Prof Satya Narayan Misra* in Bhubaneswar, May 30, 2023: Defense production was the exclusive preserve of Ordnance factories and defense PSUs, as per the Industrial Policy Resolution of 1956. While economic liberalization was embraced by different sectors in 1991, the first economic reforms in defense manufacturing were introduced in 2001 by allowing full private sector participation and 26% Foreign Direct Investment (FDI).

The Kelkar Committee in 2005 went a step ahead & strongly pitched for Public Private Partnership and to provide a level playing field to the private sector companies. The Committee also recommended that the offset policy should be introduced which will help India to leverage its Big BUY acquisition to get state-of-the-art technology, get outsourcing orders, and facilitate export promotion.

The Dhirendra Singh Committee (2015) was appointed by the Modi government to improve our self-reliance from 30% to 70%. The report envisages a Strategic Partnership model where leading private sector entities would have equal opportunity to receive technology and forge partnerships with foreign Original Equipment Manufacturers (OEMs).

The FDI limit was also increased to 49% and in selected cases beyond this if they were bringing in key technologies. In 2020, the FM also unveiled a number of initiatives for encouraging domestic manufacturing and making in India. In the last budget, the FM proposed earmarking 25% of the R&D budget for use by the industry. She also suggested that the capital procurement budget of the services should source 68%of it from domestic sources, with or without foreign collaboration. The 41 0rdance factories were converted into six PSUs in October 2021.

Impact of Liberalization

Despite the slew of reform initiatives for galvanizing indigenous manufacturing, the impact of FDI policy has so far been tepid. As against $ 62.38 billion which has come in different sectors like telecom, the FDI into defense is a measly $7 million so far. During the current year, only $3.2 million has come in as per a reply by the minister in the Lok Sabha.

Similarly, despite several tweaks, the offset policy has not brought any critical technology into the country. Except for certain low-tech outsourcing orders, both PSUs & private sector have not benefited much from the offset policy, barring a few facilities which OEMs have promised. The Dhirendra Singh Committee has also not witnessed any significant spin-offs in terms of Strategic partnerships.

The Defence Research and Development Organisation (DRDO) which is the lynchpin of indigenous design has a poor record in areas like gas turbine engines, AESA radars, passive seekers, FPAs, precision weapons, and guided bombs & carbon fibers. The Kalam Committee in 1993 had identified the above subsystems as our key weaknesses & suggested a road map in terms of facilities and capability to rev up our SRI (Self Reliance Quotient) from 30% to 70% by 2005. It has remained a pipedream in the absence of design capacity in critical technology.

Kalam had, therefore, suggested Joint Ventures with Russians for producing Brahmos cruise missiles. His vision has fructified with this JV having immense export potential, apart from meeting the huge demand for the three services. He had also mooted the idea of Joint Design and Development (D&D) with major design houses. MR SAM, a joint D&D with the Israelis has been a great success.

Importance of Improving Factor Productivity

The Nobel Laureate Robert Solow (1997) flagged the importance of total factor productivity as the gateway to increasing returns to scale and improvement in factor productivity which will concomitantly improve our self-reliance index substantially. Investment in R& D and innovation plays a critical role in this process. While India spends around 0.8% of GDP on R&D, the developed economies spend 3-3.5% on it.

Unlike India where the private sector players hardly spend any money on R&D, in France they spend more than 7% of their turnover on R&D. It is for this reason; both DPSUs & Private sector players play the role of assemblers & integrators rather than value adders going up to manufacturing at component level.

The Way Forward

We need to embrace best global practices. Brazil could successfully manufacture the Embraer aircraft out of technology provided by the USA for buying F16 as an offset deal, as it pooled together all its scientific resources and provided tax holidays. In our case, the offset policy introduced in 2006 to leverage the big-ticket acquisition to get state-of-the-art technology, FDI inflow, and outsourcing orders has largely come as a cropper as we are yet to tweak our policy at par with best global practices, allowing indirect offsets & creating a favorable enabling environment.

India’s record in terms of improving its manufacturing footprint and becoming a global manufacturing hub is poor. On the other hand, China has become the manufacturing hub for F16 as they provide 100% FDI and create the enabling environment for OEMs to set up a production base and bring in key technology. For this to happen, we need to forge JVs with reputed OEMs. Dr. Kalam showed the way with the JV with Russia for producing cruise missiles (Brahmos).

He also encouraged having design collaboration with reputed design houses. Such collaboration with Israel has ensured the successful production of Medium Range Surface to Surface Missiles. It’s also time for political leadership to privatize many products being manufactured by PSUs, like tanks, Advanced light helicopters, and small arms by forging partnerships with foreign OEMS.

The liberalization in defense manufacturing is rather half-hearted as we persist with the time, quality, and cost overruns of the defense PSUs. The conversion of Ordnance factories into public corporates is ill-conceived as most of them need to be privatized. The present rhetoric of Make in India and protecting the indigenous manufacturers from competing with better quality products of OEMs goes against the spirit of the free market, globalization & competition.

We need to improve our SRI, without building a tariff wall. The captive defense PSUs except for the strategic products must give way to privatization. Mr Krishnamurthi as Chairman of the National Manufacturing Zone had recommended (2011) that we need to increase our share of manufacturing from 16% of GDP to 25% in a decade’s time, which will generate additional 10 million jobs per year.

He also suggested that the Military Industry Complex should be part of NMZ policy, instead of planning & standing alone. We have not followed up on this sensible policy and have been taking piecemeal initiatives. The falsetto of Make in India must give way to strategic thinking, improving factor productivity & improving value addition.

* Prof Misra was Joint Secretary in the Department of Defence Production