Defence Production: Getting the Basics Right

Mere lip service to the subject of Defence Production has today made India the largest importer of weapon systems in the world.  With nearly 250 billion dollars[1] required for modernisation in the next decade, the record needs to be set straight.  The stark reality of delayed defence projects, exorbitant budget expenditure and poor product delivery has brought to fore the culture of mediocrity that is imbibed in our Defence Industrial Base (DIB).  The long gestation period for indigenous defence projects is used as an ideal garb to reduce accountability, enhance costs, assemble imported components and finally provide a product which is far from satisfactory.

With the Modi government “Make in India” thrust and a slew of decisive policies in terms of enhancing FDI in defence by 49%, cutting red tapism, boosting R&D and a strong resolve by the Defence Acquisition Council (DAC) to meet deadlines, shows the positive intent of the government.  If this can be construed as a new beginning towards self reliance, transparency and accountability, the Defence services will again be committing a historical blunder by not staking their claim to be the foremost stakeholders during all stages of defence production.

The Missing Link

The Defence Industrial Base, comprising of 08 Defence PSUs (DPSUs), 39 Ordnance Factories (OFs), DRDO and a nascent private sector is in no way interlinked with the ultimate core consumer i.e. the Defence Services.  The Department of Defence Production (DDP) controls the OFs, has a limited say on the DPSUs, has no control on the DRDO and has negligible accountability to the Defence Services.  In a chain created for the defence of the nation, the Defence Services are the missing link.  So what needs to be done is something very basic. While conceptual level discussions can be left to the top hierarchies, the Service HQs require to formulate specific project level teams to be fully amalgamated with major capital projects being undertaken by any player of the DIB right from the drawing table to the final production.  Extrapolating this template in retrospect to projects such as MBT Arjun, INSAS rifles, Tejas the Light Combat Aircraft (LCA), Nishant UAV and many such more would have given an altogether different outcome. 

Department of Defence Production (DPP)

DDP can easily be defined as the fulcrum of our DIB. It exercises administrative control over OFs, DPSUs and is the governments intermediary with the private sector.  It was raised in Nov 1962, under the aegis of the MoD, to give an impetus towards indigenisation and self reliance of defence equipment for the Armed Forces of India.  It is therefore essential to understand that any restructuring of India’s Defence Sector has to commence with the restructuring of the DDP.  The following basic measures will help the overall aim:

• The functioning of the DDP continues to remain aloof from the Service HQs with interaction limited to ‘as is required basis’.  To build greater synergy amongst all the players, posting of officers from the three services needs be done in appointments dealing with the decision making process and not a mere token presence in the OFs or the OF board.  Key appointments of JS (Aerospace), JS (Electronic System) and JS (Naval System) should be tenable in rotation by officers of the three services.
• Continuous performance evaluation by a second party with a view to seek corrective actions on real time basis and not rely merely on parliamentary committees for introspections at a later stage.
• With private players joining the defence bandwagon, organizational changes in the DDP under the respective JS needs to be done.  Representatives from CII or FICCI should also have a representation under the respective JS or a separate JS (Private Industry) needs to be nominated.
• Enterprise Resource Planning (ERP) is the way ahead and should form the backbone of all management functions.  Data connectivity between the DDP and the Service HQs is a must. Real time info has to be shared for promulgation of Qualitative Requirements, trials, R&D, vendor selection, during various stages of production and any mid course corrections required due to changes in technology, design or production related issues.  Disconnected enterprise systems lead to data redundancy, errors, poor coordination, delays in production and poor customer service.  

Def PSUs     

They account for more than 65% of the total defence industrial output [2] in India.  One can easily call them as the blue chips of our DIB who operate in the high end technology spectrum. Well, then the next question that comes to our mind is ‘Why are they delivering a sub optimal performance in their present form ?’

With the exception of Bharat Dynamic Limited (BDL), other DPSUs such as Bharat Electronics Limited, Bharat Earthmovers Limited (BEML), Garden Reach Shipbuilders and Engineers Limited (GRSE) and Goa Shipyard Limited (GSL) have already made deep inroads in the civil market and leveraged technology for civil end use.  Assembling state of the art metro coaches for Delhi, in collaboration with Hyundai Rotem of South Korea by BEML [3], creation of telecom infrastructure in the country by BEL and construction of high end commercial vessels by GRSE and GSL are a clear indicator of their shifting priorities.  Lack of clear policies by the government, long gestation period for def projects and fall in revenues from defence production has contributed towards their change of focus.  Certain basic measures which are essential to restructure the functioning of DPSUs are as under :-

• Core focus should be realigned towards higher defence production rather than civil end use production.
• Explore possibilities of mergers and acquisitions at global scales to retain competitive advantage in the high end technology spectrum. Joint ventures with companies like Lockheed Martin, BAE Systems, Raytheon and General Dynamics will help flow of high end technology for advanced weapon systems.
• A time bound disinvestment plan for all PSUs except BDL (Manufacturing base for guided weapon systems) be worked out to make them more competitive.  In the first phase, disinvestment be done in BEML (Government owns 54% of total equity) [4], BEL (Government owns 75.86 % equity) [5] and HAL (Government owns 100 % equity) [6].
• Periodic review of projects by end users to ensure efficiency, transparency and accountability.

Private Sector

Much has been said and written about the critical role that the private sector can play in defence production.  With concrete steps now being taken both by the government and the private players, the following basic issues need to be streamlined:

• End unfair monopoly and government patronage to the public sector vis-a-vis the private players.  A level playing field is a must.
• Raksha Udyog Ratna (RUR) status be accorded to selected private firms like, Tata Advanced Systems Limited, Mahindra Defence Systems and Larsen and Toubro.
• Focus should be on ‘Make’, ‘Buy and Make (Indian)’ to ensure long-term development and sustenance.
• Tax holidays for a minimum of 20 years period and liberal policy for export of indigenous defence products, will ensure financial viability of their investments.

Foreign Direct Investment (FDI)

The concept of FDI has to move from the drawing board to that of promoting self reliance in the defence industry.The permissible limit of 26% FDI since 2011 did not lead to any value addition.Similarly, the recent limit enhancement to 49% [7] may not be able to kick-start the def industry as ‘control and management’ of the company remains elusive to the foreign investor till it exceeds 49%.It may however be appreciated that FDI beyond 49% will raise concerns of national security and overall control of such ventures.Keeping in line with India’s framework of FDI in four maximum limit based categories [8] of 26%, 49%, 74% and 100%, the way ahead is :-

• The quantum of FDI to be allowed should be based on the merit of the project on a scale of 26% to 100%.
• Projects involving meaningful flow of technology and long-term exploitation be allowed upto 74% FDI. 
• 100% FDI be allowed for investments in the high end of the technology spectrum having strategic implications.

Defence Industrial Agency (DIA) Under the PMO

Of all the points mentioned earlier, this perhaps is the most significant.  To ensure accountability and seamless coordination of effort and resources, the DIA needs to be raised directly under the PMO to:

• Coordinate policy related issues between the MoD, Finance Ministry, Foreign Ministry, Ministry of Heavy Industries and even the Ministry of Environment and Forest.  
• Help resolve issues pertaining to land acquisition, site clearances, taxation, export and import and environment clearances.
• Act as a single window to resolve inter ministry barriers.
• Periodic review of projects with a view to meet timelines, review budgetary allocations and ensure adherence to technical and quality parameters.

Conclusion

In 2011, India replaced China as the world’s largest importer of weapons and has retained the spot since then [9]. A lot needs to be done in terms of a concerted effort towards ‘Make in India’ Campaign and enhanced budget allocation by the government. None the less, the pain could have been a lot less if certain basic policy making processes had been put to place earlier. Meaningful presence of the Defence Services in all decision making platforms, restructuring of the DDP, disinvestment of DPSUs and realigning their core focus towards defence production, providing a level playing field to the private sector and leveraging the FDI spectrum from 26% to 100% on a case to case basis is merely a matter of policy formulation.  What India has lacked in terms of high end technology and enhanced budgetary allocation, could have been overcome to a certain extent through better management of the various components of the DIB and formulation of coherent policies to synergise India’s defence sector.

Views expressed are personal.