[Burning Issue] Defence Production and Export Promotion Policy, 2020

The realities of International relations has ensured that the importance of hard power never diminishes. From China to USA, military power has time and again seen research, innovations and reforms. It is true if India wants to see itself as a hard power then innovation is the keyword. More precisely, indigenous production!  

In order to provide impetus to self-reliance in defence manufacturing, multiple announcements were made under ‘Atmanirbhar Bharat Package’. The next step is a draft Defence Production and Export Promotion Policy 2020 (DPEPP 2020) formulated by the Ministry of Defence (MoD).

With this edition of Burning Issues, let us look more closely into this policy, some challenges and solutions.

History bears testimony to the fact that all nations with a strong military-industrial complex had a strong military force, resulting in a strong and vibrant foreign policy to stand comfortably amongst the comity of nations.

Why the fuss about Indigenization?

1) Reducing import dependence

  • India was the world’s second-largest arms importer from 2014-18, ceding the long-held tag as the largest importer to Saudi Arabia, which accounted for 12% of the total imports during the period, says 2019 SIPRI report.
  • Pakistan stood at the 11th position, accounting for 2.7% of all global imports.
  • Such higher import dependency leads to increase in the fiscal deficit.

2) Security Imperative

  • Indigenization in defence is critical to national security also. It keeps intact the technological expertise and encourages spin-off technologies and innovation that often stem from it.
  • Indigenization is needed in order to avert the threats associated with the frequent ceasefire violations like that of the Uri, Pathankot and Pulwama attacks.
  • India is surrounded by porous borders and hostile neighbours need to be self-sufficient and self-reliant in defence production.

3) Economic boost

  • Indigenization in defence can help create a large industry which also includes small manufacturers.
  • Example: USA has a strong defence industry with cmpanies like Lockheed martin contributing to economic growth as well.

4) Employment generation

  • Defence manufacturing will lead to the generation of satellites industries that in turn will pave the way for a generation of employment opportunities.
  • As per government estimates, a reduction in 20-25% in defence-related imports could directly create an additional 100,000 to 120,000 highly skilled jobs in India.

It was the military industrial set-up of Germany that enabled it to launch its offensive practically against the entire western world both in World War I and World War II.

Defence Production and Export Promotion Policy, 2020

The DPEPP 2020 is envisaged as overarching guiding document of MoD to provide a focused, structured and significant thrust to defence production capabilities of the country for self-reliance and exports.

The policy has laid out the following goals and objectives:

  1. To achieve a turnover of Rs 1,75,000 Crores (US$ 25Bn) including export of Rs 35,000 Crore (US$ 5 Billion) in Aerospace and Defence goods and services by 2025.
  2. To develop a dynamic, robust and competitive Defence industry, including Aerospace and Naval Shipbuilding industry to cater to the needs of Armed forces with quality products.
  3. To reduce dependence on imports and take forward “Make in India” initiatives through domestic design and development.
  4. To promote the export of defence products and become part of the global defence value chains.
  5. To create an environment that encourages R&D rewards innovation creates Indian IP ownership and promotes a robust and self-reliant defence industry.

The Policy brings out multiple strategies under the following focus areas:

  1. Procurement Reforms
  2. Indigenization & Support to MSMEs/Startups
  3. Optimize Resource Allocation
  4. Investment Promotion, FDI & Ease of Doing Business
  5. Innovation and R&D
  6. DPSUs and OFB
  7. Quality Assurance & Testing Infrastructure
  8. Export Promotion

Outlined strategies:

1) Procurement Reforms

  • A Project Management Unit (PMU) will be set up for the development and production of technologies involved, life cycle costs and maintenance requirements of platforms, equipment and weapon systems.
  • It also aims to move away from licensed production to design, develop and produce indigenously.
  • It also aims to own the design rights and IP of the systems projected in the Long Term Integrated Perspective Plan (LTIPP) and a Technology Assessment Cell (TAC) would be created.
  • The TAC would also assess the industrial capability for design, development and production, including re-engineering for production of major systems such as armoured vehicles, submarines, fighter aircraft, helicopters and radars with the major industries in the country.

2) Indigenization And Support to MSMEs/Startups

  • The indigenization policy aims to create an industry ecosystem to indigenise the imported components (including alloys and special materials) and sub-assemblies for defence equipment and platforms manufactured in India. 5,000 such items are proposed to be indigenised by 2025.
  • More than 50 startups are currently developing new ‘fit-for-military-use’ technologies/products.

3) Optimize Resource Allocation

  • The share of domestic procurement in overall Defence procurement is about 60%.
  • To enhance procurement from domestic industry, the procurement needs to be doubled from the current Rs. 70,000 crore to Rs. 1,40,000 crore by 2025.

4) Investment Promotion and Ease of Doing Business

  • India is already a large aerospace market with rising passenger traffic and increasing military expenditure, as a result of which the demand for aircraft (fixed and rotary wings) is rising.
  • The opportunities in the aerospace industry have been identified in the following segments – aircraft build work, aircraft Maintenance, Repair and Overhaul (MRO), helicopters, engine manufacturing and MRO work, line replaceable units, Unmanned Aerial Vehicles (UAVs) and upgrades and retrofits.
  • The improvement in market size, demographic dividend and availability of diverse skill sets are evident from India’s ranking in the World Bank’s ‘Ease of Doing Business’ (EoDB) report.
  • The investments in the defence sector need to regularly sustain the steady supply of orders.

5) Innovation and R&D

  • Innovations for Defence Excellence (iDEX) has been operationalised to provide necessary incubation and infrastructure support to the startups in the defence area.
  • iDEX would be further scaled up to engage with 300 more startups and develop 60 new technologies/products during the next five years.
  • Mission Raksha Gyan Shakti was launched to promote a greater culture of innovation and technology development and file a higher number of patents in Defence Public Sector Undertakings (DPSUs), Ordnance Factory Board (OFB). It would be scaled up for promoting the creation of Intellectual Property in the sector and its commercial utilization.

6) FDI limit increased to 74% by automatic route

  • The liberalisation of FDI in defence manufacturing, raising the limit under the automatic route to 74%, has opened the door to more joint ventures of foreign and Indian companies for defence manufacturing in India.
  • It would also sustain domestic industrial activity in the research, design and manufacture of systems and sub-systems.

Challenges in indigenous manufacturing

India has its own set of inherent issues when it comes to indigenous manufacturing:

1) Excess reliance on Public Sector

  • India has four companies (Indian ordnance factories, Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL) and Bharat Dynamics Limited (BDL)) among the top 100 biggest arms producers of the world.
  • All four of these companies are public sector enterprises and account for the bulk of the domestic armament demand.
  • Governments usually have tended to privilege Defence Public Sector Units (DPSUs) over the private sector, despite ‘Make in India’.

2) Policy delays

  • In the past few years, the government has approved over 200 defence acquisition proposals with the transfer of technology provision, valued around Rs 4 trillion, but most are still in relatively early stages of processing.

3) Lack of Critical Technologies

  • Poor design capability in critical technologies, inadequate investment in R&D and the inability to manufacture major subsystems and components hamper the indigenous manufacturing.
  • The relationship between the R&D establishment, production agencies (public or private) and the end-user are extremely weak.

4) Low advantage due to long gestation

  • The creation of a manufacturing base is capital and technology-intensive and has a long gestation period. For a factory to reach optimum levels of capacity utilization, it could take anywhere five to 10 to even 15 years to commence production.
  • By that time newer technologies make products outdated and unable to match with what the enemy may have acquired.

5) ‘Unease’ in doing business

  • An issue related to stringent labour laws, compliance burden and lack of skills, affects the development of indigenous manufacturing in defence.
  • Overlapping jurisdiction of the Ministry of Defence and Ministry of Industrial Promotion impair India’s capability of defence manufacturing. Due to this, India hasn’t been able to attract decent FDI in defence.

6) Lack of quality

  • The higher indigenization in few cases is largely attributed to the low-end technology.
  • Historically, India has been availing of technology through licence agreements from Russia and a smattering of Western countries.
  • For modern production, none of the entities has granted India the ToT owning to quality standards.
  • For example, Dassault had reportedly expressed its lack of confidence in the manufacturing quality of the HAL when the defence deal was being negotiated.

7) FDI Policy

  • The original equipment manufacturers for setting up a business in India in partnership with public/private players want to have a major say in the management of manufacturing.
  • The earlier FDI limit of 49% was not enough to enthuse global manufacturing houses to set up bases in India.
  • Countries such as China and South Korea on the other hand, have become major manufacturing hubs in aeronautics and shipbuilding technology by being very liberal in their FDI policy.

8) Lower R&D Allocation

  • Besides the FDI policy, inadequate investment in R&D and lip service to technology funding by making token allocations is an adequate commentary on our lack of seriousness in the area of Research and Development.
  • The allocation to DRDO remains sticky – around 6% of defence expenditure through successive parliamentary committees have recommended a minimum allocation of ten per cent.
  • Private sector giants such as the Tata, L&T and Mahindra and Mahindra invest less than one per cent of their turnover in R&D unlike in countries such as France where corporate organisations invest more than ten per cent

9) Lack of skills

  • The second challenge is around talent available for the industry. The current sources of supply of talent are largely from the defence PSUs and user services.
  • Neither are they adequate in quantity nor in terms of skills and quality when evaluated from a perspective of the magnitude of demand arising from the need to build a robust homegrown industry.
  • There is a lack of engineering and research capability in our institutions. It again leads us back to the need for a stronger industry-academia interface.

Along with the policy, what else can be done?

1) Proper implementation of the policy framework

  • A long-term integrated perspective plan of the requirements of the armed forces should give the industry a clear picture of future requirements.
  • The real deal here is implementation and in future promoting forward-looking strategic partnerships between Indian and foreign companies, with a view to achieving indigenization over a period of time for even sophisticated platforms.

2) Boosting MSMEs

  • There is visible incentivisation of Micro, Small and Medium Enterprises (MSME) in many spheres.
  • Their energetic response to the government’s initiatives is seen in their setting up of a Defence Innovators and Industry Association.
  • This bodes well for the future since MSMEs, which are the Tier-II and -III suppliers, are the crucibles of innovation and the true determinants of indigenization.

3) PSUs overhaul

  • The Defence Research Development Organisation (DRDO), Ordnance Factory Board (OFB) and Hindustan Aeronautics Limited (HAL) need to revamp their organisational structure.
  • They must unload their bureaucratic burden, cut the red tape and take a leap towards becoming result-oriented, professional organisations.

4) Mandatory Transfer of Technology for Subsystems

  • It is imperative that when India imports any weapon systems, there should be a plan for the ammunition and spares to be eventually manufactured in India so that we are not driven to seek urgent replenishments from abroad during crises.
  • The same goes for repair, maintenance and overhaul facilities for the upgrading of the weapons platforms.

5) 100% indigenization should be the aim

  • There is also thinking within the establishment that ‘Make in India’ means every system is completely built in India.
  • Even a fighter plane like Rafale or Gripen has equipment and systems, which are made outside the country of its origin.
  • India cannot attempt to make them, but that effort should be separated from the main policy which should be looked at from a practical point of view.
  • As and when things materialise, the indigenous sub-system should be added.

A note for private players

  • The private companies will have to acknowledge that they cannot get everything on a platter. They should not limit Make in India to just assembling or manufacturing through tie-ups with foreign players.
  • The private sector will have to invest money in research and stay put for the long haul. As for the government, it must handhold these companies and give them the required support.

 

Conclusion

The government has rightly clarified that self-reliance would not be taken to overzealous extremes. The thrust for indigenous research and development will coexist with the import of cutting-edge military technologies to obviate near-term defence vulnerabilities.

There is still a huge amount of work left.

With the new DPP in place, one hopes that it empowers the procurement process to become election-proof — national security cannot be held hostage to ineffective functioning of personnel who constitute the MoD and the political system.

 


References:

https://www.makeinindiadefence.gov.in/admin/webroot/writereaddata/upload/recentactivity/Draft_DPEPP_03.08.2020.pdf

https://www.thehindu.com/opinion/lead/grasping-the-defence-self-reliance-nettle/article31635965.ece?homepage=true

https://www.thehindu.com/opinion/columns/Defence-preparedness-the-way-forward/article14244118.ece

http://www.indiandefencereview.com/news/make-in-india-challenges-before-defence-manufacturing/

https://www.theweek.in/theweek/current/2019/05/25/how-make-in-india-in-defence-sector-is-still-an-unfulfilled-dream.html

https://www.financialexpress.com/defence/recent-reforms-in-the-indian-defence-sector/1977971/

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