The NDA government has put in motion the proposal to increase FDI in the defence-industrial sector from the existing limit of 26 per cent to maybe even 100 per cent. This is breathtakingly bold and quick, but may not be the only measure required to galvanise our defence industry.
We must simultaneously address other equally important reforms to achieve our objective of adequate self-reliance.
The first major reform introduced to galvanise the domestic defence industry was in 2001, when then defence minister George Fernandes opened up our defence industry to the private sector and also introduced 26 per cent FDI. The next step was to promulgate a defence offset policy in 2005. Unfortunately, in the implementation of these reforms, the ministry of defence (MoD) faltered gravely.
Our private sector greeted the reforms with enthusiasm. A number of companies created new divisions, made investments in manpower and infrastructure, but when they came to the crucial business-end, they hit a solid wall of resistance from the MoD. Generally, orders would only go to the defence PSUs or the foreign defence multinationals. So, the first mission of the new government should be to address the issue of giving the private sector a fair and level playing field. Admittedly, such a measure may impact the business of the defence PSUs. But the government’s primary agenda must be greater indigenisation, and not the profitability and survivability of the PSUs.
The bigger challenge, however, lies in the transformation it must bring about in our Ordnance Factories Board (OFB), defence PSUs and DRDO. These undertakings together produce everything the armed forces require. The problem is with technology, quality as well as cost and delivery schedules.
In terms of real estate, infrastructure and manpower numbers, our defence production establishments can compare with the best in the world. In contrast, our production and efficiency indices would be amongst the worst.
Most problems are fixed by starting at the top. The Department of Defence Production (DDP) controls all defence PSUs and the OFB.
Since the DDP is part of the MoD, we have a situation where the designer (DRDO), manufacturer (PSUs and OFB) and the customer (captive) are all rolled into one entity. The bureaucrats posted to the DDP have no knowledge of the defence sector. Ironically, they choose to learn their trade from the establishments they control and not from the armed forces they are meant to serve. Hence, the first step would be to review the corporate control of the PSUs and the OFB.
Concurrently, the functioning of each defence production establishment must be subjected to close scrutiny. R&D, currently the preserve of the DRDO, must shift in great measure to the production units —a recommendation made many times but not implemented. The OFB requires a serious overhaul.
On the technology induction and assimilation front, we have failed to adequately exploit the benefits of our “offset policy”. We did not fully comprehend the gritty battle we would have to fight to fully extract the benefits of the offset policy. No country or company will easily part with technology. While they seek our business, which is incomparably huge, they also engage in furious lobbying against our offset policy — claiming primarily that our existing industrial base is not yet advanced enough to absorb even 30 per cent business of the large orders we are placing. The irony is that we listen to them and also allow Indian partners to fudge.
In order to derive benefits from our defence offset policy, we have to put in place an effective organisation. The government should consider setting up a “Department of Defence Offset Implementation”, with representatives from the industry, the scientific community (DRDO) and the defence forces, backed by a strong legal and financial team. Perhaps the current DDP could be reorganised to discharge this function.
While we weigh the merits of increasing FDI to boost our defence industry, the aforementioned steps must also be given equal consideration.
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