Defence Industry

Facts:

• India is the world’s largest weapons importer over a five-year period 
• India accounted for 14% of total imports between 2011 and 2015. China ranks second with 4.7%. 
• India’s current share in total global arms sales stands at less than 2%. This indicates that India has been a weak player in international markets.
• The global arms market is dominated by US companies which have a whopping 57% of the market share, followed by Russia (9.5%), United Kingdom (9%).

 

Critically examine, what are the challenges that private sector faces in defence sector and what needs to be done by the government in this regard. (200 Words)

Defence industry is highly technology driven and it is the private sector that adapts itself better to rapidly changing technology. It helps the nation to build a reservoir of latest technology to give it an edge over its prospective adversaries But the private sector faces the below challenges

 

• POLICY ISSUES:
  

 

1. 1. 1. In all deals where transfer of technology is negotiated, the nominated recipient is always a DPSU. Private sector company is not considered even if it is better placed in terms of infrastructure and know-how to absorb the technology.
      2. Increasing the FDI limit to 49% is unlikely to be sufficient to attract FDI with technology transfer.
      3. Most countries have export control laws that regulate the participation of defence manufacturers in ventures abroad .They guard their technology and perpetuate their monopoly with consequent financial gains

 

• PROCEDURAL ISSUES:

 

1. Inadequate time for the submission of technical and commercial proposals as requirements of the armed forces are not made known to the private sector sufficiently in advance.
2. Indian private companies that have the requisite capability are not considered for the RFPs (Request for proposals) apparently owing to their lack of experience in delivery.
3. Lack of necessary financial strength

 

• FUNCTIONAL ISSUES:
  

 

1. 1. 1. Many Indian vendors have not fully grasped the import of highly accurate and exact standards requirement of defence equipment.
      2. RFPs are issued for one-time piecemeal quantities without any long term commitment regarding regular flow of orders. This deters Indian companies from committing  resources for establishing production facilities as the venture can prove both expensive and risky

 

• THE COMMUNICATION GAP:
  

 

1. 1. Procurement Agencies are Unaware of Industry’s Potential: There is no data bank of Indian industries available with the MoD. Requests for Proposals (RFPs) are issued only to a few highly visible companies, while many others lose by default.
   2. Industry Lacks Knowledge of Defence Requirements and Procedures: Many private sector companies having the capability to manufacture the whole range of defence requirements are ignorant of the procurement agencies, their policies and procedures.

STEPS TO BE TAKEN BY THE GOVT

1. Transparency: All contracts should be opened up for bidding
2. RURs: As suggested by Kelkar committee, government should identify certain firms based on their technical, managerial and financial strength as “champions” (“Raksha Udyog Ratna”) and circulate RFPs for major systems to these firms.
3. Tax rebates: Removal of the differential and regressive tax and duties
4. Infrastructure Availability: Availability of capital, land and infrastructure; Total elimination of licensing;
5. Ensuring better planning and strict implementation of offsets
6. Facilitation: A directory of credible defence manufacturers should be made available to all the defence procurement agencies and foreign producers to locate potential Indian partners for collaboration.

Critically analyse the challenges faced by the government in the defence sector. In your opinion, how should government respond to these challenges? Discuss. (200 Words)

The problem faced by government in the defence sector can be summarized as below :

1. The woes of the DRDO:
   1. The research and manufacturing capabilities of the DRDO are embarrassingly poor .
   2. Saddled by the problem of utterly slow bureaucracy and inordinate delays in decision making and progress of critical defence research programmes .
   3. It is facing huge shortage of skilled manpower and infrastructure such as advance labs .
2. Slow and un-moving acquisition process:
    
   1. The defence acquisition process of critical military hardware has been
   2. Distressingly slow and unresponsive to the need of the time, locked motionless at the bureaucratic level in the defence ministry, worsened further by delayed supply of ordered military equipment and escalating costs than estimated before .

1. No proper structure in India’s acquisition hierarchy that owns the

acquisition process. There are gaps in targets, responsibility and

accountability.

1. The diplomatic efforts so far have been unable to persuade countries like the U.S to share and sell their cutting -edge technology. The upper cap of 49% in FDI in defence sector has been unable to generate sufficient enthusiasm and interest among major foreign defence players to share their technological Knowhow.
2. Lack of properly framed defence policy and likely hurdles in acquisition of- land for defence purposes further complicates the problem
3. Lack of Coordination between all three wings of Defence. So, there is a debate going regarding need of Chief of Defence wings.
4. Inefficient DPSEs: The DPSEs like HAL, BEL etc. are not able to live up to the country‘s expectations. There are a number of projects which are delayed and there are some which are envisaged decades ago but are still in pipeline such as multi-role helicopters which were to be manufactured by HAL.
    

Steps that needs to be taken:-

1. Focusing more on indigenous defence technology development by appropriate funding of researches and hiring skilled manpower by DRDO and other state and private owned entities in defence.
2. The Defence Procurement Procedure (DPP) has to be urgently revamped to cut the bureaucratic steps to a bare minimum. Looking into international practices, like USA where there is a special integrated Defense procurement agency which coordinates the requirements of the armed forces
3. India‘s acquisition process must become the enabler of an indigenous defence manufacturing base that delivers on quality, timeliness and capacity.
4. Creating a structure that owns the acquisition process and has officers of all departments influencing defence indigenisation and must work under one head, who will oversee the process of drafting policy and implementation. Private sector: Treat them as equal partners and offer them big projects to boost their capabilities
5. Increased % expenditure of GDP in phased manner to 3% in time bound manner.
    

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Defence procurement policy (DPP)

 

India has been the largest importer of world of defence products accounting to 10% of total import. In 2013 a defence procurement policy was released to increase the domestic share in defence procurement which will provide impetus to domestic manufacturing and will reduce the import bill.
 

Merits of the policy:
 

1. The offset clause which gives a boost to the Indian manufacturers with a mandatory obligation of the foreign entities to source 30% of their requirement from Indian vendor.
2. The locking in of the requirements at an earlier stage which would make the whole system transparent.
3. Categorization of the vendors with Buy (Foreign) being accorded the least priority. This move will reduce the high import costs of defence equipment’s
    

Demerits of the policy:
 

1. Although the offset clause is mentioned, in most of the cases, the orders are given to the Defence PSUs thus hampering the businesses of the private sector.
2. Though it asks for increasing the share of indigenous technology, no major incentive was provided to domestic industry
3. The purchase of critical components is purchased from foreign original equipment manufacturers instead of manufacturing. This allows them to bypass the offset clause.
4. No substantial technology transfer occurs as critical components are still purchased. Thus there will be only “make in India”, not “create in India” with respect to critical components.
5. Due to lack of clarity on long term planning of procurement needs, the private sector is averse to investing hugely in terms of R& D and indigenous production.
    

Need of integrated procurement agency instead of piecemeal procurements:- Army, Air force and navy sometimes take different routes to buy missiles. Instead a common procurement route will give more bargaining chip and leveraging capacity.

Initiative in ‘Make in India’

The U.S.-based BAE Systems has picked the Mahindra group as a partner for the M-777 Ultra-Light Howitzer (ULH) deal under which an assembly, integration and test (AIT) facility is to be set up in India under the government’s Make in India initiative.