Tuesday, 10 June 2014

Defence needs projects, not FDI

An artillery gun barrel, machined in an Indian private company

by Ajai Shukla
Business Standard, 10th Jun 14

There are widespread misconceptions about raising the foreign direct investment (FDI) limit in defence production. This is especially so in the hazy post-Congress euphoria of economic azadi, where any loosening of government controls is reflexively lauded as a progressive step even when it involves issues far beyond economic liberalisation. I observed this while participating in a recent television discussion on the initiative by the Ministry of Commerce and Industry to raise the current 26 per cent cap to 49, 74 or even 100 per cent. My co-panellists --- one from the Bharatiya Janata Party (BJP) and the other from the Congress --- had little interest in debating whether, or how, a higher FDI cap would boost indigenisation. Instead, they squabbled over credit. The BJP member boasted about his party’s purposefulness on defence; the Congressman claimed correctly that the UPA had already permitted 100 per cent FDI for firms that brought in high technology. Ironically, they were both seeking credit for giving foreign arms vendors concessions that are both unprecedented and unnecessary.

FDI in defence is usually considered in a highly simplistic context, summarized in a 2010 proposal by the Department of Industrial Promotion and Policy (DIPP), which has now been dusted out again. The 2010 proposal notes: “Manufacturing within the country… will be a better option than importing the equipment from abroad. The general perception is that the present FDI cap of 26% discourages original equipment manufacturers (OEMs) from bringing in proprietary technology, as OEMs may be reluctant to license their proprietary technology to a company in which their equity is restricted to a minority of 26%. This has resulted in India not being able to access the latest high-end technologies available.”

This argument is plain wrong. Since 2006 the government has permitted 100 per cent FDI in defence on a “case-by-case basis”, i.e. for OEMs who bring in high-end technology to build weaponry in India. Since then, not one OEM has responded with a proposal, nor is anyone likely to. That is because even when a vendor sees a terrific business case in building defence systems in India, it is not her board but her government that will have the final say on technology export. The OEM can release no proprietary technology to an Indian production unit, even fully owned, without the home government’s explicit sanction. This requirement is legislated by every major defence exporter through laws like the US International Traffic in Arms Regulations (ITAR). As the Federation of Indian Chambers of Commerce and Industry wrote to the government in 2010 while contesting the DIPP proposal, “A 100% owned Indian subsidiary (hypothetical case) of an OEM thus has no special status when it comes to obtaining technology from (the) overseas parent company.”

The DIPP is even more mistaken in measuring indigenisation in the framework of percentage of manufacture rather than design capability. There is no truth in the belief that transferring defence manufacture to India, even of low-to-medium-end equipment, would make India more secure or its defence more affordable. Instead, the crucial first step in indigenisation is to nurture the expertise needed for designing major weapons platforms in accordance with our operational requirements, environmental conditions and user capabilities. India must build on its growing ability to design the major weapons platforms it needs ---tanks, artillery, battlefield communications, warships and fighter aircraft. It is acceptable to initially build these platforms with foreign components that are readily available over-the-counter, especially to a high-volume buyer like India. Just as western OEMs see no conflict in designing defence electronics and avionics with computer chips built cheaply in southeast Asia, India should have no problem in initially building its fighters with foreign engines and cockpit avionics; its tanks with bought-out engines and thermal imaging sights; and its warships with imported engines and transmission. Having established design capability, manufacturing indigenisation can proceed based upon an evaluation of what sub-systems can be manufactured cheaply in India, and what would be essential for supporting the basic platform through its service life.

This fundamental truth animates the Kelkar Committee report of 2005, which notes: “There is an urgent need to review the whole concept of indigenization and self-reliance and it is time to go beyond the idea of looking at indigenization purely as import substitution of components, sub-assemblies etc within the country from raw materials. Today indigenization as a concept will need to involve capability enhancement and development, increasing know-why, design and system integration rather than having numerical targets.”

Once the defence ministry prioritises design capability over manufacture, the logical next step would be to prioritise “Make” category acquisitions over other categories like “Buy & Make (Indian)”, which involves the production of foreign weaponry by an Indian manufacturer, based on technology transferred by the OEM. It is often forgotten that the “tried and tested” weapon thus built would be technologically 15-20 years old when it enters service --- at least five years in development, five years in host country operational service and five years in evaluation and production for India’s military. With the hope of exporting such a system bleak, the Indian production line would shut down after fulfilling the domestic order. Furthermore, the OEM does not transfer key technologies for production in India; the DPP allows the retention of “proprietary technologies”.

In contrast, the defence ministry should act purposefully on its oft-expressed intention to promote “Make” category projects, in which Indian consortia develop and manufacture futuristic platforms, co-opting foreign OEMs only for inaccessible technologies. This category galvanises indigenisation across the spectrum, from research, design and development to manufacture, with the IPR resident in India. While the MoD is already committed to funding 80 per cent of development cost, the user service should contribute another 10 per cent. Success would depend heavily upon the full involvement of user services in the integrated project management teams (IPMTs) that oversee each project, rather than outsourcing technology management to the DRDO, which is the current tendency. Currently there are just two “Make” category projects under way. Stepping these up to 100-150 would galvanize India’s defence industry and put an end to the uninformed FDI debate.


Anonymous said...

The fundamental principles in this article are correct. NOBODY in this world will part with IP and technology. India has to impose sanctions on herself and resolve to develop ALL key technologies in country. This is the only true way to self reliance, super power status and economic growth. Our PSUs should get out of the system integrator mind set and think big.

Anonymous said...

lets see... kill... 2 birds... a stone... birds... manufacturing... defence production... stone... fdi...

pravin kumar sinha said...

i have had the privilege of being directly involved with the make program's of today . What is your guess how much could be produced locally without investments , let it be anyone . My experience both the Indian industry and PSU,s dont have an appetite to spend to get quality . The Indian armed forces will continue to lump it , beggars can't be choosers.I hope in TV debates we have people who understand our capablity to produce world class military hardware.

Anonymous said...

Sir, fdi gives enormous amount of money, frankly we are in desperate need for money. That is the major reason for allowing 100% fdi. Developing indigenous industry is in our hand. Surely many foreign manufacturing industries will shift to india. There is no other way to create money inflow in india. We need to clear funding for our pending aquisitions.

Unknown said...

I want 10000 factories churning out aircrafts tanks helicopters high speed rail engines ship engines and ships and avacs ,do
we have the technology Pl where is the know how and money in core core rupees,do we have it?

Unknown said...

We are not talking about a gun barrel but aircrafts of 500 types,tanks,ships high power loco engines high speed roads and rails amounting to 10000 trillion dollars do we have this money and knowledge,no no,then?

Anonymous said...

And the way forward on at least one item, Tejas, is to compel ADA/HAL to outsource manufacture of the fighters to Indian Private players and let ADA/HAL concentrate on R&D and upgrades.

Anonymous said...

If all the players : armed forces, DRDO, defence PSU, MoD want to,have the easiest way out , no sweat. Who can stop them ?

Anonymous said...

Well written article Colonel..

An old soldier

Mahendra Singh said...

Very well written. Agree with you 100%.

Shikhar said...

Off-topic on this, but please do write on the liklihood and implications of Russia selling Mi-35s to Pak, with Sartaj Aziz already in Kazan.
Has Pak managed to crack the solid relationship ? Is Russia showing it's picque to India by doing a symbolic deal ..? What will this mean to the Indo-US and Indo-Israeli military relationship

Abhiman said...

Brilliant article, Col. Shukla.

FDI must Not be allowed in defence, if the fledgling local industry is to be allowed to flourish.

And what most people don't realize is that whether its foreign manufacture, or local manufacture -- both are Imports !

In the case of local manufacture, the only advantage is the use of local labour and raw material, which brings the high price of importing down only a little.

RAM said...

Hillar Clinto wanted to kill MODI


Anonymous said...

Intellectual property is not something which can be stored in files or password protected in computers.It is in the brains of people who develop them. India has cheap brains which are used by GE, MS,Google etc etc,for doing R&D. Why can't Boeing, Raytheon do the same. Won't developing a world class scientist base add value to the nation ??.The problem is Indian industries ,whether it be pvt sector,PSU's or OFB's want to eat all the cream themselves,without taking the pain of investing in R&D.

Anonymous said...

Anonymous (last one) - its completely wrong to say Indian companies are not investing in R&D. Alpha Design Tech (Bangalore) invests 20%+ of its Revenue in R&D. BEL is investing 8% in R&D. See the capabilities companies like Tata and L&T have, and think of the expenditure in capex and manpower. This is despite the past 8 years under a pathetic MOD/Def Min combine led by somebody like AK Antony, who idly watched while Def allocated spend lapsed and was used to fund colossally wasteful votegathering schemes led by PChidambaram. Why do you think so many "make schemes" languished, whilst even the DPSU/DRDO combine did not get the funds they required to accelerate their projects? Similarly, AK used the enquiry line to slow down many programs. Those funds happily went across to the eNREGA and other useless programs (and some were pocketed as well, the usual "leakage") while of course, shri Antony kept his own mundu clean, needs of the nation be darned.
In contrast, the services/DPSUs/DRDO were happy that at least they got "something" as invariably project costs escalated and those were cleared. Never mind funding for transformative development in Indian industry never came about. Pvt sector never got the make projects it had already invested for.

So bottomline, Ajai is correct. Launch 100 odd "Make projects" with strict conditions - 50% by value and high end contribution from India, and see private industry deliver, working along with DRDO. The competition will shake up the DPSUs as well and allow them to take far reaching reforms to get their unionized work forces in line with the changed reality.


js bibra said...

same old story
fact--ofb just made the new bofors so we are capable thanx very much
fact--tata made the bofors and fired it last year thanx very much
fact--the papers were with ofb for last 20 years but they didnt act till some god of war stepped on there neck
fact--repeat of my other comment elsewhere on this blog
--politicians and bereaucrats have there own way of learning the truth,
so why not leave it at that--if they dont want to increase fdi or dont want to procure something new for the services why argue--when the baloon goes up (will it ever go up is another interesting story--oh yes let the pakis come and occcupy siachen and all that) the truth will be revealed
meanwhile keep all the blunders on file for a good story over drinks--all the hullabaloo over low procurement seems to be created by some very inetrested parties methinks..