Tuesday, 11 June 2013

Going beyond 70:30

By Ajai Shukla
Business Standard, 11th June 13

Last week I attended my zillionth seminar on defence indigenization and, for the zillionth time, found myself lamenting the Indian strategic community’s mistaken belief that we would be largely self-reliant in defence if our current indigenisation ratio of 30:70 could be improved to 70:30. In other words, India imports 70 per cent of its defence requirements, while building only 30 per cent in the country; reverse that ratio and things would be fine.

This notion is fallacious. It is like saying that the Electronic Warfare systems on a Royal Navy battleship are not British because most of the chips inside were made in Taiwan. The Tejas Light Combat Aircraft (LCA) is an Indian fighter, even though 90 per cent of it comes from abroad. What determines whether a fighter or tank is Indian or foreign is not how many foreign Commercial Off-the-Shelf (COTS) sub-systems and systems there are inside. Rather, it is design expertise and the key components and systems that money cannot buy.

Another falsehood about indigenisation is the argument that allowing more foreign direct investment (FDI) in defence production would bring to India a rush of technology and manufacture from global defence giants. The current FDI cap of 26 per cent, it is argued, makes foreign investors reluctant to transfer high technology, and allows them only a meagre share of the profit. These are flawed notions. Governments, not companies, control defence technology and its release is based on strategic considerations more than profit. For western governments, with declining defence budgets, the need to safeguard high-tech defence manufacturing jobs at home overrides any argument their companies make about labour arbitrage in India.

To manage success in indigenisation, the complex defence planning landscape must be reduced to four key players. First there is the military, which must be made to understand that dependence on foreign weapons systems is at least as great a long-term strategic threat as is Pakistan or China. For too long, the services have held out the prospect of “imminent threat” to persuade the defence ministry (MoD) to import foreign weaponry instead of adequate Indian systems that are available. This was seen in the case of the Akash air defence missile; the Arjun tank, the Tejas fighter; and now an artillery gun. The MoD must muster the political courage to flatly say, “War is not imminent. Operational readiness today is less vital than building our own weaponry tomorrow.”

Secondly, once the need to drive hard at indigenisation is internalised, stock must be taken of resources for pursuing this goal. The much-vilified Defence R&D Organisation (DRDO) is now an increasingly ambitious player, emboldened by success in developing technologies, systems and entire weapons platforms. But the DRDO cannot realistically be responsible for the whole gamut of development.

With an energised private sector waiting in the wings, the DRDO must focus on basic research and enabling technologies, while the public and private sector can translate those into systems and platforms. The new DRDO chief, Avinash Chander, says he is forging partnerships with academic institutions that would allow DRDO scientists, academics and research students to work in community, developing far-reaching technologies that would be “transplanted” onto DRDO laboratories. For DRDO die-hards, who developed entire platforms (and a credible missile arsenal) while defying international technology denial regimes, the suggestion to stay confined to a corner of the playfield will seem heresy. But the DRDO’s long-term good lies in being canalized into carefully chosen avenues rather than in dissipating energy needlessly.

The third crucial component is the private sector, where top-drawer managerial and technological expertise waits to be allowed into the lucrative field of defence development and production. Holding them back is the question of finance: an MoD that has spent lakhs of crores on nine defence public sector undertakings (DPSUs) and forty Ordnance Factories (OFs) finds it politically risky to allocate government money to private sector defence companies who would compete with the DPSUs/OFs. The MoD would rather that the private sector paid its own way. Earlier this year, Defence Minister AK Antony called on private defence companies to abandon their “miserly attitude” towards R&D. There is something to Antony’s uncharacteristic outburst; even big players like the Tata group and L&T have hesitated in investing in defence, waiting for the MoD to pick the tab.

Fourthly, the MoD must realize that the avoidance of decision-making cannot be its only policy in this landscape of competing interests. With the military demanding immediate overseas procurement; the DRDO looking to spread its wings; the DPSUs/OFs pushing the frontiers of cronyism; and the private sector waiting for a perfect policy environment before making a grand entrance, the policymakers cannot confine themselves to risk-free decisions aimed more at shielding officials from accusations of mala fide than at maximising self-reliance at minimum cost.

A multi-disciplinary body, led by the DRDO, must carry out a Technology Gap Assessment to identify a development roadmap for the future. Specific technology projects must be allocated to industry, with design houses being set up by groups that would share costs with the government. The MoD’s fear of being seen as favouring a particular business house cannot block targeted involvement. Modalities must be evolved for funding design and development. Individual projects can be funded through the American DARPA model. And major design centres can be set up --- envision the Tata Design Centre, or the L&T Submarine Research Bureau --- for which companies submit proposals which will be evaluated by a DRDO-led decision-making body.


Anonymous said...

going to be... pipe dreams... like development... happens when... money clings... making the noise... falling into private purses of... Air Marshals... Generals... and lure of flesh for... Admirals...

Kajal Basu said...

Excellently analysed. But perhaps the most telling bit is not that the government is behaving like an obstacle to itself - the Indian politicoeconomic platform has been designed to trip over its own shoelaces - but that the Indian private sector will not step into the rocky field of defence R&D unless it can factor in some short-term profit. And THAT is a contradiction in terms.

Jayant M said...

Col. Shukla,
Thank your for enunciating clearly what is required to take the process forward. I enjoy your policy prescriptive articles tremendously. They are logical, clearly thought out and weave seemingly disparate threads into a seamless narrative. I do hope the next Government ropes you in some capacity on policy matters related to defence.

Your previous article on the new Chief of DRDO, Mr. Arvind Chander allowed your readers to get a close and personal glimpse of the man from whom the country expects so much. The choice of simple vegetarian lunch from the DRDO guest house and to have the lunch meeting in his office rather than a fancy restaurant speaks volumes.

So a big thank you from a regular reader of your column

Satish Bhat said...


Your thoughts on how the Indian SME community can be harnessed in indigenization would be welcome. Is the prevailing mindset in favor of leveraging the supplier ecosystem of large companies like the TATA or L&T group or in nurturing independent SMEs with specific capabilities in design/research and manufacturing?

Anonymous said...

Hello Sir,

A quick Observation.
"current indigenisation ratio of 30:70 could be improved to 30:70"

should this say improved to 70:30?


Broadsword said...

@ Anonymous

Yes, you're absolutely correct... have amended the text. Thanks for pointing this out.

Hari said...

Couldnt have written any better Ajai Sir.

Abhiman said...

One of the best articles you've written, Col. Shukla.

As rightly mentioned by you, one of the stupidest misconceptions is that by increasing FDI to 100%, India will get the latest and best technologies from the world.

The reason this argument is foolish, consider the following: Suppose I am the CEO of a major aero-space or defence manufacturer in the west. I export my products worth hundreds of billions of dollars annually to Middle East, Eastern Europe, Africa, South America, India etc.

Now, why oh why would I transfer my technological secrets to a low-cost manufacturing hub like India ? Only to see it trump me in the international market tomorrow ??

And would Uncle Sam want a challenge to its supremacy by transferring its top-tech to India, Vietnam, Phillipines ??

Besides, how would manufacturing by foreign firms in India, change the current status quo of PSUs license manufacturing foreign products ?

Import is an import is an import. Whether it is license manufacture by HAL or other PSUs --- or whether it is by fully captive units of foreign companies in India.

sudeep said...

Congratulations on writing yet another great article. If only the powers that be could be made to understand..

Ajai, you should consider writing a book or a white paper drawing upon case studies and examples world wide. I think that might have a bigger impact that a 1000 word article. Apart from being more fulfilling I guess.