Sunday, July 14, 2024

India’s Defence Sector: Reforms That Perform

By Kamal Shah

In the grand scheme of things, a nation’s prowess in science, technology, and economics can be measured by its ability to arm its forces and reduce dependence on foreign imports. The present administration have taken significant steps towards the indigenisation of defence technologies and manufacturing in the country. The goal being, to utilise India’s exceptional science, technology, and research talent base to develop new capabilities in defence innovation. The government’s reforms will not only meet the requirements of the Armed Forces but also cater to the needs of friendly countries by exporting defence items.

The Central Government has been working towards the realisation of the objective of Make in India and Make for the World. They have implemented a series of reforms such as increasing Foreign Direct Investment (FDI), corporatising the Ordnance Factory Board (OFB), and creating defence corridors in states such as Uttar Pradesh and Tamil Nadu. These efforts will encourage foreign original equipment manufacturers (OEMs) to invest, manufacture and export from India.

Over the past two years, Indian Aerospace & Defence has consistently reported on measures such as increased the defence budget and the administration’s efforts to ensure that the earmarked amount goes to developing the defence-manufacturing ecosystem in the country. India has seen unprecedented advancements in new technology developments and significant improvements in defence infrastructure as well. 

Additionally, there have been several structural changes in the forces. Establishing the post of Chief of Defence Staff (CDS), launching the Department of Military Affairs (DMA), and working towards creating Integrated Theatre Commands top that list. These changes will require the Armed Forces to develop Integrated Operational Concepts (IOpC) and Doctrines to fight together, which is crucial currently.

Economic Reforms in the Defence Sector

The extensive focus on ushering in economic reforms in the defence sector in the past few years is impossible to miss. The allocations in the Union Budgets reflect this trend, with the Indian Armed Forces, part of the larger Ministry of Defence (MoD), receiving the largest share of the budget.

The Defence Allocation is about 1.5-2.5% of India’s Gross Domestic Product (GDP). Within this, the Indian Army, the second largest in the world, commands a share greater than 50%. 

Yet, the picture becomes a bit confusing when viewed from the perspective of expenditures. The revenue expenditure, which includes salaries, allowances, and other daily expenses, is sky-high compared to the capital expenditure, which deals with equipment and infrastructure.

IADB has extensively covered the multiple reforms initiated to curb this trend.

Over the years, the Government of India’s (GoI) primary goal has been to increase the capital expenditure while reducing the revenue expenditure to enhance the capacity of the Armed Forces to invest in new equipment and infrastructure. This would not only help the Armed Forces to modernise and strengthen their defence capabilities but would also reduce dependence on foreign imports. Bringing in transparency and encouraging the private sector’s participation have been critical steps in this direction.

  1. Zeroing in on the need for better equipment 

In India, the defence services had a disorienting ratio of revenue expenditure to capital expenditure – a close 65:35. This meant that for every INR 100, a whopping INR 65 was spent on salaries, allowances, and pensions, while a measly INR 35 was allotted for equipment and infra-related activities. For the army, out of every INR 100, a staggering INR 81 was spent on revenue expenditure. In 2014, the Centre set up the General Shekatkar Committee to recalibrate the expenditure pattern and enhance India’s combat capability. The committee presented its report in 2016, highlighting the urgent need for a change. Following the committee’s recommendations, the government took an unprecedented step to hike the capital outlay by 19%, ensuring that soldiers did not suffer from the lack of equipment. 

  1. Paving the way for more investments

India’s strict licensing norms in the defence manufacturing sector have necessitated greater investments to expedite modernisation. The cumbersome process for FDI approval holders to seek Government approval for changes in equity/shareholding patterns under the Automatic Route has also unnecessarily subjected many companies to the approval regime. Additionally, unlike other sectors, defence lacked a dedicated agency to streamline and promote investments, and India’s Defence Industry was left to compete in a field heavily weighted in favour of foreign manufacturers due to cheap imports of essential supplies.

To address these issues, the Government of India has liberalised the FDI policy, increasing FDI in the Defence Sector by up to 74% through the Automatic Route and up to 100% by Government Route, where it could provide access to modern technology. This higher automatic route limit facilitates ease of doing business. 

Moreover, the Defence Investor Cell (DIC) was created in February 2018 to act as a single point of contact for addressing all defence production-related queries of entrepreneurs and/or industry. Since its inception, DIC has successfully handled more than 1,100 queries. To further promote investments, the policy envisages the establishment of long-term strategic partnerships with Indian defence majors through a transparent and competitive process wherein Indian companies would collaborate with foreign military firms to set up domestic manufacturing infrastructure and supply chains to build military platforms like submarines, fighter jets, helicopters, and armoured vehicles/main battle tanks in India.

Furthermore, the Border Roads Organisation (BRO), a premier road and infrastructure building organisation, has been allowed to participate in Global Tendering in select priority countries where India has specific strategic interests to counter China’s aggressive strategy. This move is intended to help India increase its presence in neighbouring countries, providing strategic dividends against the aggressive policies of China.

  1. Providing a level-playing field for Indian Industry 

The Indian government has taken measures to provide a level playing field to the domestic defence industry by introducing import embargoes and reforms in the offset policy. 

Under the import embargo, three ‘Positive Indigenisation Lists (PILs)’ have been issued, comprising 310 weapons and military platforms of Defence Services, for which there will be a phased embargo on imports. This includes high-tech weapon systems such as artillery guns, cruise missiles, assault rifles, corvettes, sonar systems, transport aircraft, light combat helicopters (LCHs), radars, wheeled armoured platforms, rockets, bombs, and armoured command post vehicles, among others. This initiative is expected to translate into orders worth more than INR seven lakh crores over the next five years.

Additionally, two ‘PILs‘ of Defence Public Sector Undertakings (DPSUs) were launched, comprising 2,958 items for which there would be an embargo on imports. The first list for DPSUs contains 2,851 items, out of which 2,500 items have already been indigenised. This initiative is expected to save foreign exchange of INR 3,000 crore a year.

Furthermore, reforms in the offset policy have been introduced in the Defence Procurement Procedure (DAP) 2020 to incentivise investment and transfer of technology (ToT) for defence manufacturing. The value of the incentive multiplier for the transfer of critical technologies under offset discharge has been increased, and such transfers have been extended to private industries, with a thrust on attracting investment and transfer of technology for defence manufacturing.

These measures offer an unprecedented opportunity to the Indian Defence industry, particularly the private sector, to manufacture items using their own design and development capabilities and to meet the requirements of the Armed Forces in the coming years.

  1. Ensuring efficiency for Defence Manufacturing 
  1. Corporatisation of Ordnance Factory Board 
  • The rigidity and hindering control of needless compliance hurdles meant that the OFB, with its ordnance PSUs, could never become agencies with higher turnover and enhanced profitability. 
  • Corporatisation of OFB was approved in May 2020. OFB has been restructured, and seven new Defence Cos have been set up for greater efficiency and productivity.
  • The Corporatisation of OFB has provided functional and financial autonomy and managerial flexibility, improving its accountability and efficiency in Ordnance Supplies.
  • It has also enabled the organisation to grow faster and play a greater role in the country’s defence preparedness while adequately safeguarding the workers’ interests.
  • The Ordnance Factories, which were classified into seven groups, are showing profit. 
  1. Defence Testing Infrastructure Scheme (DTIS) 
  • Defence Testing Infrastructure is often capital intensive, requiring continuous upgradation. It is not economically viable for individual defence industrial units to set up in-house testing facilities.
  • Earlier, private sector companies had to make their own arrangements and get the testing done by Indian/international private agencies.
  • Testing facilities available with Government entities have been made available to the private sector
  • DTIS has been formulated for creating six to eight Greenfield Defence Testing facilities in the country. 
  • This will provide easy access and meet the testing needs of the domestic defence industry, which will facilitate indigenous defence production, consequently reduce imports of military equipment and helping make the country self-reliant.

Revolutionising Procurement Practices

In pursuit of the “Atmanirbhar Bharat” vision, the Indian government has strongly pushed towards procuring defence equipment from domestic sources. This has provided a boost to private domestic manufacturers, including Micro, Small and Medium Enterprises (MSMEs) and start-ups, and has made Indian private shipyards eligible for bidding on projects alongside PSU shipyards.

Reforms have also focused on accelerating domestic defence acquisitions with greater transparency, overhauling trial and testing procedures to nurture competition based on principles of transparency, fairness, and equal opportunities for all, as pointed out by IADB’s extensive coverage in the past two years.

To encourage start-ups and promote indigenous design and development of defence equipment, the “Buy Indian-IDDM” (Indigenously Designed, Developed and Manufactured) category has been introduced as the most preferred category for procurement. The newly introduced “Buy Global – Manufacture in India” category of capital procurement in DAP 2020 allows the outright purchase of equipment from foreign vendors, followed by indigenous manufacture through its subsidiary in India, a joint venture, or an Indian Agency. This reform has helped create domestic design capabilities in the defence sector.

Furthermore, faster approvals for amendments to contracts have been implemented. All cases for extension of the Delivery Period (DP) were previously processed with the imposition of damages and other penalties as per the contract. This led to a delay in decision-making for the extension of DP cases where consultation was required with the IFA. It is now proposed that Competent Financial Authority (CFA) may approve all amendments to contracts for DP extension, with LD, without consultation of IFA even when the original contract was concluded with its concurrence. This will lead to faster decision-making by taking away the time for unnecessary approvals.

Streamlining Procurement: Boosting Armed Forces’ Operational Capability

With the aim of aligning procurement with the specific requirements of India’s armed forces, several measures have been implemented to empower service headquarters and field formations. These measures include the delegation of procurement powers to Service Headquarters (SHQs) and the enhancement of financial powers of Vice Chiefs up to INR 500 crore. Emergency financial powers have also been delegated to the armed forces for the procurement of ammunition and spares, while special emergency powers have been granted to SHQs.

These reforms have resulted in quicker decision-making, better planning, and enhanced operational preparedness of the services, enabling the optimum utilisation of resources.

Terrain-Specific Equipment for India’s Armed Forces

Acquiring equipment suitable for all kinds of terrain has led to longer acquisition timelines, sub-optimal exploitation of equipment, and increased costs. In response, a study on ‘Designing and Equipping the Armed Forces with Terrain Specific Equipment’ was ordered and conducted by Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA). Implementation of the recommendations will lead to equipment suitable for terrain configurations that exist in the country, resulting in speedy acquisition and optimal utilisation of equipment. This will lead to reduced acquisition timelines, reduced costs, and optimal utilisation of equipment.

Simplified RFP for Shipbuilding and Repairs

The Defence Procurement Procedure, 2016 (‘DPP’), promotes procurement of products from Indian vendors, with prescribed Indigenous Content (‘IC’) levels. To streamline the process, the overall documentation requirements from the OEM have been reduced, along with the time for procurement and procedural steps. The prescribed format for calculating IC has been mentioned for ease of calculation for the bidder, and the categorisation has been simplified to make it more accessible for bidders.

The simplified Request for Proposal (RFP) has a direct impact on intended RFP participants by reducing procurement time and documentation requirements while improving transparency by providing upfront clarity on the calculation of IC, which will be covered under qualitative parameters.

Devolution of Financial Powers to Field Formations

The primary aim of enhanced delegation of financial powers is to empower field formations to procure equipment/war-like stores speedily for urgent operational necessities. This will overcome procedural delays and bring about greater decentralisation and operational preparedness. These measures ensure the optimum utilisation of resources, enabling the Indian armed forces to be well-prepared for any challenge that comes their way. 

Structural Reforms in the Armed Forces

In recent years, bringing the three forces together under theatre commands and making India’s defence forces modern, capable and efficient have been amongst the administration’s top priorities. There have been some major structural reforms to that end:

Chief of Defence Staff (CDS)

Following the several wars that occurred after India’s independence in 1947, the need for a Chief of Defence Staff was identified. In 2019, Prime Minister Narendra Modi formalised the appointment of the CDS to integrate the forces and streamline communication protocols among them. The CDS’s role helped fast-track indigenisation and reduce dependency on imports while implementing the Five-Year Defence Capital Acquisition Plan (DCAP) and the Two-Year roll-on Annual Acquisition Plans (AAP) as part of the Integrated Capability Development Plan (ICDP).

The Benefits of a Theatre Command System

Implementing the ‘Theatre Command System’ aims to bring synergistic coordination between the three branches of the armed forces. Not only will the theatre commands be useful during wartime, but they will also streamline communications and procurement of resources. This will help establish a budget, reduce expenses, and upgrade armed forces as required.

Leveraging Young India

The Agnipath Scheme has been designed to enable a youthful profile of the Armed Forces. The scheme offers a Tour of Duty (ToD) model for aspiring youth to join the forces. Under this scheme, 25% of Agniveers will be inducted into the forces on a permanent basis. Not only that, several state governments and private industries have stepped up to provide jobs for candidates who pass out of the programme.

The five Young Scientists Laboratories launched by the Defence Research and Development Organisation (DRDO) in 2020 are located in Bengaluru, Mumbai, Chennai, Kolkata, and Hyderabad. They provide an R&D environment for young minds to explore emerging engineering fields and advanced technologies such as Artificial Intelligence (AI), Quantum Technologies, Cognitive Technologies, and Smart Materials. With such opportunities at hand, the future looks bright for young talent looking to serve their country and make a difference.

Major Process Reforms 

The Indian government’s push for self-reliance in defence manufacturing has gained steam under the leadership of PM Modi. With a goal to increase domestic manufacturing capacity and reduce dependence on imports, the government has introduced several policies and initiatives. One key initiative has been the digitisation of processes, which has streamlined procurement and made the process more transparent. In addition, the government has implemented checks and balances to restrict imports, while promoting exports and creating a conducive ecosystem for FDI.

The government has also formulated schemes aimed at promoting ease-of-doing-business and encouraging the manufacturing and procurement of indigenous products. These policies have provided a much-needed boost to the domestic defence industry, creating new business opportunities and helping establish India as a global player in the defence sector. IADB’s previous coverage has highlighted that the focus on domestic manufacturing and innovation is expected to drive significant growth in the defence sector, creating new jobs and boosting the economy.

Industrial licensing: Simplifying industrial licensing processes to encourage more domestic production has been a key area of focus. The government has rationalised the defence products list requiring industrial licenses, which has increased the validity of the license from three to 15 years, with an option to extend it further on a case-by-case basis. This move has provided companies with the necessary time and space to operate without any hindrance and secure financing from institutions. The ease of filing applications has also resulted in more licenses being issued and faster approvals.

Capital Acquisition Procedures: Another move has been to simplify the Make-I and Make-II Capital Acquisition Procedures. Under the Make-I category, the administration funds 90% of the projects, whereas the Make-II category involves prototype development or upgrades primarily for import substitution. The government has introduced industry-friendly provisions in this procedure, such as relaxing eligibility criteria and minimal documentation.

SRIJAN portal: To facilitate indigenisation by the Indian industry, including MSMEs, the government launched an indigenisation portal, SRIJAN, in August 2020. Through this portal, the Indian industry can identify and express interest in the items for which they possess or can obtain design, development and manufacturing capabilities. Over 21,000 defence items that were previously imported have been displayed on the portal, and the private industry has expressed interest in indigenising more than 4,700 items.

Special Focus: Defence Industrial Corridors

The Indian government is moving ahead with its vision of establishing Defence Industrial Corridors to bolster economic development and growth in the country’s defence industrial base. The corridors, one in Uttar Pradesh and the other in Tamil Nadu, are set to become an engine of economic growth. The Uttar Pradesh Defence Industrial Corridor (UPDIC) will connect six nodes: Agra, Aligarh, Chitrakoot, Jhansi, Kanpur, and Lucknow, while the Tamil Nadu Defence Industrial Corridor (TNDIC) will develop five nodes, including Chennai, Coimbatore, Hosur, Salem and Tiruchirappalli, The corridors will house public, private, and MSME units, with an investment of Rs 20,000 crore planned by 2024. So far, the industry has already invested around Rs 5,000 crore, indicating strong support for the project. This initiative will create numerous job opportunities in the coming years, while the development of regional industries will get a significant boost.

R&D Drawing an Era of Innovation

Gone are the days when Defence R&D was limited to government labs and research centres. The Indian government has now opened up defence R&D to the industry, start-ups, and academia, with a whopping 25% of the defence R&D budget earmarked to promote the development of defence technology in the country.

Nine thrust areas for defence research: The Defence Research and Development Organisation (DRDO) has identified nine thrust areas for focused research to develop innovative solutions in defence technology. These areas include platforms, weapon systems, strategic systems, sensors & communication systems, space, cyber security, artificial intelligence and robotics, material and devices, and soldier support.

New initiatives to foster the adoption of AI: To enable the adoption of AI in defence, the government has created the Defence AI Council (DAIC) and Defence AI Project Agency (DAIPA). An AI roadmap has also been finalised to streamline the development of AI in the defence sector.

DRDO launches Technology Development Fund (TDF): The DRDO has launched the TDF to support Indian industries, including MSMEs and Start-ups, with financial support for the design and development of innovative defence products. The TDF provides funding through grants-in-aid to enable the development of new technologies.

New patent policy to boost Indian industries: The DRDO has also promulgated a new patent policy to provide Indian industries free access to use DRDO patents. This move is expected to provide Indian industries access to the innovations carried out by DRDO, further boosting their R&D of capabilities and fostering the development of new technologies.

iDEX platform to incubate and develop ideas: The Indian government has launched the Innovations for Defence Excellence (iDEX) platform to foster innovation and technology development in defence and aerospace. Hundreds of start-ups and innovators have responded to the rounds of Defence India Start-up Challenge (DISC) and open challenges, and many of them are using the iDEX platform to incubate and develop their ideas. The government earmarked INR 500 crore to support MSMEs and start-ups through iDEX, and the platform provides funding and other support to carry out R&D with potential for future adoption in the Indian defence and aerospace industries.

With these revolutionary initiatives, India is fostering open innovation and collaboration in defence R&D, opening up new opportunities for start-ups, MSMEs, and academia to develop cutting-edge technologies to meet the country’s defence needs.

Going To The Grassroots

Connectivity and economic vitality in remote border regions are crucial for national security. It can strengthen border security against external threats and promote cross-border trade for improved regional relations and stability.

Two of the Central government’s initiatives focus on this aspect of defence. 

Vibrant Village program: The Vibrant Villages Programme (VVP) was unveiled in India’s Union Budget for 2022-23. The government is implementing the Border Area Development Programme (BADP) in partnership with State Governments/UT Administrations, covering habitations situated within 0-10 km from the first habitation at the international border in 460 border blocks of 117 border districts in 16 States and 2 UTs. The programme approves annual action plans submitted by States/UTs, consisting of works related to village infrastructure, such as roads and bridges, health, education, agriculture, sports, drinking water, and sanitation.

Development of BRO in work of strategic nature: Over the past eight years, several measures have been implemented to enhance the efficiency and timeliness of the Border Roads Organisation (BRO) in carrying out its duties. These include the establishment of a “Centre of Excellence” by BRO to prioritise road safety, the integration of safe road practices in construction, and the identification and mitigation of accident-prone areas or “black spots,” leading to a decrease in road accidents.

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