Cover Story: Rise in India’s Defence Sector

Intro: If India wants a viable Defence innovation economy then it should launch a ‘Defence Industrialisation Drive’ and its states should also play a role in supporting technological breakthroughs to create an advanced science nation.

India has the dubious distinction of being the largest arms importer in the world, accounting for 14 per cent of global arms imports, thus foregoing the opportunity to create advanced manufacturing eco-systems, jobs and skills in the country.
The problem is that though India has achieved impressive technological breakthroughs, it is not geared to generate advanced manufacturing technology. As the world enters the post-industrial age, it has never been more critical to control advanced technology, with MIT and McKinsey forecasting that new disruptive technologies—Artificial Intelligence, Robotics, 3D Manufacturing, Nanotechnologies, Embedded Technologies and Genomics—will add trillions of dollars to the annual economic growth of developed countries. That is why the race for power in the 21st century is really a race to gain the upper hand in technology. This is why China has massively increased spending on R&D and is poised to overtake even the US in this area. Hence it is imperative that India should focus on creating the right conditions for indigenous R&D and technology generation.
Instead India has remained stuck in the licenced production mode. The Forum on High-Tech Defence Innovation met for the 5th time in November 2014 to formulate solutions. The Forum’s deliberations had an impact on policy makers, in Defence FDI, and Offsets in the Aerospace and Electronic Sectors. The Forum concluded that India should launch a Defence Industrialisation Drive to achieve all the above objectives based on the four Ashokan pillars of RISE: R&D (R), Indigenous Indian Industry (I), the Science State (S), and Education (E). It made the following recommendations under each Pillar.
I. ‘R’ for Research and Development

• India should double its R&D/ GDP ratio to 1.75 per cent by 2016.
• India must create special funds to boost R&D along the Israeli model.
• Procurement rules must be reformed to encourage innovation.
• India must create many science-cum Industrial cities/zones which combine Education, Technology Research Universities, R&D and Manufacturing.
• India must develop and set its own defence, naval, telecom and electronics specifications and standards.

II. ‘I’ for Boosting Indigenous Indian Industry
The Forum recommended strengthening of Defence Offsets as a tried and tested route widely followed by other countries to promote defence industrialisation. 100 per cent Offsets on Defence imports estimated at US$100-200 bn would boost the Indian economy by a similar magnitude. Offsets are thus the logical way forward for India too.
But the worldwide success of Offset policies has been well hidden from Indian policy makers by vested interests that thrive on imports. There is enormous pushback to suggestions to strengthen our own Offsets regime from Indians themselves.
But the best argument for Offsets is that if these were really so harmful, why would scores of countries be attributing the success of their Defence industrialisation drives to Offsets? Japan, Canada, Poland and Croatia are implementing Defence Offsets. Israel has a National Offsets policy (Industrial Co-operation Programme) which extends beyond Defence. Turkey became a major exporter of Defence equipment by successfully leveraging Offsets, whereas today Brazil and South Korea supply 70-80 per cent of their own Defence equipment because of successful Offsets policies. Brazil and China created aircraft manufacturing sectors through Offsets, whereas India frittered away Civil Aviation Offsets.
So the end result is that even though we have the maximum leverage, India has one of the weakest Offsets policies in the world. No wonder India–the world’s 11th most industrialised nation gets worse concessions than tiny Croatia and smaller countries.
The Forum recommended:

• India must leverage the opportunity of huge Defence imports by strengthening Defence Offsets provisions by:

• Raising the quota from 30 per cent to between 70-100 per cent.
• Reducing the minimum threshold to US$ 5 million.
• Ensuring full Technology Transfer with full export and production rights.
• Under 100 per cent Offsets, indirect Offsets can be permitted to develop the overall ecosystem – education, skills base, training in technology, and vocational skills.

• Institute a National Offsets Policy in Defence, Aircraft, Telecom and Electronics.
• Huge hardware equipment importers in Service Sectors should have mandatory Offsets.
• Training of Ministry of Defence officials handling Offsets should be mandatory, as the real bottleneck in increasing the percentage of Offsets lies in the institutional inability to handle large flows of projects.
• Have strict oversight and audit.

Boosting Indian Industry:
India is the only major power that does not have an integrated Production Manual or what is called an RDA (Research, Development & Acquisitions System). In countries with advanced Defence production sectors—the entire flow chart from indigenous research, development, production, to final deployment and acquisition—is outlined in the RDA, thereby supporting domestic production. Its lack underlines the fundamental difference between producing countries like the USA and China, and importing countries like India.

• A clear and simple Defence production manual, not a convoluted Defence Procurement Procedure (DPP) which skips the research and production stages of acquisitions—should be adopted along the lines of countries with advanced defence production.
• The misnamed Preferential Market Access (PMA) policy can boost innovation and growth in allied sectors which will have a spin-on effect on the military sector.
• Indian industry should get priority in Defence procurement orders as opposed to OEMs. Indian firms or consortia must be designated as Lead Integrators for Defence Offsets and manufacturing projects.
• Tax/fiscal policies should not discriminate against Indian Industry vis-a-vis OEMs.
• A ‘Buy Indian Act’ along the lines of the ‘Buy America Act’ should be adopted.
• The MRO market must be exploited reversing the unilateral grant of air seats under bilateral ASAs to help make India an aviation hub.

III. ‘S’ for Science State
America’s technological achievements were made possible with active State intervention and funding. The State plays a key role in all advanced countries with major Defence production capabilities. If India wants a viable Defence innovation economy, it will have to play a similar role in supporting technological breakthroughs, industrial policy and finally – disruptive innovation to create an advanced science nation.
IV. ‘E’ for Education Reform
Creating skilled manpower and educational base for defence industrialisation

• Defence industrialisation will require an enormous supply of scientists, engineers, skilled technicians and operators.
• Funding for education needs to be massively increased.
• Infrastructure for skills training must be massively expanded. The German model of Applied Science Universities which feeds directly into its high-tech industrial sector can be applied in this regard.
• Defence technology and research-oriented universities must be established.
• Provisions favouring endowments to educational institutions—like the American Inheritance Tax Laws, should be incorporated in Tax Laws.

A New Manthan
Fortunately, Government is open to new ideas and is implementing confidence—instilling measures—like improving India’s rank in WB’s Ease of Doing Business Index and giving many Defence projects to domestic industry. All this will give a push to building a dual-use, high-tech, post-industrial economy including a Defence Production Sector which will benefit India’s security and national welfare.
Smita Purushottam (The writer is Ambassdor to Venezuala)