IDSA COMMENT

Time to Act on the Defence Industry Front

November 29, 2011

If India is really serious about reducing its dependence on foreign sources for its defence needs, this is the time to act.The MMRCA selection process is nearing its end. The tenders were scheduled to be opened early this month. The lowest bid would then be compared to the notional figure that the Government of India (GoI) would have calculated on the basis of prevailing prices of the same or similar equipment. Problems could arise if the difference between the two is large and in that case the whole process could well be delayed further.

The MMRCA contract is extremely important because the offset clause obliges the vendor to spend up to 50 per cent of the contract value in India, and that is huge. But to derive the maximum benefit from these the Indian industry must be in a position to absorb such major technology infusion. This is unlikely to fructify if the GoI focuses only on Defence PSUs like HAL and ignores the numerous small and large players in the private sector.

The current climate is especially propitious because many aviation and other defence industry majors in Europe and America are facing a bleak future. The fears of a second economic meltdown are widespread and the Eurozone crisis is showing no signs of a lasting solution. Here then is the real opportunity to strike deals that would finally help the indigenisation of India’s defence industry.

The US government is likely to make deep cuts to its defence budget. The F-22 programme and now the F-35 programme are afflicted not only by their own development problems (the first with the on-board oxygen generation system that resulted in its grounding for nearly five months and the second with far too many serious issues to be discussed here) but also budgetary cuts. The US offer of the F-35 to India is also due to the present economic difficulties and it is likely that the earlier restrictions on transfer of technology would be greatly loosened.

Following the Strategic Defence and Security Review (SDSR) of October 2010, Britain announced deep cuts in its defence spending even though these were termed as inadequate by the Comprehensive Spending Review (CSR) that came a few months later. The UK plans to ultimately cut its defence spending by a whopping 10 per cent over the next decade with some two billion pounds already saved (cut?) this year.1 The process began in December 2010 with the early phasing out of the 63-strong Harrier GR9 jump-jet fleet2 — the pride of the Royal Navy. (Recent reports, however, indicate that all of these are slated to be purchased by the US Navy at discounted prices). The Nimrod MRA 4 fleet which had played a crucial role of maritime surveillance and airborne SIGINT duties for over forty years was the next to see retirement. Its replacement, the US KC-135 Rivet Joint, has been put off until 2015. The Royal Navy also had to decommission an aircraft carrier, the HMS Arc Royal. HMS Illustrious, the other carrier, is also due to be decommissioned in 2014.

Estimated redundancies or employment losses are likely to reach 25,000 civilian/industry and 17,000 military.3 Considering that each of them is a specialist and skilled worker in his/her own way it can have a very debilitating effect on the British industry. The Royal Air Force (RAF) is also allowed a fleet of only 107 Eurofighter Typhoons4 instead of a much higher figure that was sanctioned earlier. Germany has announced plans to cut its Bundeswehr or Federal Defence Forces strength from 220,000 to 185,000.5

Other partner countries namely, Spain, Italy and Germany are in a similar situation, with the Eurofighter consortium offering some used aircraft to the Czech Republic at a discount of 30 to 40 per cent.6 This is unprecedented. These countries are also not keen to buy the numbers that they had earlier committed for and are hoping that like Saudi Arabia they can find other customers to help keep their industry running. The Eurofighter is manufactured by a consortium of four countries, Spain, Italy, the UK and Germany, and each builds its share of components for the Typhoon. The absence of orders or a delayed delivery schedule can seriously affect all these companies.

According to Richard Paniguian, the head of the UK Trade and Investment Defence & Security Organisation (UKTI DSO), which looks after its sales and exports markets, “building partnerships with indigenous companies in target markets is the future of British defence exporters and will supersede the traditional business model of direct sales.”7 Another official has clearly identified the export of defence equipment to India, Saudi Arabia and other countries as the main focus area for the UK in these difficult times. “Partnerships rather than pure exports are the way to go,” he says. The Eurofighter Typhoon is likely to play a major role in this scheme.

India is thus in an enviable position8 with her economy doing well enough to continue to commit a sizeable amount for defence purchases. Since India is unlikely to raise the FDI limit in defence industry it is possible that investments might not be so easily forthcoming in the defence sector but India should find other alternatives.

It is perhaps time for the Indian majors like Tata, L&T and Mahindra Defence and indeed the Indian Government/DPSUs to invest in American and European defence companies. General Atomics, the manufacturer of the RQ-1 Predator and RQ-9 Reaper, Honeywell, EADS, BAe and many such names come to mind. These countries might welcome these relatively small investments. Such forays will open vital contacts with these industries and facilitate transfer of technology and joint ventures.

We must also focus on Indian companies. The LCA programme has spawned some 300 small and medium Indian companies that made a signal contribution to the programme. Many of these, according to one very knowledgeable source, were managed by single individuals or by very small groups of people who are now getting on in years and have no assurance that their businesses will survive in the long term. Indian private majors could give these small players the necessary assistance or buy them outright. That is, however, possible only if the government encourages the private player to invest in these projects. Big corporates can easily do that with a little persuasion by the government.

Remember that China has been under a NATO arms sales ban since 1989 and many European countries, especially France, are strongly advocating that it be lifted. If the European economy shows signs of a further slow-down China would be in a better position to exploit the emerging opportunities. Also recall that in the early 1990s the Chinese leadership immediately grabbed the opportunity to get a cash-strapped Russia into parting with the Su-27 and other technologies that were then considered out of reach of any country. China had also managed to get some 400-500 jobless Russian engineers to work in China on the numerous projects that were then starting.

The Indian Government must be prepared to invest a sizeable sum, say USD 500 million each, in four or five of these companies whose products India needs; e.g., UAV/UCAV, Aero-engines, AESA Radars, MANPADS like the Stinger, multipurpose short range missiles like the Griffin and Javelin, and many other weapon systems including PGMs that can in due course of time be produced in India.

India has already spent large amounts of foreign exchange on big ticket items like the C-17, Hercules C-130J, PC-22 trainers, Mirage-2000 upgrade and a variety of helicopters and Surface to Air Missiles (SAM). It is time to cast the net wide and take some bold steps to kick-start the indigenisation process and also obtain what the Indian military needs.

It is a truism that for any country to become an autonomous power centre, it must, among other things, possess a strong strategic defence industrial base. This is one area where India should closely follow Chinese practices. Our leaders have been repeatedly stating that India’s dependence on foreign sources for 70 per cent of its defence needs is both ‘shameful and dangerous’ and yet we have made little progress on the ground. As a result vital opportunities are quickly slipping by.

  1. 1. Jane’s Defence Weekly, Volume 48, Issue 44, 02 November 2011, p. 24.
  2. 2. Jane’s Defence Weekly, Volume 47, Issue 51, 22 December 2010, p. 32.
  3. 3. Jane’s Defence Weekly, Volume 48, Issue 41, 12 October 2011, p. 30-32.
  4. 4. Ibid., p. 4.
  5. 5. Jane’s Defence Weekly, Volume 48, Issue 39, 28 September 2011, p. 13.
  6. 6. Jane’s Defence Weekly, Volume 48, Issue 42, 19 October 2011, p. 15
  7. 7. Ibid., p.34.
  8. 8. Note 3, p. 22.