Harnessing the private sector in defence

by Ajai Shukla

(Business Standard: 26th March 07)

It is seven years since the government permitted private sector companies to manufacture defence equipment, subject to licensing and a 26% cap on foreign holding, but only now are there indications of enthusiasm amongst private Indian engineering giants. If this does translate into meaningful defence production, enlightened policy-making from the Ministry of Defence (MoD) will have less to do with it than growing private sector confidence. With India continuing to pay staggering prices for cutting edge weaponry, several private sector giants now believe that they can develop those systems cheaper than the global majors who currently benefit from India’s custom.

Many of these private players are not newcomers to defence production. But the self-defeating pattern of recent decades had created a hierarchy, which was broadly structured as follows: putting together an overall weapons system --- whether a radar, an aircraft, a tank, or a communications network --- was the preserve of the Defence Public Sector Undertakings (DPSUs); the sub-systems and parts were frequently sourced from private companies. The technology for all this came from a global vendor, traditionally Russian, French or British. Despite the rhetoric of “technology transfer”, the proprietary technologies were never given to India. Instead, detailed manufacturing drawings were handed over; the Indian partners merely constructed and assembled according to those blueprints.

This process has been hallmarked by a profound intellectual apathy amongst the “technology recipients”, the Indian DPSUs, to absorb the technology in meaningful ways. Private companies claim that even if they had been handed over nothing other than blueprints, their scientists and engineers would have extracted and absorbed expertise that could have been canalised into new products. But Mazagon Docks Ltd constructed HDW submarines without absorbing the technology; Hindustan Aeronautics Ltd has built MiG series, Jaguar and Sukhoi-30 aircraft for decades, but still struggles to complete the LCA; and Bharat Electronics Ltd, which was transferred expensive technology for night vision equipment, has now embarked on an even costlier purchase of the next generation of the same technology.

While the private sector has been one of the links in this sterile process, the challenge before it is to move beyond in-country manufacture for dominant global corporations. Instead, groups like the Tatas, L&T and Godrej & Boyce, with proven engineering excellence, must actively participate in the entire cycle of weapons development, including visualisation, technology development, engineering, manufacture and integration. Small and medium industries must be actively developed as sub-component suppliers, a role in which they have already displayed their capability.

Traditionally, industry wants little more from government than that it stands out of the way, but building an indigenous “defence industrial base” will require more than that of the MoD. The greatest hurdle to private sector participation in defence is the high cost of R&D for a product that might never be accepted into service. That can be overcome by providing MoD funding for specified defence projects, a measure that has already been recommended by the Vijay Kelkar Committee in 2005. The MoD took the bold step of laying down in the DPP-2006 a procedure for subsidising R&D by nominated Raksha Udyog Ratnas (RuRs) from the private sector, in cases where the government decided to indigenously develop a weapons system. But trade union pressure from the DPSUs has prevented the MoD from nominating the RuRs and, so, that progressive clause stands blocked.

The MoD must also step in to task the Defence R&D Organisation (DRDO) to develop the costly “enabling technologies” that underpin the systems and sub-systems that go into a weapons platform. With fundamental research from the DRDO, subsidised research on systems technologies by the private sector, and with the DPSUs and private sector companies competing to manufacture and integrate the final product, India’s private sector will be given a meaningful role in developing a world class defence industry.