How to fire up defence production

The Defence Production Policy (DProP) 2018, announced in March, has set ambitious goals for 2025. It includes ₹1,70, 000 crore worth of production, ₹35,000 crore of exports, and investment to the tune of ₹70,000 crore. It would, thereby, create two-three million jobs domestically and aim to achieve global leadership in artificial intelligence and cyberspace technology.

To drive this policy, the government has identified 13 product categories and permitted 74 per cent FDI in “niche” technologies. It also plans to develop two defence production corridors, which constitute private sector units and , and establish defence innovation hubs.

Surprisingly, there is no analysis of why earlier defence procurement policies failed to deliver results and whether the initiatives spelt out in the new policy are adequate to ensure success. Why has FDI not brought in any foreign companies with their advanced technologies? Why has the private sector not entered defence production in a big way? Why does the country still import 70 per cent of its critical defence equipment despite several defence public sector undertakings, ordnance factories and defence research laboratories? After all, self-reliance has been the Indian motto for seven decades of nationhood.

Would FDI and its accompanying expectations of high-technology transfer prove successful? There is a mistaken belief that production companies decide on transfer of technology and that foreign manufacturers would be attracted by the mega Indian market for their products.

Governments, not manufacturers, decide technology transfer based on political and military considerations, geopolitical factors and long term business commitments. And even then, certain cutting-edge technologies are closely guarded and foreign companies will not part with them under any circumstances. And, can any government assure the foreign companies that orders will continue to be placed for all time to come? Clearly, the FDI route is no salvation for self-reliance in defence production.

Self-reliance goal

It is a truism that success follows strategy and strategy in turn follows structure. Can the existing Indian defence production structure prove suitable to attain self-reliance?

How are other countries able to fulfil their military technology requirements? What lessons can India learn from them?

Every military needs reliable and robust combat/combat support systems to counter threats from its adversaries. Technology of the equipment should match, or preferably be better than, the technology its adversaries deploy. The military also expects product support — technical manuals, spares, repair and overhaul, trainers and simulators besides mid-life upgrades during the equipment life cycle which typically will be about 20 years.

Undoubtedly, the public sector industry alone can meet these requirements. And to stay in business, both public and private industry will have to invest in R&D and be able to design and develop next generation products and systems. It is equally important to realise that research, design and development and manufacture are closely coupled and are best done under one roof.

Assistance from DRDO

However, the reality is that domestic industry, particularly the private sector, lacks the capability, domain knowledge, skill, expertise and experience or capacity in terms of adequate trained manpower, specialised test facilities, test ranges, etc., in many areas at present. In such cases, while industry would be the lead agency for development of new products, it may seek the help of DRDO laboratories to make up for shortage of expertise.

Industry may sub-contract development of certain sub-systems to a DRDO laboratory on payment or obtain services of DRDO scientists on deputation or hire test facilities on payment.

One time technology purchase may be permitted for a start but companies must be told that they are expected to develop upgrades, variants and next generation technologies indigenously. It would amount to marriage of industry’s managerial acumen and DRDO’s technical expertise for optimum results.

Over seven to ten years, Indian industry ought to become self-sufficient and be able to develop new technologies independently. During this period, some DRDO scientists may get absorbed by industry and some may even start their own enterprises.

Those with a purely scientific bent of mind will be the core of the transformed DRDO which should morph into an equivalent of DARPA in America with focus on futuristic technology development and involve universities and research laboratories. The new methodology, therefore, would not endanger the careers of DRDO scientists.

Another essential structural change necessary is that the armed forces should fund the development of new products from their own budgets to give them a sense of “ownership”. Today, the MoD funds the DRDO for development of new products which results in minimal interaction between the armed forces and developer.

Therefore, money from the military budget will give the armed forces an incentive to monitor the progress at regular intervals, participate in inevitable trade-offs between conflictual requirements, make-buy decisions, trials at sub-system stage, authorise release of funds based on accomplishment of milestones, etc.

Such an approach would minimise time and cost overruns and shortfall in specifications. The development contracts can be on fixed price, cost plus fixed profit or cost plus fixed percentage of profit dependent on complexity and unknowns.

The defence accounts would need to develop expertise to scrutinise cost plus contracts and release instalment payments. The armed forces would need to develop project monitoring skills.

Manufacturing ecosystem

Today, manufacturing industry is organised into a three/four tiered structure. For instance, in the automobile industry Maruti Suzuki, Hyundai and Tata Motors are tier one companies who source sub-assemblies and parts from tier two, tier three and tier four companies.

Tier one companies are “integrators” and the whole chain forms an “ecosystem” which the DProP 2018 recognises.

However, it is industry which can create and nurture such ecosystems, not the government. To assure long term loyalty and commitment, tier one companies have to necessarily handhold MSMEs initially and perhaps even invest in equity to nurture an umbilical relationship with them.

The defence production sector would need about 20 tier one companies and several lower tier companies. Therefore, for DProP 2018 to succeed this is a model could be considered or else it could meet the same fate as earlier policies.

Prabhala is a former Chairman and Managing Director, Bharat Electronics, and Chengappa is a Professor of International Relations and Strategic Studies at Christ University, Bengaluru.

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