INDIAN DEFENCE INDUSTRIAL BASE NEEDS TRANSFORMATIONAL CHANGE FOR ATMA NIRBHARTA TO SUCCEED
By: Rambir Mann
Tags: Largest Arms Importer, Defence Ecosystem, Indian Defence Industry, Transformation, Arms Contracts

INDIAN DEFENCE INDUSTRIAL BASE NEEDS TRANSFORMATIONAL CHANGE FOR ATMA NIRBHARTA TO SUCCEED

Jean-Baptiste Alphonse Karr quote ‘The more things change the more they remain the same’ seems to fit our attempts at bringing Aaatma Nirbharta in defence perfectly. Having worked in the system and studied it closely since 2006 when defence offsets were introduced alongwith the initial ‘Make’ procedure, to my recent doctoral thesis on defence offsets at IIT Delhi, the hoopla and hyperbole on self-sufficiency, self -reliance and indigenisation of defence requirements has been constant over the last 14 years. So have been the incremental changes every now and then, resulting in our weapons and equipment imports remaining consistently above 65 percent.

India inherited a functional Defence Industrial Base at independence, mainly as it served as a base for the allied South East Asia theatre in World War II (Stephen, 1996). Yet nations such as Turkey, Israel, Japan, Brazil, South Korea amongst others that also arose from the shackles of colonisation or the ashes of World War II have done much better in their defence indigenisation drive. There are numerous examples of other nations utilising tools such as defence offsets, technology purchase, reverse engineering imported weapons or developing improved versions consequent to import. Our northern adversary, China, is a shining example of national resolve to develop a robust defence industrial base employing a battery of tools to include reverse engineering, poaching scientists and technology, acquiring companies, training specialists in needed fields in the best of universities abroad. But in our case, despite multitudes of imported assembly line projects of aircrafts, tanks, artillery guns and many others, and nine defence industrial reform committee reports starting with Dr Vijay Kelkar’s report ‘Towards Strengthening Self Reliance in Defence Preparedness’ released in 2005, to Mr VK Aatre’s Reports on ‘Selection of Strategic Partners’ of 2015, we have not been able to produce our own aircraft, tank or even something as basic as a modern day rifle. This despite the fact that few nations have consistently faced such security challenges. My research tells me that the present structures and systems will not deliver. I would like to argue my case by citing some examples of our policy evolution, contract negotiation, organisational structures and some global comparisons.

Lessons from Defence Offsets.

The manner in which defence offsets have been handled since first introduced is illuminating. The Defence Offset Policy enunciated in 2005, envisioned 30 percent offsets on all import contracts worth Rs 300 crore or more. In 2005, based on the Long-Term Integrated Perspective Plans of the Defence Forces, it was clear that the quantum of imported defence equipment over the next five years alone would exceed US $ 100 Billion. With an average application of 30 percent defence offsets on these imports, offset business opportunity to the tune of approximately US $ 30 Billion ought to present itself to the Indian defence industry by 2010–11 alone. With the stakes being this high, specialists to enable strategizing, cost benefit analysis, future business flows and personnel and administrative structures to effectively manage and audit this quantum of offsets, were needed. During my research, I learnt that the exercise of implementing offsets in defence procurements was done by the pioneering team learning on the job. While world over, due to the intricacies of defence offsets, specialists are employed to manage defence offsets, in our case officials already posted in the Department of Defence Production had to first self -educate themselves.

Indian Defence Offsets have failed to meet most of their objectives and in fact may have facilitated corruption as reported in the AgustaWestland VVIP Helicopter offset contract case. A Transparency International Report of March 2016 has found that poorly directed and administered offsets are a source of corruption world-wide in defence contracts. That Indian defence offsets will deliver at all remains doubtful, as the facts below indicate. The Defence Offsets Management Wing (DOMW), is responsible for defence offsets and functions under a Joint Secretary (JS) level officer who is a generalist administrator and may have no previous experience of the subject. The hands-on functionaries, however, were two civilian Officers on special duties (OSDs) and one junior level officer each from Army, Air Force and Navy. It is seen that most of these officials come with limited or no previous expertise in this field and in the DOMW, officials continue to learn ‘on the job’ each time there is a change, which is generally every three years in the case of Armed Forces Officers. In addition, the paper audit of defence offset discharge reports by the OEMs is carried out by the Controller General of Defence Accounts (CGDA) on a case-to-case basis while audit of defence offsets is again a specialised field (Martin, 1996) perhaps not suited to general auditors like those from CGDA. The key method of monitoring and evaluating of defence offsets executed is through six monthly reports by the Original Equipment Manufacturer (OEM) to DOMW giving value of offsets fulfilled rather simplistically, in INR, of the offset obligations contracted and executed. Instead, Defence Offsets should ideally have evaluation parameters such as enhancement in Skill and Capacity, Design and R&D, successful ToT, value chains created, diffusion of the technology, number of long-term partnerships and resultant global supply chain participation, increase in employment and exports, and corresponding decrease in imports, to bring long term value to the Defence Industrial Base (DIB). Even after 16 years of offset handling experience, we have not been able to create or tap defence offset specialists to direct, monitor and assess defence offsets in a manner that will positively impact our DIB.

Contract Negotiation and Implementation

During the course of the doctoral research, two major procurement contracts were analysed based on open source information. These are the Main Battle Tank (MBT) T-90 and the SU-30 MK-I Fighter Aircraft contracts signed in 2001 and 1996 respectively. From both these contracts, poor contract negotiations signing, monitoring and execution inefficiency in Indian procurements from abroad are evident. Despite enjoying a large market clout we are not able to extract the best benefits as it emerged quite explicitly that besides poor ToT, absorption of technology and indigenisation, we were unable to maintain adequate quality assurance standards. For example, till as late as 2015, overheating of the engine caused by ineffective indigenous engine radiators resulted in urgent import of T-90 radiators. The Comptroller & Auditor General (CAG) Report for the year ended March 2016 Union Government (Defence Services) Army and Ordnance Factories Report №15 of 2017, observed that the order for indigenous radiators to be fitted in the T-90 tank were given to a firm which had no prior experience and radiators which did not conform to stipulated technical requirements were accepted. Further, continuous QA problems with the indigenisation ammunition had been resulting in repeated accidents during practice firings in peace time and consequent loss of life of army personnel. Even in case of the SU-30 MK-I, the CAG Report No 35 of 2014 (Defence Services) has highlighted major weakness in contract writing, monitoring and execution. The IAF has repeatedly observed Quality Assurance (QA) issues at delivery of aircraft by HAL. 69 investigations into engine failure have been carried out since 2012, which are high by global standards. Problems identified include metal fatigue in engine bearings, excessive engine vibrations and lack of pressure in engine lubricating oil. In addition, non-availability of spares and inadequate vendor support have adversely affected the serviceability of the fleet, which is reported to at a poor 56 percent.

Comparison with other Nations. The table below lists India’s arms import/exports with four nations with comparable beginnings but with perhaps varying security challenges. However their comparative progress reinforces the point that our system is fundamentally flawed.

As evident from the table above, India imported close to eight times more arms and equipment than Brazil, but our arms exports were only one-sixth theirs. The paradox, however, is that India has four public sector arms companies in the SIPRI top 100 list with a combined arms production turnover of US $ 6.8 Billion, while only Embraer from Brazil figures in this list with arms production of US $ 871 Million. It must also be noted that only 15 percent of Embraer’s turnover is devoted to defence. Hence, bulk of the indigenous production by India is for the Indian Armed Forces, which are captive to these public sector arms manufacturers who therefore, need not compete in terms of efficiencies or quality.

A similar comparison with Turkey is even more revealing. Being amongst the top 20 global defence exporters, Turkey has only two arms manufacturers in the SIPRI top 100 list, namely Aselsan and Turkish Aerospace Industry with arms sales of US $ 1.2 Billion and US $ 1.1 Billion respectively in 2016. It can therefore be concluded that despite having a larger DIB than both Brazil and Turkey, there is little global interest in Indian manufactured arms. The reasons for this could be many including poor quality, inferior technology and inefficiencies.

In the case of Israel, steadfast arms and technology transfer from USA to Israel including through offsets has helped the nation develop a modern and efficient DIB. The combined arms sales (2016) of the top three firms in SIPRI top 100 list from Israel is at US $ 7.8 Billion (most of which is exported), which far surpasses the total arms sales of the top four Indian firms.

Between I960 and 1988, the US licensed 28 major weapons systems to Japan to include fixed and rotary wing aircraft, components, subsystems, engines and missiles. Japan’s long-standing offset philosophy helped fostered a strong, technologically advanced and a self-reliant Defence Industrial Base and more than 90 percent of Japan’s requirements of the military are now met domestically (Mitra, 2009). Defence production investment through offsets enabled beneficial spin-offs not only in defence industries but also in the promotion of Japan’s civil industries. For example, the brakes of the Japanese bullet train have been developed from the F-16 transfer of technology to Japan.

Brazil, Japan, Turkey and Israel had access to technology and licensed production from the US as well as their European NATO allies as did India from others. They could leverage the same effectively and it is evident that different nations can have different outcomes when policies and structures facilitate. Indo-Soviet strategic convergence from the late 1960s up to the fall of the Soviet Union in 1991 resulted in large scale transfer of arms from the erstwhile Soviet Union to India, largely in the form of licensed production (Laskar, 2013). This, however, did not result in technology transfer benefits, as India continues to remain dependent on imports for the next generation weaponry. China, on the other hand, was able to benefit significantly from the Sino — Russian strategic partnership after the end of the Cold War and consequent arms technology transfer to China, as by 2004, a number of Russian origin components and subsystems were being manufactured in China (Weitz, 2010). Consequently, as per SIPRI, Chinese arms exports had increased to US $ 2.2 Billion in 2016.

Need for a Defence Industrial Ecosystem.

A comparison of some key input components of the Global Innovation Index (2018) of these nations with India is interesting. Greater value gets added when we include China in this analysis. It is apparent that all these nations except Brazil have a higher rating vis-a-vis India. But most importantly, on the parameters of Institutions and Government Effectiveness, India is far behind all the other nations, and this emerges as a key aspect adversely impacting development of the Indian DIB. This lends belief that an overall supportive environment and ecosystem is essential for the growth of a robust DIB.

It is however only of late that our public policy documents have started referring to the concept of Defence Industrial Ecosystem in DPP-2016 while the draft Defence Production Policy 2018 has also aimed at creating a tiered defence industrial ecosystem. To my knowledge, this is the first-ever official reference of the ‘Defence Industrial Ecosystem’ in the Indian context. It is noteworthy that in this policy, the MOD has laid the onus of building an extensive Defence Industrial Eco-system on ‘Strategic Partners’ in the Private Sector. However, nowhere has the Defence Industrial Ecosystem been defined, nor have any other metrics been identified.

Internationally the concept of ‘the defence ecosystem’ has been around for a while. A RUSI paper published in 2011 on the subject of defence industrial ecosystems highlighted the importance of ‘Strategy’ and ‘market influence’. The British enunciated a Defence Industrial Strategy in 2005 followed by a Defence Science and Technology Strategy in 2006 which acts as a uniform guiding beacon for all forces at play within the British DIB and is updated in keeping with evolving realities. The closest India has to this is the Technology Perspective and Capability Roadmap 2018, which basically is a very generic listing of the arms and equipment requirement and the defence technology needs of the Indian Armed Forces but the key Indian Government document is the Defence Procurement Procedure (DPP) 2016 but a ‘Strategy’ is conspicuous by its absence.

The second issue is about market influence. In all defence markets, the influence exercised by the respective governments is important. Unlike developed nations where these are largely globalised, corporatized or privatised, the Indian Government exercises complete control as the Indian DIB is largely Public Sector dominated. An examination of the Economic Survey of India presented along with the Budget 2016 is revealing. While the Indian economy had been amongst the best performers globally in 2015–16 and inflows of FDI into Industrial sectors such as the services, computer hardware and software, automobile, telecom, construction and chemicals have been significant, the defence industrial sector has attracted amongst the least. Out of total FDI inflows of US$ 31 Billion from April 2000 to September 2016, only US$ 5.12 million have been directed into the defence sector. That the Indian defence industrial sector remains the least preferred for foreign investors when we are amongst the largest arms importer, indicates the lack of confidence globally in government policy and administration of the defence sector.

While studying the weightage of different industrial sectors in the Index on Industrial Production data in the Economic Survey given in the Union Budget 2016, Vol II, it was surprising to note that the Defence and Aerospace Sector is not reflected in any of the data tables / statistical tables. It is therefore seems that there is no central data capture of this sector and hence no metrics available to assess the rise or decline thereof. Being a non-planned sector delegated to the Ministry of Defence, there is perhaps inadequate central monitoring and oversight, especially since the concept of ‘outcome’ based budgeting is not applied to the defence budget. An examination of the database of the Ministry of Statistics and Programme Implementation finds very limited data on the Defence and Aerospace Sector. A similar examination of the data available on defence SEZs in the database of the Ministry of Commerce and Industry also draws a blank. Further, the MoD website gives very limited data and information on the Defence Industrial Base (DIB). This reinforces that there is lack of recording and harvesting data on the DIB overall.

Conclusion

In course of my research, it thus became evident to me that if we are to succeed in Atmanirbharta in defence the following issues are key — (1) To acknowledge and recognise our shortcomings that have resulted in a weak DIB since independence, (2) development of a clear vision for strengthening the DIB in the context of national security needs and clarity in high-level policy towards this end, (3) a knowledgeable and expert body that develops, oversees, and monitors the overall approach towards strengthening the DIB, (4) re-establishing of structures to support this process, and (5) ensuring that the defence offset process and other policy tools available to the government are linked to, and helps nurture, the broader defence industrial ecosystem.

Bibliography

Laskar Rejaul Kasim (2013): India’s foreign policy: An Introduction, New Delhi, Paragon International Publisher, P 173.

Martin, Stephen (1996): The Economics of Offsets — Defence Procurements and Countertrade, Centre for Defence Economics, University of York, UK, Routledge.

Mitra, Anuradha (2009): A Survey of Successful Offset Experiences Worldwide, Journal of Defence Studies, Vol 3 Issue 1, IDSA New Delhi.

Weitz, Richard (2010): Why China snubs Russian Arms? The Diplomat, 05 April 2010.