Lining up for a new start

The Modi government′s Make in India programme promises to revive India′s stuttering domestic defence industry and make India self-sufficient over the next two decades. It is one piece of statistics that no Indian is proud of. That India, the world's fastest growing country, the ninth largest economy and, by common agreement, the brightest economic spot in the world, is also the world's largest arms importer is a huge matter of concern for India's political leadership and strategic community.

India imports 70 per cent of its requirement of arms from foreign countries, mainly the US, Russia, Israel, France, UK and some other European and South American nations. Since Independence, successive governments have tried to build a defence industrial base in the public sector but the handful of government-owned companies that till recently had enjoyed a monopoly over defence production in the country have failed miserably to measure up to the country's needs. The Make in India push After coming to power in May 2014, the Narendra Modi government has launched a major initiative under its flagship Make in India programme to speed up the indigenisation of weapons production. The goal is to reverse import-make in India ratio from 70:30 to 30: 70 within a reasonable period of time. A number of measures have been announced, including allowing 49 per cent FDI through the automatic route. The new policy allows higher levels of foreign ownership on a case by case basis. Other onerous conditions, such as the requirement for foreign companies to bring in “state of the art” technologies have been replaced by the requirement for “modern” technologies. Then, defence procurement procedures have also been eased to facilitate the entry of private sector and foreign companies. The government has also come out with a list of equipment requiring Industrial licences and eased regulations for the same. It has also come out with a security manual and completely revamped the offset policy, under which foreign defence vendors are obliged to source a portion of the deal amount from Indian suppliers.

In addition to simplifying previously convoluted and complex procedures, the government has made it easier for private sector Indian companies to export defence equipment and also entered into strategic partnerships with a number nations, including the US, Russia and Vietnam for production and export of defence platforms. For example, India recently provided four naval patrol boats to Vietnam under a $100-million line of credit. It has extended another $500-million credit line and is believed to be negotiating the sale of the supersonic BrahMos missile to the South East Asian country. A $100-150-billion opportunity Over the next decade, India is scheduled to procure arms platforms worth at least $100-150 billion. The government is attempting to use this eye-popping sum of money as a bait to encourage foreign armament vendors to tie up with Indian private sector companies such as the Tatas, Bharat Forge, Reliance, Mahindra & Mahindra, L&T and set up manufacturing bases in India. It is early days yet but there are indications that the government's initiative is moving in the right direction. Already, two major US defence contractors, Boeing and Lockheed Martin, have shown interest in setting up assembly lines in India for iconic fighters like the F-16 and the F-18. Sweden's SAAB, too, has offered to shift its production facilities for the Gripen fighter, with full technology transfer, if India agrees to buy the plane for its Air Force. “There are many foreign companies that are willing to / are in the process of establishing defence units in India. Setting up base in the country is dependent on many complex issues - easing of licensing procedures, FDI norms, offsets rules, a general feeling of ease of doing business and other such actions taken by the government are poised to play a major role in the years to come. Two major foreign OEMs, Elbit and Rafael, have formed defence units (in the form of JVs) with the Kalyani Group. I am sure similar discussions are going on with many other companies in the country,” said Baba Kalyani, Chairman & Managing Director, Bharat Forge Ltd, the world's largest forgings company and a big player in India's nascent defence sector. For example, the Mahindra Group has an agreement with BAE to assemble the M777 lightwight howitzers that India plans to equip its new China-focused mountain corps with. The deal is worth about $750 million after a recent change in the duty structure. 50% equipment obsolete The current situation, with arms procurement skewed massively in favour of imports is a huge impediment to India's big power ambitions. Then, it has been estimated that though India spends approximately 2 per cent of its GDP on defence - with 40 per cent of this amount being spent on capital requirements - only 15 per cent of equipment used by its armed forces is state of the art. Another 35 per cent has been classified as modern, while as much as 50 per cent is obsolete.

Chronic shortages India is located at the centre of the Indian Ocean and shares its land borders with seven countries. Of these, at least two can be termed hostile to its interests. The worst nightmare for Indian strategic and defence planners is a two-front war simultaneously with Pakistan and China. To counter this threat perception, the Indian Air Force needs 42 squadrons of warplanes. But obsolescence and crashes have reduced it to only 34 squadrons. The bulk of these are made up of the obsolete MiG-21 and MiG-27 platforms. Then, India's frontline Sukhoi 30 fighter faces a chronic shortage of spares, which reduces its operability to only 50 per cent. This means only 50 per cent of India's mainstay fighters are ready for war at any given time against the desired ratio of 75 per cent. But the public sector HAL has been unable to deliver the indigenous light combat aircraft Tejas, which is decades behind schedule, on time, forcing the government to look for alternatives abroad. Even foreign acquisitions, such as the French Rafael fighter, have been delayed for years. It was only after the Modi government took over that the efforts to buy the jet gathered some momentum. A final agreement to buy 36 planes off the shelf is likely to be signed shortly. Similarly, India faces a debilitating shortage of tanks, howitzers and, scarily, even of rifles, carbines, light machine guns and ammunition. A new beginning The Indian Army has not inducted a single new howitzer since the Bofors scandal broke in the 1980s. Faced with a precipitous decline in its offensive capabilities, the government belatedly decided to use the old Bofors design to make a new gun called Dhanush. The 155 mm Indian howitzer, which is considered even better than Bofors, is being inducted into the Army after undergoing extensive field trials in different weather conditions, altitudes and terrains. Bharat Forge, too, has designed and built four howitzers that are currently undergoing field trials. “Having proven our capabilities with these developments, we are now focusing on the requirements of the Indian defence forces and are confident of providing state-of-the-art indigenous artillery solutions for them,” Kalyani told India Investment Journal. Riding on India's strength in IT “In the coming years, the role of IT and network centric warfare is going to be a game changer. As the Indian defence industry catches up with the international industry in terms of producing hardware, it could take a quantum leap in matters of information warfare. The recent push by the government to incentivise electronics manufacturing in the country will complement the existing expertise in services and software,” Dhiraj Mathur, Leader, Aerospace and Defence, PwC, said in a recent report brought out by the Big 4 consultancy firm. Creating an eco-system India is now taking baby steps towards self-reliance in the defence sector. But before it gets there, it will have to create a network of vendors, suppliers, independent consultants and designers, especially in the micro, small and medium enterprises sector, who will, necessarily, have to form the backbone of the country's defence-industrial sector. “We firmly believe that building a defence industrial base in India will require proactive government support to facilitate and encourage the private sector to invest in this capital- and technology-intensive high-risk industry. The support will need to include funding R&D, creating a low interest regime to bring down capital costs, addressing the disadvantages of exchange rate fluctuations, providing stability and assurance in policy and orders and encouraging exports to achieve economies of scale and become globally competitive,” a KPMG report said.

In this context, many experts feel India can leverage its strengths as a major global auto components producer to develop a vendor base for the defence sector. “India is slowly emerging as a preferred investment destination for high-end manufacturing. The auto component industry in India successfully supplies components to all global major auto OEMs in India as well as abroad, meeting their stringent quality and delivery norms. The expertise developed by domestic component manufacturers in heavy engineering and precision manufacturing can be leveraged to supply to the fast-growing aerospace and defence sectors in India. This will help mitigate the risk of industry cyclicality within the automotive industry,” Harish Lakshman, President, Automotive Component Manufacturers Association of India, has been quoted as saying in that report. Long road ahead “The defence sector has immense possibilities: for attracting investments, setting up manufacturing facilities, obtaining technologies and capabilities and generating high skilled employment. Though the sector was opened for private, domestic and foreign investment more than 12 years ago, the level of domestic as well as foreign investment, has been way below its potential,” said PwC's Mathur in the report quoted earlier. Many experts have said it will take at least two decades for India to develop an indigenous defence-industrial base that can not only sustain India's arms requirements but also export Made in India weapons platforms to friendly nations. They cite the example of the auto sector here as well. In the 1980s, when India first allowed Indian companies to tie up with foreign two-wheeler companies, the market was flooded by cheap 100 cc Japanese motorcycles. But three decades later, an Indian company, Hero Motocorp, has emerged as the world's largest two-wheeler maker. And in the domestic market, Bajaj Auto Ltd, which does not have a foreign collaboration, has emerged as a major force in the motorcycle market in which it did not have a presence when the sector was opened up. “Development of a defence industrial base needs a self-reliant technology and manufacturing eco-system. Indian industry has taken rapid strides in the field of manufacturing and is competing with the best on the global platform. However, defence manufacturing in India is not aligned to the manufacturing capability existing in the country. Fortunately, the present government has realised this and its 'Make in India' campaign is expected to address this issue - to promote defence manufacturing in India and develop the country as a manufacturing hub,” said Kalyani