Draft Defence Production Policy 2018: Challenges Galore

In pursuance of Finance Minister Arun Jaitley’s 2018-19 budget announcement related to an “industry friendly Defence Production Policy 2018”, the Department of Defence Production (DDP) of the Ministry of Defence (MoD) released a 14-page draft policy on March 21, 2018. The draft Defence Production Policy (DPrP) 2018, which was open for public comments for six working days till March 30, is intended to replace the earlier policy promulgated in 2011. The broad mission of the draft policy is to promote the Make in India initiative in the defence sector and create a world-class arms manufacturing base, fulfilling not only the larger goal of self-reliance but also the requirements of friendly foreign countries. The laudable mission notwithstanding, the draft policy suffers from a number of shortcomings, which, if left unaddressed, may limit its usefulness.

Draft Defence Production Policy 2018: Salient Features

The draft DPrP 2018 is ambitious and forward looking. Unlike the 2011 policy, the draft of the 2018 policy sets a clear vision, a set of objectives and strategies. Its vision is to put India “among the top five countries of the world in aerospace and defence industries,” though the timeframe within which this is to be achieved has not been articulated. The key objectives of the policy include development of a strong defence industry leading to higher self-reliance. Setting its sight on the need to reduce the current high import dependency, the draft policy identifies 13 sets of weapon systems/platforms (including fighters, helicopters, warships, missile systems, ammunition and explosives, land systems, and electronics) whose development and manufacture would commence latest by 2025. Other objectives include an increase in domestic arms sales to Rs 170,000 crore ($26 billion) by 2025, with around one-fifths of it –Rs 35,000 crore ($5.0 billion) – coming through exports. The policy also intends to make India a “global leader in cyberspace and AI [artificial intelligence] technologies.”

From the industry’s point of view, the DPrP’s attractiveness lies in the host of provisions and incentives it offers. The draft policy talks of further ease of doing business for the industry including the Micro, Small and Medium Enterprises (MSMEs); pruning the existing list of items subject to industrial licence; increasing the FDI cap under automatic route from the current 49 to 74 per cent for certain niche technologies; streamlining the offset policy to attract investment and facilitate the speedy and transparent execution of offsets; rationalising the taxation system to support domestic manufacturing; providing financial assistance of up to Rs 3,000 crore each to Special Purpose Vehicles created for the development of two defence industry corridors that were recently announced, and up to Rs 100 crore each towards common testing facilities created by the industry; setting up of a corpus of Rs 1,000 crore to fund start-ups to meet specific defence R&D requirements; creating the ‘necessary mechanism’ to harness the potential of AI and Robotics for defence use; and creating an Intellectual Property Cell in DDP to facilitate the registration of intellectual property rights. Besides, the draft policy also talks of setting up an Aeronautical University on a 50:50 cost sharing basis between Hindustan Aeronautics Ltd (HAL) and the government; and the possibility of setting up an “autonomous National Aeronautical Commission, in line with Nuclear and Space commissions.”

How Realistic are the Draft DPrP’s Vision and Objectives?

Though the draft policy is quite supportive towards domestic arms manufacturing, it is nonetheless quite ambitious in its vision and objectives. To put the country among the top-five aerospace and defence manufacturing countries, as the draft policy’s vision states, would mean India joining the ranks of such countries as US, Russia, France, UK and China, which are presently the global leaders in arms production. To join such a coveted club would also mean some of the established Indian defence manufactures breaking into the club of top global arms producers. Can this happen in a realistic timeframe of say the next 10 years?

Suffice it to say that at present not a single Indian defence company figures in the list of top-10 global companies, though India is counted among the top-five military spenders in the world. As per the US-based Defense News’s list of top-100 defence companies in 2017, HAL, India’s biggest defence company, is placed at 35 and Bharat Electronics Ltd (BEL), the second biggest Defence Public Sector Undertaking (DPSU), at 59. For them to climb from their present rankings to the top 10 or 15 would be anything but easy, considering the huge turnover gap between Indian and major global companies as well as the pervasive technological backwardness of Indian entities.

Like the vision, the objectives of arms turnover and exports are also quite ambitious. At present, India’s arms production, as accounted for by the DPSUs and Ordnance Factories (OFs) – the two main players in the Indian defence production sector— is about Rs 56,000 crore (or $8.4 billion). In the past five years, the annual growth in defence production has been around seven per cent. To reach a turnover of Rs 170,000 crore ($26 billion) – a three-fold increase – by 2025 would require domestic production to grow by nearly 75 to 80 per cent per year, which is overly ambitious. The same is also true of arms exports, which recorded the highest turnover of Rs 2059 crore ($317 million) in 2015-16. To rise from that level to reach Rs 35,000 crore (a 17-fold increase) by 2025 is too much to ask for from an industry that has so far relied on technology imports for much of its production.

Draft DPrP 2018: The Challenges

Though the draft DPrP is a marked improvement over the 2011 policy, especially in terms of provisions and incentives for the industry, it still faces a number of challenges, which, if left unaddressed, may limit its usefulness. Though, unlike the previous policy, the draft 2018 policy has identified 13 different sets of items for indigenous production, these are mostly generic names and includes items which are under production or cleared for production in the near future. In other words, the policy does not identify any specific new projects by name that would have given the industry an indication of the likely business prospects. Without such an indication, the draft policy suffers from the same uncertainty that the previous policy faced. A simple step to mitigate this policy gap would have been to deduce a comprehensive production list from the approved Long Term Integrated Perspective Plan (LTIPP), which projects the services’ equipment requirements over a 15-year time horizon. The deduced list could have further been divided into two broad categories: items to be produced based on domestic R&D, and items to be produced under licence. The policy would then have focused more on the former for building domestic capacity.

The second challenge that the draft policy suffers from is the structural distance of the DDP, the implementing agency of the policy, from the Defence Research and Development Organisation (DRDO) and the Acquisition Wing of the MoD (one may also add the users to the list) as far as domestic arms production is concerned. Since these stakeholders are more or less independent (though each agency’s action impinges on others and vitally on defence production and self-reliance), reconciling their varied interests has been a major challenge in the past. From the self-reliance point of view, the Defence Procurement Procedure (DPP) has so far attempted to reconcile the divergent interests of these stakeholders, mainly through the prioritised procurement categories that give preference to domestic industry over direct import. However, since the DPP has not dramatically improved India’s defence production capability, nor changed the culture of licence production, more needs to be done. The draft DPrP does not, however, provide a concrete solution beyond some cursory remarks that other stakeholders will play their due role.

Third, the draft policy, like its predecessor, does not fully address the private sector’s trust deficit with the government, even though the former is expected to play a major role under the Make in India initiative. Notwithstanding the various promises, including that of providing open competition in contracts, the private sector has a genuine reason to mistrust the policy in the making. The mistrust is largely due to the representation of senior MoD officials in the governing boards of the defence public sector companies, which often leads to the nomination of larger contracts in their favour. It is high time that the MoD appointed a dedicated additional secretary level official to allay such mistrust, and look after the private sector’s genuine interests.

Fourth, the DPrP does not address the issues of inefficiency and lack of accountability on the part of the DRDO, DPSUs and OFs, which, being the mainstay of Indian defence industry for the last several decades, are responsible for much of the indignity of the country’s poor track record in attaining self-reliance. Instead of suggesting some bold steps to reform these entities, the draft policy merely talks of the professionalization of OFs and “disinvestment of minority stakes in DPSUs.” Here, it is not clear what the draft policy means by disinvestment of minority stakes when the government has more than majority stakes in all the DPSUs. Even these cursory remarks are silent on DRDO, indicating further the DDP’s structural gap in commenting on organisations outside its administrative domain. Without improving the efficiency and governance of these entities, it is well-nigh impossible to achieve even a fraction of the targets set by the policy. It is high time that the government took a hard look and completely privatises the DPSUs and OFs besides laying down clear accountability norms for the DRDO.

Last but not the least, the draft DPrP faces stiff budgetary constraints that may not allow the policy’s promised investments to fructify in a time bound manner. In all, the draft policy talks of investments worth over Rs 77,000 crore by 2025—–which includes nearly Rs 70,000 crore as additional investment to increase domestic production. In all likelihood, these investments will come largely from the defence budget, either directly or indirectly. To accommodate such a large investment, the defence budget has to provide an extra Rs 11,000 crore or so per year for next six to seven years. However, this may not be feasible, given the huge resource crunch that the defence ministry is presently going through and which is likely to continue for the next several years. The present fund crunch is such that the MoD is finding it difficult even to service its own financial commitments. The DPrP has to therefore think of some innovative means, such as corporate bonds, disinvestment proceeds, and monetisation of some defence assets, if it wants to keep its investment promises.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.