MORE THAN four years after the prime minster gave the call to convert India into a manufacturing hub while delivering his first Independence Day speech, there is little evidence of the ‘Make in India’ initiative having taken firm roots in the defence manufacturing industry. The on-going public discourse on the Rafale deal has queered the pitch further for both, the Ministry of Defence (MoD) and the industry.

There is no denying that the controversy concerning the deal has pushed the government on to the back foot. This virtually rules out the possibility of any bold decisions being taken in the run up to the next general elections to promote the domestic defence industry, especially in the private sector. Any effort to do so at this stage is likely to end up reinforcing the politically-undefendable spectre of crony capitalism. This has grave political consequences for a government seeking re-election.

 

The situation might have been a bit different had the efforts made by the government in the last four years put the industry firmly on the upward path in the value chain. The reality, however, is that the steps taken by the government, ranging from easing of the Foreign Direct Investment (FDI) regime to making significant changes in the procurement procedure, have had little impact on rejuvenation of the domestic industry, probably because all these steps were taken without evolving a cogent policy or a workable strategy concerning defence production. These steps have also been disjointed and divorced from fiscal reality to boot.

Stagnation in defence procurement and domestic defence production was a big issue when the present government took over in 2014 but the need for developing a sector-specific strategy for defence was not felt till 2015 when, in a belated move, the Ministry of Defence (MoD) set up a committee of experts to help it evolve a policy framework to facilitate ‘Make in India’ and bring about necessary procedural changes to achieve that objective in keeping with the call given by the prime minister almost a year earlier. This delay in initiating the reforms was inexplicable.

 

The committee submitted its report in July 2015, but it was not till 2016 that a refurbished Defence Procurement Procedure (DPP) was promulgated by the MoD incorporating some of the recommendations made in the report. This was done without setting out a clear policy framework or a comprehensive strategy to galvanise defence production. Instead, an impression was created that the Strategic Partnership (SP) model, recommended by the committee, was to be the centrepiece of ‘Make in India’ in defence and that the MoD will shortly come up with a scheme to unroll this model.

In the event, it took MoD another one year to notify the scheme to unroll the Strategic Partnership (SP) model. As the subsequent developments indicate, the scheme was notified without tying up all its loose ends. No wonder then that the process of selecting the prospective Indian strategic partners, which is one of the essential features of the model, is yet to begin. Consequently, all big projects entailing manufacturing of aircraft, helicopters, submarines and armoured platforms in India are likely to remain stalled till the process of identifying the potential strategic partners from among the Indian industry is completed.

 

Before the SP model became the new mantra, the strategy to promote the domestic industry centred around the ‘Make’ category which entails development of prototype of defence items by the Indian industry with substantial funding of the cost of development by the MoD. The category was adopted in 2006 but having failed to award any development contract under this category MoD decided in 2016 to split this category. Consequently, a new sub-category was created to let the industry take up self-funded developmental projects as a part of the ‘Make in India’ initiative. However, without waiting for the results to start showing, the procedure related to this sub-category has again been modified this year. This betrays a streak of irresoluteness in decision-making in the MoD which affects the ongoing development proposals.

This vacillation has been evident in many other areas, offsets being a prime example of that. It is no secret that even the most reputed manufacturers in the world have been struggling to discharge their offset obligation. The Comptroller and Auditor General of India (CAG) has slammed MoD for tardy handling of the offsets in the report submitted to Parliament in August this year. The problems besetting defence offsets are well known and yet these largely remain unaddressed, notwithstanding several minor procedural changes made in the recent years.

The biggest issue concerning the offset policy is that it is largely vendor-driven. The vendors are free to choose from a wide range of options available under the existing guidelines and formulate the proposal to discharge their obligation. This vendor-driven policy deprives the MoD of the opportunity to channelize offsets into the areas where these are required the most to strengthen the defence industrial base in India.

Not many will remember that revised offset guidelines were drafted a few years back to enable MoD to demand offsets in specific areas rather than leaving it to the vendor, but nothing came out of it. Instead, another draft that aims at providing more options to the vendors to choose from has been doing the rounds. If adopted, the revised guidelines may make it easier for the vendors to discharge the offset obligation, but it is arguable whether this will promote manufacturing of big platforms in India in any concerted manner.

The disjointedness of the steps being taken, or proposed to be taken, to promote defence manufacturing in India is evident from the unexpected announcement made earlier this year that the government proposes to set up two defence industrial corridors. This step has evidently not been taken in response to any need projected by the domestic defence industry. At a time when the already existing companies are struggling to fill their order books with defence contracts, it is doubtful whether there is a business case for them to shift, or the new investors to set up, defence production units and service providing facilities along these corridors as and when they come up in future.

Some notable exceptions notwithstanding, the stagnation in domestic defence production may have been exacerbated by inadequate budgetary support. Reacting to the allocation for defence made in the current year’s union budget, the vice chief of the army staff (VCAS) is on record saying that the allocation had dashed his hopes, that the marginal increase barely accounted for inflation and that it did not even cater for taxes. Even the Standing Committee on Defence has been berating the government for the inadequate outlay for modernisation of the armed forces which is presently being driven largely by imports and not domestic production.

There are several other factors that inhibit ‘Make in India’ in defence, and though it is not possible to dwell here upon each one of them, the issues discussed above go to the heart of the problem. Sadly, a lot of precious time has been lost in pursuing a disjointed approach to kick start defence manufacturing in India, especially in the private sector. To be sure, given our politico-cultural environment, it is not going to be easy to do so. The challenge the decision-makers face is to work within this politico-cultural milieu and come up with an outcome-oriented strategy that starts showing some tangible results within a short time frame as the need for modernisation brooks no further delay.

With the die having already been cast for the last year of the term of the present government, it would be highly optimistic to expect any spectacular results before the next general elections are held. There are two reasons for that. One, as of now the major policy decisions like unrolling of the SP model or construction of the defence industrial corridors are still in the preparatory stages of their execution and, going by all available indicators, it is likely to take a very long time to cross this stage. Two, there is little chance of any substantial additional budgetary allocation being made for defence later this year at the revised estimate stage. Even if that happens, the limited time left after the additional allocation is made till the end of the financial year will make it virtually impossible to put that money to good use.

This scenario is certainly not very reassuring but pretending that the domestic industry is poised to covert India into a defence manufacturing hub, thanks to all the measures taken in the past four years, will be of little help in the face of the mounting evidence to the contrary. What is required is a pragmatic policy on defence procurement and production, a fiscally-sound strategy which also recognises the constraints imposed by the politico-cultural environment of the country on implementation of resplendent policies, and a dramatic improvement in MoD’s decision-making process which has always been the bane of defence procurement and production. This transformation cannot take place before the next general elections but a framework for next round of comprehensive reforms can certainly be evolved during this period. This could well be the lasting legacy that the present government can realistically expect to leave for the future.

– The author is Ex-Financial Advisor (Acquisition), Ministry of Defence