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Modernisation of Chinese Military : Impact on India : Procurement Focus

The dragon smiles with a pinch all around. The conclusion of the 19th Congress of the Communist Party of China (CCP) has thrown up a new dimension in the geo-politics of the region. Mao’s legacy is history, so it seemed after his enigmatic portrait was replaced by the one and only one towering visage, Xi Jinping. Selection of a 200 member central committee, a 25 member politburo and an Apex Politburo Standing Committee (PSC; having just five to nine most powerful party leaders) is the hallmark of the event at the Great Hall of the People. There are no surprises here, Xi Jinping will be central to all and central to the central leadership, that’s how it works, more work behind the curtain than what is seen and heard.
Welcome to the emerging new world order. Trump and Modi leading the two largest democracies of the world, Abe returned to power to institutionalize the reforms he has conceived and worked for, Xi returned with a larger than life enigma, and we have Kim Jong Un and leaders like Kim to provide for the balance of geopolitics. What are the major implications for the largest democracy in the shadow of these developments and how must we position ourselves in this new world order.
Xi has emphasised that the PLA is vital for the party and hence a need to keep them close to themselves, well it is no secret that Xi’s spouse is a serving Major General in the PLA. Idea is to have an expert system and yet retain complete control over them. The CCP now infiltrates all organs of governance and corporate. In an effort to woo the PLA, PLAN, PLAAF, rocket forces and others, the underlying emphasis would be on modernisation of the Armed Forces, to keep them loyal and ready.
The thrust of the PLA’s modernisation is based on the concept of non-contact wars which rely on psychological operations that compel the enemy into submission without an actual military engagement.
An effort in the reorganisation of the PLAAAF has witnessed a flattening of the apex structure with Xi calling all the shots, he is known to be present in the Military Operations Planning Room and in direct conversation with the theatre commanders. The concept adopted is a limited war under Informed conditions; smaller military objective with major political connotations. Information Warfare, Electronic Warfare and Surveillance are integrated and applied as a single homogenous entity. While the 21 group armies in the 1990s has reduced to just 13 Group Armies today, the quality of recruitment as wella s arms and equipment has improved considerably. They train in an exclusive area of about 10,000 Sq Km, a unique and tough concept indeed.
PLAN intends to incorporate 65 Destroyers and Frigates, of which they have 21 x Destroyers, 35 x Frigates, 20 x Corvettes and notably 56 Amphibious ships. They are progressing towards a Blue-Water Navy(PLAN); as they consistently increase their tonnage and can meet a wide range of operations. The Ari Craft Carrier capability is equally large.
Aircraft carriers can be bought off the shelf or for that matter a Strike Corps is not as much as a problem as it is to deploy them, train them to become battle worthy. Their combat capability has increased since the modernisation drive began in 2014.
While China is racing ahead in its drive to modernisation, we have not even been good spectators. China’s new round of modernisation of its Armed Forces began in 2010 indicating major progress in 2020 and to fight and win wars in the mid 21st century. They would keep talking and keep nibbling, confusing the world and yet eating into real estate on ground, at sea and in the air. A larger emphasis is on IW, EW, and ensuring information dominance. Their foray into Space is admirable, with the military(PLA SSF) in complete control of all Space programs and IW. They have 181 satellites in orbit from a meagre 10 (in 2000). What is of importance is the importance given to Cyber W and IW since Xi Jingping heads the Centre for Cyber Space Affairs. Investment in skill development is note-worthy with a demand of 1.2 million work force by 2020 from a present demand of 700, 000(of which the country is able to field only 30,000 as on today.

Where are we?
Acquisition of the Rafales from Dassault Aviation of France has brought about a sense of ascendency in the might of IAF, parity in capability was always in the favour of the IAF. Additional Rafales, the ongoing discussion needs to be taken to a logical conclusion, thus arming the IAF with a capability to set the Chinese thinking. Our military balance is more equal due to the SU MKI and now the Rafales.
Acquisition of the Single Engine aircrafts, is another important milestone that would set parity at a more equal level, both in quality and quantity. Gripen E next generation, is a natural choice given the advanced technology incorporated and the state-of-the art features. Aerospace industry in India is set to grow to levels never seen before. US would be happy with this choice for the important part of engines and few other systems belong to them. Single engine aircrafts will also help assist the AMCA program in stealth capability, while expediting its development.
Air to air refuelling capability has been put on the back-burner, needs to be revived.
Advanced US technologies incorporated in the Predators and Avengers would integrate such capabilities both in terms of passive and active intervention(when required). This would endeavour to enhance our IW capabilities in the Sub-continent. Cooperation with the US for being a part of the “Fish Hook”, the improved sound surveillance system as also the General Dynamics developed “DRAPES(Deep Reliable Acoustic Path Exploitation System)”, to get reliable information on the movement of submarines in our area of interest. As Russia, and especially China, have developed larger and more advanced submarine fleets, the U.S. Navy has had to re-learn old Cold War anti-submarine warfare competencies while developing new capabilities to tackle more challenging modern submarine technology. Using cueing data from those platforms, improved local anti-submarine assets like the P-8I Poseidon sub hunter aircraft(ASW capabilities) and surface combatants with new, improved towed sonar arrays of their own, like the Multi-Function Towed Array, can then close on a target, and track or engage it as needed. Use of UAVs in tandem is a force multiplier.
The acquisition of A-330 based AWACS is a long pending program, the government may like to pursue to achieve the over-arching capability in IW and command and control of the areas of Interest. This will be in sync with the other programs that are in the pipeline In addition, Amphibious aircrafts from Japan is an essential pre-requisite to project force in areas of interest, besides enhancing maritime amphibious capability both at sea and across the Brahmaputra.
Capitalising on the progress made in the Indigenous EW Program, it is a neighbourhood call to enhance capabilities in EW and IW, incorporating all facets of IW. Information Ascendancy is a battle wining factor. If the Chinese had a Sun Tzu, we have a Chanakya Niti. The greatest recorded war in history, the Kurukshetra war, is replete with examples of Information Warfare in aid of the greatest of Army Commanders ever on a battle field. Our leadership needs a lesson or two from the Bhagwat Gita, to improve upon IW, EW, Psy W, Cyber W and create a potent force to deal with Information and cyber.
Does a requirement exist for us to re-evaluate our capabilities in IW and space and initiate an effort to integrate the capabilities for a national benefit and not relegate it to a specific service, to create and enhance national capability.
The SSBN capabilities of China are not much to talk about and our own Prithvi has more than matching capability and Nirbhay successfully tested for more than 1000 Km range; with the steady progress in the IMDGP, we would retain the leadership position in the subcontinent. In the application of Force, we would retain a more than equal capability.

Is there more we can do?
Yes, much more, but then, we may like to address the programs that have been listed above, they are already in the pipeline.
The programs in the pipeline will provide us with a Airborne EW capability duly integrated with UAVs, UAS, shipborne sensors, ground based EW capabilities and an ascendancy in IW. This is an essential pre-requisite for launching of operations.
We are at a cusp of a Defence Industrial Revolution, with the more friendly Defence Procurement Procedures (DPP 2016), the implementation of Strategic Partnerships and a number of MAKE programs on the anvil, the government will do well to put into action all of the above programs to enable them to fructify by 2020.
We as a nation have little choice but to actively speed up modernisation for the Indian Armed Forces. Let the Armed Forces guard the nation effectively and let the nation equip the Armed Forces efficiently.

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India gets a new Defence Minister in Smt Nirmala Sitharaman

Elevation of Smt Nirmala Sitharaman to the post of the Defence Minister is a master Stroke in Modi’s strategy. Defence industry is the major ailment  of the defence sector suffers in its road to progress. The Synergy between the Ministry of External Affairs,  Ministry of Commerce and industry and the Defence Ministry would ensure harmony In International relationships and a show of strength on the military diplomacy. For a democracy it is essential to optimise international relationships with an element of military diplomacy and that’s exactly what the Modi government is doing.  We cannot but appreciate the choice of the Defence Minister at this point in time when many programs are held up and the newly announced strategic partnerships policy is ailing. The path to success will be pinned on the initiatives from Nirmala Sitharaman to push the strategic partnerships towards logical conclusion and conclude the contracts before October 2018.  Major programs and inviting of foreign direct investment into the Defence sector is one of the key areas that the Prime Minister was looking at.  This can be achieved if at all,  only by Nirmala Sitharaman. We are in for good times and interesting times. – Col K V Kuber

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How Strategic Partnerships will change the Indian Defence Industry Ecosystem

Systemic changes to the environment around us has affected our thought processes to have an enhanced look at ourselves. This is what the Modi government has done to us, has made us feel better of ourselves and also empowered us with the ability to achieve what we always wanted to. Among the 23 identified sectors for Make in India, the PM has chosen the Defence sector to be the key one. Much talk of reversing the import ratio of 70:30 for more than a decade without any work done on ground. Manohar Parrikar led Defence ministry embarked upon a series of reforms amongst which the Strategic Partnership figured towards the end. This was essentially to ensure that the ground work is done to enable the industry and the nation to respond to the Strategic Partnerships in the private sector, in the manner envisioned by the Dhirendra Singh Committee(of which the author was a key member).

Vision, was to arm the Forces with the state of art weapons and systems for them to engage with the ever-provoking enemy both from within and without. Key strategic procurements cannot be relegated to a vagaries of a procurement procedure(DPP), that handles routine procurements. Delays in decision making, have crippled the Forces as never before.

For example, the procurement of 126 fighter aircrafts in the much talked about MMRCA, began in 2004 or so and RFP was issued in 2006 and no decision was taken till 2016, despite down selecting the lowest bidder in 2013. This is essentially because we drafted a QR for an aircraft that was never made and the global majors such as Boeing, LM, Eurofighter, SAAB/Gripen, Mig, Dassault/Rafale, were competing for the deal. It would have been wiser for the IAF to have placed a finger on the aircraft they needed and rest left to the MoD to make sure the deal is done in a timeframe that the IAF wants. Ideally, such deals must be negotiated between governments to iron out any misgivings and assure support at the government level.

In the same manner as the MoD is able to place orders/indents onto the OFB and DPSUs on a single tender basis; an enabling condition was necessary to extend this to the private sector; thus came about SPs. There is space for everyone, the OFB, DPSUs and the private sector, demand side being strong a balanced approach is expected.

Indian Defence Industry has grown beyond the realms of the OFB and DPSUs to include the private sector as a force-multiplier. While it may be argued that the infrastructure investment in the private sector is way too low, well the game has just begun. In the past five years there have been many private sector companies that have bagged large orders from the MoD. L&T with the K9 Guns in collaboration with Hanwa Techwin, Tata Power SED for the mountain warfare EW systems, Alpha Design for various programs in communications and EW and as recently with ISRO, just to name a few. There are also many examples of private sector actively supporting the Public sector such as the Global Engineers building the explosive plants for OFB, VEM technologies developing their own ATGM with home grown technologies, and so many more. India’s geo-political and economic ambitions have grown significantly. Establishment of a robust indigenous manufacturing capability supported by a energetic and vibrant ecosystem in the Aerospace and Defence industry is the call of the hour.

 

The un-enviable security environment in the Indian subcontinent region, places huge demands on defence requirements. In the foreseeable future, this will only increase thus making indigenous development of modern defence hardware and technology a top priority for the government.

DPP 2016 was indeed a game changer,  a transformational one ringing about such lasting changes with a focus on indigenous design, development and increased manufacturing. With the government’s agenda to reduce import dependence in defence by 35-40 percent it is actively promoting indigenous defence manufacturing with initiatives like Make in India and policy reforms including allowing 100 percent Foreign Direct Investment (FDI). Several states are also offering incentives and concessions in the form of aerospace clusters or Special Economic Zones (SEZs) for developing an ecosystem where all core and ancillary activities related to defence manufacturing can co-exist, the most recent one being Haryana, with a A&D industry policy.

How does the SP policy contribute

It is estimated that procurement to the tune of about US$10 billion worth of defence products per year is planned in the next 5 to 10 years. It is in the interest of the OEMs and the domestic industry to move on from a buyer-seller relationship to that of a partner in terms of co-development and co-manufacturing, with transfer of technology. Indian companies will largely front end all business with the government and the opportunity for the OEMs is indeed huge in establishing a sound relationship not only for Indian market but also to service the global market.

While the government will short-select both the platform and OEM on the one side and the pool of Indian industry considered eligible to become SPs on the domestic side, the differentiator would be the partnership-relevance between the SP and the OEM. This relevance comes about through indication of range and depth of transfer of technologies, development of ecosystem and establishment of a production base in India.

One of the essential parameters of the SP policy is that of outsourcing. Although, deliberately, the Government of India has not indicated any specific number in terms of percentage of outsourcing that an SP should do; they have outlined the concept. Such as, it has been elaborated that the SP is expected to be a system of systems integrator; this means a lot, clearly indicating that if something can be outsourced, please do not do it. Concentrate on the Integration part, concentrate on the core technology part and leave the rest to the eco-system.

How did Bangalore, Hyderabad, Chennai in a major manner and other towns like Pune, Belgaum, Nasik and others in a smaller scale develop into pockets of excellence in Defence Sector? This was because of the DPSUs/OFB and DRDO labs that were in the vicinity that was an Industry-enabler cum Developer. So, there was an eco-system that developed to support the large government owned factories, despite these PSUs having huge infrastructure and their erstwhile known resistance to outsourcing.

Now the situation is much in favour of the small-scale industry. Here, the government will enable the formation of SPs with guaranteed business, four segments have already been identified, the aircrafts, submarines, helicopters and Armour Fighting Vehicles; all of which together count on more than 100 thousand crores. Although the potential SPs in the submarine segment have some infra to talk about, in each of the other segments they have little to offer, and will have to build from scratch. Herein lies the opportunity for the eco-system to develop. If for example we carryout a systems analysis of an aircraft , we could well end up with some 5000 sub-systems that go into its making, some of the major ones being Flight control systems, Engine control systems, Fuel systems, Hydraulic systems, Electrical Systems, Pneumatic systems, environmental control systems, Emergency systems, Rotary systems, Advanced systems, Avionics systems and more than about 200 technologies that determine its efficacy. The idea of listing some of these above, is that the nominated SP will not be able to master all of these and perforce will have to outsource, retaining the core technologies and system integration.

SPs are expected to have a global outreach addressing the global market and service them in addition to the domestic demand. Demand side dynamics are very strong in each of these segments and hence the opportunity for the industry to show up with centres of excellence in each of these areas. In addition, India offers tremendous opportunities in engineering services, supply chain sourcing and associated maintenance, repair and overhaul-related activities. This is the call of the hour and the nominated SPs are mandated to service all revenue requirements, MRO, spares, performance based logistics(PBL) over the life cycle of the product.

One challenge for the industry will be in Skill. From where do you get the work-force? Companies like P3 Consulting Engineering have been the pioneers in establishing a centre of excellence in skill development for training fresh engineering graduates to provide them with a finishing course in design skills. This initiative needs more hand-holding from the government and must extend to manufacturing and services like MRO, testing etc. As per government estimates, a reduction in 20-25 percent in defence related imports could directly create an additional 100,000 to 120,000 highly skilled jobs in India. The industry therefore, needs to build and train talent to address the growing needs of the market. With SPs in business these figures could well exceed estimates.

Tiered system of Industry – this is in the making with the SPs. While presently in India, we either have the MSMEs or then the big industries, the medium ones are neither here nor there; while they continue to do what the MSMEs do, they have greater aspirations. Aspirations will now be matched with discipline oriented investments at system and sub-system levels. Partnerships both with foreign OEMs and with the public sector are in the offing, for increased efficiencies. It is the turn of the DRDO labs to interface with industry in forging technology oriented relationships. Every design house must have a front-end manufacturing house, this relationship will boost Indigenous design and development. Partnerships amongst the private sector will also be the order of the day. Discipline oriented partnerships to converge on technologies and products will determine success in business.

One key element of the policy lies in “Buy in India”. One of the ingredients that determines FE outgo, is raw material. It is widely believed that aerospace and defence grade raw-material is not available domestically. This, therefore becomes a thrust area for achieving our objectives of “Make in India”. If a raw material is available within the country, it must be procured, imports of such raw material must be forbidden, even if the Indian supplier is higher in price. Similar mandate is required for any sub-system and products/technologies that are home-grown.

Cost to Country

It is often argued by few finance experts that Indian products and systems are costly and drains the national exchequer. MoD Finance is very happy with the award of contract going to the lowest bidder, also called as L-1. This could be true in a pure domestic competition, but has a slightly different connotation when the competition is geography agnostic.

Consider this as an example. From available public information, the cost of a Sukhoi 30 MKI if procured directly from Russia is INR 350 Crs. However, when HAL makes the SU 30 MKI, the cost is 450 Crs, implying a cost escalation of 30%. Is it then wiser to procure the SU 30 MKI from Russia and not get it manufactured in HAL?

The answer lies in an understanding of the concept of, “Cost to Country”. When the SU is made in HAL the first advantage the country gains is the direct savings of precious FE of equivalent of USD $60 million per aircraft. There would however, be an element of FE outgo in terms of certain raw materials and proprietary products that may still have to be sourced from Russia. This FE savings can be better utilised for purposes that could have a social affect. The funding of SU 30 MKI from HAL would be done by the MoD in rupee terms, and this rupee is circulated back into the system in a variety of ways. Tax-payers money is getting back to enrich the tax-payer.

The other advantages are far more over-reaching. More than 42 new high-end technologies were mastered by HAL Nashik. HAL Nasik division, has grown into a manufacturing division and one for overhaul. complete Repair and overhaul (ROH) is done from within the country. Besides manufacturing the SU 30 MKI, it also supplies spares, consumables and aerospace fasteners. It has also taken up work-packages for civil aircrafts and exports spares to various countries as well, such as Egypt, Syria, Vietnam, Malaysia, Algeria, Poland and Russia. The complete Mig 21 and Mig 27 fleet( about 500 aircrafts still in service in many Air forces across the world) is supported globally from Nasik. The division has (from information on their website) manufactured 850 aircrafts and undertaken overhaul of more than 1800 aircrafts. The division presently holds on rolls, 1770 trained technical experts and 650 engineers; while more than 8000 trained over the two decades; this much for skill. They have a huge outsourcing bill, including disciplines like sheet metal components, machined components, non-metallic components, springs, metallic tanks, and a variety of tooling items, besides outsourcing labour. The eco-system developed just for the SU 30 MKI line could be more than 350 small companies that are tirelessly working on high end aerospace components. The outsourcing has a target of 30% and is leaning towards that with a 20% outsourcing that is presently taking place. Nasik has three huge industrial estates, viz, Satpur, Ambad and Sinnar with more than 2600 industries in it. The who’s who in the industry have their manufacturing plant there, just to name a few, Siemens, Kirloskars, Crompton Greeves, Mahindra, VIP industries, Mico and many more. Also, to facilitate exports, Nashik division of HAL created a socio-economic JV between HAL and CCI corporation of India to provide a single window export clearance and facilitation for the agri-produce(grapes, Pomegranate, Bananas and others) the region is famous for.

A cost analysis of all of the above and the over-bearing advantages, would indicate that the cost to the country is far less, when we source from within the country.

When our SPs get on to their job, the contribution they could make to the environment would be far greater with a sound eco-system and a formidable production base established in the country with impinging technologies and manufacturing processes of global standards. SP model initiated by the government is a great transformational initiative and all stake-holders must come forward to whole-heartedly support this.

Parting shot

The SP policy is expected to cause a sea-change in the industry both in terms of outlook and real effects. Proliferation of technologies, development of skilled force, best practices in manufacturing, tired system of industry and development of MSMEs will be the order of industry. Niche companies with intense technological outlook will mushroom across the geography of the country and centres of excellence such as Nasik, Bangalore, Hyderabad and Chennai will spring to support the national effort.

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FDI in Defence Sector

Background

Government of India has taken a number of measures to increase the participation of Indian companies in the Defence Sector. From liberalizing the licencing regime to making remarkable changes in the Defence Procurement Procedures, according AONs on the Make in India platform provided by the Buy Indian, Buy and Make Indian and Make provisions of the DPP, the government has done all that it could to energize the Indian Defence Industry. Easing of provisions of NOC for exports through timebound online processes has been accomplished and Populating the SCOMET chapter on Defence products, which hitherto has been vacant for a long time, is a work in progress as is the membership to various control regimes. In consonance with all of this the government has also revisited the extant FDI policy and brought it in sync with the other policies and procedures, by taking a bold step of inviting FDI in the Defence Sector upto 100% with a 49% through the automatic route. FIPB is also being eased out to simplify processes.

The formal thrust of the DPP 2016 has been incorporated in the “Buy IDDM(indian designed and manufactured)”,”Buy Indian” and  “Buy and Make Indian” with simplified procedures for effective implementation. The  “Make” acquisition strategy has been completely redesigned to include the small industry segment(MSMEs) with great incentives and purchase guarantees.

As outlined by the DPP 2016, “Buy” would mean an outright purchase of equipment and could be “Buy (Indian)” or “Buy” (Global)’. “Indian” would mean Indian vendors only and “Global” would mean foreign as well as Indian vendors. “Buy” Indian’ must have minimum 30 per cent indigenous content if the systems are being integrated by an Indian vendor. Buy IDDM is the key for creating an ecosystem in the country with emphasis on Indian design or with a caveat Indigenous manufacture.

“Buy & Make” would mean purchase from a foreign vendor followed by licensed production/indigenous manufacture in the country. “Buy & Make (Indian)” would mean purchase from an Indian vendor including an Indian company forming joint venture/establishing production arrangement with an original equipment manufacturer (OEM) followed by licensed production in the country. “Buy & Make (Indian)” must have minimum 50 per cent indigenous content on a cost basis.

Included in the DPP 2016 is a liberal offsets guidelines of 30-50 per cent for any arms imports above a a threshold of INR 2000 crs to promote transfer of technology amongst other avenues such as direct purchase and FDI in terms of equity and transfer of technology as well as investment in kind in terms of assembly lines, jigs and fixtures.

So what

These measures were incentives for foreign OEMs to bring in technology into the country, however, this has not happened, we are still grappling with screw-driver technology. In the prevailing global geo-political-economic order, it would be difficult for foreign OEMs and their  countries that control these technologies, to part critical technologies. Control regimes are very strong and technologies are well guarded. War-machines and arms-industry lead the global technology innovation and applications. We as a nation are at a cusp of technology breakthrough and proliferation in manufacturing sector. We have established a niche space in the IT sector but are we there in engineering design and high-end critical design element?

This is a serious question we must ponder on.

There is a time in history of nations when the revolution is forced upon the state to come up to what is expected of the state. While the Armed Forces are at nerves-end in combating terror and busy protecting the strategic interests of the nation, it is the nation’s call to respond. We have tried the organic route of the DRDOs and the DPSUs for too long, they have delivered to the Forces in time of need and continue to do so. Is that enough?

Are we still satisfied with the 70% or more imports that we make even in the Buy Indian categories of procurement? Is the MoD in sync with the “Make in India” initiative of the nation? Do we have to do more?

Where is FDI in all of this?

FDI is not a magic wand with all the solutions for the Defence Industry. However, it is also a fact that very little has happened in this space. Is this because of the lack of confidence of the foreign OEMs and their governments in the ease of doing business in India? Is this because of the bureaucratic lethargy in extra-ordinary delays in decision making to push programs through? Or is this because the nation cannot fund the programs for the Forces and hence a deliberate delay is caused sometimes tending to infinity. All of this causes uncertainty in the minds of the industry, both, domestic and foreign.

One of the key defence industry reforms initiated by the Manohar Parrikar led Defence Ministry, mooted by the Dhirendra Singh Committee, the Strategic Partnerships, has seen the light of the day. Will the programs listed therein be signed off before October 2018? Any delays in execution could once again put the policies and programs associated , in jeopardy.

One of the major causes for delays in most programs has been attributed to the Finance wing of the Defence ministry as also the Ministry of Finance. Most objections on procedures and processes and often-times, fundamental issues have been raised at late stages in the procurement time-cycle. Is this because we as a nation are unable to fund the programs and therefore we use the bureaucracy to do the honours to cause delays, through effective use of English language? It could be only an apprehension or may be true too.

Do we need to go only the organic route and hold the Forces on, till such development takes place indigenously, could be infinity, or the DRDO or the other organs of the government come up with a development when the Forces no more require the system, or even the other world has gone far ahead fighting our Armed Forces with superior weapon system?

In the situation that we are in, the latent potential energy in the industry is overwhelming. The government has done well to support the domestic industry, has opened up the private sector in more ways than one to support the Forces. What then is holding up FDI in the sector?

There is a definite requirement to infuse money into the sector. This could be done by external borrowings, foreign line of credit, and even through banks, that lend to governments to support their programs. This however, may not be the best of options. Therefore, FDI with its instruments of support is considered essential. FDI could typically include, equity, technology, investment in kind, institutional investors, NRIs(who of late are in the news for sending back home huge sums of money) and others.

Technology is critical to development of the sector, however, foreign OEMs are more comfortable in transfer of technology, if they have management control over the JV/Indian company so formed for this purpose. Management control, however does not mean total control, and hence checks and balances are necessary. In all such ventures, it may be pertinent for the government or one of the organs of the government to hold a golden share, with representation on the Board, that will help monitor the progress and health of these companies.

Thus, it is essential, that we embark on both, organic and inorganic growth. While the government may approve a JV or a fully owned subsidiary with 100% FDI, it may also parallelly launch a indigenous program for home-grown technology. This will enable our DRDO to compete, a timeline would be set for the same. In course of time, we could witness collaboration between our government institutions and industry both domestic and foreign.

Where do we go from here?

There have been a number of debates since the time of complete protectionism prior to the 1991 industrial policy to the changes affected in the PN 4  of 2001 and PN 4 of 2002, inviting 100% participation of private industry in the Defence Sector with a 26% cap. Then it was argued that a 49% will make a difference. It took more than a decade and a new government with a dynamic outlook to implement that. It now seems this is not enough. After all, between 26 and 49 nothing has changed, in so far as the industry structures are concerned. Of course, some restrictions have been removed, and the process eased, well that is not enough.

The call of the hour is to take bolder steps like permitting 100 per cent FDI in defence industry, and incentivise the OEMs to set up plants in India. Just 100%  FDI may not be enough, this will need to be dovetailed into progressive A&D policies of states in sync with the federal reforms. This way you can ensure that key technology will not be denied and Indian vendors would have the opportunity to get into the global supply chains of world leaders, till such time we become one.

While the industry is opened up with unrestricted FDI, following must be mandated :-

  • Outsourcing with clear norms of upto 50% or above
  • Development of supply chain : this has to be a demonstrated for furthering business.
  • Integration of Development partners, in consonance with above.
  • Integration into global supply chain, demonstrated capability.
  • Buy India : Buy raw material from India where available; this has to be done with scant respect to lowest bidder(else, China would take away this business). Quality assurance will be the norm, while adhering to such policy. Also, in the first instance even iof the raw material is sourced at say a 90% quality, the Indian company can be encouraged to exceed expectations in the next order and so on. A systematic encouragement to industry is called for.
  • Develop, raw material suppliers, where this is not available indigenously.
  • Focus on exports from such subsidiaries.

What happens to my DRDO/OFB/DPSUs

The new steps taken by the MoD indicate that it is reluctantly moving in the right direction, but as of now it remains much too protective towards the government companies. There would be a few large corporates who also advocate this type of protectionist tendencies to maintain their monopoly of what little they hold. This fear holds us back.

Can the government companies be let free and compete? How long will the government hold on to them and how long will they be made more inefficient with government breathing down their necks. Can an ill experienced bureaucrat, with a generalist intellect dictate and run high-technology companies? Can we learn something from the ISRO? Let them free, disinvest and make them more efficient, must be the mantra, they must learn to compete in this highly efficiency driven, technologically supreme, and skill oriented sector.

There is one more fear, what if the OEMs run away after making the investment? Well, the investment is made in kind in the geography of our country and there can be no occasion that they will be allowed to slip away, some personnel may make the grade, well the reminder of the IP and skill remains in the country and hence can be strengthened with little effort. A parallel can be drawn from Australia, where the global majors have made 100% subsidiaries, and are flourishing well. The dictat in Oz, is that the complete work-force must be Australian, the technology developed and transferred will reside in Oz, and they are mandated to develop an eco-system of small industry.

Concept of Cost to Country

It is not necessary to always follow the finance department for determination of L-1 bidder. There is a concept of cost to country that needs to be advocated. Even if the cost of an indigenous supply is costlier by 50% or so, let us be aware that this money spent is rotating within the country, in rupees, amongst the tax payers who have contributed to the national exchequer. A simple analysis would reveal this is a cheaper option, also saving precious FE.

Recommendations

  • FDI could be free-flowing with no limits
  • Limits and mandates on work-force and skill, 100% Indian
  • IP to reside in India
  • Concept of IDDM be dove-tailed into FDI oriented industries with mandated outsourcing and demonstrated development of MSMEs.
  • Raw material if available in India will be procured from India only. Buy from India is an essential pre-requisite for “Make in India” and “Made in India”.

Jai Hind

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MSME in Partnerships

Sector Overview

The MSME sector is an important pillar of Indian economy as it contributes greatly to growth of Indian economy with a vast network of around 30 million units, creating employment of about 70 million, manufacturing more than 6000 products, contributing about 45% to manufacturing output and about 40% of exports, directly and indirectly. This sector even assumes greater importance now as the country moves towards a faster and inclusive growth agenda. Moreover, it is the MSME sector which can help realize the target of proposed National Manufacturing Policy of raising the share of manufacturing sector in GDP from 16% at present to 25% by the end of 2022.

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College of Material Management

MAKE IN INDIA IN DEFENCE SECTOR | START UP INDIA | STAND UP INDIA

INDIGENOUS DESIGN DEVELOPMENT AND PRODUCTION

Sep’2016

Background.

Defence Procurement Procedures since inception have been incorporating different categories of procurement to enhance indigenous production. From its just two categories in DPP 2002 to the present six categories, the march has been significant, in the decade and a half. Concept of providing priority to categories in acquisition in Defence procurement was first introduced in the DPP 2013.

Never before in the history,  a priority been assigned for indigenous design and development. Having recognized the importance of indigenous design and development, the Manohar Parrikar led ministry has for the first time provided both importance to indigenous design and development as well as granted the pride of place for design and development as a part of the procurement process. What does this mean and what are the implications for the indigenous industry, let us see.

Was there a requirement at all to provide for such a category with overriding priority in the procurement process? Or has this requirement of recognizing the importance of Indigenous Design and Development, come about a bit late into the procedures?

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Indigenously Design Developed & Manufactured

MAKE IN INDIA | INDIGENOUS DESIGN DEVELOPMENT AND PRODUCTION

Sep’16

Background.

Defence Procurement Procedures since inception have been incorporating different categories of procurement to enhance indigenous production. From its just two categories in DPP 2002 to the present six categories, the march has been significant, in the decade and a half. Concept of providing priority to categories in acquisition in Defence procurement was first introduced in the DPP 2013.

Never before in the history,  a priority been assigned for indigenous design and development. Having recognized the importance of indigenous design and development, the Manohar Parrikar led ministry has for the first time provided both importance to indigenous design and development as well as granted the pride of place for design and development as a part of the procurement process. What does this mean and what are the implications for the indigenous industry, let us see.

Was there a requirement at all to provide for such a category with overriding priority in the procurement process? Or has this requirement of recognizing the importance of Indigenous Design and Development, come about a bit late into the procedures?

DRDO is the nodal agency for design and development of military platforms, systems, subsystems and in many cases components too, for the Armed Forces. It was designed to be so. It came about into being for this very reason to meet the requirements of our Armed Forces. In its more than six decades of existence, has DRDO even remotely met the expectations set out for? Why is it that our Armed Forces have to remain dependent on foreign sources for more than 70% of their needs even after seven decades of independence? What was lacking, (i) was it indigenous design and development (ii) was it indigenous manufacturing or (iii) was it both? What is more important for our Armed forces to be sustained from within the country for all their needs, is it (i) Design and Development or (ii) Manufacturing or both?

How did this all begin?

DPP 2013 already had flavour so of “Make in India”, by according to priority in categorization of procurements, such as, “Buy Indian”, had the greatest preference over all the others such as (ii) Buy and Make Indian followed by (iii) Make and then (iv) Buy and Make, with Transfer of technology, basically for the foreign OEMs and lastly the Buy Global.  Introduction of Buy IDDM to override and sit above all of this in the order of priority of ‘Make in India’ initiative by Government of India in Defence sector is indeed transformational. An indigenous emphasis has increased the business of Indian Defence Vendors and also strengthened the economy by Rs 1,152.48 crore this year as compared to 2015 as reported by the government.

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Strategic Partnerships Ecosystem – June 2017

Say “Yes” or “No” was the thought that was engaging the minds of many corporates both domestic and foreign. While the industry was confused and apprehensive on the decision-making ability of the government, well, the corridors of power were busy sifting the various reports from different committees and trying to build a consensus. As it is normal in such policy formulation, there were differences in opinion from the stake holders and it was important for the government to take them all together.

The concept and fundamentals were laid down by the Dhirendra Singh Committee. To quote, “There are cases however where certain platforms are of strategic importance. For these, we are recommending the ‘Strategic Partnership model’ for creating capacity in the private sector on a long term basis. Such a capacity will be created over and above the capacity and infrastructure that exists in Public Sector units. This is expected to spur the sectors towards a more efficient and effective mode of operation. Likewise, there are cases where quality is critical and vendor base is very narrow. For these we are recommending a model of ‘development partnership’”. The committee further recommended few segments like aircrafts, warships, AFV, complex weapons networks, materials, and suggested a well defined protocol for selection of SPs. The follow-on task force dwelled into the details to lay down parameters for selection of SPs followed by Industry-led discipline oriented sub-committees. Issues concerning requirement of industrial Licence, minimum revenue of 4000 crs, three years of growth, weightages on segment specific criteria and more were deliberated in an Industry interaction on 11 June 2016. In less than one year, the the cabinet approves the policy and chapter VII of DPP 2016 stands populated.

Before we have an understanding of the polisy enshrined, let me address a few apprehensions such as, (a) What will happen to the JVs already established? Many of them may be in sectors now not declared as SP. (b) It jettisons the idea that market forces should drive development and competition. (c)  Will value for money be achieved if orders on exclusive basis are given ? (d) What will happen if MoD decides not to buy the equipment after the SP produces it.

The reasons for such apprehensions can be figured out with less difficulty. They want to keep the pot boiling so that the Indian establishment continues the consultation process without speeding up implementation. As I see it, the initial efforts at forming JVs was only to take advance action and gain experience. No Indian company has wasted resources in actually building platforms. Market Forces do not work in monopsony conditions and the investment are so high that no one can risk it. However, it can be noticed that market forces have a role to play in the determination of SP, since it is the lowest bidder amongst the shortlisted ones that makes the grade. In fact, Value for money is achieved by various ways and not only thru competition, these have been illustrated in the spirit enshrined in the Dhirendra Singh committee report as well as the policy. In fact the standard procedure for value chain build up and long term vendors  is based on constant interaction to improve quality and reduce costs. This is the standard procedure in civil Industry and in India the auto industry is a good model. So giving exclusive orders can be more beneficial to the country in the selected platforms. The question of not placing an order does not arise as the SP model is based on the RFP being issued on the basis of assured demand. The Indian Industry ( big for SP and small for DP) must whole-heartedly support the GOI in this venture, not miss this golden opportunity, ignore the doubting Toms and make India self sufficient in defence equipment manufacture.

 

The fundamentals of the policy are strong. For any strategic procurement, the nation needs to have a say in the choice of the platform and the supplier. For “Make in India” to be effective the nation must drive the initiative through reforms and choose their partners in progress. MoD will have control over the short-listing of the OEM on the one hand and the SP on the other, thus having a say in both the platform under procurement and the SP. In addition, the GoI has given due importance to Market Forces in actual determination of SP.

GoI has now come out with a business oriented policy, business first. This is a program based policy, addressing in the first phase four programs, viz, (i) Fighter Aircraft (ii) Helicopters (iii) Submarines and (iv) Armour Fighting Vehicles. The corresponding programs are easily interpolated, SAAB Gripen/Lockheed for the single engine, Airbus Helicopters and others for the Naval Utility Helicopter program and other multi utility helicopters, DCNS, HDW and other probable OEMs for the P75 I, and the FICV/FRCV program with multiple choices including RADS, BAE and others. With a clear business visibility, the MoD has proceeded to pick up their OEMS and SPs.

Initial shortlisting of SPs will be based on the model recommended by the Task Force with two gates, first being the minimum qualification criteria to include financial, technical and other general criteria and the second stage would be a site verification with an evaluation of financial and technical capabilities. Thus, the MoD intends to create a pool of SPs from the private sector. At this stage no apriori allocation of disciplines or segments is being made and therefore none of the SPs in the pool can lay claim on a particular discipline/segment. This is indeed a very smart move, providing a level playing field to the prospective SPs to compete for their rightful place in the choice of discipline.

As a part of parallel processing technique, MoD would send out an EOI or RFI to the prospective foreign OEMs for these particular programs seeking requisite technology in range and depth. From a purely technological perspective, based on an assessment of the responses received, two OEMs per program/discipline would be shortlisted. Thus, the MoD would have made a choice on both the platform/OEM and the desirous prospective SP.

Now it is time for the market forces to come into play. For the programs short-selected in the first phase, as above, the MoD will now issue an EOI/RFP to the prospective SPs, indicating in the RFP the short-selected OEMs for the program. Prospective SPs are expected to indicate their preferences for segments concerned. Prospective SPs in turn are expected to find their comfort zone with the OEMs and submit a single bid. The lowest bidder is the SP for the segment/discipline/program. In this final selection stage the GoI has left room for assessment/evaluation of segment specific capabilities within the SPs so contending, thus indicating a L-1/T-1 concept.

Evaluation criteria follows the task force recommendations thus reposing confidence, that included two stages of evaluation, stage 1 based on minimum qualification criteria and the second stage comprising of financial and technical parameters. Subject to compliance to certain aspects such as wilful default to the banking system or being black listed by the RBI or any joint lenders forum, debt restructuring and not classified by any bank as NPAs, all participant companies that qualify the first stage evaluation, will be considered for the second stage evaluation.

Few questions emerge, such as, While considering the single engine aircraft, is it wise to also consider the power pack and hence call for an SP for engine manufacturing? Should the percentage of R&D spend be the only criteria or there also be an absolute number to it? Could the third and fourth segment experience a single vendor situation with only few in the pool? Should the selected SP not perform, is there any exit clause and what options does the government have to fill the voids in defence preparedness?

What are then the outsourcing norms? From the concept outlined by the Dhirendra Singh committee, one aspect stands out loud and clear, SPs and DPs go together. What are DPs and how do they affect the defence industrial ecosystem? DPs are Development Partners; what SPs are to the GoI, DPs are to SPs. If the GoI is reposing trust on the SPs, the SPs are in-turn expected to repose their trust on the DPs, else this system will collapse. If India lives in villages, industry lives in MSMEs. The policy on SP must mandate a minimum specified amount of outsourcing, say 50% of which another 50% must find favour with DPs. It is expected that invariably DPs are from the MSME segment. It is perceived that the major beneficiaries of the SP model would be the small-scale industries, well only then will the ecosystem develop.

The question that comes up is what next? One of the highlights of the draft policy is that aspects like Performance based logistics for ten years, spares, MRO, life cycle support, upgrades, setting up of testing and proving laboratories, all of which are by themselves huge follow-on contracts during the life of the system. Therefore, MoD has kept it open for market forces to determine an SP for a future requirement in the same segment. While the initially nominated SP may have the first-mover advantage, room is provided for a new entrant and hence room for innovation and no-room for complacency. This is clearly a win-win situation for the Armed Forces as well as for the industry. For future acquisitions MoD has provided incentives such as investments made to improve segment specific infrastructure, nature of R&D investments made which is qualitative, development and acquisition of relevant technologies and extent of ecosystem created.

No country can win wars with other’s arms. It is time we introspect and develop a formidable indigenous defence industry to support our Armed Forces that are forever in combat, without any respite. To build a formidable indigenous defence industry, it is imperative that the ecosystem is developed, and once the ecosystem is developed, only system of system integrators remain, sourcing can be done at will. New industry champions will emerge, new trends will be set, knowledge will grow and the nation will emerge stronger.

The preamble to the policy, the definition of SP and the clauses relating to issue of EOI make it absolutely clear that there is NO ROLE for DPSUs in the SP model. The SP has to be private industry. The only role of DPSUs/OFB is to team up with the SP along with MOD, DRDO etc to carry on indigenous efforts to make India self-sufficient in defence products . It is clear that the SP production will be over and above the DPSU capacity . This is as per the Expert Committees recommendations. It is the Private Sector for whom this policy has been carved out and that the policy states that along with the SP the Development Partner will also have a role and most of them will be MSMEs.

Is there a price the nation has to pay? Unfortunately, our Finance experts in the confines of the government buildings understand only L-1, the lowest bidder; ie, the lowest cost quoted by a bidder for a particular system or equipment. Has anyone spoken about the cost to the country? In the path to progress with great emphasis laid on “Make in India”, it is possible that the cost of design, development, supply chain management and production may be costlier than a foreign made fancy toy. Well, since the complete development, ecosystem and production is taking place within the geography of this country, the entire tax-payers money so billed against the Indian manufactured system under consideration, is circulated within the same geography many times. Thus, the cost to the country would be far less than the L-1 cost, if seen in this perspective. This is a perspective that needs to be dovetailed with the SP policy.

Is there a case for management control with the foreign OEMs within the existing framework of 49/51 FDI to enable the FOEMs to transfer technology seamlessly? Since the segment wise technical capability could be a challenge for SPs to showcase, should this be evaluated in a more comprehensive manner to include the “Offered Technology”? Once this is done, the FOEM will be incentivised to transfer technology in range and depth in sync with the spirit of creating the ecosystem in India. What are the limitations to Liaibility and how is this carved out for protecting the nation’s interest? Will the GoI hold a “Golden Share” in the SP, thus enabling protection? This is essential, to ensure that the SP/FOEM do not sell their shares in the market thus causing a disturbance in the existing relationship.

The document is great and aspects mentioned herein need attention to make it robust and encourage sound relationships.

 

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Impact of Demonitization and its effects on Defence

Impact of Demonetisation(De-Mon) in the Defence Sector

Jan’17

If there was one event that attracted attention it was the big announcement of November 8th 2016, viz, Demonetisation. It assumed centre-stage as year 2016 came to close after the announcement of phasing out of existing denominations of INR 500 and 1000. This was a rude shock to many delivered in a gentle manner through an announcement that was to bring about a revolutionary change in terms of curbing black money and regaining a control over the economy in a very subtle manner.

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Strategic Partnerships : Challenges and Opportunities for Indian Corporates

Nov’16

Background

Indian Military is today at the cusp of scanty preparedness, dealing with old and obsolete equipment and systems on the inventory, that they can neither use nor discard, with little hope of any replacements or upgrades in the near future. Indian defence procurement process is plagued with such incompetence that none in the corridors of power is either accountable or blamed for incompetency or non-performance, in ensuring compliance to the timelines laid down. They are in such a critical state of non-performance that they are not able to adhere to the time-lines laid down by themselves.

Observations from CAG clearly highlight the chinks in India’s armour. India’s defence forces have faced a shortage of personnel and critical equipment because acquisition and modernisation plans remain stuck in a mesh of bureaucracy. Out-dated equipment, technologically backward, low reliability, and perennially in short supply – these are just some of the problems with India’s defence equipment. Delayed modernisation has ensured that defence capabilities are way behind countries such as China. India now spends 1.1% of its GDP on defence (capital expenditure ex-land and construction), which is higher than the US (0.8%) and largely in line with that of UK (1.4%). While India’s capital defence spending has increased (vs. US and UK), only a small part of it goes towards new equipment. In addition, almost 60% of the annual capital budget is towards imports, mainly because India’s defence PSUs lack the expertise to manufacture complex systems and private sector participation is still nascent. In order to correct this anomaly, the current government has taken steps towards changes to procurement procedures – by introducing new category IDDM, revision of the defence products list, issuing industrial licenses to the private sector, and relaxing FDI norms. India’s Defence Minister, Shri Manohar Parrikar, has been leading from the front to address the sluggishness in defence preparedness, head on.

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