Create Defence-Industrial Giant

Prime minister Narendra Modi extolled “Made in India” products from “satellites to submarines” in his Independence Day address. A day later he demanded that “Instead of having to import even small things…India…become an exporter of [military] equipment over the next few years”. And, he exhorted foreign countries and companies to “make in India”. Rendering the country self-sufficient in armaments, it turns out, will help India emerge as workshop of the world manufacturing all kinds of quality goods economically. But it will require the PM to do to the Defence Public Sector Units (DPSUs) overseen by the ministry of defence (MoD) what he did to the Planning Commission—utilise their resources more effectively.

At the core is a fact that cannot be glossed over: DPSUs are deadweight. Despite outputting some 800 combat aircraft and thousands of jet engines not an iota of any of the technologies, for example, have been absorbed let alone innovated over the past 60 years by Hindustan Aeronautics Ltd. Indeed, DPSUs haven’t progressed much beyond assembling platforms from imported kits achieved during the Second World War when Harlow PC-5 and Percival Prentice trainer aircraft, trucks, and mortars were mass-produced for the Allied armies. In this context, the indigenous HF-24 supersonic fighter developed from scratch in the 1960s seems an aberration. It is because the DPSUs have stayed stuck at the screwdriver technology level that the department of defence production in MoD has evolved a procurement system willy-nilly funnelling billions of dollars to foreign vendors with minimal transfer of technology (ToT). DPSUs neither ingest foreign technology nor let the private sector benefit from it.

How much the ToT provisions are eyewash and how much the military procurement system favours imports and enriches foreign countries may be gauged from a few facts. Firstly, the technology transfer content in deals is not required to be divulged by the foreign vendors until after the bids are in and a supplier chosen! This empowers the vendor to restrict the technology it chooses to transfer, usually basic stuff related to the platform—a ToT threshold DPSUs are comfortable with. As prime buyer India doesn’t use its leverage to squeeze state-of-the-art technologies out of the suppliers, is uncommonly generous in forking out huge sums at the outset, and tolerates delays in delivery and non-transfer of technology. Hence, gains from indigenisation even from the offsets policy are minimal. It leads to imports of high-value packages being locked into long-term deals. Dassault, for example, will supply 30% of the advanced avionics amounting to over $10 billion of the $30 billion plus contract for the full duration of the Rafale programme.

Secondly, ostensibly because of foreign currency fluctuations foreign suppliers are not held to the cost-figure in their winning bids, even as Indian bidders who may buy technology from abroad and refine it here are! Foreign suppliers are thus incentivised deliberately to underbid to win contracts and then to raise the price at the price negotiation stage without incurring any penalties. The French firm, Dassault Avions, originally offered the Rafale combat aircraft with comprehensive ToT for $10 billion. But after winning the tender, it increased the cost to over $30 billion and the MoD did not blink! This skewed system is bolstered by the military’s preference for foreign, especially Western, hardware. India, consequently, is routinely relieved of monies and Indian private sector companies are prevented from winning procurement contracts.

The extant system has evolved around the fact that the remit of the Defence Production Secretary as the guardian of DPSUs is to ensure their order books are full. Because DPSU capability is limited to licensed manufacture, procurement deals centre on it. Committees chaired by ex-bureaucrats, the most recent one by Vijay Kelkar, are periodically constituted to recommend revamp of existing protocols and procedures but without disturbing the dominance of DPSUs. This is akin to leaving a cancerous tumour intact while fiddling with the tissues around it! In the event, documents such as “Defence Procurement Policy-2013” are meaningless.

But how can competition and profit motive, the two great drivers of any vibrant industry, be injected into the defence industrial and military procurement spheres? The solution lies in eliminating the spurious distinction between public and private sectors and meshing their resources and capabilities. It was outlined in a 1999 paper by me to the technology review sub-committee in the first National Security Advisory Board. Keeping in mind the need to amortise sunk costs in building up impressive laboratories and physical facilities for R&D and weapons testing under DRDO (whose “chalta hai” attitude was decried by the PM) and production facilities in innumerable DPSUs and ordnance factories, I proposed that all these installations, some 50-odd, be divided into two nearly equally capable defence R&D and manufacturing combines and be led as commercial enterprises by two of the most ethical and industrially versatile business houses—Larsen & Toubro and Tata.

These two combines, subsuming the capacities of L&T and Tata, would pay the government rent for the DRDO centres/DPSUs/ordnance factories in their group and royalty for the technology, software, and hardware outputted by them. They’d bid for all weapons contracts with funds being provided by MoD to develop prototypes, and the winner determined by a transparently conducted run-off. What technology is procured from where under what financial terms, and which foreign or local firms are associated on which project, would be the sole concern of the combines. It will hasten the globalisation of Indian industry.

Such a scheme, besides creating a world-class defence-industrial complex and arms exporter, will rid the procurement system of its most serious ills—the inclination to import, endemic corruption and influence-peddling, the self-defeating lowest tender (L-1) process, production orders in small tranches that undermine economies of scale, and the bans on commercialising imported technology and exporting military products. Integrating private and public sector skills and wherewithal, inducing competitive pricing, and rewarding performance will increase labour productivity and efficient resource-use resulting, say, in the Kolkata-class destroyer being produced not in 8-9 years but the international industry standard—three years. Unsurprisingly this “out of the box” proposal is collecting dust.

[Published in the New Indian Express, August 23, 2014 at http://www.newindianexpress.com/columns/Create-Defence-Industrial-Giant/2014/08/22/article2391250.ece

About Bharat Karnad

Senior Fellow in National Security Studies at the Centre for Policy Research, New Delhi, he was Member of the (1st) National Security Advisory Board and the Nuclear Doctrine-drafting Group, and author, among other books of, 'Nuclear Weapons and Indian Security: The Realist Foundations of Strategy', 'India's Nuclear Policy' and most recently, 'Why India is Not a Great Power (Yet)'. Educated at the University of California (undergrad and grad), he was Visiting Scholar at Princeton University, University of Pennsylvania, the Shanghai Institutes of International Studies, and Henry L. Stimson Center, Washington, DC.
This entry was posted in arms exports, Asian geopolitics, civil-military relations, Defence Industry, DRDO, Europe, Geopolitics, Great Power imperatives, India's strategic thinking and policy, Indian Air Force, Indian ecobomic situation, Indian Navy, indian policy -- Israel, Iran and West Asia, Indian Politics, Military Acquisitions, South Asia, Strategic Relations with the US & West, Technology transfer, US., Weapons, Western militaries. Bookmark the permalink.

25 Responses to Create Defence-Industrial Giant

  1. Atul says:

    Your analysis of the problem with Indian DPSUs is correct and to the core. However, the solution given here, makes one a bit uncomfortable.

    While the principle of “GOCO – Government Owned Contractor Operated” is a successful one which has been implemented by American government (BAE, GD etc), only two companies having control over the entire Indian military-industrial complex doesn’t sound promising. For starters, what will stop it from converting into another “Bombay Club” of industrialists which resisted tooth and nail against LPG policy of ManMohan Singh in 1991? For them, it will be fairly easy and in their best interest to maintain the status quo and maximize the profit. In nearby countries, China has two major company in every sector, be it electronics, land systems, missiles, aircraft makers, engines and others. It has multiple shipyards under government control but it encourages competition among them which has led to impressive shipbuilding capability.

    An optimum solution would be a combination of several policies which would include GOCO, Cluster formation of similar industries, breakup of Ordinance Factory Board and formation of specialized five-six companies, breakup of HAL into 3-4 companies, formation of a engines mission, outright sale of redundant DPSUs like Vehicle Factory Jabalpur (VFJ) and many more. One low-hanging example of GOCO is Hindustan Shipyard Ltd in Vizag which desperately needs private management. Thus, a combination of tough but consistent policies are needed for advanced military industrial complexes. One or two military industrial clusters are good for small European countries but not for India.

    • Ideally, dividing the extant defence industrial capacities in the public sector into several competing combines would be best. But what has to be borne in mind is from a DPSU-dominated scene to transit into a fragmented defence-industrial free-for-all would make for an even more perilous journey than creating two competitive combines. There will also be a problem of creating a critical mass of capability in more than two groups from amongst the constituent DRDO/DPSU/Ordanance factory units. Incentives for indigenization could be built into rules of business for the GOCO combines. The danger of a monopoly “Bombay Club” emerging is, as you suggest, real. But an alternative arrangement may be harder to handle off-the-bat.

      • RV says:

        What about the DAE and ISRO? Surely,these require an altogether different yardstick. Also, on a more general note, the notion of security clearances need to be stricter. No foreign nationals, PIO’s,or Indians with foreign permanent residencies should be allowed to be in sensitive positions. These days, the definition of Indian sovereignty is rapidly blurring.

      • Well, sure, DAE and ISRO do not, for obvious reasons, fall into the category of having their capabilities redistributed — because, by and large, they have performed often against immense odds (mostly owing to complacency and inattention of the government).

      • RV says:

        And by extension, units like V. G. Sekharan’s lab (ASL) and related outfits. These are National assets.

  2. RV says:

    This article is reminiscent of Park Chung Hee’s formation & promotion of Chaebol’s, which led to the throttling of competition to the favored Chaebol’s. The analysis in the article is typically shallow, or more accurately not existent. However, it is worthwhile discussing these points in a mature and deliberate manner.

    • RV says:

      Let us take advantage of the opportunity Karnad has given us and try to tackle this issue to the best of our time and abilities. The arguments stated by @Atul and the Chaebol example provided above are pretty accurate. However, lets go a bit deeper and ask ourselves whether the solution to the problem is really government vs. private ownership, or something a lot deeper. Let me venture by asking a few questions in point-form for the sake of brevity:

      1. Despite India claiming to be a “software superpower”, why hasn’t a single so-called Indian “high tech” IT companies, or a conglomeration of them come forth and built an Indian search engine. The gravity of the current situation is such that the absence of an Indian search engine and related accompaniments (filters, virus and intrusion detection in embedded chips,encryption models/paradigms, etc.) has caused a security problem of incalculable proportions.

      The Indian Government has indeed given 1000’s of crores of INR to Indian private sector companies to come up with solutions for these problems, C4ISR, etc, but to no avail. Why has the India private sector not been able to come up with even simple solutions to these problems, especially when talent in these areas is/has been made available to it?

      2. We often hear these days of the phrase Transfer of Technology (ToT), which is essentially a non-existent commodity! . Why does the Indian tax payer have to be continually looted by bogus ToT agreements with foreign countries? The list of both dual-purpose and dedicated military technologies which may be classified as strategic and quasi-strategic is pretty much well known. How many Indian private sector companies have spent money (despite of the fact that many of them being cash rich) or have even bothered to foster basic/fundamental innovation even in dual-purpose disciplines which have applications in a variety of areas, such as multi-axis and high precision CNC machines? The market for such machines is immense in India and overseas! How many Indian private sector companies can boast of even a single strategic/quasi-strategic technology (dual-purpose or otherwise) which can truly be labeled DEVELOPED AND MADE IN INDIA?

      3. The argument by the Indian private sector that even if they invested the money, the Indian Government will not buy it is pretty hollow in many cases. Let’s take the case of MRF tires for the SU 30 MKI’s. The “legendary” capabilities of the Indian private sector may be amply captured in this link.

      wwwDOTnewindianexpressDOTcom/states/karnataka/Desi-Tyres-on-Sukhoi-Fighters-a-Runway-Hit/2014/03/05/article2091158DOTece

      (please replace all instances of “DOT”with “.”)., where even for dynamometer tests, regular pilgrimages have to be made to China. Now, even the IN wants MRF tires for the MiG-29 K a/c. Tires for a/c are extremely perishable items, and given the large numbers of such a/c in the IAF and IN, couldn’t such dynamometer testing facilities be set up in India? The same facilities could also be used in manufacturing tires for civilian a/c.

      4. Since the Indian private sector is deemed to be the solution for all problems concerning innovation, given the fact that enforcement of the Law of the Land in India is highly questionable, what measures are suggested to enforce that the Indian private sector innovates in a substantial manner and not run off to some foreign country at the drop of a hat to buy some outdated palmed off technology at exorbitant rates? Who would set these standards of/for innovation, continually update them, and enforce their compliance?

      • You are against giving head to a GOCO-kind of alternative and you are critical of the failures of a DPSU-dominated setup. So, by default you are for the situation to continue in its present state. Where will that get India? On the other hand, should the solution (I have sketched or variants of it) become reality, the private sector will be incentivised very quickly to develop into full-fledged designers and developers of military hardware. especially if these combines are also subjected to Parliamentary scrutiny (which will also preempt any Chaebol-type excesses).

      • RV says:

        You’re correct Bharat. That’s the tragedy of the situation. My primary fear is stated in Point 4, “…given the fact that enforcement of the Law of the Land in India is highly questionable, what measures are suggested to enforce that the Indian private sector innovates in a substantial manner and not run off to some foreign country at the drop of a hat to buy some outdated palmed off technology at exorbitant rates? Who would set these standards of/for innovation, continually update them, and enforce their compliance?”.

        These private sector cos. should be forced to innovate. Their R&D and D&D budgets cannot be allowed to be some tax saving or PR gimmick. . Standards for innovation should be set, and updated as technology advances. Breaches of these standards should lead to criminal prosecution of the entire Board of the holding company of the said group and the offending group company. The other day, I was talking with a senior representative of a private sector company. He/she was so thrilled that Dassault will hand over some source codes for the Rafale,and thus the deal must go through.

        I tried to explain to the person that it doesn’t matter if the source codes are given, but the main fact is that the algorithms for the said module aren’t provided or understood by the Indians. Without understanding the algorithmic details, the source codes could well be useless. This can be overcome only if the private sector have their own algorithm design units that innovates on algorithms of at least certain sections of the said module which incidentally make up about 30 % of cost of the Rafale. I heard the same story about source codes from Matheshwaran (in the Youtube clips). What do you think/suggest should be done/can be done in such a situation?

    • President Park’s creation of the chaebols fast-tracked South Korea’s industrialization and was the best thing to have happened to that country. The excesses of these giant combines in later years also led to the contemplation of their breakup by Seoul. It led to an immediate tempering of Chaebol excesses — that option is always there with any Indian government in a GOCO defence industrial milieu.

      • RV says:

        IMHO, using your article as the basic outline, appropriate statutes and legislature need to be introduced to enforce the absolute necessity of an original and substantial innovation clause. This in turn would require the Company Laws to change so that a certain % of the Board of the private sector company must be made up of technical experts in the areas in which the said company operates. If this is not possible, then there has to be an Advisory Board which contains these technical experts.

        As you may recall, following on from the tradition of I.G. Farben A.G., in post WW2 Germany, there was an unwritten rule that the Chairman of the Board of Hoechst, Bayer, and BASF had to be a technical person, and there were technical people on the Board as well as on the Advisory Board. This tradition lasted till (say) the mid 1970’s – early/mid 1980’s. The change of this tradition coincided with the decline of some of these companies. Of course, the “sage advise” of Arthur Anderson should also be factored in.

  3. An interesting and “thought provocative” article as evidenced by the comments above. Both @Atul and @RV make several valid observations. However, the heart of the matter is that the present state of ” decay” , ie, the state or process of rotting or decomposition.of the DPSUs/OFB/DRDO cannot continue if India aspires to achieve self reliance and become a global player.

    Undoubtedly, the reservations expressed above, particularly, Para of @RV is a major concern. However, at the current juncture, a majoritarian government led by a decisive PM needs to take certain bold steps. Tough decisions need to be taken since the present system, if allowed to continue will only putrefy and deteriorate further!!

  4. RV says:

    This post may be OT, and my apologies if so. This link shows the SUPERBLY designed and manufactured ASW corvette INS Komorta, which was recently commissioned:

    pbsDOTtwimgDOTcom/media/Bvs4odtCcAAC4XTDOTjpg:large

    please replace all instances of “DOT” with “.”. This ship is Indian designed and built, and could easily be classified as a frigate in many Navies, but for the IN’s rule of classifying a vessel one grade below than what it is.

    My angst /question is as follows: J. F. Kennedy said: “‘A nation reveals itself not only by the men it produces but also by the men it honors, the men it remembers.”. Why should commissioning and induction ceremonies of these few symbols of National Pride be converted into political carnivals? Instead of “Jet Li” or any of his “wise and esteemed” predecessors/successors, why not have some Kargil War Hero, or a decorated War Hero from other conflicts like Capt. (Honorary) Bana Singh, PVC, or even the immediate family members of slain martyrs do the honors and be honored?

  5. RV says:

    Now here’s an example of the lack of technical understanding by politicians (and the Indian powers-that-be in general) can cause chaos and misdirection, even if their motives are good. I believe Modi is India’s first PM who is both Nationalistic and competent. Now in:

    timesofindiaDOTindiatimesDOTcom/india/Narendra-Modi-extremely-unhappy-with-DRDOs-failure-to-meet-deadlines-in-delivering-products/articleshow/40768843DOTcms

    please replace all instances of “DOT” with “.”, it is stated “…It is to weed out the dead wood that Modi made the announcement about employing only young scientists, not over the age of 35, in five of the 52 DRDO labs….”

    This is a most uninformed and misplaced statement/intent/sentiment if actually expressed. For example, on the average the age of persons getting Ph.D. degrees from top class schools is around 26-28. Now, in the sciences and engineering disciplines, one requires around 10-15 sustained effort after getting a doctorate to become an expert in his/her field of specialization.

    If one goes by Modi’s statement, this would be cutting off any genuine experts from having any part/role in these 5 stipulated DRDO labs. Such statements made/alleged give a very bad impression. Age is only a number. It is productivity that counts. However in the Indian system how does one judge productivity? The Indian system is one of elimination and not selection. This is where the absence of a sound, sustainable, credible, and internationally competitive value system has hurt India in the past, and will continue to cripple India for the foreseeable future!

  6. Received as email from Ajay Kharade:

    Talking of making everything in house (in india), where is the Human resource to built things ?
    In human resource I mean mechanics, craftsmen hands-on engineers, material scientists etc who are responsible for building prototypes. The academic institutions (IITs. IISc ), R&D institutions (DRDOs, BARC) and industries (private & public) all work in vacuum, totally disconnected with each other.To make things worse most of these govt. institution are run and ruled by administration babus , clerks and arm chair 9 to 5pm scientist (paper writers) .These people have systematically destroyed technical and scientific man power. Hoping anything out of these institution is a joke. Essentially the Babus are supreme and will maintain status quo.The rot starts from bureaucracy, leftist academicians and PSUs (defense or otherwise).We talk about HAL, Maz docks etc but see Hindustan motor, Indian railways, MTNL, BSNL these have never designed and produced its own car, rail engine-bogey, tele-exchange-phone respectively. This tot-ka culture of importing and serving indian citizens is deep rooted in the system (TOT).Bringing Private sector is not a magic wand but it will bring in accountability I hope. But fundamental question of good human resource remains even for private sector.

    • RV says:

      A most relevant and accurate post. However, the rot doesn’t stop with the DPSU’s. If anybody is looking to the Indian private sector to revitalize/restructure the Indian defense set-up, they are in for a very big and sorry surprise. At a technical level, I found many (if not most) of the DRDO/DAE/ISRO crew far smarter than those in most of the renowned Indian private sector outfits!

      Unfortunately, they (the DRDO/DAE/ISRO people) are paid APPALLING salaries, and aren’t too terribly well versed in MBA jargon. In addition, there is the continual political interference on one side, and ridicule from the English language MSM on the other side which is deliberately orchestrated by certain foreign vested interests with intent to brain wash a substantial portion of the Indian political, social, and decision making elite.

      Most of these Indian private sector cos. are water carriers/house boys/coolies for the western companies and interests. In their current state they do not, and in all possibility will never allow, any credible, significant, and meaningful innovation to be developed. The cultural ecosystem is simply absent in these outfits. IMHO, they are incapable of either changing themselves, or being a catalyst for any positive change. The reason being even if they wanted to do so, they wouldn’t know how and where to even begin!

      The only way out is to Constitutionally enshrine the requirement of establishing, updating, and STRICTLY enforcing clauses requiring original and substantial innovation by the private sector, with mandatory provisions of DRACONIAN punishments meted out to the powers-that-be who fail to honor these criteria/commitments. .

    • The cerebral General Padmanabhan once said “Every system works if people in it make it work”. The way out may be this.
      1) Define the scope of what technologies DPSUs, DRDO other R&D departments will work on. High end research may require public funds like BARC, ISRO, DRDO, defence funded projects in universities and IITs.
      2( Production of platforms designed and developed by DRDO can be outsourced to private sector after competitive bidding like production of UAV’s, may be even Tejas.
      3) Certain technologies can be given to private companies in return for royalty after competitive bidding, for them to innovate and produce whatever product they can design. In defence or civilian sector.
      4)Certain areas should be limited to private sector and PSUs should exit(offload government stake) where private sector can easily scale up and produce like vehicles.

      There has to be competitive bidding we can’t decide that this company is respectable and this company is not. We cant live without public funded institutions either. To give an extreme example only PSUs can make ICBMs and strategic weapons.

      • RV says:

        Excellent post!

      • Thoughtful and doable; via media between the status quo and maximal privatization.

      • RV says:

        This approach needs to be carefully discussed within the scope of a specific example, say the Tejas. Specifically, could the private sector realistically replace HAL in the assembly line production stage. What facilities from HAL would be required? It would be wonderful if a solution was found out! Alternately, this not being possible, how can HAL and a hypothetical private sector player work together realistically/constructively?

        Further, in sectors where the Government stake is completely offloaded, what becomes of the workers, their pay structure, etc. Finally, the issue of introducing statutes forbidding the private sector buyer to convert the property into a (say) residential complex a few years after the ownership is transferred, also needs to be studied.

  7. You are setting up a straw man the easier to strike it down by speculating about private companies selling off the valuable real estate owned by DPSUs, etc when the proposal is clearly premised on govt retaining ownership of all such facilities and gaining only from the rent and the royalty. As to the manpower, well, its interests will be safeguarded only to the extent that it remains unproductive as judged by the new corporate managers. The less motivated amongst them could always be VRS-ed off.

    • RV says:

      There’s no straw man here. My query concerns the scenario (see @prime…..):

      “4)Certain areas should be limited to private sector and PSUs should exit(offload government stake) where private sector can easily scale up and produce like vehicles.”

      Off loading Government stake tacitly implies transfer of ownership to the pvt. sector entity. So, the point counter of rent & royalty does not apply in this case.

  8. Actually, no, it doesn’t tacitly or formally imply any transfer of ownership any more than use of the testing facilities (such as wind tunnel) at Wright-Patterson AFB in Ohio by pvt companies transfers to the latter any title deeds to anything.

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