Make in India must help reduce import dependence of defence manufacturing sector
By Santosh Mehrotra
India is the largest importer of defence equipment in the world. It imports 70% of its weapons and technology, and this has its own costs, the kickbacks and corruption being only one of them. Between 2004-08 and 2009-13, India’s share of international arms imports increased from 7% to 14%. Russia was the largest supplier (75.7%) of India’s defence imports, the US a distant second (6.8%).
This import dependence needs to change with a focus on ‘Make in India’, so that India makes at least 50% of its defence equipment in less than a decade. It will save foreign exchange, build technological capacity for civilian manufacturing and grow new skills. If we export defence equipment, it can generate forex. Just as India’s space missions and nuclear R&D have dual civil-military use, so does defence manufacturing.
India has purchased weapons worth around $10 billion over the last five years from the US, but without any transfer-of-technology (ToT) clauses. Future acquisitions should include ToT clause. The aim should be to make India a design, development, manufacturing and export hub for defence equipment, just as China succeeded in doing so between 2000 and 2010. Experts report that China was at the stage India is in now in the late 1990s, a situation it transformed within a decade.
The Defence Technology and Trade Initiative (DTTI) signed on January 22, an earlier agreement with India the US extended during the Obama visit, is to pursue co-development and co-production in four projects (two involving US government and two with US companies) to advance the DTTI. They will explore aircraft carrier technology-sharing and design, and possible cooperation on development of jet engine technology.
For some 50 years after Independence, no private sector participated in the manufacture of Indian-made defence equipment. Indian defence production was confined to Defence Public Sector Units (DPSUs) till 2001. Decades of defence ties with the Soviet Union/Russia did not result in an Indian domestic defence industry. However, like the emergence of an automobile industry in India in the last two decades, this can be changed through growing private sector participation.
But the defence industry, unlike the automobile sector, operates in a monopsonist (single demand) market with government as the only buyer, leading to greater business unpredictability for private players in defence, both foreign and domestic. India needs to encourage exports to reduce this unpredictability. With the added constraint of an FDI cap of 26% till now (raised to 49%), India received only $5 million in defence FDI over the past decade.
In 2013, the US offered 10 joint production projects to India, including a maritime helicopter, a naval gun, a surface-to-air missile system, a scatterable anti-tank system and a mindset change in favour of TOT to India in defence. New Delhi had decided recently on a defence equipment policy regime. Indigenous content, eg. 30%, is to be achieved on an overall cost basis, as well as in core components i.e. the basic equipment, manufacturer’s recommended spares, special tools and test equipment taken together.
Not surprisingly, large Indian companies (Tata, Mahindra, and Larsen & Toubro), have entered into joint ventures with leading foreign defence companies. Thirty licensed private companies commenced commercial production and about 23 joint ventures, involving public and private companies, had been established till 2012.
For Make in India in defence, FDI will be needed for heavy capital and technology requirements, to build global supply chains involving multiple vendors in India, to rapidly implement projects to avoid obsolescence. We will have to wait to see if the operationalisation of the DTII yields results, now that the US has agreed also to an Advance Pricing Agreement (APA). Washington backing the APAs could well reduce a potential tax-related hurdle in securing US investment generally, including in defence.
But above all, to become a major defence manufacturer, India needs to reexamine its structure of governing defence production, as the Chinese did in 2000. Earlier, the Chinese defence industry was separated, Soviet-style, between R&D and manufacturing units.
The Chinese leadership allowed the military a central role in overseeing the defence industry. With end-users involved, the result was a surge in innovation. In 1998, the Chinese defence industry filed for 313 patents; in 2010, 15,000.
India’s defence industry today mirrors its Chinese counterpart in 1998. The R&D element (the
DRDO) functions separately from the manufacturing segment (the defence PSUs). That has to change.
(The writer is Professor of Economics, JNU)
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