Arming for the Future
Bracing to Combat Future Challenges and Threats (Industrial landscape and Policy parameters)
In our previous issue we had focused on aspects of acquiring military capabilities in tune with the nation’s strategic vision and changing nature of warfare. Prominent military experts seek to understand the complexities of security challenges across the spectrum of conflict and the military hardware that would be required to ensure credible national security.
Recent years have seen momentous strides taken in the fields of Cyberspace and AI technologies. The ‘digitisation’ of space is now a reality to accost and nations feel compelled to raise “Armies’ of cyber warriors to both attack and defend their cyber spaces. The horizon of the so far ‘conventional’ space is today increasingly blurred with UAVs, RPVs, Drone swarms, PGMs etc, being as much at the centre-space of strategic discussions as conventional platforms. Developments in special materials and high-end material technology, rugged and miniaturized chips are, likewise, spectacular. The criticality of software that integrates various systems and sub-systems, enable seamless communication, and in facilitating real time decision making needs no emphasis.
What then is India’s understanding of and preparation for the emerging challenges of technology? Are these adequate or does it stand on the threshold of ‘missing more technological cycles that would leave it stranded in isolated quagmire, dependent on others?
Defence production in India has long been dominated by Defence Public Sector Undertakings and Ordnance Factories with the sole technology incubator being the Defence Research and Development Organization. India’s ‘self-reliance index’ in defence procurement has been and is abysmally low, underlining the urgency for a transformational shift in this status quo.
Several actions and plans have been and are in progress. Harnessing the potential of the private sector in defence manufacture has seen definitive steps, though with limited success. The umbrella ‘Make in India’ initiative itself aims to enhance the contribution of manufacturing sector in the GDP from 16% to 25%. The Defence Procurement Policy of 2016 is compliant to this initiative and has introduced several significant correctives, most significant being the relaxation of FDI norms for the defence sector, rationalizing offsets and their accounting, adopting the ‘Strategic Partnership’ Model for major platforms, incentivising indigenous manufacture of critical components through priority to the Buy IDDM (Indian Design Developed and Manufactured) category etc.
A fresh Defence Production Policy is also on the anvil that seeks to directly address the aspect of high import dependence and aims to achieve self-reliance in development and manufacture of thirteen listed weapon systems/platforms. The proposed Defence Industrial Corridors announced in the Annual Budget for 2018 would complement the intent of the draft Defence Production Policy.
More recently, a high-power Defence Planning Committee under the chairmanship of the National Security Adviser that includes the three Service Chiefs, Foreign Secretary, Defence Secretary, Expenditure Secretary and the CISC with HQ IDS as its Secretariat. Another initiative is a Task Force on Artificial Intelligence set up under the Chairmanship of Tata Sons Chairman, N Chandrasekaran to study the strategic implications of AI in national security perspective and in global context.
This ‘Part II’ of ‘Arming Smart’, in which two of our foremost military strategists, Lt Gens JP Singh and Subrata Saha, both former Deputy Chiefs of Army Staff and both of who have been propagators for a forward looking pragmatic policies related to defence manufacture and indigenisation.
The focus is on the rapid developments in science and technology with potential to disrupt existing templates of concepts and thought and the organisational and structural changes required being contemplated to hasten the processes of security related decision making, with both eminent authors spelling out their respective perspectives and roadmap for the future.
To sum up, Arming Smart implies acquiring capability to fight future wars conventional and/or hybrid. Capability is the sum total of military hardware, organizational structure, R&D and industrial infrastructure backed by a policy framework that enables, enhances and empowers all of them with a visionary leadership.
India’s Defence Industrial Landscape – The Time for Change is now
Lt Gen JP Singh, PVSM, AVSM (Retd)
Defence production in India has long been dominated by state run entities, viz, the Defence Public Sector Undertakings (DPSUs) and Ordnance Factories (OFs) with Defence Research and Development Organization (DRDO) as the sole significant indigenous technology provider. Despite the size, vast resources and experience/hand holding of public sector defence production entities, India’s self reliance index in defence procurement remains abysmally low. This has placed them under a scanner. To change the status quo and become a key player in global defence industry, series of policy changes coupled with a mind set shift towards the private sector is likely to bring a transformational change in the defence industrial landscape by 2025.
The transformation in India’s defence industry commenced with the vision of the present government’s Make in India policy. The vision seeks achieving self -reliance in defence sector through building indigenous capabilities for design, development, manufacture and maintenance of defence equipment in cost effective manner. The vision encompasses opening of strategic defence sector for private sector participation on a level playfield with the state enterprises. Indian companies, to bridge the capability gap in technology and equipment development, can enter partnerships with global OEMs by transfer of technology (ToT) arrangements and leverage the domestic market. The main aim of Make in India defence sector policy is to provide protection for investments, incentivizing R&D activities in defence sector in India and ensuring maximum production by Indian industry.
Market Size and Opportunities
India’s defence sector is at the take off point in its expansion cycle as an attractive market for defence manufacturing driven by modernization and sustenance plans under Make in India. The draft defence production policy talks about goal of achieving self reliance in development and manufacture in 13 major areas of production, a turnover of Rs 1,70,000 crore, involving an investment of nearly Rs 70,000 crore, creation of over 2 million jobs and exports of Rs 35000 crore by 2025.
Defence share accounts for about 17% of India’s non - planned expenditure. Though the allocation under Capital Head is much less than the requirement and the MoD is seized to balance it against rising revenue expenditure. The foreign exchange outgo in defence is nearly 50% and imports constitute about 60 to 70% of total defence procurement. The new policies aim to change the scenario by placing bulk of orders under capital acquisition and upgrades under revenue on Indian firms.
The future prospects of private sector in defence is immense, predominantly due to the following factors:
• Large capital procurement projection
• Large imports to be substituted
• New thrust to preferred categorization of acquisitions in DPP
• Increased scope for transfer of technology
• Increased FDI cap in automatic route and governmental route subject to certain conditions
• Level playing field with the public sector; removal of exemptions granted to public sector companies for payment of customs and excise duties
• Clarity on items requiring industrial licenses (ILs), single window for application to obtain ILs under a streamlined procedure and increasing the license validity from 7 to 15 years
• Exchange rate variation protection has been made applicable for private sector at par with public sector undertakings
• Relaxations in offset policy with enhanced threshold value enable foreign OEMs to actively engage with Indian companies in manufacturing of defence items
• The outsourcing and vendor development guidelines mandate DPSU and OFB to review their short and long-term outsourcing and vendor development plan and gradually increase outsourcing from the private sector.
Enabling Government Policies
Defence Procurement Procedure 2016 (DPP 2016), released in April 2016, bears a clear linkage with the ideology behind Make in India initiative. It identifies manpower and engineering capabilities of India’s strength in defence industry, fortifies the need to identify strategic partners to create a self -reliant defence industry.
Capital acquisitions under DPP 2016 are considered in light of three key factors:
• Whether the capital being acquired is being bought in fully operational state or is being manufactured in India
• Whether the vendor is an Indian vendor
• Whether there is any indigenous content in the capital being acquired.
DPP 2016 introduced the BUY (Indian IDDM) as preferred order of acquisition followed by BUY (Indian), BUY and MAKE (Indian), BUY and MAKE and BUY(Global) as last preference. Procurement of equipment with enhanced performance metrics. Funding of private sector design and development projects with special focus on MSME Sector.
The Defence Production Policy 2018 (DPrP), is being finalized for release. The broad mission of the new production policy is to promote Make in India initiative in defence sector and create a world class arms manufacturing base, achieve self reliance and venture into arms export. The vision is forward looking with a defined set of objectives and strategies.
The key objectives of the policy are development of a strong defence industry and reduce high import dependency. It identifies 13 sets of weapon system/platforms whose development and manufacture should commence by 2025. The DPrP mentions ease of doing business for the industry, simplifying IL, increasing FDI, stream-lining offset policy, rationalizing taxation system, providing financial assistance to SPVs upto INR 3000 Crore, development of two defence corridors, setting up common testing facilities, setting up a corpus of Rs 1000 Crore to fund start- ups, creating necessary mechanism to harness the potential of AI and robotics for defence use; creating an IP cell in DDP to facilitate registration of IPR. The policy also talks about setting up an autonomous National Aeronautical Commission in line with Nuclear and Space commission.
Ministry of Defence has specified new rules for homegrown start -ups to undertake research projects to develop or upgrade weapon systems and work towards reducing imports. DIPP recognized start -ups with simplified criteria will qualify for defence projects. Draft production policy has promised that the government will set up a Rs 1000 Cr fund for start-ups that would be selected through ‘hackathons’. The Three Services have shortlisted over 53 projects to be awarded under MAKE II category where there will be no government funding for developing the prototype. Number of these projects can be undertaken by the start-ups and MSMEs.
Focus on augmentation of indigenous manufacturing capacities is the revamped approach to building the export potential of the industry. As per the MoD, the public and private sector enterprises are free to explore opportunities in international markets for defence products. The new DPrP lays a target of Rs 35,000 Crores of exports in defence sector by 2025.
Though the private defence industry in India has obtained in principle its long-standing demand for a level playing field, it is still in its nascent stages given the fierce global and public sector enterprises competition. It faces several institutional and structural challenges. Major ones being lack of a nurturing financial atmosphere, R&D and highly skilled specialized workers.
Some of the measure to strengthen private sector in defence are:-
• Payment terms through irrevocable Letter of Credit system
• Grant of infrastructure status which entails financial incentives and tax benefits for the defence sector
• Tax benefits to include tax exemption towards R&D expenditure and entire R&D value chain that include R&D in labs, pilot production, test beds, design and development, field trials and pre-commercial trial production
• Granting Deemed Export status in certain cases
• Nomination must be stopped. MoD still continues to nominate public sector units for large value projects.
Indian companies to bridge the capability gap in technology and equipment development, go for partnership with global OEMs by Transfer of Technology (ToT) arrangements. Their ability to effortlessly absorb and adapt foreign technology is not tested since no major contract has been given to the private sector in the last four years accept the contract to L&T for K9 Vajra tracked SP gun system imported from South Korea.
Though one of the main aims of the DPP was to bridge the capability gap between Indian companies and foreign OEMs, there are no specific guidelines or standards laid in the DPP with regards to the IP being transferred in such TOT arrangements. Resultantly, Indian companies are not effectively being provided with the right to carry out domestic production or development of such technology. This is evident in DPSUs who over the years, having paid for the TOT, have failed the main aim of attaining self reliance in defence sector in India.
The DRDO has in particular over the last three years transferred proven technology, after field trials, to number of private companies especially in manufacture of ammunition. No orders have been placed on any of these companies on competitive basis. Some of the companies are capable of exporting ammunition if their production line gets going with limited orders from domestic users. There is a huge domestic and export market for ammunition. Currently the OFs are not able to meet the requirement and foreign OEMs are milking the exchequer.
Over the last 17 years, the MoD has released series of defence procurement and production policies and manuals. Though the policies do not address the inefficiencies and lack of accountability on the part of DPSUs and OFs and time overruns by DRDO, the objectives and contents of these documents are compelling. There is a structural distance between the implementing agency of the policies, i.e. the procurement office, production department, technology generators, users and defence finance. All the stakeholders are independent, though each agency’s actions impinge on others and vitally on defence production and self reliance.
The private defence sector seems fatigued, DPSUs are still in status quo mode.
As an immediate step, the government can identify some major DPSUs and OFs to be run on PPP model. All MROs at base workshops should be privatised to save revenue outflow. Give some contracts of major platforms on the horizon, like the ATAGS and DHANUSH, to be designed and developed indigenously in a spiral mode to the private industry. The major integrators in turn will engage large number of MSMEs as tiered suppliers.
Do we wait for the 2019 elections or is the government of the day going to transform the defence industrial base by surmounting the above macro-challenges – the time to act is Now.
Realising Potential of Technology
'Make in India' in the Defence Sector
Lt Gen Subrata Saha, PVSM, UYSM, YSM, VSM**(Retd)
The ‘Make in India’ initiative was announced by the Prime Minister on 15 August 2014 as part of a wider set of Nation-building initiatives. The initiative was launched in September 2017. Defence sector was identified as one of the critical sectors. One of the key objectives of Make in India was to increase the contribution of manufacturing from 16% to 25% of the GDP.
Following up on the Make in India initiative, specific policy directions were promulgated through the Defence Procurement Procedure 2016, relaxation of FDI norms and strategic partnership. More recently the Make-II Procedure has been simplified, the Draft Defence Production Policy and revised offset guidelines are under deliberation.
The Government has since also constituted the Defence Planning Committee under the chairmanship of the National Security Adviser. The composition of the Committee includes the three Service Chiefs, Foreign Secretary, Defence Secretary, Expenditure Secretary and the Chief of Integrated Staff Committee (CISC). The role of the committee is expected to be important for perspective planning and prioritization for modernization of the armed forces, factoring in financials as well.
To give the Defence Make in India further impetus the Annual Budget 2018 announced the creation of two defence industrial corridors. The UP Defence Industrial Corridor was highlighted by the Prime Minister in his address at the UP Investors Summit in Feb 2018. To encourage innovation and start-ups the Prime Minister announced the IDEX, Innovation for Defence Excellence at the Defexpo in April 2018.
A new defence production policy was put out for comments in the beginning of the year. It is a forward-looking document. The key policy objective is to reduce current dependence on imports and to achieve self-reliance in development and manufacture of thirteen listed weapon systems/platforms latest by 2025. These include Fighter Aircraft, Medium Lift and Utility Helicopters, Warships, Land Combat Vehicles, Autonomous Weapon Systems, Missile Systems, Gun Systems, Small Arms, Ammunition and Explosives, Surveillance Systems, Communication Systems, Electronic Warfare Systems and Night Fighting Enablers.
The policy has set an objective to achieve a turnover of INR 1,70,000 Crores in defence goods and services by 2025 involving additional investment of nearly INR 70,000 Crores creating employment for nearly 2-3 million people. The draft Defence Production Policy has for the first time indicated financial targets unambiguously.
While the defence production policy has rightly identified thirteen systems/platforms fundamental to defence for self-reliance, it is equally important to lay down self-reliance objectives for critical components like engines, particularly aircraft engines. The cost of an aircraft engine accounts for a substantial portion of the overall cost of an aircraft. Besides there are recurring requirements of maintenance repair and overhaul (MRO) and replacements. Given the combined size of military and civil aviation requirements of the country, there is no justification for perpetual import dependency on this. This should make an attractive business proposition for joint ventures, technology transfer and R & D requiring some spurring with encouraging policy directions.
Defence systems require special materials and high-end material technology. In fact, while it is important to incentivize high indigenous component in the procurement process through priority to the Buy IDDM (Indian Design Developed and Manufactured) category, it is perhaps more crucial to encourage materials technology in defence production.
India’s software Industry is internationally admired for its competencies. It is essential to encourage this industry to focus on defence. The importance of “software” in defence systems needs little reiteration. It is algorithms that integrate various sub-systems and systems. It is the key determinant for effectiveness of systems. Being like the nervous system for integration, self-reliance in algorithms for defence systems could well be the battle winning factor.
Technological lifecycle of software is much shorter than any other system or sub-system. The policy needs to be enabled to be able to keep pace with this much shorter cycle.
Almost akin to our inadequacies in material technology, is the lag in chip technology. In defence systems the requirements for chips get more challenging due to specifications of ruggedness, extreme temperatures and minimizing size. The trend is shifting towards systems on chips. Defence could well lead the way by focusing our IT industry towards achieving leadership in this field.
The defence production policy aims to make India a global leader in Cyberspace and AI technologies. AI is largely driven by software. It provides an opportunity to leverage the country's strong IT industry and huge talent pool of engineers. In February 2018, the Ministry of Defence had set up a Task Force on Artificial Intelligence led by Tata Sons Chairman N Chandrasekaran. The Task Force was constituted to study the strategic implications of AI in national security perspective and in global context. It is a multi-stakeholder group comprising members from government, services, academia, industry and start-ups.
The Task Force has submitted its final report to Defence Minister Nirmala Sitharaman, who is the Patron herself. The MoD statement said that, "AI has the potential to have transformative impact on national security. It is also seen that AI is essentially a dual use technology. While it can fuel technology driven economic growth, it also has potential to provide military superiority."
Today, in Israel for example AI is revolutionizing the ways in which they defend themselves. AI systems are providing recommendations to military commanders, both on the battlefield and in command centres, in ways that no human adviser could. One significant boost AI provides the Israeli Defence Forces (IDF), is the ability to accurately predict what enemies will do, based on an analysis of what they’ve done and are currently doing. AI assists in analysing the vast quantity of video feeds, basis the algorithms for video analysis which are provided by cameras fixed at potential hot spots. The immense potential of AI on a day to day basis in counter infiltration operations or counter smuggling is not difficult to imagine. Eventually, this technology should replace human operators who man control rooms, watching surveillance video feeds for lengthy shifts around the clock.
The solutions to improve teeth to tail ratios and minimising revenue expenditure lies in technology. Many mundane roles that exist now can be made to disappear for more effective roles if required.
The Chandrasekaran Task Force report, which studied the level of AI or machine learning (ML) development in India mainly in context of defence needs, suggested making India a significant power of AI in defence specifically in the area of aviation, naval, land systems, cyber, nuclear and biological warfare.
It is important now to pursue the recommendations of the Task Force. Policy and institutional interventions need to be put in place to regulate and encourage a robust AI based technologies for defence sector in the country. Procurements related to AI have to be dealt with processes that are inherently smarter than the routine. Given the nature of AI technologies it is also essential to encourage start-ups in the field.
Arguably it is an ambitious defence production policy, which has targeted self-reliance big time and has correctly focused on technology. Given our state of dependence on import and the evolving security scenario, this ‘mission mode’ is a must. To achieve the targets, it is imperative to stipulate milestones of progress and have monitoring systems involving the user, Ministry of Defence and industry.
Time bound production targets have to be supported by budgetary support. As production and procurement are inextricably linked it is critical to energise the overall process, by expediting procurements. Signing of contracts and timely payments will automatically boost investment in the defence sector, both in manufacturing and R&D, and create jobs as envisaged. Technology particularly software driven systems need a much smarter and time sensitive process for procurement.