Let's face the facts: after five decades of chasing the goal of indigenous production of defence equipment, more than 70 per cent of the defence equipment our forces use are produced abroad. This has not prevented successive governments and the strategic establishment from continuing to pursue this objective. They have done this by declaring their intention more vigorously and with greater sincerity, while making few structural changes in the manner in which defence equipment is designed, produced and inducted into service.
The Narendra Modi government is the latest to pursue this path, although it is making incremental changes to the industry structure. It has raising the FDI cap to 49 per cent and liberalised the licensing of private domestic firms to produce defence equipment. It remains to be seen whether the higher cap will bring the intended results, and the Modi government must be prepared to lift the cap entirely. Doing so will be resisted by domestic players, who despite the more liberal licensing regime anticipate risks and uncertainties in an infamously convoluted defence procurement system. Balancing these two alternative routes to indigenisation and self-reliance calls for a sophisticated, flexible and nimble new procurement rules.
The Ministry of Defence is considering exactly such a set of rules in the revised Defence Procurement Procedures (DPP). Tasked with drawing up a new DPP, the Dhirendra Singh Committee proposed a strategic partnership model where a private player is chosen to develop a platform in one of six identified segments. The choice of a single private player has caused murmurs of discontent among industry players. Perhaps to create a larger number of domestic players, the draft recommendations suggest that the same firm cannot be selected for more than one sector. This too has not gone down too well with the industry.
The defence ministry has set up a task force under V K Aatre, a former DRDO head, to select the private companies under this scheme. The task force's report is awaited, following which the new DPP will be announced.
We do not know the details, but the Modi government has created for itself the opportunity to attempt a very different approach to increasing self-reliance in defence production. In doing so, it would do well to consider the following.
First, there must be contestability in each partnership or procurement contract. In other words, more than one firm (or consortium) should be engaged in the same activity. In many industries, it has been found the contestability, more than ownership, determines outcomes, efficiency and competitiveness. In fact, defence PSUs can be given a chance to prove their mettle against private competitors in a level playing field. Such a strategy does raise costs (because the defence ministry needs to buy the same thing from more than one player), but it is worth it. In addition to competition, it adds redundancy and widens the indigenous industrial base.
Second, even as the armed forces must be integrated into the design, development and field trials, domestic producers must not be shielded from foreign competition beyond a point. To achieve this, the defence ministry should separate the development arm from the procurement arm, with the latter having the independence to choose the best kit available at the time of procurement. This might appear contradictory to the entire idea of allowing the domestic private sector into defence production, but let it not be forgotten that the overriding objective of defence policy is, well, the best national defence money can buy. Everything else must be subservient to this objective, including the business cases of private sector and indeed, the long-cherished goal of indigenisation.
It is no one's case that the yet-to-be-born private defence industry must be exposed to international competition from day one, but it must be expected from the onset. Fairness requires that private firms can be encouraged to market and export their products in foreign countries, after securing approvals from the Cabinet Committee on Security.
Third, it is important that no government entity or PSU that is an industry player is also assigned the role of a referee or a regulator. It is possible to reorganise the family of organisations and PSUs under DRDO into producers and oversight bodies depending on their function. Such a reform is possible within the constraints of the political economy, and perhaps Prime Minister Modi's inclination not privatise state-owned enterprises.
Fourth, the Modi government must not be shy of closing down indigenisation projects initiated decades ago in a different world when a cash-poor India faced a regime of technology denial. Today's world is filled with opportunities for acquisition of the latest technology on commercial terms, and we have the resources to pay for them. It is a good idea to ignore "sunk costs", recognise the valiant struggle of generations of scientists and engineers who, under heavy odds, tried to give our armed forces the kind of equipment they needed, and move on. Even if entire systems are not inducted by the armed forces, there are a number of innovations and sub-systems that can be the starting points of the new domestic defence industry.
Your columnist is no more a proponent of indigenisation than of other ways to ensure effective national defence. Mastering global supply chains and building strategic partnerships based on broad, deep trade might be equally effective alternatives. However, it makes sense to give the indigenisation project another try - but the approach has to be very different from that of the past.
The writer is co-founder and director of the Takshashila Institution, an independent think tank and school of public policy
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
