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IDSA COMMENT

Is India on the Path to Vibrant Defence Industry?

October 08, 2008

What does it take to be ‘a vibrant industry’ or more specifically ‘vibrant defence industry’? Broadly, it would demand that the industry should be innovative in terms of processes and products, its base and structure should have large dimensions horizontally, vertically, and technologically to be responsive enough to keep pace with the changing strategic expectations of the nation. Defence exports and imports should be a matter of deliberate political or commercial policy choices and not a result of security compulsions. All these would call for strong and solid linkages between the civilian and defence sectors of industries on one side and the research and development organisations and academic institutions on the other.

Every major power aspires to build a vibrant defence industrial base. This status is however not easily attainable. Apart from the United States and to some extent Russia and France, all other countries are in the state of struggling to arrive at such a defence industrial position. Certain countries like the United Kingdom may be able to attain this, but due to strategic or economic preferences may deliberately choose not to consider the enormous costs involved as against the perceived security requirements. India’s aspiration for this is well documented wherein it has publicly pronounced its goal of ‘self sufficiency’ soon after political independence and now graduating it to ‘self-reliance’. The unfortunate part is that India is still far from nearing that level even after fifty years of this laudable policy. One of the identified ongoing policy drawbacks is its weak linkage with the civilian sector of industry.

The thrust of the new policy initiative therefore is participation of the private sector in defence industry for both research and development as well as production purposes. It has also opened up the defence sector to foreign equity participation up to 26 per cent, with the government recently expressing its willingness to consider even up to 49 per cent on case-to-case basis. Together with this is the initiation of the ‘offset policy’ for major foreign procurement of defence equipment of Rs.300 crores and above. The big question is: will all these initiatives contribute to the growth of a vibrant defence industry in India?

The immediate effect of these initiatives is that significant numbers of licenses have been applied for and issued to major Indian companies for production of varied components and systems. In fact, according to CII sources alone, as of date, more than 140 companies are involved in about 345 defence items/products. Complete systems/platforms/weapons systems constitute the majority of the licenses issued, which demands higher financial investments and technical capability. This reflects the ambition and confidence of the private sector in their new ventures. On the other hand, there is a flurry of partnership agreements/collaborative ventures by these industrial companies with major global defence industrial giants from the United States, Western Europe and Israel. This is of course not to ignore the existing and ongoing collaborative projects of Defence Public Sector Undertakings (DPSUs) and Ordnance Factories (OFs) with companies from these countries at the governmental level. An analysis would reveal that India’s defence industrial scene now is moving on two distinct parallel lines. The first is equipment and technology emanating from Russia and Eastern Europe, which represent approximately 70 per cent of the country’s defence industrial set-up. The new addition is Western technology or modified/upgraded technology through private sector companies that are poised to enter India’s defence market. The moot question is: Will these different technologies eventually strengthen India’s defence industrial base or add further complexities through highly mixed inventories?

In this emerging situation, a few logical things are bound to happen. First, due to the emerging competition from Western technology largely through the private sector, the Russians or other traditional suppliers are likely to at least scale down their often-repeated business behaviour of project delays, delay in supply of spares and parts, and unwillingness to transfer technology. Moreover, the tendency to jack up costs midway while implementing agreements may also get tempered with the arrival of new competitors. However, the fact remains that the domination of Russian origin technologies and their grip on the Indian military establishment will sustain for quite some years to come particularly given that they are largely embedded through the defence public sector undertakings and other government agencies. The major positive impact of the new situation is, however, that the government agencies/DPSUs are likely to wake up from their slumber at least in those areas where they are producing items of common use, which can be easily produced at a competitive level by the private sector. This will be the immediate benefit brought in by the private sector.

While the above may be the likely positive impact, it is unlikely that Western technology will be able to easily challenge the existing market structure through the private sector. This is due to the peculiarity of defence technology and its market structure. First, given that control of technology is the essence of the growth and expansion of MNCs, the global Western defence giants may not easily part with high-end technology, whereas the Indian establishment would be looking for sophisticated weapons and equipment to supplement what has already been acquired from existing sources. The private sector’s ability to enter the market will depend on its capability to supply the components, parts and sub-systems of the new equipment in the initial period. Secondly, opportunities for the private sector would largely depend on the government decision to opt for higher and complete major systems of Western origin technologies such as the MMRCA. If such a decision goes in favour of any of the fighter aircraft of western origin, the private sector would definitely have significant scope to capture the market through the offset channel or through normal business dealings. Thirdly, the ability and willingness of Western technology to supplement the defence technology requirements of the armed forces would be the decisive factor. As of now, the armed forces are already in possession of a certain level of defence technology. What they are looking for is conceptually of a higher level, which would be supplementary in nature to bridge perceived security gaps. Will the western powers through their MNCs be willing to part with this level of technology to fill the gap, which, though may be lower than the high-end strategic technology that they possess? If the answer is in the affirmative, the prospects of their capturing the Indian market are very bright. So is also the market potential for the myriad private domestic defence companies in the next five to ten years.

The challenge for Indian industry as a whole would be the will and ability to integrate the two major technology streams in the coming years. This demands the need for dedicated and focused research leading to the capability to integrate existing systems with incoming systems. While the major platforms may continue to be of Russian/Soviet origin, the genius of Indian industry would be tested in its capability to build armaments and other sub-systems and integrating them at higher levels. This is the core challenge and the capability to do it would eventually make the defence industry genuinely vibrant. This will usher in the ‘Indian brand of defence technology’ even for export purposes free from possible objections on accounts of violations of intellectual property rights. The role of the Government of India as patron and principal customer shall be very crucial for success in achieving the above objective.