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Lecture by Shri AK Gupta on "Make in India: The Way Ahead for Indigenous Defence Production in India"

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  • Shri AK Gupta
    December 07, 2015

    At the outset, I would like to congratulate IDSA for instituting this eminent persons' lecture series named as 'Y.B. Chavan Memorial Lecture'. I am honoured to deliver this lecture on the theme 'Make in India'-The Way Ahead for Indigenous Defence Production and be a part of such an impressive list of esteemed speakers. In my lecture I have drawn heavily from the report submitted by the Expert Committee constituted under the Chairmanship of Dhirendra Singh for the purpose of evolving a framework to facilitate 'Make in India' as per the vision of the Hon'ble Prime Minister. It aims to increase the contribution of manufacturing sector to 25% of GDP and Defence Sector is a prominent one among the 25 sectors listed under this initiative. Let me start with a very brief background

    1. Although a war had been fought with Pakistan soon after independence, India’s strategic policy in the initial years, nevertheless, was to maintain peace by striving for good relations with neighbours and not by proactively arming itself to deter any aggressor. A series of events commencing with deterioration of relations with China in the late 1950’s leading to Indo-China War in 1962, Ayub Khan’s military coup in 1958 and inflow of sophisticated US arms into Pakistan, forced a rethink.

    2. A review of the production infrastructure highlighted several deficiencies and a coordinated effort was mounted with the setting up of the Department of Defence Production in November 1962 with the objective of developing a comprehensive production infrastructure to produce the weapons/ systems/ platforms/ equipments required for defence. The post-independence industrial policy, placed the production of Defence items in the Reserve List making it mandatory for production to be taken up only by the Public Sector. India, thus created a defence industrial base in the Public Sector consisting today of nine Defence Public Sector Undertakings (DPSUs) and 41 Ordnance Factories (OFs).  The products manufactured include arms and ammunitions, tanks, armoured vehicles, heavy vehicles, fighter aircraft and helicopters, warships, submarines, missiles, electronic equipment, earth moving equipment, special alloys and special purpose steels. The number of Ordnance Factories which was 22 in 1962 increased to 39 by 1995. Two new Ordnance Factories are coming up at Nalanda in Bihar and Korwa in U.P.

    3. India’s requirement of indigenous production was met by licensed production contracts. Technology transfer was limited in scope and did not extend to design and development capabilities. Thus India became dependent on the import of arms.

    4. The economic crisis of 1990-91 prompted the acceleration of the liberalisation process. Controls in many areas were removed and operation of the market forces largely restored. Auto sector started developing in a big way and it was realised that the nation needed to harness the entrepreneurship and management skills of the private sector for defence sector also. The policy of reservation of all defence equipment manufacture, for the public sector, was jettisoned in 2001-02. The sector for the first time was opened to Indian private sector participation, with Foreign Direct Investment (FDI) up to 26 percent, both subject to licensing.

    5. Another significant fall out of confidence in Indian industry was the insistence on a shift from a buyer-seller relationship to one of coproduction, co-development and joint research and development. At all meetings of bilateral Defence Groups, this became a standard demand and sub-groups on industry were formed with each of the major supplier countries. Whenever technology was to be obtained, insistence was on much deeper depth of technology, as well as on inclusion of design technology to enable incorporation of design changes in locally produced systems at subsequent stages, to suit Indian requirements.

    6. The efforts of the production and research agencies were synergised with the requirements of the Services through creation of two boards i.e. Production Board and R & D Board in 2001, chaired by their respective Secretaries. Another major policy initiative was taken when Offsets were made mandatory for specified high value projects since 2005. There have been periodic revisions of the scheme. The rationale behind the offset policy is that in big ticket global purchases, some obligation needs to be imposed on the foreign OEMs to purchase from the domestic industry.  Long Term Integrated Perspective Plan (2012-2027) was prepared by the Integrated Defence Staff. This became the basis for five year plans and annual plans.

    7. Government, in 2011, announced a Defence Production Policy, which considers self- reliance in defence manufacturing as a vital strategic and an economic imperative, and places emphasis on utilising the emerging dynamism of the Indian Industry by creating conditions conducive for the private industry to take an active role in this endeavour. However its operationalisation is through Defence Procurement Procedure. Progressive amendments to the DPP since 2002 have enabled private sector participation and increased focus on domestic production. A major amendment was made in DPP 2013, which gave a thrust to indigenous manufacturing. The Buy (Global) decision can now be taken only after other options for procurement, namely, Buy (Indian), Buy and Make (Indian), are ruled out. Let us analyse its impact. This table shows AoNs approved by the Government in the past five years. It can be seen from the table that the proportion of “Buy (Indian)” and “Buy and Make (Indian)” categories in the AONs accorded have increased significantly in 2013-14 and 2014-15. This implies that increasingly RFPs will be issued to the domestic industry which in turn can tie up with foreign OEMs, wherever required.

    AoNs Approvals (in Cr)
    Year Buy (Indian)
    Buy and Make (Indian)
    Buy (Global) Total
    Value % age Value % age
    2010-11 77,546 50.55 40,547 26.43 1,53,388
    2011-12 30,593 54.16 20,500 36.29 56,480
    2012-13 19,074 31.44 27,114 44.70 60,652
    2013-14 23,736 85.96 371 1.34 27,611
    2014-15 1,11,070 94.26 6,760 5.73 1,17,830

    Source: Ministry of Defence

    8. It is our endeavour to get every defence equipment or item required by our Armed Forces manufactured in India. Not only that, India can be a global manufacturing hub for defence sector and supplies can be made to other countries from India. I understand that in a globalised and integrated world, it is not possible to manufacture each and every part or component of an equipment in one country or at one location. However, the endeavour is to do significant amount of manufacturing and design work within the country.

    9. Further the practice of nominating only the OFB or DPSUs as recipients of Maintenance TOT was discontinued. The HQ Integrated Defence Staff (IDS) has also published ‘The Technology Perspective and Capability Roadmap TPCR – 2013’. It is expected to provide industry with a detailed perspective of what the Armed Forces are looking for, so that they can undertake requisite R&D efforts and investments for infrastructure up gradation.

    10. Till cold war period, Russian equipment were the backbone of our armed forces. In the second phase stretching from the early 90’s to present times. It has been diversified with materiel sourced from Israel, France, USA, Britain, South Africa Italy etc.

    11. The world witnessed a proliferation of defence industries in the years following both the world wars. However since the end of the Cold War, the global arms production has been consolidated in the hands of a few big primes. In the US, the biggest Defence Industrial Base in the world, there are only three aerospace primes. i.e., Lockheed Martin, Boeing and Northrop Grumman. Three companies, Air Bus, Dassault Aviation and BAE systems dominate the European aircraft industry. A similar situation prevails in the defence shipbuilding and land warfare systems industries.  Significant changes have also happened in terms of harnessing technology to enhance the capabilities of the weapon systems and platforms. In Defence, we have got two Navratna companies, i.e. Hindustan Aeronautics Limited and Bharat Electronics Limited. Their World rankings in terms of turnover are 42nd  and 82nd respectively. If we compare the turnover of HAL, which is the biggest company in defence sector, with number one company, i.e. Lockheed Martin, it is less than one tenth. This shows that we have yet to make a mark at the global level.

    12. The expenditure in foreign exchange being large, the major plank of production policy is to achieve a level of 70 percent indigenisation by 2027. At present the Indian Defence Industry is dominated by DPSUs and Ordnance Factories, which contribute about 90 percent of the total domestic defence manufacturing output. They employ close to 1,60,000 people.

    13. After opening of the defence industry sector to private sector participation in 2001, 182 Indian companies have been issued 307 industrial licenses for manufacture of licensable defence items till October, 2015. So far 50 companies, covering 79 industrial licenses, have informed about commencement of production. Further, 34 Joint Ventures have been approved for manufacture of various defence equipments to the Indian companies. The category wise licenses issued to the Indian private sector are shown in the table below:

    List of Licenses issued to Indian Industry - System/Sub-system/ Component Level Capability (As on 31.10.2015)

    Industry Licenses
    Armoured Vehicle/Arms Ammunitions 34
    Underwater Equipment/Underwater Ammunitions 11
    Ground Equipment/Ground Launch System 19
    Night Vision/Sensor based Systems/Optical Goods/Display systems 37
    Radar/Electronics Systems/Radio/Avionics/Airborne Guidance & Control System/Simulators 88
    Bulletproof Jacket/Ballistic Protection 14
    Network-Centric/Electronic Warfare System/Combat Management System 29
    Rocket, Missiles, Torpedo Tubes/Air Defence Gun/UAV's System & Sub-systems 51
    Warship/Submarines 9
    Ship, Submarine, Maritime Equipments 11
    Aircraft Engine/Airframe/Aircraft systems & Sub-systems 38

    14. The country is now entering into the third phase with a more proactive industrial policy captured in the ‘Make in India’ call. Several initiatives have been taken recently to promote the entry of private sector into defence manufacturing.

    1. The FDI policy for the defence sector has been reviewed and as per the revised policy, the composite foreign investment upto 49% is allowed under automatic route and beyond 49% with the approval of the FIPB.  That means for upto 49% foreign investment, no Government approval would be required. Even in case of FDI beyond 49%, the process of approval has been made quicker. Now such proposal would get approved at the level of Foreign Investment Promotion board (FIPB) instead of Cabinet Committee on Security (CCS). Several conditions attached to the policy have been removed to make the process simpler.
    2.       The Defence Products List for the purpose of issuing Industrial Licences (ILs) under IDR Act has been revised and most of the components, parts, sub-systems, testing equipments, and production equipments have been removed    from the List, so as to reduce the entry barriers for the industry, particularly small & medium segment.
    3. The initial validity of the Industrial Licence granted under the IDR Act has been increased from 3 years to 15 years with a provision to further extend it by 3 years on a case-to-case basis.
    4. The Defence Security Manual for the private sector defence manufacture units has been finalised and put in public domain. It clarifies the security architecture required to be put in place by the industry while manufacturing defence equipment.
    5. To establish a level-playing field between Indian private sector and the public sector, the anomalies in excise duty/ custom duty have been removed.  As per the revised policy, all Indian industries (public and private) are subjected to the same kind of excise and custom duty levies.
    6. The Exchange Rate Variation (ERV) protection has been allowed on foreign exchange component to all Indian companies, including private companies in all categories of capital acquisitions, so as to create a level playing field between the Indian and foreign industry.
    7. The list of military stores has been finalised and put in the public domain to make the process transparent and unambiguous.
    8. For the first time, a specific Defence Export Strategy has been formulated and put in public domain. The strategy outlines specific initiatives/ steps to be taken by the Government for encouraging the export of defence items. It is aimed at making the domestic industry more sustainable in the long run as the industry cannot survive purely on domestic demand.
    9. The Standard Operating Procedure (SOP) for the issue of No Objection Certificate (NOC) for export of military stores has been revised and put on the website.  Under the revised SOP, the requirement of End User Certificate (EUC) to be countersigned/ stamped by the Government authorities has been done away with, for the export of parts, components, sub-systems etc.
    10. The Department has issued a comprehensive Outsourcing and Vendor Development Guidelines to all the DPSUs and OFB in May 2015, so that the private industry, particularly SMEs are closely integrated into the supply chain of defence manufacturing. Some of the salient features of the guidelines are:

      1. DPSUs and OFB to have short-term and long-term outsourcing and vendor development plans with emphasis on gradual increase in quantum of outsourcing from private sector including SMEs.
      2. Involvement of Indian Industry, including SMEs for indigenous development of parts/components/sub-systems, which are presently being imported.
      3. Joint or co-development of systems or sub-systems between public and private sector. 

    11. A total of 25 Defence offset contracts are under implementation with offset obligations of approximately Rs. 29,274 Crore (USD 4.87 billion). The offset obligations of the offset contracts extend over a period of 14 years i.e., from 2008-2022. Another 45 cases worth USD 8 - 10 billion approximately are under different contracting stages. Offset implementation has been one of the major issues with foreign OEMs as far as doing business in India is concerned. We have undertaken the task of significant overhauling of the process of offset implementation. The requirement of prescribing Indian Offset Partners and components for offset discharge for the entire period of contract, at the time of signing of contract, has been done away with. The OEMs now can inform the name of the IOPs and the components just one year prior to the year of offset discharge. Even for previously signed contracts, the procedure to change the IOPs and the components has been simplified. One of the major demands of the industry has been to re-instate the provision of services for discharge of offsets. This also has been considered and some of the services have been restored for discharge of offsets with certain conditions and limitations.
    12. In Buy (Global) cases, level playing field has been established for discharge of offset obligations, between Indian and foreign vendors.

    15. Thus we can see that in the recent past, the Government has taken a number of policy steps to encourage and promote the entry of private sector into defence production. Many Indian companies are already part of the global supply chain and have absorbed technology and skills which can be utilised in domestic defence production. Though entry barriers such as licensing have been removed for most of the components, parts and sub-systems, a lot needs to be done to provide opportunities to the Indian Industry.

    1. Presently, there is no mechanism available in the defence sector for testing and evaluation of the products developed by the industry on its own. Defence equipment is necessarily required to undergo qualification tests (environmental, EMI/EMC etc.) during development stages before being considered for user trials. There is also a strong case to enable smooth and expeditious field / sea / flight trials of equipment developed by private industry, which they may have developed on their own initiative based on capability requirements projected by the services.  Majority of facilities like laboratories and ranges, for such qualification testing are presently held by DRDO, DGQA, DPSUs or Army/Navy/Air Force. We are in the process of making available these facilities to the private sector.
    2. There is a need for DPSUs and OFB to identify their core and strategic operations and outsource the non-core activities to the Indian Private Sector. The outsourcing effort will add to their capacity enhancement, attain cost effectiveness and improve competitiveness in global market. All the DPSUs and OFB are required to prepare a roadmap for increasing their outsourcing in a regular manner. This is being monitored very closely.
    3. In the coming years, OFB and DPSUs would have to increasingly compete with private players including global companies for getting orders from Defence Customers. This calls for adhering to timelines for delivering products in a cost effective manner. Further, continuous technology upgrades will be required to cater to changing customer needs. Moreover, with huge investment in assets creation, OFB and DPSUs need to ensure optimal utilisation of their resources in view of fast obsolescence of their products in order to remain financially viable. OFB & DPSUs must take it as an opportunity to expand themselves in new areas as well as upgrade their existing technology by way of Joint ventures/collaborations.    It is encouraging to note that OFB & DPSUs have already identified many areas where they plan to diversify.
      • OFB has undertaken development of new range of Artillery gun systems & small arms, advanced missile systems such as Smerch, Futuristic Infantry Combat Vehicles, Electronic fuzes, various types of Sights, Extreme  Cold Climate (ECC) items, advanced parachute systems etc.
      • HAL has formulated plans to have a significant footprint in Civil sector for Aircrafts & Helicopters, Civil MRO (Maintenance, Repair & Overhaul), Unmanned Aerial Vehicles (UAVs) and indigenous development of Aero engines.
      • BEL is exploring certain products in defence as well as in non-defence sectors such as Active Electronically Scanned Array (AESA) Radars, Airborne Radars, Missile Seekers, Image Intensifier Tubes, Thermal Imaging detectors for Night Vision Devices, Inertial Navigation System, Home Land Security, Air Traffic Management Radars, Elements for Smart city requirements etc. 
      • BEML plans to enter into the production of Hull & transmission of T-72 tanks, overhaul of High Mobility Vehicles (HMVs), Missiles, etc.
      • BDL has identified Warhead manufacture, Seeker technology, UAVs, Loitering missiles, overhaul of vintage missiles as new product areas.
      • MIDHANI plans to introduce new product lines like Carbon fiber, Aluminium-Lithium alloys, fasteners, valves & fittings.  
      • All the 4 shipyards MDL, GRSE, GSL & HSL have geared up for diversification through comprehensive modernisation plans, foreign collaborations in the areas such as Nuclear  submarines, fuel cells by MDL; Simulators, GRP boats, Hovercrafts by GSL; Deck machinery, Engine overhaul, Refits by GRSE: and Submarines & Landing Platform Docks for Indian Navy by HSL.
    4. Under Skill India initiative, DPSUs have been asked to use CSR funds for imparting training to the labour force. They have also been asked to define eligibility criteria for all positions in terms of National Skill Qualification Framework by amending the recruitment rules. This should remove the disconnect between demand and supply of skilled manpower.
    5. The Start Up-India, Stand Up-India initiative is supposed to encourage entrepreneurship among the youth. It is envisaged that creation of a robust ecosystem will get a boost under this initiative.
    6. World over, wherever there is strong defence industrial base, it has been observed that Government has fully supported the private sector defence industries to enable them to take risks. In such countries, Government has been working closely with the private sector industries in R&D as well as in production. Not only that, Government has also been actively marketing the products manufactured by the private sector industry through appropriate diplomatic efforts. Therefore, to create a culture of ‘Make in India’ in defence sector, the first and foremost thing is to proactively assist the private sector both in production as well as in exports. New 'Make Procedure, export strategy & idea of strategic partnership will take this concept forward.
    7. The provision of 'Make' category of capital acquisition is a vital pillar for realising the vision of the 'Make in India' initiative. Hence it is imperative that 'Make' procedure should be structured to provide the necessary leverage for the industry to take calculated risks, make adequate investments, build the required capabilities and match upto the contemporary and futuristic requirements of the Armed Forces. The ‘Make’ procedure is at an advanced stage of approval. We shall be starting 8 to 10  projects every year under ‘Make’ category of acquisitions in consultation with Service HQs. These ‘Make’ projects will not only help in creating eco-system in terms of vendor development, but also kick-start race for technology development and/ or technology acquisition by the industry, which will help the defence manufacturing in the long run. Such indigenously developed systems will also be available for export to establish India as a global player in defence market.
    8. The present offset policy is being given a fresh look to achieve the desired objective of indigenous manufacturing and acquiring technological capabilities. Like many other countries, a targeted approach under offset has to be adopted where each procurement in global cases can be leveraged to achieve the maximum desired outcomes through offset. This could be in the form of acquiring critical technologies or enhancing the manufacturing capabilities of the domestic industry.
    9. We are also in the process of bringing out a new and revised Defence Procurement Procedure (DPP), which will put further emphasis on indigenous design, development and manufacturing of defence equipments. The procedure simplification, reduced timelines, quick decision-making, transparency and capability building in the domestic industry would be the main focus of all our policies including Defence Procurement Procedure.
    10. To provide information to defence industry and to interact online with prospective as well as existing manufacturers, we are in the process of making a portal in defence sector, which can be accessed through the official website of the Department of Defence Production (DDP). The portal will provide all the policies, procedures and promotional measures related to defence manufacturing sector at one place. The portal would also be interactive, where individual investors can raise their questions and they would be provided replies or information within a stipulated time. 

    16. As per  rough analysis, it came out that the indigenous content in total defence capital procurement across all the three Services has been hovering around 40% in last couple of years. Though 100% indigenisation could be the ideal objective in strategic sector like defence, however no country can achieve this level because of globalization of supply chain and the issues of economies of scale. Practically, it may be possible to achieve 60% indigenous content along with capabilities in crucial technologies like aero engines, avionics, precision electronics, sensors and radar technology etc., in next five years with a target to reach 70% in further 5 years.

    17. ‘Make in India’ is a laudable initiative which has generated much interest amongst the domestic as well as global investors. Several global companies have made plans for investments in India. What more can be done to further accelerate the process?

    1. Increasingly technological superiority is becoming the primary source of strategic and competitive advantage in the defence area; The shelf life of new technology has sharply reduced requiring continuous up gradation making investment in research the key differentiator among major nations in their defence preparedness. Given these trends, the need for rapid and continuous innovation in the defence production space is being felt more acutely than ever before. While India is gearing up to upgrade its “ease of doing business” parameters and addressing necessary policy reforms to attract investments under “Make in India”, it is very important to put the highest priority in strengthening its innovation ecosystem, primarily led by industry and in partnership with government, academic and research institutions, nationally and globally. There is also a need to incentivise R&D in defence with innovative funding methods. The significant reserves available with DPSUs could be one such resource to encourage innovation in the MSME sector.
    2. MoD has uploaded Technology Perspective & Capability Roadmap (TPCR) on its website. However, the document does not provide complete information. If Indian Defence Industry has to really contribute, they have to know users requirement in sufficient details.
    3. It has been experienced that sometimes Indian Companies are unable to participate in procurement process because of too ambitious SQRs made by Service HQs which are too difficult to achieve. It is therefore desirable that SQRs are formally discussed with Industry before they are formalized.  Such interaction will ensure formulation of realistic and attainable SQRs.
    4. Third party inspections by the agencies of National repute, duly approved by the DGAQA/DGQA/MoD may also be permitted to provide QA/QC coverage to the private sector. It will assist in expediting the product validation process. A separate Protocol in this regard needs to be evolved.
    5. Having brought the private industry into the defence industry fold, it would be imperative for Government to support it on a long term basis. This would require both long term projections and stable current orders, and hand holding at various stages of the procurement cycle ranging from R&D to life cycle support and upgrades.
    6. A ‘Make in India’ policy for the defence sector should ideally aim to reverse the current imbalance between the import and indigenous manufacture without adversely affecting the requirements, capability and preparedness of the user. There are several aspects of this process, the best case scenario being that we have the ability to design, develop, make i.e. the ability to manufacture and integrate, test, maintain and upgrade the defence systems we require and, if possible, export these. Where this is not feasible, we should be able to at least manufacture or integrate the systems within the country with the help of full technology transfer. Given the nature of the defence materials, this may not be possible all the time. In such cases we should at least have the ability to provide a life cycle support i.e. repair and maintenance if not mid-life upgrade.
    7. Thus from the very basic level of repair & maintenance to the level of having the ability to system design, develop, manufacture and test, it is a gradual, step by step process based on the technologies and complexities as well as manufacturing and testing techniques involved. In the process, as the industry moves up the competence ladder, IPR of varying levels is also generated whether in industry, design houses or in academia.
    8. Once we have a higher portion of the defence procurement coming from the Indian vendors, we can afford to make a shift in the offset policy towards direct and directed offsets and leveraging the same towards acquiring critical technologies. The issue of direct and directed offsets is already being addressed by the DDP through a new draft offset policy.
    9. While the Government is making necessary policy changes and is committed to create an eco-system for the domestic industry to grow at the desired pace, such initiatives would bring results only with the active support from industry. The industry also needs to come up and accept the challenge in terms of technology up gradation and investments. The industry chambers like CII and FICCI also have an important role to play and can really act as catalysts.

    18. If effectively implemented, this framework should result in increasing the indigenous content in the procurements from the current level of about 40% to nearly 70%, development of certain key identified technologies and products, and take volume of defence exports to USD 1 billion in five years and USD 3 billion in next 10 years. This will not only take us towards the goal of self-reliance in defence production but will also create tremendous employment opportunities for young engineers, technicians and labour force.

    Thank You...