The New Defence Production Policy in the Making: Is it Overambitious?

At first glance, the government’s proposed new defence Production Policy (http://ddpmod.gov.in/sites/default/files/Draft%20Defence%20Production%20Policy%202018%20-%20for%20website.pdf), currently put out in draft form for comments and suggestions, appears to be overly ambitious in its scope and vision. For instance, the draft policy says, “to reduce current dependence on imports and to achieve self-reliance in development and manufacture of following weapon systems/platforms latest by 2025:

Fighter Aircraft, Medium Lift and Utility Helicopters, Warships, Land Combat Vehicles, Autonomous Weapon Systems, Missile Systems, Gun systems, Small Arms, Ammunition and Explosives, Surveillance Systems, Electronic Warfare (EW) Systems, Communication Systems and Night Fighting Enablers.” Given the experience so far, a seven-year timeline to design, develop and manufacture the above mentioned platforms is a tough ask.

A closer scrutiny however reveals that a deliberate road map is being evolved to make India one of the top five defence and aerospace hubs in the world that can create and support jobs for two to three million people by 2025. Hindustan Aeronautics Ltd (HAL), India’s only aeronautical company, is already making the Light Combat Aircraft (LCA). But it will need major financial and technological boost (may be even a strategic tie-up with an aerospace major), to meet the ambitious

objective that the Department of Defence Production wants to achieve in a relatively short span of seven years, even partially.

Other private sector Indian companies have accumulated expertise in some crucial areas of late through JVs and ToT so together with DPSUs and OFB, they can indeed help government to try and reach the ambitious goal by 2025.

Aiming to reach a turnover of over 26 billion dollars in the Indian defence sector by 2025, the Department of Defence Production under the Ministry of Defence (MoD) has proposed several major changes in rules and regulations that have so far governed the sector in accordance with the 2011 Defence Production Policy.

One significant new proposal is to allow 74 per cent Foreign Direct Investment (FDI) via the automatic route in niche technology areas. If implemented, major Defence and Aerospace players across the world are likely to make big plans for India since the current 49 per cent limit has so far failed to attract any major investment. The world’s large aerospace companies—hoping to corner big business from the Indian Air Force (IAF)—are sure to look at this option more seriously since the enhanced limit will give them the necessary controlling stake in the proposed manufacturing facilities in India. While the planned new acquisition of combat aircraft for the IAF could be a long drawn out process, military aviation majors could potentially look to establish assembly lines in India and export their products across the world.

The draft policy’s suggestion to include investment linked option under the offset guidelines will also likely ease the process of discharging offsets. Currently, nearly 20 billion dollars’ worth of offsets are pending execution because of various reasons.  However, the final policy guidelines must make sure to impose limits to foreign investment in Indian companies as part of the offset obligations. Otherwise there’s a danger of smaller Indian entities being bought out by bigger players with deeper pockets.

One more welcome feature in the proposed offset changes is to allow Indian offset partners to export parts and accessories developed /manufactured under the offset discharge programme. If implemented, it will provide one more revenue stream for the Indian offset partners.

At the same time, the draft policy recognises the need to limit the role of the state-run defence sector units to niche areas while simultaneously proposing several measures to boost participation of Indian MSMEs and innovators.

Already over 250 ‘non-core’ items earlier manufactured and supplied by the Ordnance Factory Board (OFB) and Defence Public Sector Units (DPSUs) have been taken away and given to private sector. One would have however liked more clarity on steps to revamp and revitalize (and may be partially privatise) the OFB facilities and DPSU units.

The policy does talk about some steps to improve productivity in OFB and DPSUs, the government is unlikely to take any drastic step to shake up or downsize these facilities in the immediate future, fearing backlash from unions and well-entrenched interests since over 100,000 people are employed in these units.

The draft policy states: “OFB/DPSUs will be encouraged to increase productivity and timely execution of orders by addressing issues of high inventory handling, greater vendor outsourcing, improving skill levels, overall programme management etc. Ordnance Factories will be professionalised to make them competitive and improve their productivity.” It also adds that ‘Disinvestment of minority stake in DPSUs will be pursued’.

On another front, increasing defence exports from India is a laudable objective but given that so far Indian products have not found much favour outside the country, the aim is difficult to fulfill in the suggested time frame, although one must acknowledge that in the past couple of years, exports have shown an upward trend.

Overall, the new draft policy is a leap of faith that will need ‘all of government approach,’ to succeed. We can hope for the sake of the country and the armed forces that further liberalisation and improving the ease of doing business in defence will make that objective achievable.

NITIN A GOKHALE