India has emerged as a major arms purchaser in the past few years, despite the slow pace of acquisition and defence modernisation. India’s defence imports, of which there is no accurate figure, are estimated to have been around $15 billion in 2010-11. A heightened threat perception and a determined effort to overcome technological obsolescence in defence equipment are driving this process. However, such a high level of imports tacitly admits to the failure of the domestic defence production establishment, barring a few exceptions, to meet the requirement of the armed forces, both in terms of requisite volume and cutting-edge sophistication. The current offset policy requiring foreign vendors bagging deals over Rs 300 crore ($60 million) to procure 30 per cent of components from domestic vendors was formulated to ensure a steady supply of components and spares intended to insulate the armed forces from unforeseen events, as well as ramp up domestic manufacturing and technical capabilities through technology transfer from the foreign vendor to domestic firms. The programme to date has met with limited success due to a combination of policy schizophrenia, which results in confusing signals to the private sector and the inherent limitations of the Indian manufacturing sector.
Lack of policy clarity has restricted private sector participation in defence procurement to supplying components and subsystems. Of the 30 per cent of defence supplies procured domestically, the private sector barely supplies 9 per cent. Research and Development and mass production are still largely the preserve of the state sector. However, more recently the Indian private sector has demonstrated capability to undertake complex manufacturing required for defence. Hence, a clearly articulated defence procurement policy would encourage the private sector to invest in R&D and ramping up manufacturing capabilities. Indian industry has rightly complained that the absence of an assured stream of orders does not permit the scale economies, without which profitability is not possible. Greater involvement of the private sector in defence production would allow the defence PSUs to focus on the more risky R&D, where returns are more uncertain. It would arguably take India closer to its cherished objective of sourcing more than 70 per cent of military hardware domestically. Ironically, a vibrant domestic manufacturing sector would make joint ventures between foreign vendors and domestic players more successful, by way of enhancing the technology-absorption capacity of the latter.
Collaboration between the public and private sectors needs to be taken several notches higher. This would call for an active system of technology diffusion, which would also involve universities, to ensure that the science and technology capabilities are optimally utilised. Such a system has been widely implemented in the United States for over five decades. The technology spillovers generated have had economy-wide effects and have, in turn, spawned several industries such as semiconductor, supercomputing, biotechnology among others. India should seek to create a similar system even if on a smaller scale. It makes little sense for India to fund the development of capabilities in the US, Russia, France and Israel. India’s defence spending should benefit the Indian economy, either directly or through a more calibrated offset policy. To this end, the defence ministry’s decree that all future battleships will be built in India is welcome as is the decision to extend the scope of defence offsets to civil aerospace and in developing weapons and equipment for internal security roles. A clearly focused policy can imminently meet the dual objectives of ensuring an uninterrupted stream of defence equipment, while simultaneously deepening domestic manufacturing capability.
