The Make in India initiative cannot succeed on the emotion of Nationalism alone, business houses need to be driven by a sense of what they are likely to reap. We also need to provide a level playing field to the private industry vis-a-vis the OFB and DPSUs. Hence our focus on indigenous manufacturing in  the defence space needs to be correctly aligned; only then will we be able to achieve our goal of self reliance

Overview

The Make in India initiative was expected to give a much needed shot in the arm to India’s quest for enhancing indigenous defence capability. However, it has failed to take off the way policy makers anticipated it would and has so far been what can be described as an uneventful journey, a few rays of hope shining through now and then notwithstanding. However, considering the fact, that we import around 60% of our defence equipment, the success of this initiative is imperative for us to achieve our strategic  goal of self reliance, which has been the aim of India’s defence production strategy since 1960s.

The  focus of the government on the Make in India initiative gave rise to much hope amongst the private sector players who were willing to participate in defence production. This coupled with the opening up of FDI in the defence sector was reason enough to imbue potential players with keen and positive anticipation. However, in reality it has not lived up to the promise of catalysing indigenous development and attracting investments from abroad. This despite our Defence Procurement Procedure evolving over the years and several improvements being incorporated therein.

To give a fillip to its aspiration of achieving self reliance in defence production the government came out with the Strategic Partnership (SP) Model, in June 2017, basis the recommendations of the 2015 report submitted by the Dhirendra Singh Committee. The SP Model aims to revitalise defence industrial ecosystem and progressively build indigenous capabilities in the private sector to design, develop and manufacture complex weapon systems for the future needs of the Armed Forces. Thereafter in July 2018 amplifying guidelines for the same were issued. These lay emphasis on incentivisation of transfer of niche technology and higher indigenous content. Global Majors, who in collaboration with Indian Partners are ready to make India a Regional/Global manufacturing hub for the platform will also be incentivized. Initially four segments have been chosen, namely fighter aircrafts, helicopters, submarines and armoured fighting vehicles.

As a part of its efforts to make continual improvements the government also notified a simplified Make-II procedure in February 2018 aimed at enabling greater participation of private industry in the acquisition of defence equipment to help import substitution and promote innovative solutions. However, the model involves prototype development of equipment/system/platforms or their upgrades or their sub-systems/sub-assembly/assemblies/components for which no Government funding will be provided for prototype development purposes.

Though, the official take on the subject is that the India’s focus on indigenous manufacturing in  the defence space is on track as the Ministry of Defence year end review for 2018 would have us believe, it speaks largely of  achievements of OFB and DPSUs. OFB has been credited with the Dhanush Artillery Gun, Tank T-90, T-72 BLT and Assault Rifle INSAS IC besides some other weapon systems. The successful conduct of the maiden flight of indigenously developed Automatic Flight Control System (AFCS) integrated on LCH is also mentioned. All this may be fine but where are the big ticket projects which were to be executed by the private industry and strangely or rather expectedly there is no mention of FDI.

The primary reason for the dichotomy between what is meant to be achieved and what is being achieved is essentially the absence of worthwhile orders so that the private sector has a viable business case. Even making a prototype would entail setting up complete plant and machinery. It is difficult, even for big business houses, to make the kind of investments that platforms and equipment warrant without the question of numbers coming into play. The following  case study done by a business house about the potential of the small arms market in India highlights this fact lucidly.

Case Study on Business Potential of Small Arms in India  

The case study states that the strength of service personnel, paramilitary forces & police forces in India is approximately three million personnel. The entire strength is expected to be armed with either an  Assault Rifle, CQB weapon or a LMG. Hence, the total requirement of these weapons put together is approximately three million in a ratio of 7: 2.5: 0.5. In terms of numbers this means that there is a market for 2.1 million Assault Rifles, 0.75 million CQB weapons & 0.15 million LMGs. While these may be the absolute figures, in reality these figures are not likely to translate into orders because nearly 50% of the state police forces are not armed today and about 15% of the paramilitary forces are not even armed with INSAS Rifles, which were introduced into service 30 years back, and are in the process of being discarded by the services now. The paramilitary forces are instead holding the 7.62 mm SLR, a weapon of even earlier vintage. Small arms discarded by the services are generally used to arm the paramilitary forces and state police forces. In consequence it is only fair to assume that the market for small arms in India during the next five years, is going to be in consonance with the figures projected by the services as their requirement. After five years there would be an increase equivalent to 25% of the total strength of paramilitary forces to the services requirement. The arms discarded by services/paramilitary forces will be used by state forces, barring a few elite state forces, who are being equipped with state of the art weapons.

As of now there are six to seven Indian Companies who have licenses to manufacture arms and these companies have tied up with foreign firms. These foreign firms have entered the Indian market in one way or another. This implies that there are six to seven competitors who are going to vie for the small arms market in India. This notwithstanding the DRDO is continuing with their projects of developing small arms (5.56mm Carbine, 7.62mm Assault Rifle, Sub Machine Carbine, Advanced Automatic Rifle, Anti Material Rifle). Therefore, it is reasonable to assume that a certain percentage of the small arms, required  in India will be apportioned for small arms developed by DRDO.

The Indian Government has recently concluded a Government to Government (G2G) agreement with the Russians to produce Assault Rifle x 39 at OFB-KORBA. This in effect would mean the entire requirement of services with respect to Assault Rifle x 39 will be given to this Joint Venture Company. This leaves only 75,000 more Assault Rifles x 51 left to be procured. In addition, the Russians have now proposed that CQB weapons be made in India under a G2G agreement. Considering these facts, a realistic assessment of the  market for small arms in India for the next five  years would be as follows:-

• Assault Rifle x 51- 75,000
• CQB weapon – 3.5 Lacs
• LMGs- 40,000

Orders for all the above may or may not go to one single company due to the competitive bidding process which is followed. Risks and uncertainties with respect to small  arms manufacturing  in India are as under.

• G2G for CQB weapons between Russia and India.
• DRDO stalling procurements in the guise of developing their own weapons.
• Uncertainty of orders delaying investments.
• Six to seven companies vying to capture the Indian small arms market

A reasonable assumption is that a manufacturing facility established by any firm will have a capacity of one lac pieces. To establish such a facility there would be a requirement of investing  approximately 200 Crores. In order to recover the investment and pay interest on the investment, there would be a requirement of earning at least Rs 30 Crores every year for a period of 10 Years. To make profit in such a manner, assuming a profit of Rs 15,000 per weapon, there would be a requirement of having orders for at least 20,000 weapons each year and for a total of two lac weapons over a period of 10 years. The conclusion therefore is that  unless there is an order for at least two lac weapons, it does not make business sense to commence investment. The scope for such numbers exists only in winning the CQB weapon contract. The possibility of the same appears low  as Indian Government is considering a G2G agreement with the Russians.

In view of the above factors, the six to seven serious competitors in this field are hesitant to make an investment. Punj Lloyd, having already invested, is regretting its decision. It can therefore be safely surmised that:-

• Industry will commence investment only after receipt of minimum order of two lac pieces.
• Delayed investment would also mean delayed delivery schedule after getting the contract.
• Indian markets are not sufficient to service the capital invested.
• Minimum three production lines are necessary to equip the services with their requirement.

The case study clearly brings out the reservations that private players have in jumping into the fray in defence manufacturing, even if the processes are simplified.

Indigenisation: The Way Forward

Offer Viable Business Opportunity. It is imperative that the private industry is offered viable business opportunities so that they are motivated to undertake projects in India. This is applicable for Make projects as well as SP. Firm commitments are required  on business volumes as setting up an eco-system and supply chain creation and innovation is virtually impossible without such a commitment. Though we aim to export products manufactured in India, it would happen only after the equipment comes into service in India. Keeping the rapid technological advancements which are taking place in mind, it is mandatary that the timelines for induction of equipment are kept to the bare minimum; otherwise export will not remain an option and this would  have an adverse effect.

Address SP Model Inadequacies. The model has certain inadequacies/impediments  which must be obviated so that the envisaged aim is achieved in entirety. It is necessary to consider enhanced FDI and control norms related to the SP, as these are the most critical aspect for the OEM as far as ToT is concerned.  At  present OEMs are not keen on ToT at 49% FDI and lack of administrative control. The OEMs  are also required to be jointly responsible along with the SP for certification and quality assurance of the platforms  being supplied, this certainly imposes caution especially when there is lack of control. Hence there is a need to provide flexibility to the OEM regarding accountability given ‘no control’ over the company. SP policy is supposed to build capacity throughout the supply chain of defence production, building an environment of Tier I and Tier II vendors around the SP. However, there is no mention of how MSMEs can capitalize on these supposed benefits; this needs to be clarified. The ambiguities regarding financing of the SP also need to be removed from the policy document.

Transfer of Technology. ToT is a major issue because OEMs are generally reluctant to share complete know how; this is further compounded by the aspect of sharing intellectual property rights. Whereas an ideal joint venture must cover all aspects related to ToT in totality to include subsequent upgrades, legal issues and confidentiality. The two important aspects related to ToT viz cost and time also come into play in a major way. We need  to establish mechanisms that would help iron out all grey areas related to ToT.

Provide Level Playing Field. In order to make private industry a willing partner in defence production there is a need to provide a level playing field to them vis-a-vis the OFB and DPSUs. Private companies will undertake new ventures if they are assured of fair competition, any perceived threats to the success of their business, which is measured by profit margins and their ability to create a space for themselves in an open market, will have a negative impact on the intent to enter a particular business.

DRDO and Industry. DRDOs role should be more collaborative with the private industry and both must work in sync right from the nascent stages. DRDO is the country’s premier research facility and it is therefore its responsibility to contribute to indigenisation. DPSUs and the OFB should not be the only ones to get the benefit of DRDO’s vast infrastructure and pool of trained manpower. Bureaucratic interface in the relationship between the DRDO and the private industry should be minimised to the extent feasible.

Conclusion

The Make in India initiative still continues to retain the attraction it generated when conceived. However, this is likely to fade away if the smell of success in future  business endeavours starts wearing off for the private players. The initiative cannot succeed on the emotion of Nationalism alone, business houses need to be driven by a sense of what they are likely to reap. In this context the enhancement in FDI through the automatic route to 74 %, provisions facilitating offsets and other enabling provisions as included in Draft Defence Procurement Policy 2018 will help. Another reason for the slow pace of the initiative is the fact that DPP  2016 is not being actualised as it was conceived, the implementation thereof needs to be given more impetus and the policies being framed enabled by procedures which can be seamlessly executed.