Why defence indigenisation fails

'Make' procedure, which involves real indigenisation and capability creation, must be promoted. Instead, it has been killed

By Ajai Shukla

Business Standard, 31st July 18

Defence industry experts wonder about India: Why has a country with a thriving space programme, a world-class information technology industry and a leading automotive components industry failed so conspicuously to build an indigenous defence industry? An examination of the “Make” initiative brings out some lessons.

In 2004, the newly elected United Progressive Alliance (UPA) government appointed Vijay Kelkar to plan a strategy for indigenisation. Nine months later, the Kelkar Committee submitted a report titled “Towards strengthening self-reliance in defence preparedness”, which laid out an excellent roadmap for building genuinely Indian weaponry, while nurturing a national military-industrial complex. Over the years, successive defence ministries hollowed out the “Make” procedure that lies at the heart of Kelkar’s recommendations. Last month, it was formally pronounced dead.

The “Make” procedure was introduced in the Defence Procurement Procedure of 2006 (DPP-2006). It involves conceiving, designing, developing and manufacturing complex weapons platforms in the country, such as aircraft, tanks or communications grids. This involves selecting an Indian company or consortium as a “development agency” (DA), and the government reimburses 80 per cent of the development cost incurred. Foreign firms can be co-opted as technology partners, but the DA remains the prime integrator, responsible for systems development. Make projects aimed far beyond license-producing foreign weaponry that, by virtue of being in service, incorporates technology 10-15 years old. Instead, Make projects involve developing cutting edge platforms and creating systems integrators in India. 

Central to the Make idea was the selection of Raksha Udyog Ratnas (RuRs, or “Champions of Defence Industry”). These were to be technologically capable and financially robust private firms that would be eligible to bid for “Make” projects. In developing a product, the RuR would co-opt other firms, creating a defence manufacturing eco-system. Where technology gaps forced the DA to import sub-systems, concurrent development of indigenous versions was to be promoted, preferably through micro, small and medium enterprises (MSMEs). This would indigenise subsequent versions (Mark 2, Mark 3…) of the platform. To fund small product development, a Technology Development Fund was established and allocated Rs 100 crore in 2007-08. This allowed for grants-in-aid of up to Rs 5 crore to MSMEs, deepening the supply chain and the national eco-system.

The “Make” procedure emphasised high technology. The key criterion for selecting DAs for a project was not “lowest cost” (L-1), but higher indigenisation and control over important technologies. In another innovative decision “Make” projects were not to be funded from the army, navy or air force budget. Instead, DPP-2011 mandated a separate accounting head, managed by the defence ministry’s Acquisition Wing. This would ensure that “Make” projects, which aimed at national capability creation, would not be scuttled by a military that preferred immediate combat capabilities.

The “Make” procedure encountered difficulties of various kinds. First, pressure from labour unions of defence public sector undertakings blocked the UPA government from nominating RuRs, fearing competition. That made selecting DAs difficult, since RuRs would have provided a convenient shortlist. Then, successive governments allocated only a pittance to the “Make” head. Since 2010-11, three years saw zero allocations, while they exceeded Rs 100 crore only twice. Similarly, the Technology Development Fund lapsed after a couple of years. It was revived in 2015-16, but handed over to the Defence R&D Organisation (DRDO) to administer – an unwise move, given that DRDO has its own Rs 9,734 crore (Rs 97.34 billion) capital budget and interests.

Facing difficulties in implementing “Make”, the government introduced a new category of Buy & Make (Indian) in DPP-2011. This was a throwback to licensed production – with foreign vendors offering in-service platforms for manufacture by Indian partners. Dispensing with indigenous development and systems integration, this put the foreign partner in control. An initial indigenisation level of 30 per cent is mandated (50 per cent over the lifetime of the product) but the foreign vendor can decide which technologies would, and would not, be transferred to India. Clearly, Buy & Make (Indian) will catalyse only limited, and low-level, indigenisation. 

The same is true of the current government’s “strategic partners” (SP) initiative, which involves nominating Indian defence firms to partner foreign vendors, selected by the defence ministry, for manufacturing chosen platforms in India. The notion of SPs was initially similar to that of RuRs but, typically, the government lost the thread. Now SPs will be selected for each contract, on a one-time, one-product basis, throwing out the notion of strategic partnership. The SP model then becomes similar to Buy & Make (Indian), except that the defence ministry must shortlist eligible SPs and also choose the foreign vendor. The ministry can demand the transfer of certain technologies, but little development can be expected in India, with 80 per cent of the selection weightage based on cost and only 20 per cent on factors like technology.

Currently, most major projects in the procurement pipeline are being pursued in the SP category, including Project 75-I for six submarines, the procurement of 110 fighter aircraft and of naval utility and multi-role helicopters. The government is still working on a final version of the policy.

DPP-2016 came up with the new “Make (Indian Designed, Developed and Manufactured)” category, to qualify for which a product had to be designed and developed in India, and at least 40 per cent of it manufactured in India. Unexceptionable in principle, this “top priority” procurement category faces a difficult question: How does one determine where a product was designed?

Meanwhile, the three “Make” projects that were initiated now face uncertain futures. The Tactical Communications System project sputters along, but funding remains an issue. The defence ministry has moved to shut down the Battlefield Management System project, since the army wants to save money for “more urgently needed acquisitions.” And the Future Infantry Combat Vehicle (FICV) is now being pursued under the “Make II” category, in which industry bears the entire funding cost. The defence ministry, taken aback by fierce competition amongst prospective DAs and unable, or unwilling, to choose between them, sidestepped the selection last month, declaring that all “Make” projects would be pursued under the “Make II” category. 

The latter was conceived for small projects with funding requirements that industry could afford. With the FICV development cost likely to be about Rs 800 crore – not excessive for a major platform prototype – no company is likely to bear that cost. It would not be unreasonable to expect that FICV would eventually be pursued as a SP or Buy & Make (Indian) category project, with the benefits flowing to some foreign vendor.