Self-reliance mirage

Defence manufacture indigenisation is a long way off

By Ajai Shukla

Business Standard, 23rd June 17

Prime Minister Narendra Modi was more optimistic than accurate in claiming on Tuesday, in a speech in Lucknow, that India is “marching ahead” towards self-reliance in building defence equipment. True, Mr Modi has always committed himself to indigenisation in defence manufacture. His 2014 election manifesto pledged to rewrite defence policy, restructure equipment procurement and make India a defence-manufacturing hub. In early 2015, the prime minister lamented before an international audience in Bengaluru that 60 per cent of India’s weaponry was still imported; declaring that increasing domestic manufacture from 40 per cent to 70 would double our defence output. Yet, today the percentage of weaponry India imports remains above 60 per cent.

On March 17, the defence ministry told parliament that 65.62 per cent of the military’s procurement for 2015-16 was done through indigenous sources. It also said that, over the three preceding financial years, 94 capital procurement contracts involving Rs 82,980 crore were signed with Indian vendors; while 56 such contracts, involving Rs 53,684 crore, were signed with foreign vendors during the same period. This would place the indigenous component at over 60 per cent.

But these answers obscured the large overseas component in so-called “indigenous” platforms. The Sukhoi-30MKI and Tejas fighters, the Hawk trainer, Dhruv helicopter and Dornier-228 aircraft are deemed indigenous, but are actually 40-60 per cent imported, according to Parliament’s Standing Committee for Defence. Similarly, Bharat Electronics Ltd imported 44 per cent of the input materials it used in 2015-16, Bharat Earth Movers Ltd imported 21.68 per cent, and other defence public sector units (DPSUs) and ordnance factories (OFs) have lesser, but significant, shares. Adding these import costs would present the real picture of indigenisation.

Meanwhile, the government has been talking up its policy reforms directed at boosting defence manufacture. On Tuesday, Mr Modi claimed he had allowed 100 per cent foreign direct investment (FDI) in defence manufacture. In fact, 100 per cent FDI requires case-by-case clearance; only 49 per cent FDI is permitted through the automatic route. Other reforms include the whittling down of defence items that require licences to produce. The private sector is getting a more level playing field through mechanisms such as exchange rate variation protection, which was earlier provided only to DPSUs and OFs. Offset guidelines are now more flexible and easier to fulfil. The Defence Procurement Procedure of 2016 accords preference to a new category of procurement, eponymously titled: “Buy (Indian) - Indigenously designed, developed and manufactured”. A more attractive “Make” category of procurement allows the defence ministry to fund 90 per cent of the cost a company incurs in developing new equipment. The ministry will now choose private firms as “strategic partners”, which foreign vendors can partner to manufacture in India.

Yet, despite this liberalisation, defence manufacture lags. While it is true that the goals must be realistic as defence technology is complex and sophisticated, and rapid indigenisation is probably not possible when the country doesn't really have a strong hi-tech manufacturing sector, the fact is the government has been slow in its response. It has taken three years to build the policy framework, after playing musical chairs with defence ministers. Without robust ministerial leadership, bureaucrats shirk decision-making, fearing victimisation in the future by investigative agencies. Instead they push for policies that do away with discretion and judgement, with outcomes determined by unthinking procedure. With nobody ever accountable for overruns or delays, the defence ministry – which, in defence manufacturing, is the regulator, the sole customer and also a big seller – remains moribund.