The defense spending in India constitutes a massive proportion of our national income, which if remains within India would generate employment and boost economic growth in form of defense oriented ancillary and auxiliary industries. If this argument is to be believed, then what is stopping the indigenization of defense procurements!
In order to answer this question, we need to understand the costs involved in setting up a defense enterprise. Apart from the cost factor, we also need to analyse the nature of defense contracts that these defense enterprises lobby for, often guided by geopolitics. In discussions ahead, we shall also debate that how the recent initiatives of Make in India and Defense Procurement Policy attempt to nurture the initial entry of Indian and foreign private players in the defense sector so that in decades to come, India becomes self-reliant and self-sufficient in development and manufacture of defense equipment.
Policy until now:
Hitherto, the defense sector in India was completely government owned and operated as private players were considered to be lacking the organizational knowledge, expertise, financial resources and managerial skills required for investment in this sector. It is true that Indians lacked the entrepreneurial abilities for running a defense equipment manufacturing firm, for the government had restricted private participation in this sector as it wanted India’s scare resources to be used for provisioning of civil goods and not military goods. Moreover, India is a capital scare country and none of the business houses in India, in initial years of independence had the finances or financial leverage to undertake the huge sunk costs involved. Even banking policy was against lending for private defense ventures.
Risks were high and rewards uncertain as technological advancements required the defense manufacturers to keep abreast with the changing technology such as developments in embedded circuits which in present times has given way to nanotechnology and artificial intelligence, supercomputing, ballistics, navigation systems, advancements in metallurgy that gave birth to Kevlar etc. Thus establishment of a defense enterprise requires the entrepreneur to have expert knowledge and resources in diverse fields as he’d have to adapt to the geology and climatic conditions of the various battlefields of the World.
Wide operational temperature range:
Military equipment that can be used for battles in desert climatic conditions requires that electronics function at high temperatures of 55 to 60 degree Celsius, whereas military equipment in high altitude areas needs to function at sub 40 degree Celsius. The semiconductor technology in India is not of such advanced military grade and this is why India needs to import military equipment from Russia which is tried and tested for operation in high altitude and cold regions such as Siberia.
Heavy R&D Expenditure:
Since India is a vast country spread over varying topographies, the battle fields extend from deserts of Rajasthan to rugged mountains of Kashmir and North East, and to cater to their diverse military equipment requirements, a manufacturer needs to adapt the electronics to both cold and hot temperatures, which requires huge investment in R&D. Even upgrades need to be carefully innovated to suit the climatic requirements. This entails R&D and lengthy military grade tests in diverse climatic conditions which enhance the gestation period of the project and delay sales and revenue inflow. Secondly, the three wings of the defense services often require the manufacturer to improvise the military equipment to gel well with their specific operational requirements which in itself is costly.
Defense contracts seldom come by:
Defense contracts seldom come forth as and when the requirement arises. In times when defense manufacturers have no contracts to fulfill, they still incur huge costs in terms of salaries and wages of employees as these employees are experts and need to be retained. The idle capacity too adds to costs of obsolescence and thus a loss. Since, private players lack the resources to finance their operations in such idle times, it is only the government with its huge resource pool which can incur losses at times and undertake manufacture of defense equipment.
It is evident that India is an ‘Emerging’ economy and her growing labour force requires employment opportunities. Moreover, India imports a large proportion of her defense need from abroad which if domestically manufactured, would not only generate employment, but give an impetus to educational institutions to impart specialized technical education in new disciplines as deliberated above, along with establishment of supporting ancillary and auxiliary industries such as semiconductor wafer technology, nanotechnology, supercomputing etc. This engagement of Indians in highly skilled activities would not only raise India’s GDP, but also save the precious foreign reserves which hitherto being used for defense imports would now be used to import advanced technological knowhow.
It is in this context that Government of India’s ‘Make in India’ initiative endeavours to encourage foreign players to set up manufacturing facilities on India soil by allowing upto 49% FDI in defense sector. The foreign players contend that the 49% figure is too low and that it needs to be raised for the venture to turn profitable. As per the Defense Procurement Policy (DPP), an attempt has been made to encourage the use of indigenously manufactured items under the initiative – ‘Indian Designed Developed and Manufactured’ (IDDM) whereby the product being developed with indigenous technology would need to use 40% domestically manufactured parts and product being developed with foreign technology would need to use 60% domestically manufactured parts. This is a noble initiative as mooted in DPP and would certainly motivate Indian private players to gradually develop organizational and technical expertise in billion dollar defense sector. It is true that India has been late to wake up to the reality of burgeoning military capital expenditure which if indigenized would catapult India on a higher growth trajectory, but lot depends on the legislative environment that India would provide to the foreign players.
The objective of India’s DPP is to build initial capacity that will enable India to be self-reliant in development and manufacture of military grade infrastructure and equipment, and with time culminate into self- sufficiency thereby ensuring no outflow of valuable foreign reserves of the country.