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Setting up the defence industrial ecosystem

LiveMint logoLiveMint 26-06-2017 Livemint

Last week was an interesting one for Indian defence manufacturing. On Monday, Tata Advanced Systems Ltd and US plane-maker Lockheed Martin Corp. signed an agreement at the Paris Air Show to produce F-16 fighter jets in India. On Tuesday, in Delhi, Reliance Defence entered into a strategic partnership with Serbia’s Yugoimport for ammunition manufacturing in India. On Wednesday, back in Paris, Reliance Defence joined hands with France’s Thales to set up a joint venture that will develop Indian capabilities in radars and high-tech airborne electronics.

In Moscow, on Friday, defence minister Arun Jaitley and his Russian counterpart signed off on a road map for strengthening bilateral military ties. Meanwhile, at home in India, the army rejected, for the second year in a row, an indigenously-built assault rifle after it failed field tests—a pointed reminder of how the country’s sub-par defence industry continues to damage the military’s operational preparedness.

For the most part, India has sought to make up for that failing at home with imports from abroad. Between 2012 and 2016, India was the world’s largest importer of major arms, accounting for 13% of the global total and increasing its arms imports by 43% from the 2007-11 period, according to the Stockholm International Peace Research Institute (Sipri).

That being said, in recent years there has been a greater focus on developing indigenous capabilities through technology transfers and joint production projects with international partners. The Narendra Modi government has also put defence at the core of its flagship domestic manufacturing programme, Make in India. It has opened up the still largely state-run sector to private players and foreign firms in an effort to build a “defence industrial ecosystem” that will not only support the country’s military requirements but also emerge as an important economic lever—generating exports, creating jobs, and spurring innovation.

The target is to source about 70% of India’s military needs from domestic sources by 2020. This is an ambitious plan—that’s approximately how much India imports at the moment—but it is one that has been in the works for quite some time now. Notably, the defence manufacturing industry has been open to the private sector for well over a decade, and several foreign firms are involved in the joint production of weapons systems in India.

Yet the defence industrial ecosystem hasn’t quite taken off. The Indian military is still heavily reliant on foreign imports and state-owned defence firms are still the dominant force in the market. Private firms, though growing in number, have struggled to find their feet. It is too early to say if the incumbent administration’s efforts will bring better results, but much will depend on how its “strategic partnership” model, released late May, plays out on the ground.

Conceptualized by the Dhirendra Singh committee in 2015, this model has the defence ministry identifying a few Indian private companies as strategic partners (SPs) to tie up with a few foreign original equipment manufacturers to produce some big-ticket military platforms. In the process, the SPs are expected to help catalyse the country’s defence industrial ecosystem. This has already led to some concern about the ministry of defence (MoD), often criticized for not offering a level playing field to the private sector, picking favourites.

As Laxman Behera from the Institute for Defence Studies and Analyses (Idsa) notes, “Time and again, the MoD has deviated from its own promise of fair play in award of contracts and handed over large orders to DPSUs (defence public sector undertakings) and OFs (ordnance factories) on nomination”.

Moreover, the MoD also prohibits its strategic partners from working in more than one segment. This is supposed to ensure that the SPs keep their focus but, as Richard Heald at the UK India Business Council points out, this “ring-fencing of six strategic platforms” is problematic because “many of the six named domestic champions have already invested in defence verticals that may be different from those they are selected to focus on. Then, questions are being raised as to whether mechanisms will be put in place to achieve ‘value for money’ once the sector has been awarded to a strategic partner on an exclusive basis”.

Yet another issue is that of how small and medium-scale enterprises (SMEs) will respond to this model. SMEs are crucial to building a vibrant and robust ecosystem. In particular, they do a much better job of absorbing, developing and commercializing niche technology, which is key in the defence sector. But while the government acknowledges their role and importance, it is unclear if its policy supports that vision.

Outside of policy design, the biggest challenge to developing India’s defence industry ecosystem is undoubtedly human resource and skill development. The Dhirendra Singh committee report deals with this issue at length, noting that “India at present does not have a structured framework and a robust system to prepare its human resources to address all issues connected with building and sustaining defence systems”. The report recommends several measures to bridge this skills gap—from changes to academic curriculum to setting up institutions that specialize in defence and security to raising a new generation of system integration managers. The government must consider these carefully.

How do you think India can build its defence industrial ecosystem? Tell us at views@livemint.com

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