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Context

• Defence-Expo 2022 held in Gandhinagar, Gujarat in October drew attention to a major policy initiative, the need for India to acquire the appropriate degree of “Atma-nirbharata” (self-reliance) in the defence sector.
• In this context, this edition of burning issue is will analyse the issues which ail the Indian defence industry, its present status and what all steps are needed to achieve “Atma-nirbharta” in the Defense sector.

About the Indian defence industry

• India has the third largest armed forces in the world.
• India has one of the largest defence industrial complexes in the developing world. Currently, it consists of 39 ordnance factories, 9 defence public sector undertakings under the administrative control of the Ministry of Defence (MoD); and 150-odd companies in the private sector.
• In addition, there are 50-odd dedicated research laboratories and establishments under the umbrella of the Defence Research and Development Organisation (DRDO), the premier research and development (R&D) wing of MoD.
• Together, these entities, which employ over 200,000 people, produced arms and other stuff worth over Rs. 46,428 crore ($7.6 billion) in 2014-15.
• It is the world’s fifth-largest spender on defence. India’s annual defence budget for Financial Year (FY) 2018-19 was about Rs 2,95,511 crore (at the BE stage). It spends approximately 35 per cent of its defence budget on capital acquisition.
• India is one of the few countries to have designed and produced a fourth-plus generation fighter aircraft, nuclear submarine, main battle tank, and intercontinental ballistic missile with a range of more than 5000 km.
• However, despite all these, the Indian defence sector faces several challenges

Why self-reliance in defence is necessary?

• 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. Such higher import dependency leads to an increase in the fiscal deficit.
• 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. India is surrounded by porous borders and hostile neighbours who need to be self-sufficient and self-reliant in defence production.
• Economic boost: Indigenization in defence can help create a large industry which also includes small manufacturers. Example: the USA has a strong defence industry with companies like Lockheed martin contributing to economic growth as well.
• Employment generation: Defence manufacturing will lead to the generation of satellite industries that in turn will pave the way for a generation of employment opportunities. As per government estimates, a reduction of 20-25% in defence-related imports could directly create an additional 100,000 to 120,000 highly skilled jobs in India.
• Counter China: If India doesn’t develop its defence industry, China will emerge as the sole defence equipment manufacturer and supplier in the region.
• Improve Global standing: India is striving for a permanent seat at the United Nations Security Council (UNSC), however, it cannot remain effectively a net importer of security from four out of five permanent members of the UNSC.

Challenges in achieving self-reliance in the defence sector in India

• High import dependence: India imports nearly 60 per cent of its military hardware requirements from global arms manufacturing countries. As per SIPRI data, the value of imports of defence systems by India for the period 2013-16 was approximately Rs 82,496 crore. India accounts for 14 per cent of all global arms imports and has the dubious distinction of being the largest importer of arms in the world.
• Low self-sufficiency levels: Despite having a strong DIB, the long-cherished goal of achieving a minimum of 70 per cent self-sufficiency in defence procurement remains elusive. Currently, India’s self-reliance is hovering at around just 35- 40 per cent.
• Technology transfer dependence: India is mostly involved in the licensed production or manufacturing of defence equipment based on the Transfer of Technologies (TOT) obtained through the purchase of main equipment/systems in the past from the Original Equipment Manufacturers (OEMs).
• Dependency even for raw materials: The Comptroller and Auditor General of India (CAG) in a 2011 report to Parliament had expressed its displeasure at the 90 per cent import dependency of the state-owned Hindustan Aeronautics Ltd (HAL) for ‘raw materials and bought out items’ for production of what is touted as indigenously designed and developed Advanced Light Helicopter (ALH).
• Lack of funding: There is a lack of funding, as the incremental increase in the country’s defence budget is not enough to undertake big-ticket modernisation plans for the armed forces. Further, there will be a need for capital for enhancing the capacity and capabilities of the DPSUs, Ord Fys and DRDO.

Reasons for these lacking

• Weak domestic industry: This is largely due to the non-availability of modern, hi-tech and advanced weapon systems through the domestic industry (public and private). Though such imports serve the immediate needs of the country, in the larger perspective, they delay the process of indigenisation. There has been very limited participation of the private sector (less than 5 per cent) in the overall defence acquisition.
• Failure of DPSUs: The DPSUs/Ord Fys/DRDO were raised with the expectation to create self-reliance in the field of defence manufacturing, however, the same has remained elusive so far. Over the years, the contribution of the DPSUs/Ord Fys has been dismal, which is adequately mirrored in their decreasing stake in India’s capital budget.
• Gaps in the capacity and capability: There are gaps in the capacity and capability of the DPSUs/Ord Fys/ DRDO vis-à-vis the requirements of the armed forces for modernisation/ upgradation of the equipment profile, which leads to the off-the-shelf procurement of arms/weapon systems ex-import.
• Dismal participation in R&D: There is enormous scope for investment in defence R&D by the public as well as the private sector. As per a study carried out by Institute for Defence Studies and Analyses (IDSA), the OFB invests only 0.7 per cent of its budget in R&D against the minimum inescapable requirement of 3 per cent. It was also revealed that four of nine DPSUs do not own a single patent or copyright.
• Low FDI inflows: There is a lack of Foreign Direct Investment (FDI) in the defence sector. The aspect of FDI has not received adequate importance so far and, hence, there has been very low FDI in the defence sector.

Defence Industrialisation Phases in India

India’s defence industrialisation can be divided into five different phases:

• Phase 1: The Quest for Self-Sufficiency India’s defence industrialisation immediately after independence was influenced by the country’s socialistic and centralised planning system reflected in the first Industrial Policy Resolution adopted in 1948.

• Phase 2: Self-Sufficiency to Self-Reliance The events of the 1960s, particularly the 1962 war with China and the India-Pakistan war of 1965 brought about a major change in India’s defence policy. Not only India’s defence budget as a percentage of GDP increased in the subsequent years but also the approach towards arms procurement policy and indigenous defence production changed.
• Phase 3: Self-Reliance through Coproduction Beginning with the mid-1980s, the government pumped up resources on R&D to enable DRDO to undertake high-profile projects. A major beginning in this respect was made in 1983 with sanctioning of IGMDP, LCA Tejas project.
• Phase 4: While co-development/co-production remains a distinct feature of India’s defence industrialisation process since the late 1990s, the approach towards self-reliance has taken a major turn since the early 2000s, when the government decided to allow 100 per cent participation of the private sector in defence production.
• Phase 5: Self-Reliance through the Make in India Initiative. The Make in India initiative is not restricted to the defence industry; it covers 25 diverse sectors and constitutes a part of the Modi government’s larger economic plan to propel the share of manufacturing in GDP to 25 per cent (from 16 per cent at present) and create 100 million additional jobs by 2022

International model: How Chinese defence industry grew up?

• Initially used soviet technologies: The Chinese defense industry has undergone enormous changes in recent decades. Through much of the 1970s, China was primarily capable of producing weapons based on outdated Soviet technologies from the 1950s.
• The Absorptive model: The Chinese defense industry has long relied heavily on an absorptive model in which firms acquire foreign military and dual-use technology and incorporate this into the design and development of products. This approach has significantly reduced the amount of time and money China has had to invest in R&D and sped up Chinese efforts to modernize its military.
• Using Illegal ways: in addition to legally acquiring foreign know-how, China has also illegally copied and stolen foreign military and dual-use technology. In the 1990s, China purchased Russian Su-27 fighter jets and S-300 missile systems and reverse-engineered them to assist with designing its J-11 fighter jets and HQ-9 surface-to-air missiles.
• Current thrust on innovation: Under President Xi Jinping, China has intensified its pursuit of MCF (junmin ronghe) as a means of making the defense industrial base more efficient and innovative. 

Current scenario of India’s Defence exports

With all the past efforts of the government, some positive developments have started taking place in the Indian defence sector.

• Indian products on sale: India has put out a range of military hardware on sale which includes various missile systems, Light Combat Aircraft (LCA), helicopters, warship and patrol vessels, artillery guns, tanks, radars etc.
• 700% growth in exports: From 2016-17 to 2018-19, the country’s defence exports have increased from ₹1,521 crore to ₹10,745 crores, a staggering 700% growth.
• Exporting the defence material to 75 nations: India is exporting defence materials and equipment to more than 75 countries of the world. In 2021-22, defence exports from India reached $1.59 billion (about Rs 13,000 crore).
• The target of $5 billion export: The government has now set a target of $5 billion (Rs 40,000 crore).” This is an ambitious target and will demand mission-mode resolve to be realised.
• INS Vikrant: The commissioning of the indigenously-designed and built aircraft carrier INS Vikrant.
• SLBM Missiles: The recent test fired SLBM (submarine-launched ballistic missile) from the INS Arihant is indigenously built.
• LCH Prachand: The induction of the made-in-India Prachand LCH (light combat helicopter) is a significant leap.
• Increased defence production: India’s defence manufacturing sector recorded increased production to US$ 11.85 billion in FY22 from US$ 10.9 billion in FY21. India’s defence production stood at Rs. 17, 885 crore (US$ 2.24 billion) in FY 2022-23 (until 1 August 2022). Defence production by PSUs stood at Rs. 10,831 crore (US$ 1.36 billion) in FY 2022-23 (until 1 August 2022)
• Growth of startups: The Startup Incubation and Innovation Centre, IIT-Kanpur (SIIC IIT-Kanpur) recently signed an MoU with Defence Innovation Organisation (DIO) to nurture and support start ups and SMEs in the defence sector through its flagship programme iDEX Prime.
• Improving defence procurements: Although progress from the Defence Procurement Procedure was modest at first, it has picked up in recent years; approximately $4.3 billion worth of offset contracts have been signed and launched since 2007.

 

Steps taken by the Centre to boost defence production

• Licensing relaxation: Measures announced to boost exports since 2014 include simplified defence industrial licensing, relaxation of export controls and grant of no-objection certificates.
• Lines of Credit: Specific incentives were introduced under the foreign trade policy and the Ministry of External Affairs has facilitated Lines of Credit for countries to import defence products.
• Policy boost: The Defence Ministry has also issued a draft Defence Production & Export Promotion Policy 2020.
• Indigenization lists: On the domestic front, to boost indigenous manufacturing, the Government issued two “positive indigenization lists” consisting of 209 items that cannot be imported. Recently, the 4^th indigenization list has been launched.
• Budgetary allocation: In addition, a percentage of the capital outlay of the defence budget has been reserved for procurement from domestic industry.
• Defence Industrial Corridors: The government has also announced 2 dedicated Corridors in the States of TN and UP to act as clusters of defence manufacturing that leverage existing infrastructure, and human capital.
• Long-term vision: The vision of the government is to achieve a turnover of $25 bn including export of $5 bn in Aerospace and Defence goods and services by 2025.
• Push for self-reliance: The govt has identified the Defence and Aerospace sector as a focus area for the ‘Aatmanirbhar Bharat’ or Self-Reliant India initiative.

Way forward

• Increasing the investment in R&D is necessary: At the heart of this challenge is the grim reality that historically, India has not invested enough in the national research and development (R&D) effort. As per data collated by the World Bank, India has been able to allocate only 0.66 per cent of GDP (2018) towards R&D, while the world average is 2.63 per cent.
• Matching with the Global players in R&D: The comparable individual R&D allocation (per cent of GDP) for some other nations is as follows: Israel 5.44; USA 3.45; Japan 3.26; Germany 3.14; China 2.4; and Turkey 1.09.
• Making the R&D prior national issue: Providing a sustained fillip to the national R&D effort across the board (state, corporate and academia) remains critical if India is to emerge as a credible military power and one would identify this as a high-priority issue for the national security apex the CCS (cabinet committee on security).

Conclusion

• India is in an unusual and perhaps unique position to build a vibrant local defence-industry ecosystem that could support both domestic and export demand, yielding material benefits to the industry and the nation. Self-reliance is the sine qua non in defence, in India and elsewhere, and developing a vital industry is a big step in that direction.
• Meaningful indigenisation and credible “atma nirbharta” calls for sustained funding support, fortitude and an ecosystem that will nurture this effort.

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