29 September 2020, NIICE Commentary 6055
Dr. Srinivas Junuguru
Introduction
The strategic environment around India’s neighbourhood and International Relations policies is changing rapidly. India’s policy makers, till date, had believed that they do not have foes around India’s border and therefore, they needed not to focus upon defense equipment production. However, this perception should be changed now as Pakistan and China are making aggressive moves to encircle India. If both Pakistan and China attack India simultaneously, India will not go for medium and long wars considering its defense and security apparatus as it has great dependence on other countries. Thus, it is a critical moment for India to bring some defense-related policy changes. Currently, India is the second largest defense import country just behind the Saudi Arabia. In 2020, India became the third largest annual defense budget country with USD 70 billion behind the US and China, as both these countries have an annual defense budget as USD 732 billion and USD 261 billion respectively. Further, to reduce the dependence on external sources for defense equipment, India framed new policies, which are the ‘Draft Defense Production Policy’ in 2018 and ‘Draft Defense Production and Export Policy’ in 2020. It is in this context, the piece explores how the India’s ‘Make in India Policy’ will play the key role in enhancing the production of defense equipment in India.
‘Make in India’ Policy
The ‘Make in India’ policy was mooted in the 1990’s by then policy makers. However, it has been materialised by present Prime Minister of India, Narendra Modi, in 2014. The ‘Make in India’ policy was launched by the government of India in September, 2014. Prime Minister Narendra Modi, in his first address from the Red Fort on 15 August 2014, espoused a ‘Make in India’ package of ‘satellites to submarines’, for which the Defense Production Policy of 2018 stipulates that it shall be accomplished by 2025. The aim of the policy is to encourage companies to manufacture their products in India and incentivise dedicated investment. The initiative targeted 25 economic sectors for job creation and skill enhancement, to transform India into a global economic and manufacturing hub, while also to expand its arms exports to worth USD 5 billion by 2025. Thus, the ‘Make in India’ policy is primarily being impelled by the motivation to reduce arms import bills and optimise defense expenditure.
India’s Defense Sector
Out of the total domestic defense production, 80 percent comes from government-owned public sector including DRDO and its 50 labs, 4 defense shipyards, 5 defense PSUs and 41 ordinance factories. Currently, India domestically produces only 45 percent to 50 percent of defense products it uses, and the rest are imported from other countries. The major reason for this is that India’s military-industrial frameworks have had little success and India has allowed the private sector to undertake defense equipment production only very recently. However, the defense equipment exports are slowly increasing over a period of time. For example, India’s defense exports were Rs. 20 billion in 2014, Rs. 4,6.82 billion in 2017-2018, Rs. 10,5 billion in 2018-2019, and reached Rs. 17,5 billion by 2019-2020. Therefore, there is a lot of scope for increasing the same, provided some policy changes are undertaken. To this effect, the government of India has brought about two policy changes to increase the domestic production.
Opportunities
The government of India proposed the Draft Defense Production policy in 2018 replacing the 2016 policy. This policy has embarked on an ambitious journey to mark India’s position among the top defense production countries in the world. It is focused on self-reliance. The policy seeks to change India’s position from being the largest importer of arms in the world, to the largest exporter and producer. It has a goal of placing India among the top 5 global producers of the aerospace and defense manufacturing, with annual export target of US USD 5 billion by 2025. Likewise, again in 2020, Ministry of Defense (MoD) has formulated a draft Defense Production and Export Promotion Policy. The policy’s aim is to achieve a turnover of Rs. 1750 billion (USD 25 Bn.), including export of Rs. 350 billion (USD 5 Bn.) in Aerospace and Defense goods and services, by 2025. Further, to develop a dynamic, robust and competitive Defense industry, including Aerospace and Naval Shipbuilding industry, to cater to the needs of Armed forces with quality products. Also, the policy’s aim is to reduce dependence on imports and take forward the ‘Make in India’ initiatives through domestic design and development. Furthermore, it also promotes export of defense products, for India to become integrated into the global defense value chains. Finally, it creates an environment that encourages R&D, rewards innovation, creates Indian IP ownership and promotes a robust and self-reliant defense industry. The important aspect of it is that India has a lot of hardware and IT resources. India has the capability and resources, so what we need is the right policy and political will. However, there are some challenges that need to be focused upon.
Challenges
First and foremost, there is a need for an overarching infrastructural, fiscal and legal environments and essential testing and validating facilities that individual firms cannot cost-effectively create. Furthermore, the above-mentioned policies involve multiple ministries which could delay the establishment of defense production ecosystem within an optimistic time frame. Since India has the intention to spend USD 130 billion on military modernisation in the next 5 years for achieving self-reliance in defense production, India has to bring lot of policy changes. Therefore, the government of India should reform the defense production of India. The ‘Aatmanirbhar’ policy is a welcome initiative in this regard. However, a catalyst to the effective production by the domestic defense industry could be facilitation of timely procurement of defense equipment because historically, we have been plagued by policy paralysis. One of the fundamental stumbling blocks in indigenous defense manufacturing is the failure to understand how a successful Military Industrial Complex (MIC) functions. Therefore, the Indian government should focus on fiscal reforms to enhance prospects for training, upskilling and research. For that, the following policy suggestions can be recommended.
Policy Recommendations
Currently, in India, there are only 2 Defense Corridors: (i) Uttar Pradesh, which leverages the existing manufacturing ecosystem in the state, ideally suited for economic testing and R&D facilities, and (ii) Tamil Nadu, which ensures a mature manufacturing ecosystem for investments and innovation. Therefore, the Indian government should expand it to the Telangana, Maharashtra, Andhra Pradesh, Chhattisgarh and Orissa corridors. Apart from that, there is a dire need for close interactions between Armed Forces, Scientific Community & ‘Military Industrial Complex’ Developers. The Indian government should also prioritise the fact that the higher the Indigenous Content in a product, the greater is its procurement priority. Further, India’s Defense Sector Needs More Spending on R&D and that can be done in 2 ways: (i) indigenous efforts and (ii) transfer of technology. For example, China’s R&D expenditure was USD 275 billion in 2018, and it is about 2.2 percent of its GDP, that is, more than Japan, Germany and South Korea combined. However, India’s spending on R&D has been stagnant at 0.6-0.7 percent of its GDP. Therefore, India needs to think it over. The fact is that, unlike China or Vietnam, India did not invest enough in infrastructure, R&D, healthcare, education and skill-development to build a relatively educated and disciplined workforce, or an advanced business-cum-manufacturing ecosystem over a period of time, in defense. Naturally, this impinges on indigenous capabilities. Moreover, India’s almost all major contracts of the past ten years have been ‘off-the-shelf’, with no transfer of technology. For example, the French ‘Rafale’ fighter, Russian S-400 strategic SAM system, the United States’ Apache and Chinook helicopters, P8i maritime patrol aircraft, etc. are the contracts which can only give India defense equipment, and the technology transfer provision is not there in the contracts. This dynamic must change. Furthermore, corporatization of ‘Ordnance Factory Board’ (OFB) is imperative. Because, historically the Units of the OFB and Defense Public Sector Undertakings (DPSUs), with their unions and political patronage, have been always resistant towards bringing deep reforms for a number of reasons for several years. Therefore, improving the quality of its nature and its functioning is important. The government must ensure the creation of a conducive policy environment with minimum red-tape, less intrusive monitoring and attractive incentives to promote domestic defense production. Finally, the government should emphasise more upon MSMEs, as in the developed countries, MSMEs provides care quantities of defense equipment and lot of employment opportunities. Besides, if we focus on this sector in next 4 to 5 years, 50 percent of our dependence on other countries will come down.
