How Make in India leaves defence manufacturing sector hanging

Speaking at an interactive session organised by the Confederation of Indian Industry (CII) at Bangalore in February this year, defence minister Manohar Parrikar said we need "implementation and action" and not "little-little" changes in policy.

Implementation

While that is true in a general way, one policy that requires not just implementation and action but also more than "little-little" changes is the "make" procedure, a curious mix of policy and procedure. Introduced in 2006, it was intended to provide an opportunity to Indian industry to undertake research, design and development of high-technology complex systems, with government funding up to 80 per cent of the cost of prototype development and assured purchase order for the predefined quantity of the equipment so developed. Sadly, not a single project has taken off under this category so far.

The question then is what does past experience show and what needs to be done now. In 2011, MoD came out with a Defence Production Policy whose objective was to achieve "substantive self-reliance" through indigenisation. The next year, MoD promulgated a new look "offset" policy which requires foreign companies to plough back at least 30 per cent of the contract value into the Indian defence sector, if the contract is for Rs 300 crore or more, through one of several permissible modes, including transfer of technology or equipment to the Indian offset partners.

The hierarchical ordering of the modes of procurement that requires preference to be given to procurement from indigenous sources either by way of outright purchase or by involving the Indian industry in the manufacturing of defence equipment, was the highlight of the revised Defence Procurement Procedure (DPP) of 2013. The latest in a series of steps taken by MoD was raising of the FDI cap in defence production last year from 26 to 49 per cent with removal of the condition that 51 per cent of the stake in the investee company should be in the hands of a single Indian individual or company. These measures were expected to revolutionise indigenous defence production but that has not happened. Ironically, this is the period when India was on its way to becoming the largest importer of arms.

Initiative

The call given by the PM to "Come, Make in India" and the subsequent "Make in India" blitzkrieg by the governmental agencies have raised new questions about defence production without addressing the old ones. The question now being asked is: How does the current "Make in India" initiative fit with the make procedure? While "Make in India" is apparently all about inviting the foreign companies to use India’s soil for manufacturing defence equipment, the make procedure is designed to promote the Indian industry to take the lead in the matter of defence procurement and production. The information put out on the "Make in India" website mostly predates the PM’s call and fails to address this question.

There is no doubt that both foreign companies and Indian industry will have to play a role in India’s quest for becoming a manufacturing hub. The defence public sector in India, the ordnance factories and the defence research and development organisation cannot also be written off as MoD’s non-performing assets. It would be naive to argue – as some people do - that their role needs to be drastically curtailed to give the private sector an opportunity to speed up indigenisation.

Clarity

Clearly, what is needed is a policy that brings clarity regarding the role each of these players is expected to play in strengthening the defence manufacturing sector in India and how these roles will be synergised. It should also address the question of transfer of technology, co-production and co-development. Such a policy will work only if it is backed by an procedural framework. The DPP 2013 will need to be reconceptualised to bring it in sync with the new policy. In particular, the make procedure will need to be reoriented to accommodate the spirit of "Make in India". A foreign company wanting to enter the Indian defence production sector must know how to go about it; DPP 2013 does not answer this question.

But with its 142nd ranking in the global index of ease-of-doing business India cannot expect to attract foreign companies, or even fire up Indian industry, which has its own list of woes relating to taxation, deemed export status for the defence industry, industrial licensing, and the like. All these issues need to be addressed; disjointed measures, such as raising of the FDI limit to 49 per cent, have very limited impact when taken in isolation. Lastly, greater professionalism is required in handling several activities, such as formulation of the qualitative requirements (specifications) which have derailed several procurement programmes in the past. This entails difficult structural reforms. MoD could signal its intention of bringing about a change by setting up a forum where the representatives of the industry – both Indian and foreign – could regularly meet ministry officials for discussions. Pragmatic and implementable solutions will arise only from such interactions.