Saturday, September 08, 2007

The business of defence



Mumbai-based engineering major L&T has set aside Rs 2,000 crore to build a shipyard where it can make both military and civilian vessels. And the company says it is determined to have a piece of Indian Navy’s Project 76, which involves buying 24 submarines over the next two decades.

L&T’s optimism is a sign of the times. India’s private sector sees a huge opportunity in defence R&D and manufacturing as the government has realised the public sector is stretched too thin to meet the needs of the country’s rapidly modernising and expanding armed forces.

The private sector’s entry in defence is also vital because India is spending billions of dollars importing all sorts of major weapons and losing out on the opportunity to boost the local economy with that money. Moreover, India cannot hope to sustain a major war with imported weapons, as foreign suppliers can cease supplies and spares at any time.

“India is the only large country to be dependent on imports for its defence,” says Brahma Chellaney, professor of strategic studies at Centre for Policy Research, a government think-tank, in Delhi. “If it truly aspires to be a great power, India has to meet the first test of greatness — the capacity to defend itself independently.”

However, the private sector has to overcome many obstacles before it can throw up an Indian equivalent of the US’s Lockheed Martin or the UK’s BAE Systems.

For now, India’s defence industry is rather small given the country’s total defence expenditure and it is overwhelmingly dominated by the public sector.

“Unfortunately, India has not developed an armament production base,” says Chellaney. “It is not lack of resources but a reluctance to get its priorities right that has left India far short of meeting its defence needs.”

According to Confederation of Indian Industry (CII), India will spend $45 billion (Rs 1,84,500 crore) on buying arms and equipment ... about $30 billion (Rs 1,23,000 crore) of this will be spent on imports, because of which India’s defence industry will get business worth about $9 billion (Rs 36,900 crore) through the new defence offset policy. ... the Defence Research & Development Organisation (DRDO), India’s public sector military R&D organisation, is planning to palm off some of its work to the private sector.

The private sector can play a big role in keeping a large part of India’s defence dollars at home and directing those towards creating jobs, businesses and boosting GDP. Besides making the defence dollars work for the domestic economy, increased private participation in defence production will also create a large new industry. India’s defence industry has the potential to be 10 times its current size of Rs 20,000 crore within a decade given the current trend of increased arms acquisitions. Private sector firms can draw inspiration from the US defence industry, which, according to SIPRI, had a turnover of $183 billion (Rs 7,50,300 crore) in 2005, about one-fifth of India’s present GDP. The US defence industry also employs more than 2 million people whereas the Indian defence industry employs roughly 200,000 people.

Another significant spin-off from having a vibrant defence industry would be emphasis on technological R&D, which could also be useful in the civil sector. Historically, military research has yielded many technologies or accelerated technological development. In the US, military needs accelerated development of now familiar technologies such as the internet, computers, satellites, even high-definition television. In India, one example of military technology put to civil use is ready-to-eat packaged food, which was developed by DRDO for the troops but later licensed to MTR Foods.

Though only 37 industrial licences have been obtained by the private sector since defence production was opened for it in 2001, a few companies have already taken small but significant steps towards becoming serious players.

L&T has been working for DRDO on many projects, including development of missiles and rocket launchers, torpedo launchers, bridge-laying tanks and submarine hulls. It has already bagged orders for 40 ‘Pinaka’ mobile rocket launchers that it developed along with Tata Power from the Army. Tata Power’s Strategic Electronics Division has also specialised in making computers for fire-and-forget weapons and surveillance and tracking systems. Then, Mumbai-based Mahindra & Mahindra (M&M) is making light combat and armoured vehicles; Noida-based HCL Comnet has laid satellite and terrestrial communication networks for the Army; and Hyderabad’s Astra Microwave Products makes radar components.

The ambition of India’s private arms companies is even more noteworthy. L&T, for example, says it plans to make war ships, submarines, torpedoes, missile launchers, sonar systems, armoured vehicles and artillery guns. Tata Power has stated it would like to make electronic warfare systems, components for fighters and helicopters, tanks and naval guns. M&M has said it wants to make light attack and armoured vehicles and also carbines, torpedoes and mines.

Significantly, IT companies are also keen on joining the action. Bangalore-based Wipro, for example, has set up a cell to tap the offset opportunities in engineering design and software for weapons and aircraft components. The company also has a hydraulics division, which is looking to tie up with aircraft landing gear makers. “Though Wipro will remain an IT company, defence will be one of its large verticals,” says Parthasarathi Guha Patra, vice-president for strategic initiatives and offset program at the company.

While private companies are thinking big, the big question is, do they have the expertise to realise their ambitions?

The private sector gets a vote of confidence from an unlikely quarter. “The private sector has acquired significant designing and precision manufacturing capability over the past decade,” says DRDO’s Prahalada. “Its leadership is with educated entrepreneurs and not Lalaljis, and India is better integrated with the developed world than ever before.” He reminisces that in the early 1990s, DRDO spent three years making the onboard computer for Akash missile from scratch for lack of expertise in both public and private sector. “Today,” he says, “all I have to do is call one of the private companies and they will deliver a finished onboard computer in less than a year.”

According to M.V. Kotwal, senior vice-president of L&T’s defence division, his company has developed considerable technological capability in defence technologies and manufacturing techniques through in-house efforts and supplying prototypes of weapon launch platforms to DRDO.

According to an official of CII, the private sector is battling two powerful lobbies in the Ministry of Defence — one that favours imports in the name of providing the armed forces with the latest and the best in the market, and another that favours the public sector in the name of national security and jobs. Many bureaucrats in the defence ministry are on the boards of defence PSUs and tend to fight for them rather than play the impartial arbiter.

“The ministry of defence sources a lot of military items on nomination basis from defence PSUs,” says the CII official. A nomination order is one where a buyer tells one or more companies to supply an item without allowing other suppliers to compete. “This demoralises private companies that develop products in the hope of winning defence orders, and discourages others that plan to invest in development and production of defence items,” he says.

One example of a private company taking initiative in product development and then failing to make headway is M&M. Its defence systems unit has developed a Hummer-like fast attack vehicle and an armoured variant for protecting troops from mines and improvised explosives during transit or patrol. Eight months after the company submitted the vehicle to the army for evaluation against a tender for 8,000 multi-role light vehicles, it is yet to be tested, according to the division’s CEO, Brigadier (Retd) K.A. Hai. He worries that government-owned companies will import and re-label vehicles, such as the Land Rover or Hummer, and bump off Mahindra’s home-made vehicle.

Jewel Fief

In 2006, the government tried to level the playing field a bit. It mooted a plan to create Raksha Utpadan Ratnas (RURs), or defence production jewels, a scheme for the private sector. Under this, some private sector companies will be selected for PSU-like treatment in defence procurement. The scheme is meant to widen the options of the government and also provide impetus to private sector investment in defence. But it is stuck in political and bureaucratic mire.

In early 2007, 20 large private companies, including L&T, Tata Power, Tata Motors, M&M, Wipro and HCL were screened for participation in the RUR scheme by a committee headed by a former secretary for defence production, Probir Sengupta, with the help of DRDO. In the first week of June 2007, the committee submitted its report to Defence Minister A.K. Antony. The report contained a list of companies recommended for RUR status and a set of recommendations on the interface between these companies and the ministry of defence. But since then, the ministry has maintained a stony silence on the subject.

The Left parties, whose support is crucial for the Congress-led Union government’s survival, have objected to any privatisation of defence. “The Left does not mind the country paying vast sums to foreign private companies, but it objects to home-grown companies having a role in national defence,” says the CII official.

Some bureaucrats are also trying to scuttle the RUR scheme, the official says, because they will not be able to control or influence private arms companies the way they do the defence PSUs. However, paradoxically, many bureaucrats would love to see a thriving private sector in defence because they admit they would like the greater career opportunities this would create.

In 2006, the ministry of defence had a brainwave. It introduced an offset condition for all foreign suppliers getting contracts worth Rs 300 crore or more. That means foreign companies getting such large orders will have to spend a part of the orders’ value on sourcing defence products and services from local defence companies or investing in them.

“Because of the large size of the order, we raised the offset obligation to 50 per cent,” says Kiran Chadha, chairperson of Defence Offset Facilitation Agency (DOFA). The policy exempted the fast-track orders — those involving delivery within 12 months — from the offset condition.

There is some concern about Indian defence industry’s capability to absorb the offset orders. However, according to Brigadier (Retd) K.A. Hai, CEO of Mahindra Defence Systems, a division of Mahindra & Mahindra, it will not be a problem given India’s vibrant automobile, IT, telecom and electronics industries.

But there is another major concern. People in industry and in government are worried that the foreign companies may not share their design and manufacturing technology with Indian companies and may just distribute their offset obligation on mundane, albeit defence related, activities such as IT services outsourcing and local maintenance and repair. “We want foreign companies to share technology with Indian companies through outsourcing, co-development, and joint ventures without pinning them down to specific items,” says Chadha. “However, we reserve the right to make changes if the spirit of the offset is violated.”

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