forces need in an ever changing security environment, the industry needs technology and infrastructure. This has been missing, largely due to policy paralysis.
Policy Paralysis
The decision to keep the private sector out of defence manufacturing was one of the gravest policy failures. In was in 2001 that the National Democratic Alliance government, led by Atal Bihari Vajpayee, opened up the defence sector for private participation and allowed Foreign Direct Investment (FDI) of up to 26 per cent. However, failure of the successive governments in capitalising on the opportunity this reform provided held back private participation.
The effect of this policy change was felt a decade later, in 2011, when the private shipyard Pipavav Defence and Offshore Engineering Company won a fiercely contested naval order to build five naval offshore patrol vessels for the Indian navy. The success was repeated in 2013, when a consortium of two private firms – L&T and Ashok Leyland – emerged as the lowest bidder in a Rs 100 crore tender for refurbished rocket launchers mounted on trucks for the Army.
Since then, the participation of the private sector has been on the rise. However, Indian firms are still not a part of the global supply chain, owing their failure to government’s flawed offset policy that is aimed at bringing foreign investment.
Offset Policy
In every deal worth more than Rs 300 crore (limit raised to Rs 2000 crore in 2016) that India signs with a foreign manufacturer, it imposes a mandatory clause that calls for investment of up to 30 per cent of the contract value in the Indian industry.
However, the policy, introduced by the United Progressive Alliance government in 2005, has so far failed to yield any meaningful returns. A report published by Bloomberg, based on defence ministry figures, revealed that there was a shortfall in implementation of offset obligations in 13 of the 25 contracts signed with foreign vendors since 2008. Of the $5 billion offset obligation in these 25 deals put together, only about $2 billion have been accounted for by the global companies and only about $250 million worth of offset has been approved by the MoD as implemented.
In other cases, the foreign manufacturers got away by investing in assembly lines or manufacturing of less sophisticated equipment rather that investing in development of infrastructure, high-end technology and expertise in the country. This has inhibited growth and innovation in the country’s military-industrial complex.
However, the government has addressed this issue in its revamped Defence Procurement Policy unveiled in 2016, the results of which were visible in the offset obligations imposed on Dassault Aviation in the Rafale deal.
According to the offset contract, 30 per cent of Dassault’s revenue will be invested in India’s aerospace industry and the remaining 20 per cent has been set aside for manufacturing spare parts for Rafale fighter jets in India.
How Does The Strategic Partnership Model Help?
The strategic partnership model is aimed at boosting the participation of Indian private sector firms in defense manufacturing. As a part of this model, the government will identify private defence firms in India, which in collaboration with foreign Original Equipment Manufacturers will be allowed to exclusively make various military platforms for a specified period of time.
The model will open up the defence manufacturing sector for the private players in four major equipment categories, namely fighter aircraft, helicopters, submarines and armored vehicles. At a given time, only one private sector firm will be allowed in each of these fields, ensuring sustainability and incentivising the firm that decides to invest in the development of infrastructure and technology.
Participation of private players will increase competition, forcing state-owned firms to become more efficient. Results on these lines have been achived in the ship building industry, where participation of private sector firms has forced state-owned firms to forge tie-ups with foreign firms and improve their working.
Involvement of foreign firms will provide Indian players and opportunity to work with leading manufacturers throughout the world, helping them develop technology and skills in the process. Engagement with foreign manufacturers will also bring transfer of technology, assistance in training and other support for Indian firms.
As all the manufacturing will be done in India, the model will also help in the development of modern defence manufacturing infrastructure in the country, fulfilling the objective that was to be achieved through offsets in defence deals.
India has already seen the benefits of promoting tie-ups between local firms and foreign manufacturers, most recently in the procurement of artillery guns. Over 120 M777 Ultra-Light Howitzers, at-least 100 K9 Vajra-T artillery gun and a large, although still unknown, number of Advanced Towed Artillery Gun System will be manufactured in India by private sector firms who have tied-up with foreign manufacturers.
The strategic partnership model will expectedly bring an end to the situation where the armed forces, faced with the failure of the of state-owned industrial complex, were forced to resort to off-the-shelf ‘panic buying’.
However, the onerous task of reforming the state-owned complex, parts of which are still involved in development of hybrid varieties of cucumber, tomato and capsicum, new strains of Angora rabbits and identification of the sharpest chilli in the world, still lies with the government.
Source:-Swarjyamag
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