This article analyses India’s defence procurement and self-reliance measures post the ongoing Russo-Ukraine war. It discusses India’s major defence agreements with the USA and France, and initiatives by the Ministry of Defence to boost ‘Aatmanirbharta’ (self-reliance) including offsets, FDI increases, strategic partnerships, indigenization lists, and purchase categorizations, highlighting the challenges and ineffectiveness in truly achieving technological independence and development in defence.

Introduction

When the Ruso – Ukraine war broke out in Feb 2022 most experts had predicted the demise of Ukraine in 48 to 72 hours. History has a strange way of making a mockery of expert predictions. Even today the war rages on with no end in sight. India being one of the major beneficiaries of Russian/Ukrainian imports of Defence equipment – Tanks, BMPs, submarines, Aircraft and helicopters – has been the most affected by the endless war with supply of spares for these equipment being badly affected. Realizing the gravity of the situation, our Prime Minister made two high profile foreign visits a few months back, first to the USA and later to France for the Bastille Day parade. During the PM’s visit to the USA five major Defence deals were established viz. Co- Production of the GE 414 engine with HAL, procurement of 31 MQ- 9B predator drones and a master ship repair agreement with Indian Private and public shipyards. The important takeaways in as far as Defence deals with France are concerned include the proposal to order 26 (22 single seater and 4 double seater) additional Rafale Jets and three Scorpene class Submarines for the Indian Navy plus negotiate a ToT (Transfer of Technology) from France for the Shakti Engine of ALH (Advanced Light Helicopter). While all this augurs well for the Indian Armed forces in terms of its combat preparedness, it also begs the question – “How effective are such imports in achieving genuine indigenization and substantive self-reliance (Popularly called Atmanirbharta) in as far as core technologies are concerned?

This paper looks at the initiatives taken by MoD for boosting Atmanirbharta in Defence including the import option bundled with ToT and offset obligations.

Initiatives By Indian MoD to Achieve Atmanirbharta in Defence

Offsets: Under the offset clause, a foreign company that wins a defence deal is supposed to invest a part of the contract value in the country, thus developing skills and bringing in technology, while also generating employment. When this clause was first introduced it was made applicable to tenders of value of INR 300 Cr and above with a minimum offset of 30 % in the same project for which the order was placed. When this incentive did not succeed, the offset policy was modified to allow offsets in other projects including for non-Defence orders. When this policy change also failed to produce results the offset policy was again changed to include orders only INR 2000 Cr and above. Considering that the offset procedure has had negligible impact, it can be safely said that it has been given an informal burial in as far as non G2G/FMS tenders are concerned.

Increase in FDI: This initiative wherein FDI in Defence was increased from 49% to 74% through the automatic route, flattered to deceive as once again the foreign OEMs, possibly due to the onerous conditions imposed, were not interested. It may be noted that in the Telecom sector where FDI has been 100% via automatic route for close to two decades India still does not produce its own Mobile handsets, core switches or the core EPC/IMS software and we are still dependant on the Ericssons, Nokias and Huaweis of the world for these. As such increase in FDI is surely not the way forward as far as Atmanirbharta is concerned.

Strategic Partnership: As per DAP 2020, this model involves collaboration between Indian Private firms and a foreign OEM and play the role of a System Integrator by building an eco-system of development partners, special vendors and suppliers especially from the MSME sector. While a number of EoIs/RFIs (Expressions of Interest/Request for Information) were floated under this model, the closest this initiative got to realization was in the tender for the P 75(i) submarine given to one Private and one public ship builder last year. From latest reports, the project does not seem to be going anywhere and seems to have run into strong headwinds with a number of foreign OEMs pulling out.

Positive Indigenization List: Over the last four years the MoD has notified around four positive lists. (Initially termed as negative lists) consisting of around four hundred products/technologies (many of them low end nuts and bolts products/technologies) that are banned from being imported through. While this will ensure that these products/technologies will only be sourced/developed by Indian companies this initiative is unlikely to lead to ownership of critical technologies.

Buy Indian Categorization: The DAP 2020 contains three Categories of Buy programs prioritized as under:

1. Buy Indian [IDDM (Indigenous Design Development & Manufacture] which mandates 50 % indigenous content (IC).
2. Buy (Indian) – Which mandates 60% indigenous content.
3. Buy & Make (Indian) – Which allows import of some initial quantities in the Buy phase with a mandate that the quantities under the make phase will have 50% IC.

Some of the major reasons why none of the above programs have resulted in indigenous development of critical technologies are:

• The requirement of proving 50 % IC at the NCNC (No Cost No Commitment) trial stage. This is a huge barrier since no ToT is possible at NCNC stage and only becomes possible when the vendor gets the order.
• Inability to validate the IC, there being no fixed guidelines for the same. The process of obtaining IC certificates from the CFOs of the last vendor in the supply chain is impractical and has not succeeded.
• Linking costs to IC is a flawed concept and lends itself to fudging by vendors by tweaking their prices to force fit the IC requirements and thus meet the IC compliance – albeit only on paper. A better procedure would be for the MoD to specify in the RFP, the technologies that have to be indigenously developed/owned and delink it from the costs. To some extent the Buy & Make (Indian) categorization does factor in these issues, but being low in the priority of categorization is rarely used.

MAKE 1, MAKE 2 Categorization & Innovation For Defence Excellence (IDEX): DAP 2020, lists these initiatives with the professed aim of boosting Atmanirbharta in Defence. While the intent was noble, the procedures have not factored ground realities. Defence indigenization has to be a national effort, involving both public and private players under level playing field conditions, with significant budget allocations by the Government. The MAKE 1 categorization does, to a great extent address the issue of indigenization and self-reliance, as the MoD funds, or is at least supposed to fund 70% of the development costs, with the balance 30 % to be funded by the down selected Development Agencies (DA). Under the MAKE 1 procedure the MoD is mandated to down select at least two DAs and fund each of them with up to 70% development cost. It is a different issue altogether that since 2011, not a single MAKE 1 program has fructified. The much-touted Battlefield Management System (BMS) program was retracted after down selection of the DAs while the Futuristic Infantry Combat Vehicle (FICV) program died a natural death.

The MAKE 2 categorization involves 100 % funding by the vendor, without any assurance of production orders and suffers from the following infirmities:

• MoD expects industry to fund 100% development cost with no guaranty of an order and no visibility of timelines. While this is OK for small sub 1 Cr programs, it is not financially viable for high value programs.
• The intention of MAKE 2 was to help MSMEs and start-ups enter Defence market. However, the deliverables at the UTRR (User Trial Readiness Review) stage itself are so onerous, that leave aside MSMEs, even big tier 1 vendors cannot afford to participate due to the high costs of UTRR and NCNC trials – which are very comprehensive and include, besides user trials, QA(Quality Assurance) evaluations, EMI/EMC (Electromagnetic Interference/Compatibility) evaluations and MET (Maintainability Evaluation Trials).
• Even assuming a vendor clears all trials, he has to be the L1 bidder, to get an order. There is a provision in the MAKE 2 programs to reserve some orders for the L2 vendor in case he agrees to supply at L1 price. For some strange reason, none of the MAKE 2 EOIs/PSOs incorporate this clause, which is another huge disincentive/risk for the Vendors.
• The vendors who clear the trials but lose out in the commercial bid are given a ‘certificate’ saying they have successfully cleared all trials – this is a joke, since the certificate has no monetary value and is not worth the piece of paper it is written on.
• In some cases, a nominated single vendor tender is issued to a DPSU while a multi-vendor tender is issued for the same product – and guess what – the nominated DPSU is also allowed to bid for the multi-vendor tender. The DPSU can easily cross subsidize the multi-vendor commercial bid by not loading his development costs in the multi-vendor tender (As he would have already loaded it in the nominated tender) – thus L1 of DPSU is assured.
• The ‘March in Rights’ for the IP are invoked ab initio – that means the MoD, with zilch investment in the development costs wants access to the IP.
• MAKE 2 ensures no investments by the MoD and provides no guaranty of orders to the Vendors willing to invest. To expect indigenization and self-reliance in core technologies in Defence sector, without GoI funding is a pipe dream. The GoI needs to take a leaf out of the books of the DARPA model. To expect Indian Industry to fund huge development initiatives, without visibility of timelines and orders is also a tall ask.

Direct Imports with ToT and Offset Obligations: The G2G or FMS (Foreign Military Sales) initiatives have thus far been the most successful as far as speedy procurements of cutting-edge weapons (not technologies) are concerned. The procurement of FH 77 light howitzer, Rafale MMRCA, Hercules & Globemaster Aircraft, Apache helicopters plus the recent deals established during the PM’s visit to USA and France are examples of such procurements. However, with the low percentage of ToT 9Around 20%) they are unlikely to result in ownership of core technologies. If this is only manufacturing ToT without knowledge transfer of design, drawings and source code, then its pure BTP (Build to Print) – no way will it boost indigenization and self-reliance. (However, the MRO facility will surely generate employment). Considering its from USA, even this BTP is likely to come with highly restrictive End Use Clauses.

Conclusion

Despite a number of initiatives and the GoI’s best intentions to boost Atmanirbharta in Defence sector the situation does not seem to be improving. While each of the initiatives listed above have merit, it requires no rocket science that there is no substitute for Indigenous development through organic home-grown organizations that exist for this very purpose and that ToT from a foreign agency is not the way out. Despite their best efforts the Defence R&D agencies have not been able to meet the time and cost milestones resulting in a constant Technology chase where often the Armed Forces have been unfairly criticized for demanding state of the art technology and products for its troops. It defies logic that when one scientific agency is sending missions to the moon another is at odds to meet the combat requirements of the forces. It must be emphasized that no meaningful development of critical Defence technologies can happen where the R&D ecosystem is skewed and monopolistic. It is time that the Private sector is seamlessly involved in the development of core technologies with active and generous funding by the GoI, on a level playing field, with assurance of orders. Unless this happens, India will continue to have the dubious distinction of being the world’s largest arms importer.