How the Private Sector Can Enhance India’s Firepower

The government needs to place private companies at the heart of Atmanirbhar Bharat in order to create an ecosystem where high octane weapons are designed and made in India

Special Feature

By Rakesh Krishnan Simha

 

In 2009, long before Make in India became a popular buzzword in the defence industry, Mahindra Aerospace acquired a 75.1 per cent stake in Australian light aircraft manufacturer GippsAero, becoming the first – and still only – private Indian company that is able to make an entire aircraft.

It took just two years for Mahindra to leverage the technologies absorbed from the GippsAero deal and create something big. In 2013, the company inaugurated a 25,000 square metre Bangalore facility, equipped with a suite of sheet-metal, surface-treatment and assembly capabilities to meet the requirements of the global aerospace industry. Today, Mahindra Aerospace assembles eight- and 10-seater aircraft in Australia, with most of the parts manufactured in India.

Mahindra’s big-ticket investment is aimed at becoming a global defence major. From components to small aircraft, these are the stages the company is passing through to eventually producing larger passenger aircraft. The company’s CEO Arvind Mehra told Flight Global magazine, “As a pure component manufacturer, you can never be a tier-one supplier, only tier three or four. But if you reach assemblies or aerostructures quickly, then you become an integral part of aircraft manufacturers’ supply chain.”

TIME FOR A RETHINK

Why did Mahindra choose to acquire a small and unknown aircraft maker in a far flung country instead of developing the technology in-house or with the assistance of an industry major such as Airbus or BAE, with which it has entered into partnerships?

The reason for the alarming level of import dependency is that for decades after Independence, the private sector was shut off from the lucrative defence manufacturing sector

Collaborating with foreign partners might seem like the ideal way to develop India’s defence industry to world standards. However, defence public sector undertakings (DPSUs) have been doing this for decades and barring a few notable exceptions they are still unable to create world class weapons as their foreign partners such as Sukhoi, Mikoyan, Snecma and Thales. The reality is that no established player in the defence or aerospace industry will part with their best technologies. Mahindra decided to grow inorganically as it knew that most companies will not even provide second level defence technology.

Clearly, if India wants to attain self-reliance in defence, it has no choice but to get rid of the old ways of license production and technology transfer. The number one lesson is that the defence sector has to do things differently from the way things have been done over the past decades. Also, Indian defence companies have to generate resources from within.

HOW WE GOT HERE

India has the fourth largest military in the world, but it also has the dubious distinction of being the second largest importer of defence equipment in the world. No major power in the world has such a strategic disadvantage. The reason for the alarming level of import dependency is that for decades after Independence, the private sector was shut off from the lucrative defence manufacturing sector.

At first the private sector was not allowed to produce weapons because Prime Minister Jawaharlal Nehru and his Gandhian colleagues decided that India had no enemies and would solve all its problems through peaceful ways. In their view, because the military needed the bare minimum weapons, it could be produced by the defence PSUs. After the 1962 India-China war, the state owned ordnance factories were allowed to expand production to re-equip the armed forces. However, when the DPSUs grew powerful, they lobbied to keep the private sector out.

Monopolies are never a good idea and predictably the quality of weapons produced by the DPSUs was shockingly poor. Plus, even if their designs or products looked promising (for instance, the HF-24 Marut jet fighter) they were sabotaged by the import lobby. This led to the armed forces turning to the Soviet Union.

The growing demand for military equipment in the country coupled with the Narendra Modi government’s vision to make India a leader in global manufacturing is creating new pathways for private players to enter the defence manufacturing space

But this presented another problem. India’s defence ties with Moscow led to a dangerous dependence on a single vendor. According to a Royal United Services Institute report titled ‘India’s New Armament Strategy: A Return to Self-Sufficiency?’, by the end of the Cold War, India was 100 per cent dependent on the Soviet Union for ground air defence; 75 per cent for fighter aircraft; 60 per cent for ground attack aircraft; 100 per cent for tracked armoured vehicles; 80 per cent for tanks; 100 per cent for guided missile destroyers; 95 per cent for conventional submarines; and 70 per cent for frigates.

It was only in 2001 – 10 years after India’s defence forces started experiencing major problems with supplies from Russia – that India allowed the private sector to enter defence production.

ATMANIRBHAR BHARAT – BREAK FROM THE PAST

The growing demand for military equipment in the country coupled with the Narendra Modi government’s vision to make India a leader in global manufacturing is creating new pathways for private players to enter the defence manufacturing space.

The current government has been continuously tweaking the defence production policy in a bid to level the playing field for the private sector. In March 2018, it released the Draft Policy on Defence Production, which states that the private defence majors will be encouraged to play the role of a system integrator and setup an extensive eco-system comprising development partners, specialised vendors and suppliers, particularly from the MSME sector.

In August 2020, the Ministry of Defence released a draft Defence Production and Export Promotion Policy (DPEPP 2020) with the objective of achieving a turnover of US$25 billion, including exports of US$5 billion in aerospace and defence goods and services by 2025.

DPEPP 2020 is envisaged as an overarching document to provide a focused, structured and significant thrust to defence production capabilities. It says the aim is to reduce dependence on imports and take forward “Make in India” initiatives through domestic design and development, and to promote the export of defence products as part of the overall Atmanirbhar Bharat policy.

DRDO, for instance, will set up missions in select fields in consultation with the armed forces and other scientific and industrial establishments to develop futuristic weapon systems. These range from hypersonic, ballistic and cruise missiles to armoured vehicles, gas turbine engines, submarines, fifth-generation fighter jets, transport aircraft, robotics and airborne sensors.

“With all the effort that has gone into finalising the policy, it can potentially be a turning point in India’s endeavour to have a robust homegrown private defence industrial base,”
-Pierre de Bausset, President, Airbus India

The draft policy brings out multiple strategies with the focus areas being procurement reforms; indigenisation and support to MSMEs/ start-ups; optimisation of resource allocation; investment promotion, FDI and ease of doing business; innovation and R&D; DPSUs and ordnance factories; quality assurance and testing infrastructure; and export promotion.

The policy comes after the government in May made it clear the armed forces will have to shed their penchant for exorbitant foreign weapon systems unless they can be made in India through joint ventures with global armament and aviation majors. Whether the stated goals can be achieved in five years remain to be seen.

STRATEGIC PARTNERSHIP

The trouble with policy tweaks is they are never quite enough. The liberalisation of FDI norms hasn’t exactly led to a flood of foreign capital. The reason is that the defence sector involves a high level of secrecy and leading global defence companies are not keen to give away their crown jewels to India, or for that matter any country that could become a future competitor. So, for instance, Lockheed Martin is offering the complete technology and tooling for the 1970s vintage – but still potent – F-16 jet fighter but the latest F-35 stealth fighter remains closely guarded.

The current flavour of the season in India is the Strategic Partnership model which was announced in May 2017. As per the policy, Indian companies will qualify to bid for four upcoming projects – submarines for the navy, a single-engine fighter for the air force, helicopters and armoured vehicles for the army. One company will be allowed to participate in only one strategic partnership project.

India has announced two projects – the 114 Multi Role Combat Aircraft and 111 Naval Utility Helicopters procurement. These two projects are worth at least US$20 billion. Two more programmes – the 123 Naval Multi-Role Helicopters and the six Next-Generation Submarines – too are being processed to be launched under the Strategic Partnership model. These two will cost upwards of another US$10 billion.

However, foreign companies intending to participate in the Strategic Partnership projects have communicated to the Indian government that they were not comfortable with the complexity involved in the implementation of the programmes, primarily because they cannot take responsibility for project that are not managed by them directly. They were uncomfortable with the 49 per cent FDI limit that meant they enjoyed no control over either the technology they transferred to India or the Indian entity that would be created to execute the Strategic Partnership programmes.

According to a report by the New Delhi-based Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), the biggest roadblock in the Strategic Partnerships is not substitutes for the inefficient DPSUs and ordnance factories; rather, they are visualised as poor cousins of state-owned entities. “In other words, only when the DPSUs/ ordnance factories are not able to deliver within a stipulated time frame (because of their overflowing orders), the Strategic Partnerships would be considered for contract execution. This is a highly inefficient way of protecting state-owned entities whose inefficiency and poor functioning have so far been the main reason for India’s poor record in attaining self-reliance.”

PICKING THE RIGHT TEAM

Government steering of defence policy may turn out to be a positive aspect if done in the right manner. The best example of managed capitalism is the way Japan’s Ministry of International Trade and Industry (MITI) took the World War II devastated country to explosive economic growth by guiding particular companies to concentrate on different sectors of the economy.

From the 1950s onwards, MITI facilitated the early development of nearly all major industries by providing industries with administrative guidance and other direction, both formal and informal, on modernisation, technology, investments in new plants and equipment, and domestic and foreign competition.

If Indian companies are to become self-reliant in producing high-end weapons platforms, the Ministry of Defence must offer guarantees that it will buy their aircraft, howitzers, infantry combat vehicles, warships and helicopters in enough numbers so that these private Indian companies stick around to develop the next stage of these weapons

If state guidance can work in Japan, why not in India. All that the Centre has to do is get the perfect matches going and then step aside. “With all the effort that has gone into finalising the policy, it can potentially be a turning point in India’s endeavour to have a robust homegrown private defence industrial base,” Pierre de Bausset, President of Airbus in India, told Reuters.

GODREJ AND BRAHMOS: MODEL PARTNERSHIP

The Strategic Partnership model has been tried out in the 1990s with spectacular success. To get an idea of what can happen when things are done right; one only has to look at BrahMos Aerospace – a game changer in the Indian defence manufacturing sector. Initially, the company was incorporated with DRDO and Russia’s NPO Mashinostroyeniya (NPOM) holding 49 per cent each and an Indian financial institution holding two (2) per cent. But the Russian side argued that involving a third party would compromise secrecy, and also insisted the joint venture be a private company.

The final shareholding was 50.5 per cent for DRDO and 49.5 per cent for NPOM. The government’s decision to relinquish control – despite being the primary funder – proved to be fortuitous. Free of bureaucratic interference, BrahMos has grown to be one of India’s most dynamic armaments companies.

BrahMos Aerospace persuaded a number of private Indian companies to become subcontractors. Among the first off the blocks was Godrej Aerospace, a subsidiary of the 199 year old Godrej conglomerate. Initially, Godrej was awarded an order that included the supply of the airframe section plus wings, fins, nose‐caps and nose‐cap motors. Making these complex, precision components robust enough to function at supersonic speeds required Godrej to understand 1200 Russian drawings, 2500 Russian manufacturing standards, 25 various types of metallurgies and acquire 25 specialised technologies provided by NPOM.

Under the programme, Godrej Aerospace has designed and developed 5,000 process sheets for various manufacturing processes, inspection and quality assurance. More than 2,000 tools, jigs and fixtures were developed and qualified for the final desired output.

Today, as many as 205 Indian industries are part of a missile ecosystem that is growing with the release of technologies by BrahMos and NPOM to the private sector.

MSME SECTOR: KEY TO JOBS AND GROWTH

The new thinking in India is that the Strategic Partnership model is not just a sound economic option but a strategic imperative to pare down our dependence on imports and move towards self-sufficiency in defence manufacturing. At present, about 50 per cent of defence manufacturing in India is dominated by the international players (via imports). By enhancing the participation of domestic private players, the share of imports is projected to come down by 20-25 per cent in 4-5 years.

In advanced countries, it is the MSME sector that supplies the hundreds of thousands of parts that go into each weapons system. However, in India there are very few private companies with experience in integrating complex defence systems and sub-systems. Hence, a framework for nurturing such capabilities needs to be created over time.

Huge supply chains complying with world class standards will come up around the manufacturing facilities and would help the Indian MSMEs enter the global supply chain of manufacturers. Only by developing a tiered ecosystem of defence production, including MSMEs, can the defence industry become a mainstay of manufacturing in India.

GOVERNMENT GUARANTEES ARE A MUST

Historically, private sector companies in India have been reluctant to work for the government because there is guarantee the weapons they were subcontracting for would be purchased by the armed forces. In most cases they were right as India’s defence industry has a history of cancelled weapons programmes.

With the country’s political leadership having shed its decades long – and incredibly daft – Gandhian policy of treating weapons with a mixture of contempt and shame, these are exciting times for India’s private sector companies to jump into the defence industry

If Indian companies are to become self-reliant in producing high-end weapons platforms, the Ministry of Defence must offer guarantees that it will buy their aircraft, howitzers, infantry combat vehicles, warships and helicopters in enough numbers so that these private Indian companies stick around to develop the next stage of these weapons. Without such guarantees, we will continue to have more HF-24 Maruts that never progress to the next generation.

Made in India weapons don’t have to be world class from the get go; they just have to be good enough to get the job done. Quantity has a quality all its own. An indigenous Tejas fighter costs US$26 million whereas an imported Rafale jet costs $300 million. For the cost of 20 Rafales, India could have 230 Tejas jets which could be sent in waves to overwhelm enemy air defences. Plus, if India loses a Rafale jet in combat there’s no ready replacement whereas Tejas losses would be quickly replenished by HAL. Unless the Defence Ministry buys Indian products in large numbers, there will be no business case for private companies to undertake manufacturing. This is the mindset change that has to take place in India if we are to establish a world class defence production sector.

As well as providing purchase guarantees, the government must ensure there are no overly long field trials, which can play havoc with the morale of the defence forces and kill the enthusiasm of the engineers, scientists and entrepreneurs who are developing weapons. Modi and his team need to address these vexing issues that impede weapons projects.

ENDGAME

Despite teething troubles, India’s defence manufacturing landscape is changing – and changing fast. Today, a company like Mahindra Aerospace can dream of becoming the Embraer of India. The Brazilian company grew out of a country with no aviation experience and carved out a niche in a world dominated by big Western players. Compared with Brazil 30 years ago, India currently has a large pool of talent in both hardware and IT which can be harnessed by the increasing number of private players that are rushing into the defence industry.

As a nation, India is certainly not lacking in terms of capability or resources. According to a budget proposal report by KPMG India: “With an abundance of qualified manpower, skill intensive manufacturing capabilities, a booming auto industry and a leading IT base, it is quite evident that India possesses the essential ingredients to create a strong domestic defence manufacturing base. What is lacking is the inflow of sophisticated technology. With further enhancement of the FDI limit, critical technology may flow in.”

The key requirement is a level playing field for private players. “The government must ensure the creation of a conducive policy environment with minimum red tape, less intrusive monitoring and attractive incentives to promote domestic defence manufacturing,” adds KPMG.

As India’s economy grows, its defence forces must keep in step. We live in a dangerous neighbourhood with jehadis on the western border and communists on the north. The prospect of a two-front war against these two conjoined enemies cannot be dismissed. A country of India’s size cannot fight a medium or long war with imported weapons. With the country’s political leadership having shed its decades long – and incredibly daft – Gandhian policy of treating weapons with a mixture of contempt and shame, these are exciting times for India’s private sector companies to jump into the defence industry.

–The writer is a globally cited defence analyst. His work has been published by leading think tanks, and quoted extensively in books on diplomacy, counter terrorism, warfare and economic development. The views expressed are personal and do not necessarily reflect the views of Raksha Anirveda

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