Private participation

Defence production should not be left to public sector

Over the past five years or so, “indigenisation” has been a major aim of India’s defence procurement policy. There are good reasons for such an effort in any country, including India. It is important, particularly in an increasingly unsafe world, to have as much control as possible over essential weapons platforms and materiel. Reducing the amount of foreign exchange spent on arms and armaments is typically another desirable outcome. Finally, there are good reasons to suppose that expenditure on the domestic defence sector is one of the best ways for a government to stimulate innovation in the domestic economy. Yet, for indigenisation of defence procurement to become genuinely sustainable over time, the private sector must be properly engaged. Some recent figures released by the Ministry of Defence seem to suggest that this is not happening to the extent desired.
 

According to the defence ministry, while India’s domestic defence production has now been above ~1 trillion for two financial years, the share of the private sector — at about a quarter — is broadly the same as it was in 2017-18. Many have noted that some private companies, such as Larsen & Toubro, have expanded their defence business of late. But the data shows that such expansions by the private sector are merely enough to maintain its share of defence output in India. The vast majority of defence output continues to be through the defence public-sector units (DPSUs). It is not certain that they possess the capability to move India up the value chain in this sector, or to create in-house innovation of the sort that is essential not just for a security edge but to maximise spillovers into other industrial sectors. Clearly, while “Make in India” is an aspiration, “Make in Public Sector” seems to be the reality.
 

It is important to recognise where the government might need to change things if indigenisation is to truly empower the private sector. One requirement is to enable investment in a secure environment for Indian companies in the defence business. This can come about if the government issues clear guidelines for its needs, these guidelines are reasonable and realistic, and that they are accompanied by a commitment to buy. In other jurisdictions, private companies are happy to make big investment in the sector because there is trust that such investment will not go to waste. But such trust is lacking in India. In a business with a single big customer, that customer has to go the extra mile to ensure that it is seen as a reliable purchaser if it wants to induce investment.
 

Some aspects of the defence private sector in India are often pointed to as successes. These include the increasing presence of small or medium enterprises — often startups — within the ecosystem. But in the absence of a clear road map for the larger private sector, such startups will fail to find a sustainable place or lack the incentive to grow. India will also need to be a little more relaxed about the guidelines that govern foreign investment in the sector. While at least one project with 100 per cent foreign ownership — for the Swedish Carl-Gustaf rifle — was permitted last year, other possibilities are languishing because of competing concerns about technology transfer. Such concerns cannot be allowed to delay investment. Expanding the scope of the private sector is overdue.