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14 January 2021

India's Pursuit Of Self-Reliance In Defence Manufacturing And The Challenges Ahead

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Ikigai Law

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Ikigai Law is an award-winning law firm with a sharp focus on technology and innovation-led businesses. We advise clients from high impact startups to mature market-leading companies and are often at the forefront of policy and regulatory debates for emerging business models. Our TMT practice is ranked by Chambers and we were named Boutique Law Firm of the Year in 2019 by Asian Law Business.
The Ministry of Defence has taken several measures to boost self-reliance in defence manufacturing. However, there are several challenges facing India in its pursuit of self-reliance. In this piece
India Government, Public Sector
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The Ministry of Defence has taken several measures to boost self-reliance in defence manufacturing. However, there are several challenges facing India in its pursuit of self-reliance. In this piece, we discuss both.    

Recent measures to achieve self-reliance in defence manufacturing

For a few years now, the Ministry of Defence has tried to boost the 'Make in India' policy in defence manufacturing. Yet, the growth of defence manufacturing has been slow and the domestic industry has struggled to manufacture high-technology weapons and equipment.1 In the wake of its new Atma Nirbhar Bharat policy, and the border clash between Indian and Chinese soldiers at the Galwan valley, India renewed its pursuit of self-reliance. Several new measures were announced by the Ministry to make India self-reliant in defence production:

(i) Import embargo on defence equipment: The Ministry of Defence recently took a decision to introduce an import embargo on 101 defence equipment to be implemented progressively until 2024.2 This to apprise the Indian defence industry of the anticipated needs of the Armed Forces' future needs to encourage indigenous manufacturing. The list comprises of simple parts, and high-technology weapons such as artillery guns, assault rifles, corvettes, sonar systems, transport aircrafts, light combat helicopters, radars, among others.3 The Army and Navy have placed wheeled armoured fighting vehicles and submarines, respectively, on the list with an indicative import embargo from December 2021.4 Similarly, the Air Force has listed light combat aircraft LCA MK 1A with an indicative import embargo from December 2020. Following this decision by the Ministry, the Defence Research and Development Organization released another list of 108 systems and subsystems which will be designed and developed by the Indian defence industry 2020 onwards.5 DRDO will also provide support to the domestic industries including Medium, Small and Micro Enterprises (MSMEs) to design, develop and test the systems.      

(ii) 74% FDI in defence production: The Department for Promotion of Industry and Internal Trade, in a September, 2020 Press Note, increased the Foreign Direct Investment in the defence sector from 49% to 74% under the automatic route.6 The decision to increase FDI in the defence sector was taken by the government to increase domestic defence production, development new technology in India and maximise expansion of private sector in defence production.7

(iii) Capital procurement budget: For the year 2020-2021, the Ministry has created a separate budget head for domestic capital procurement and has allocated a budget of INR 52,000 crore for domestic procurement.8 Earlier, the capital procurement budget comprised of both domestic as well as foreign procurement. According to the government, this move will reduce the defence import bill and encourage domestic manufacturing of defence equipment.9 

(iv) Defence Acquisition Procedure 2020: The Defence Acquisition Procedure (DAP) 2020 has increased the indigenous content requirement in all categories of defence procurement.10 The DAP 2020 has also proposed other measures to increase indigenisation such as increase in indigenous availability of high-end military materials, the use of indigenous software in equipment/systems and a boost to innovation by start-ups and Micro, Small and Medium Enterprises (MSMEs). For a discussion on the changes introduced in the DAP 2020, please see our previous article, here

Challenges to achieving self-reliance

While the industry stakeholders welcomed these new measures, the domestic defence industry faces several challenges which hinders India's pursuit of self-reliance in defence manufacturing. These challenges are: 

Lack of growth in defence modernisation and defence capabilities  

Over the years, the pace of defence modernisation in India has remained slow and indigenous production of high-tech weapons continues to be a challenge.11 This is mainly due to a (a) declining defence budget towards long term investments, and research and development; (b) process inefficiencies and delays in domestic production by government lead organizations; (c) and the government's reluctance to grant defence contracts to India's private sector.12 For instance, so far, the only major contract granted to India's private sector is the INR 4,500 crore deal with Larsen & Tourbo to supply specific artillery systems.13 As a result, India continues to rely on foreign imports for high-tech weapons, thereby hindering the development of the indigenous industry.14

Budgetary issues  

A lack of capital expenditure on domestic defence production, and research and development has been a major obstacle to India's self-reliance goals. While India's defence budget has increased over the years, a major chunk is spent on personnel costs such as salaries and pension, thereby shrinking the funds available for defence production.15 For instance, of the total defence budget for 2020-2021, 58.6% is allocated for salaries and pensions, whereas only 22.7% has been allocated for capital outlay.16 While an increase in personnel costs are important, a relative increase in expenditure on defence production is also imminent. Further, India's budget allocation for research and development is only 4% of the total defence budget for 2020-2021. This is much lower compared to capital expenditure by technologically advanced countries like USA and China, which spend 12% and 20% of their defence budgets on research and development, respectively.17      

Lack of strategic planning for future needs of the Armed Forces

In the emerging geopolitical scenario, the Indian Armed Forces has to remain operationally ready to respond to border threats. Consequently, the Armed Forces' war-fighting capabilities has to be constantly augmented and the technology in the weapons and equipment has to be updated.18 In order to meet these needs indigenously, there is a need to strategically and pragmatically plan for the needs of the Armed Forces and invest in long-term development of high-tech weapons. Commentators have argued that this is currently lacking in India's defence policy.19   

Production and time delays

Indigenous defence production has been wrought with production delays. For example, India's first indigenously produced Light Combat Aircraft, HAL Tejas, faced a long production delay with HAL requiring a total of seven years to produce 16 aircrafts despite the estimated timeline of four years.20 HAL is yet to complete the order for 20 more aircrafts. Even the Defence Research and Development Organisation has come under the scanner for constant delays, poor performance, and inadequate monitoring of its projects. According to a 2018 report by a parliamentary Committee on Estimates, the Defence Research and Development Organisation failed to meet timelines in all 14 mission projects for the Indian Air Force, thereby severely affecting the Air Defence plans of the Air Force.21

Hierarchal and skewed decision-making

A 2018 internal report of the Ministry of Defence identified skewed decision-making process, bureaucratic red-tape and multiple decision-making heads as the reason for inordinate delays in defence procurement.22 Decision-making on issues of national security and defence procurement has been slow and inefficient due to hierarchical complexities, resulting in the slow growth of defence modernisation.23 In addition, there is a lack of input from the Armed Forces in the decision-making on defence and national security strategy.24 To offset these criticisms, the Ministry recently created a new role called the Chief of Defence Staff, in the Department of Military Affairs, two decades after it was recommended by the Kargil Committee in 2000.25 The Chief of Defence Staff will be a single point military advisor to the Ministry of Defence and will synergize the operations of the three forces, but will not be the operational head of the Armed Forces.26  However, according to industry observers, this may cause friction in the military leadership and risk undermining the authority of the three service chiefs.27

Suggestions for reform

To overcome the challenges identified above and support self-reliance in defence production, the Ministry could consider the following suggestions for reform:

(i) Supporting private sector: To build a defence industrial base, the government should consider supporting the private sector in India and trusting the private sector with bigger and stable defence contracts. Supporting research and development, and design and manufacturing capabilities of the private sector are vital for increasing defence production in India.28

(ii) Funds for Armed Forces: Several defence projects are pending due to a lack of funds.  The Indian government should consider reviewing the budget allocation for the defence to ensure adequate funds for the three forces relative to personnel costs. In addition, long-term and larger capital investment in the defence production, and research and development are the need of the hour. The government could also consider allowing the Armed Forces to raise their own funds by entering into for-profit public and private sector projects such as repair and maintenance of machinery and aircraft for private companies, building and repairing highways and expressways, among others.29

(iii) Decision-making and time delays: To overcome decision-making challenges facing defence procurement, the Ministry of Defence should consider a restructuring of the decision-making process. Representatives from the three forces should be included in defence procurement and national security decision-making for a more inclusive and efficient decision-making. Time delays in defence procurement can also be reduced by making structural changes to the decision-making process. As recommended by the report of the expert committee headed by Indian Institute of Management Professor Pritam Singh, an external organization called the Defence Capital Acquisition Authority should be set up outside the Ministry of Defence to reduce delays and corruption in defence procurement.30 The organization will be responsible for the entire defence acquisition process including legal, financial, costing and technical, and include experts for each stage. This will drastically reduce the time delays in defence procurement since the organization will combine the functions of several agencies involved in defence procurement including technical and trial evaluation, quality assurance and contract negotiation, among others.31 Similar model has been adopted by countries such as France, United Kingdom and Australia.32 
  

This piece has been authored by Kruthi Venkatesh, a consultant working with Ikigai Law, with inputs from Anirudh Rastogi (anirudh@ikigailaw.com), Managing Partner at Ikigai Law.

Footnotes

1 Harsh V. Pant, India's defence policy change, May 8, 2019, Observer Research Foundation, available at, https://www.orfonline.org/research/indias-defense-policy-challenge-50601/.

2 Press Release, MOD's big push to Atmanirbhar Bharat initiative, August 9, 2020, available at, https://pib.gov.in/PressReleasePage.aspx?PRID=1644570.

3 Ministry of Defence, Import Embargo List of Defence Weapons, available at, http://164.100.117.97/WriteReadData/userfiles/IMPORT%20EMBARGO%20LIST%20MOD.pdf.

4 Press Release, MOD's big push to Atmanirbhar Bharat initiative, supra note 2.

5 Press Release, DRDO identifies 108 systems and subsystems for industry to design, develop and manufacture towards achieving "Atmanirbhar Bharat", August 24, 2020, available at, https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1648234.

6 Ministry of Commerce and Industry, Department for Promotion of Industry and Internal Trade, Press Note No. 4 (2020), available at, https://dipp.gov.in/sites/default/files/pn4-2020_0.PDF.

7 Scroll.in, Centre will allow 74% FDI in defence sector through automatic route, says PM Modi, August 27, 2020, available at, https://scroll.in/latest/971558/centre-will-allow-74-fdi-in-defence-sector-through-automatic-route-says-pm-modi

8 BusinessWorld, Defence Ministry Bifurcates Capital Procurement Budget into Domestic, Foreign Routes: Rajnath Singh, August 9, 2020, available at, http://www.businessworld.in/article/Defence-ministry-bifurcates-capital-procurement-budget-into-domestic-foreign-routes-Rajnath-Singh/09-08-2020-306751/.

9 The Hindu, Coronavirus package | Domestic defence procurement gets separate budgetary provision, May 17, 2020, available at, https://www.thehindu.com/news/national/coronavirus-package-domestic-defence-procurement-gets-separate-budgetary-provision/article31603195.ece.

10 For more information on DAP 2020 and the increase in indigenous content, please see our article titled 'India's Defence Acquisition Procedure 2020: An Overview' , here.

11 Abhinav Dutta, India's Defence Modernisation: Challenges and Prospects, July 7, 2016, available at, http://www.indiandefencereview.com/news/indias-defence-modernisation-challenges-and-prospects/.

12 Harsh V. Pant, India's defence policy change, May 8, 2019, available at, https://www.orfonline.org/research/indias-defense-policy-challenge-50601/.

13 Id.

14 Harsh V. Pant, India's defence policy change, supra note 12.

15 Shane Mason, Military Budgets in India and Pakistan: Trajectories, Priorities and Risks, at 12 (2016), available at, https://www.stimson.org/wp-content/files/file-attachments/Military-Budgets-India-Pakistan-Trajectories-Priorities-Risks-Oct2016.pdf.pdf.

16 PRS Legislative Research, Demand for Grants 2020-2021 Analysis: Defence, available at, https://www.prsindia.org/parliamenttrack/budgets/demand-grants-2020-21-analysis-defence.

17 Id.

18 Abhinav Dutta, India's Defence Modernisation: Challenges and Prospects, supra note 11.

19 Id.

20 India Strategic, FOC Standard LCA Tejas Finally Takes to the Skies, March 2020, available at, https://www.indiastrategic.in/2020/03/18/foc-standard-lca-tejas-finally-takes-to-the-skies/.

21 Committee on Estimates, 29th Report: Preparedness of Armed Forces- Defence Production and Procurement, July 25, 2018, at 69, available at, http://164.100.47.193/lsscommittee/Estimates/16_Estimates_29.pdf.

22 Economic Times, Skewed decision-making hitting military modernization: Defence Ministry Report, February 27, 2018, available at, https://economictimes.indiatimes.com/news/defence/skewed-decision-making-hitting-military-modernisation-defence-ministry-report/articleshow/63100513.cms?from=mdr.

23 Abhinav Dutta, India's Defence Modernisation: Challenges and Prospects, supra note 11.

24 Id.

25 Fida Malik, Will restructuring help improve India's military decision making?, March 30, 2020, available at, https://strafasia.com/will-restructuring-help-improve-indias-military-decision-making/.

26 Financial Express,  Appointment of Chief of Defence Staff: A transformational moment?, January 19, 2020, available at, https://www.financialexpress.com/defence/appointment-of-chief-of-defence-staff-a-transformational-moment/1828051/.

27 Fida Malik, Will restructuring help improve India's military decision making?, supra note 25; See also, Financial Express,  Appointment of Chief of Defence Staff: A transformational moment?, supra note 25.  

28 Assocham and PWC, Self-reliance in defence production: The unfinished agenda, at 17, available at, https://www.pwc.in/assets/pdfs/publications/2014/self-reliance-in-defence-production.pdf.

29 Tara Kartha, India must allow armed forces to raise own finances, Defence budget will never be enough, The Print, July 23, 2020, available at, https://theprint.in/opinion/india-must-allow-armed-forces-to-raise-finances-defence-budget-not-enough/466309/.

30 Financial Express, Defence procurement delays; panel to tell Manohar Parrikar to create unit outside MoD to fast-track purchases, available at, financialexpress.com/india-news/defence-procurement-delays-panel-to-tell-manohar-parrikar-to-create-unit-outside-mod-to-fast-track-purchases/535611/.      

31 Defense World, Indian expert committee calls for independent defence procurement organization, February 3, 2017, available at, https://www.defenseworld.net/news/18392/Indian_Expert_Committee_Calls_For_Independent_Defence_Procurement_Organization#.X4z9U3gzbUo.

32 Id.

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ARTICLE
14 January 2021

India's Pursuit Of Self-Reliance In Defence Manufacturing And The Challenges Ahead

India Government, Public Sector

Contributor

Ikigai Law is an award-winning law firm with a sharp focus on technology and innovation-led businesses. We advise clients from high impact startups to mature market-leading companies and are often at the forefront of policy and regulatory debates for emerging business models. Our TMT practice is ranked by Chambers and we were named Boutique Law Firm of the Year in 2019 by Asian Law Business.
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