Being AtmaNirbhar in Defence Industry

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Following Prime Minister Narendra Modi’s “Vocal for Local” call and launch of Atma Nirbhar Bharat Abhiyan (Self-Reliant India Campaign) on May 12, 2020, the Ministry of Defence (MoD) has tweaked its capital acquisition manual to promote greater self-reliance in the defence production, while addressing the previous concerns. On August 8, 2020, Defence Minister Rajnath Singh’s tweets signaled that India is seriously looking at stepping up production to match indigenous defence requirements.

Over the decades, India has set up many committees like the APJ Abdul Kalam Committee, Arun Singh-headed Group of Minister’s (GoM) Task Force, Kelkar Committee, Sisodia Committee, Naresh Chandra Committee among others to indigenize the country's defence industry. According to the 2019 report by Stockholm International Peace Research Institute (SIPRI), India's defence expenditure stood at $71.1 billion in 2019, which is the third-highest after the US and China. In 2017, the government came up with an ambitious policy under which select private firms were to be roped in to build key military platforms like submarines and fighter jets in India in partnership with global defence majors. The expenditure on defence constitutes 15.5 per cent of the Indian Central government’s budget and 2.1 per cent of India’s estimated GDP for 2020-21. In the Union Budget 2020-21, the MoD was allocated Rs 4,71,378 crore in which expenditure on capital outlay is Rs 1,07,233 crore (23 per cent of the defence budget).

Defence Research and Development Organisation (DRDO) has always been at the forefront of indigenous design and development of defence equipment, with many remarkable achievements in strategic programmes, such as the recent successful conduct of Mission Shakti, an anti-satellite (ASAT) missile test. However, with regards to conventional arms, there has been a deep-rooted perception that the DRDO has not been so successful, even though the organisation, with all its human resource and budgetary constraints, has designed and developed a range of complex systems including Light Combat Aircraft (LCA), Main Battle Tank Arjun, Pinaka multi-barrel rocket system, advanced towed artillery gun, and myriad other weapons and sensors. In terms of value, the DRDO-designed products (other than strategic systems), whether inducted or in the process of induction, amount to Rs 2,65,007 crore, as of 2017.

To see a visible change, the Prime Minister also needs to address the demand side of the self-reliance problem in defence, which, in essence, is rooted in the inadequacies of civil-military relations and lack of political guidance to Armed forces under a National Security Strategy (NSS). Without doubt, the recent structural reform through the creation of the post of Chief of Defence Staff (CDS), who is also the Permanent Chairman - Chiefs of Staff Committee (PC-COSC) and head of the Department of Military Affairs (DMA), has boosted the possibility of improved civil-military relations. For long, in the absence of a mother document like the NSS, the Armed Forces, through the Headquarters Integrated Defence Staff (HQ IDS), have formulated the draft of the Raksha Mantri’s operational directive which is then approved by the Raksha Mantri; in reality, the Armed Forces were scripting their political guidance. The problem was compounded by a lack of expertise within the MoD. That inadequacy has been addressed by the creation of DMA. So, now, while the MoD is better equipped to provide political guidance, it is still severely handicapped in the absence of the NSS.

Recommending replacing of foreign-produced items in CSD with locally produced items

The need for self-reliance has further been intensified by the Chinese belligerence and killing of Indian soldiers in eastern Ladakh and the subsequent public outcry for banning Chinese products. Thereby, the Indian government has restricted predatory acquisition of Indian companies by China, disallowing global tender enquiries in government procurement of goods and services of up to Rs 200 crore, and banning video-sharing TikTok app and 223 other Chinese mobile applications which are considered inimical to India’s national security and public order.

Another area where the MoD could push Prime Minister’s Atma Nirbhar campaign further is through the Canteen Stores Department (CSD) — an attached organisation functioning under the MoD — by mandating it to ban the selling of imported items and dealing primarily with only India-made items. The CSD, provides “easy access to quality products of daily use, at prices less than market rates, to the uniformed personnel, ex-servicemen and their families, select paramilitary forces and defence civilians. It is now one of the largest retail chains in India, catering to the requirements of 12 million consumers.

All CSD items are sold invariably less than the prevalent market price. This is made possible by the bulk-buy at a discounted price from around 600 suppliers and rent-free retail outlets run as URCs within cantonments and other establishments. Moreover, the government subsidises half of the tax levied on the products. The total tax forgone by the government is around Rs 1,200 crore in 2018-19. Significantly, despite the margin profit, the price of goods remains significantly lower than the market price in most cases. Half the profit is deposited in the Consolidated Fund of India (CFI) and the remaining half is used for the welfare activities of the beneficiaries. During five years between 2014-15 and 2018-19, the CSD deposited a total of Rs 835 crore with the government.

Of the 5,500 items sold by the CSD, around 420 items are imported via various Indian suppliers. The imported items are procured from around 25 countries where China accounts for the bulk of the imported items. This assumes importance considering that the taxpayers’ money is used to partly subsidise items sold by the CSD.

The Negative List and its Significance

Subsequent defence-specific reforms were announced by Finance Minister Nirmala Sitharaman on August 9, 2020, through a negative list of 101 defence items which are banned for import, to be progressively implemented between 2020 to 2024. The list of embargoed items, which comes days after the MoD released two more domestic-friendly documents — the draft Defence Acquisition Procedure 2020 (DAP-2020) and the draft Defence Production and Export Promotion Policy 2020 (DPEPP-2020), were promulgated along with bifurcation of the capital procurement budget between the domestic and foreign sources. Moreover, FDI limit in defence manufacturing under automatic route is hiked to 74 per cent from the existing 49 per cent.

Among all the listed weapons and platforms, 69 items are banned for import from December 2020, 11 from December 2021, four from December 2020, eight each from 2023 and 2024, and one (long-range land-attack cruise missile) from December 2025. The staggering timelines seem to be driven by the current developmental status of various projects being undertaken by the DRDO, Defence Public Sector Undertakings (DPSUs), Ordnance Factory Board (OFB) and the private sector at large.

With the negative list in place, the MoD estimates that orders worth Rs 4 lakh crore (US$ 53 billion) will be placed on the domestic industry in the next five to seven years. Of the total value, Rs 1,40,000 crore worth of contracts are expected to be placed by the navy, while the army and air force are likely to sign deals worth Rs 1,30,000 crore each. The expected orders above Rs 3.5 lakh crore (US$47 billion) were already placed by the three-armed forces between April 2015 and August 2020. This will benefit the ability of the Indian industry, which is otherwise known for inefficiency and poor innovation, to design and produce a vast range of complex weapon systems.

Conclusion

For the defence sector, ‘self-reliance’ has remained elusive for seven decades and India remains the second largest arms importer on the global stage. Import dependence and consequent strategic vulnerability have long been an area of concern. Despite continuous efforts, indigenisation has remained a losing battle and its turnaround will mainly depend on reforms in India’s military-industrial base, which is the supply side. With all these measures in place, the Indian industry is likely to be the biggest winner as all the identified projects are to be executed within India. This does not, however, mean that the foreign companies will not have any role in the identified projects.

All eyes would now be on the MoD, particularly the DMA, as to how the projects are implemented. There is a belief that global players like Lockheed Martin, Boeing, Airbus and Dassault Aviation will now set up manufacturing hubs in India and bring niche technology without hesitation as the firms will have majority stakes in their Indian subsidiaries. The finance minister also said that Ordnance Factory Boards will be corporatised for better management and eventually get listed on the stock market. For the time-bound defence procurement process and faster decision-making, project management unit (PMU) to support contract management will be set up.

So, while the Rs 20 lakh crore economic package announced is the developmental push, there is no room to neglect India’s military preparedness. Asking the military to stop importing, is short-sighted and ignores national security imperatives. Both of India’s adversaries are nuclear powers and, therefore, the utility and application of force will have to be governed by the reality of the nuclear shadow. There is a need for the military to embrace the concept of ‘useable military power’ and differentiating it from ‘deterrent military power’. Security and development are two sides of the same coin.

On paper, it is a great boost to India's defence production capabilities, an opportunity for Indian industries with interest in defence production to pocket huge money at home, a giant leap for the country to be self-reliant in defence with homemade weapons and nearly a magic wand to achieve the ambitious goals of Atma Nirbhar Bharat. It is left to see whether Prime Minister Modi’s target of $5 billion worth of military exports in the next five years will be achieved or not.

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Madhulika Baniwal is a Research Associate (Policy and International Relations) at Society of Indian Defence Manufacturers, Confederation of Indian Industry, New Delhi.

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