View: Indian defence sector waking up to the call of hour

An increased emphasis on modernization of the defence equipment, a major restructuring of the armed forces and prioritisation of defence acquisitions reflects the shift of focus towards developing India as a power hub of defence capacity. The shift in policy is in tune with the changing security conceptions on India’s land and maritime borders. The financial and tactical strength of non-state actors in Pakistan and increasing Chinese economic and military presence in the Indian Ocean Region pose security challenges to India to be addressed by large-scale mechanization of the Indian armed forces as well as a restructuring to meet such new challenges. Mr. Tribhuvan Darbari Chairman CII Aerospace & Defence Subcommittee (ER) & Managing Director & Chief Executive Officer, Texmaco Defence Systems Private Limited (TDSPL) & Chief Executive, Texmaco Rail & Engineering Limited said that we all know the fact that the country is amongst the biggest defence importers in the world but now, it is working hard to change the situation and also to enhance its capacities and capabilities at a fast pace. The initiative taken during the last few years are especially praiseworthy.

Mr. Tribhuvan Darbari says that this is a crucial time. India is facing threats on the borders, and it is vital for the Indian defence sector to fully equip its armed forces with state-of-the-art equipment and technology. The government is completely aware that India’s adversaries are continuously upgrading their military arsenal with advanced technologies, which is posing a big threat to India.

Mr. Tribhuvan Darbari further added that according to a 2019 report, the Indian government under the leadership of our Hon’ble Prime Minister Shri Narendra Modi & Hon’ble Defence Minister Shri Rajnath Singh has firmed up a mega plan to spend $130 billion to bolster combat capability of the armed forces in the next five to seven years.

Mr. Tribhuvan Darbari also mentions that with the recent cabinet approval for corporatisation of the Ordnance Factory Board (OFB), the defence sector in India has started to move forward in the right direction with much-needed reforms, which should have been initiated several years ago. Mr. Tribhuvan Darbari also adds that the standoff with China in eastern Ladakh had brought out the desperate need for modernization out in the open, and the recent initiatives will play a crucial role in the future.

According to the Economic Times – The corporatization of the Ordnance Factory Board, if properly implemented and monitored, will help in inducting the state of art facilities and technology in the ordnance factories. Along with giving more decision-making capacity and flexibility to the factories’ management, corporatization will also make them more productive and capable of earning profits by slashing the inefficient use of funds on expenditures such as overheads. It was astounding to know that overheads constituted 33% of the overall allotted budget on OFB for the year 2017-2018 according to the Comptroller and Auditor General’s Report of 2019. Adding to the shock is the fact that ordnance factories were able only to execute less than half of the orders in time.

These inefficiencies point to the pertinent need of restructuring the OFB to make it produce quality and cost-efficient equipment using the most modern technologies and innovations in the sector. The corporatization gives the opportunity to engage professionals in managerial positions of the newly formed seven Defence Public Sector Undertakings (DPSUs) and thus bring a new life to the ailing ordnance factories. After corporatization, OFBs should be free to enter into partnerships with private entities and form strategic alliances with overseas companies, thus boosting innovation and transfer of technologies. Modern products of world-class quality can be produced in this way, which can be sold to overseas buyers, thus ensuring that the OFB generates returns for the taxpayer. If Atmanirbharta has to be promoted then it should not distinguish between the public sector and private sector. Both will create jobs and also pay taxes to the treasury. The government must maintain competitive neutrality so that the whole defence industry prospers in a competitive manner.

Apart from this, corporatization also reduces the financial burden of the union government at a time when its coffers are struggling, because the Defence PSUs will no longer be entirely dependent on government funds. The DPSUs can now source funds using different means such as listing in the stock exchange. By achieving financial independence, the DPSUs can spend more on R&D, thus boosting innovation and modernization of products. Advanced weapons and equipment can be made at competitive prices by the new DPSUs.

The OFBs (the new Opto-Electronics DPSU) should develop advanced drone detection technologies to tackle the new threat imposed by India’s neighbours. New drone and Unmanned Aerial Vehicle (UAV) designs and technology can be developed with the help of the iDEX system, developed by the government of India. A potential collaboration with Israeli and US defence sector companies will help in the production of modern defence equipment in drone and UAV domains. Israel is already in line to supply advanced Heron Mark-II drones to India for strategic surveillance in the borders.

Mr. Tribhuvan Darbari says that not only OFBs but the defence sector in India has also gone through several significant reforms as part of the Defence Procurement Policy, 2020 (DPP), that will ensure huge transformation in the architecture and capabilities.

Initiatives for Modernisation of the Defence Sector

• Capital Acquisition Budget (CAB): The Defence Ministry has decided to earmark around 64% of its modernization funds under the capital acquisition budget for 2021-22, a sum of Rs 70,221 crore for purchases from the domestic sector.
  • For FY 2020-21, the capital budget allocation for domestic vendors was made at 58%, an amount of Rs 52,000 crore.
• MSMEs and Startups: This increase in CAB will have a positive impact on enhanced domestic procurement, having a multiplier effect on the industries including MSMEs and start-ups.
  • The Defence India Startup Challenge (DISC) started by the defence ministry shall be lauded; over 1200 MSMEs participated in the fourth edition of the DISC in 2020.
• Self-Reliant and Make-in India: It would also increase employment in the defence sector. Hence, it is a welcome step towards encouraging Atma Nirbhar Bharat and Make in India.
  • The government in its negative list has included light combat helicopters, artillery guns; these items will not be imported by anyone thus encouraging self-reliant India.
  • The SRIJAN portal has also been launched to facilitate the two initiatives.
• Other Efforts: The government has taken initiatives like de-licensing, deregulation, export promotion, encouraging FDI, etc to liberalize the defence industry.
  • In the last 3 years, 118 of the total 191 projects which have been sanctioned have gone to the Indian industries.

One such major reform is the rise in the Foreign Direct Investment (FDI) automatic approval from 49% to 74% which will help in attracting foreign funds to the defence-oriented ventures in India. It will potentially lead to sharing of the most modern technology and the know-how in defence technologies between foreign and Indian companies. If responsibly used, this can bring revolutionary changes in the defence manufacturing sector in India. There are other reforms such as a separate capital budget for indigenous weapons procurement and a negative list for import of defence equipment in India, which will help in achieving self-reliance.

The DPSUs should also be empowered to receive offset funds from foreign companies which are supplying defence equipment to India. They are required to invest 30% of their gross receipts in Indian firms. Currently, many foreign companies do not find the necessary opportunity to invest in their offset obligations.

The Economic Times further mentions that the corporatization of OFB and other changes which the defence sector in India is introducing won’t be effective and achieve the desired outcomes, unless constantly monitored and evaluated by third parties. The Policy Planning and Force Development division of the Integrated Defence Staff College in India can undertake a detailed study of how the ordnance factories in a select group of countries are functioning and what lessons India can draw from them in terms of monitoring and evaluation. If the reforms are ensured to be implemented to their fullest, it can lead to revolutionary changes in the Indian defence sector. It will enable the sector to achieve self-sufficiency and reduce the huge burden of the defence sector on the national treasury. We should strive to get rid of the tag of ‘second-largest arms importer in the world and aim to become a big exporter of defence equipment.

Sources:

Economic Times: Indian defence sector waking up to the call of hour

NDTV News: India Bringing Modern Technologies From Around World For Armed Forces