DSA April 2014 by Defence and Security Alert

Foreign Direct Investment (FDI) in defence and offsets

Defence Budget 2014-15

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sound defence industrial base takes years of effort and investment. Effort involves putting together a vibrant and dynamic team coupled with raising the necessary infrastructure. Investment in research, hiring the brightest minds and developing cutting edge technologies produces the end result of a complete defence cycle. But all of this is only possible when the country has a well thought out long-term defence planning and vision. After all it takes a lot of time to develop the talent, put together the infrastructure, conduct the research and finally develop the state-of-the-art product. For all this to happen the country first needs to think through its national security strategy, develop a national security doctrine, both of which finally produce a national security policy. India, alas, is the prime example of a country lacking in all these aspects of defence. There isn’t a defined national security strategy, one that is based on logic, regional and the global environment, ambitions and goals that are achievable. Far too little intellectual effort has been made over the decades in working out a national security doctrine. The end result is that the entire defence planning process lacks planning and foresight. There is in fact no planning. So there is no policy. And where there is no policy India lacks the vision that it needs to achieve its goals. It is after all policy that makes clear capability and intention, the ultimate cocktail that determines success. Success is something that India has sorely lacked while setting up a viable defence industrial sector in the country. In all the years since independence and the various five year plans, annual budgets and so on, the country has floundered seriously. So in the early and vibrant part of the 21st century India has the unenviable record of being the world’s largest importer of weapons and combat related systems. Despite producing precision instruments, world-class satellites and their launch systems, reasonably good automobiles, first rate software and bio-technology research, India has still not been able to design, develop and manufacture an automatic combat rifle of global standards. The INSAS family, despite years of effort and production, now seems to be readied for the museums. And India will approach the world arms producers for the most basic and important weapon. This has been the track record for a the last few decades. Early efforts at combat aircraft and tank design were prematurely stopped and the baby was thrown out along with the bath water. So typical then and expected now as well. All of this is because the government hasn’t allowed anyone to enter the defence sector as an independent designer, researcher and manufacturer. The monopoly of ideas and plans has resulted in not enough of both being developed. The government has an endless stream of money to throw and is not accountable either for its failures or its baby and bath water policies. It is well nigh time to sit back, take stock and prepare a blueprint for creating a sustainable defence industrial sector. The most important contribution in this has to come from the private sector, domestic and international. In a rapidly globalising world and increasing policy integration there is no reason to exclude international companies from setting up base in India with domestic partnerships. The bogey of national security being compromised is simply, a bogey. In this digital age of satellites and constant surveillance there is little to hide in terms of capability. All of the best tanks and combat aircraft mean nothing if there is no intention of using them. And intention is the most closely guarded national secret in any case. No amount of surveillance can detect what intention lies behind a weapon system. That is the sole prerogative of the political and military leadership. What they need are weapons of capability. How and when they’re used is the secret of intention. It is time that the Defence Research and Development Organisation undergoes a serious scrutiny of its functioning and record. Is encouraged to tie-up with domestic and international players in developing systems and promotes their manufacturing in India. In the meantime private players must also be allowed the freedom to enter the sector fully. Monopolies are never a good idea.

Manvendra Singh April 2014 DEFENCE AND SECURITY ALERT

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Road Map for Public-Private Partnership

t should now, nearly 67 years after attainment of independence from colonial rule and ﬁve wars and innumerable terrorist attacks instigated by neighbours, have become axiomatic in Indian minds that no nation that does not produce most of the weapons that it needs for self-defence can aspire, with any degree of credibility, to play its due role in the comity of nations.

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Volume 5 Issue 7 April 2014 Chairman Shyam Sunder Publisher and CEO Pawan Agrawal Editor-in-chief Manvendra Singh Director Shishir Bhushan Corporate consultant KJ Singh Art consultant Divya Gupta Central Saint Martins College Of Art & Design, University Of Arts, London Corporate communications Mamta Jain Creative Prem Singh Giri Representative (USA) Steve Melito Representative (J and K) Salil Sharma Correspondent (Europe) Dominika Cosic Production Dilshad and Dabeer Webmaster Sundar Rawat

Unfortunately, the exertions post-1962 debacle at the hands of the Chinese have not produced the desired result of self-reliance as the ﬁrst step towards self-sufﬁciency in military wherewithal. We are still dependent on imports of military equipment to the extent of 60 per cent or more, notwithstanding the assurances given by outgoing Defence Minister AK Antony to reverse the trend. I believe that until the government takes the initiative to develop its own industrial base, private sector alone cannot do much. There has to be a very detailed and well-planned road map for joint efforts to expedite this process. I have met many private players recently who are earnestly willing to invest huge amounts to develop a strong defence and security industrial base in India but ironically, a commitment from the government is still elusive.

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This attitude prompts the inescapable question, “What happens if we are attacked by China or Pakistan in the near future? How will our defence and security personnel handle a concerted attack along our borders if they are not equipped with the best gadgets and technologies required to counter any such challenges?” There are many reasons for this state of affairs and some are listed below:

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As defence experts would confirm, the edifice of indigenously produced defence and security apparatus plays an important role in the peace and prosperity of a nation and its people. Congruently, it also applies to its ability to achieve the goals it sets for itself within its own region and on the global stage. Israel presents the best illustration of how a nation that was born in a hostile environment, akin to our own, can defend its existence by the dint of its own military industrial complex. The reason being, that a self-respecting nation with a strong defence and security industrial base not only fulfills its own requirements, but is also in a position to cater to the needs of the other developing and underdeveloped countries. The exchequer trove of foreign exchange it generates is a matter of great pride for the Israelis.

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Bhutan

Political interference in the decisions of procurement No clear policy so far developed for the procurements Non-cooperation with the investors Vested interests of certain middle-men dealing in defence and security equipment

Bangladesh

Myanmar

Why doesn’t the government ensure transparency as clearly visible in the fields of education, automobile, telecommunication etc? We are well aware of the success story of Maruti Suzuki and the amazing capability made available to the nation by the joint venture of Indo-Russian BrahMos missile to fulfill the requirements of all three Services; be it for air-to-air, air-to-surface, surface-to-surface and undersea-to-surface military operations. A joint venture with the Russians to produce the 5th generation fighter promises a quantum leap in the ability of India to defend itself. This edition is dedicated to highlight the challenges our defence and security industries are facing, the role of FDI and offsets and the Defence Budget for 2014-2015, which has become a ritual only as there is hardly any increase in the funds allotted whenever it is presented on the floor of the Parliament. I am sure that if government gives more leverage in the Foreign Direct Investment in the area of defence and security the industrial base in India can become self-reliant and will not have to look for imports all the time. So it is going to be a big challenge for the incoming new government after the general elections to take adequate steps to overcome challenges, remove these deficiencies and empower the defence and security industrial base in India.

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April 2014 DEFENCE AND SECURITY ALERT

Pawan Agrawal

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Contents

CHALLENGES FOR THE DEFENCE INDUSTRIES IN INDIA A R T I C L E S Unravelling The Indian Policy Major General (Dr) Mrinal Suman AVSM, VSM (Retd)

India’s Defence Offset Policy Dr Rajiv Nayan

Self-reliance in Defence – A Myth Or Reality? Cmde S Govind (Retd)

India's Military Industrial Complex A long And Arduous Journey Radhakrishna Rao

Opportunities For Win-win Solutions Air Marshal Anil Chopra PVSM, AVSM, VM, VSM (Retd)

Is Nation Prepared? PM Kamath

Leveraging FDI: National Aerospace And Defence Industry Cmde Sujeet Samaddar NM (Retd)

Defence Of The Realm Needs More For Defence Forces Lt Gen OP Kaushik PVSM, AVSM, VSM, M-IN-D (Retd)

A Common Technology Hub For The Forces Col AG Thomas (Retd)

China Leads Global Shipbuilding Industry Dr Vijay Sakhuja

Problems In Acquiring Hi-tech Machine Tools Mukund Puranik

Consensus Is The Victim Dominika Cosic

Plugging Gap Between Demand And Supply Cecil Victor

Indian Defence Industry: The Constraints Dr Laxman Kumar Behera

ASEAN Defence Industry And India Dr Pankaj Jha

Militarisation Of The Indian Cyber Space Arjun Singh

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Contents SPECIAL ISSUE APRIL 2014

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Vo l u m e 5 I s s u e 7 A p r i l 2 0 1 4

F E A T U R E S

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EXCLUSIVE INTERVIEW Mr Arun Chaudhary DG Sashastra Seema Bal

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challenges for defence industries INTERVIEW

SERVICE, SECURITY AND BROTHERHOOD M r Arun Chaudhary, Director General SSB joined the Indian Police Service in the year 1977 and was allotted Bihar Cadre. He joined the Intelligence Bureau in the year 1994 where he played a key role in various assignments at Delhi HQ and Kashmir. For excellent service throughout his career, he was decorated with the Police Medal in the year 1996 and was also awarded President’s Police Medal in the year 2002 for distinguished service. He was elevated to the rank of Special Director in the Intelligence Bureau wef 18. 2. 2011. Before taking charge of SSB Mr Chaudhary was Special DG in Central Industrial Security Force (CISF). Defence and Security Alert: SSB made a modest beginning in 1963 in the aftermath of Indo-China conflict and has over the years grown to become nation’s premier BGF. Please share with our readers the highlights and milestones of this eventful journey and also your vision for SSB of the future. Sashastra Seema Bal: SSB was set up as “Special Service Bureau” under MEA in early 1963 in the wake of Indo-China Conflict of 1962 and worked under the Cabinet Sectt. SSB was deployed in NEFA (Arunachal Pradesh), North Assam, North Bengal, Hilly districts of Uttar Pradesh (now Uttarakhand), Himachal Pradesh, Part of Punjab, Ladakh area of Jammu and Kashmir. The jurisdiction was further extended in the states of Manipur, Jammu and Kashmir and Tripura in 1965, Meghalaya in 1975, Sikkim in 1976, Rajasthan and Gujarat in 1985, Nagaland, Mizoram and South Bengal in 1989. However after the Kargil Conflict, the governement of India decided to convert SSB into a border guarding force. Since 2001 Sashastra Seema Bal has been guarding the Indo-Nepal border and Indo-Bhutan border from 2004 onwards. We guard 1,751 km of Indo-Nepal border and 699 km of Indo-Bhutan border. We have deployed 5 Frontiers at Guwahati, Siliguri, Patna, Lucknow and Ranikhet towards that effort. SSB is today a 70,000 strong force, the third largest CAPF. We have 12 Sector HQs and 57 battalions. Also we have a dedicated intelligence wing consisting of 25 Areas and 55 Sub-areas. My vision is to see SSB evolve as a credible border guarding force ready to take on responsibilities in difficult theatres like naxal and militancy infested areas. I also would like to see SSB as a tech-friendly force never forgetting its People First motto. DSA: SSB was set up to inculcate feelings of national

April 2014 DEFENCE AND SECURITY ALERT

belonging and patriotism in the population in the border areas and promote a sense of security among the people living close to international borders. How successful has SSB been in achieving these objectives?

SSB: SSB was ﬁrst raised in North-east frontier agency in 1963 in the wake of Chinese aggression. The main task of the SSB at that time was to create a sense of security among the border populations and to develop a capability of resistance should any such misadventures take place in future. SSB was also the face of governments – both state and the central – in the remotest parts of our country.

Perception management and civic actions were two tools which made SSB successful in achieving the objective of inculcating feelings of nationalism and patriotism in the border populations by selfless service. You will be surprised to learn that SSB doctors and vets provided door to door service to lakhs of citizens even in those difficult areas. DSA: Now, SSB is also mandated to prevent trans-border crimes and unauthorised entry into and exit from the territory of India. What has been your experience in managing these dual scourges? SSB: Border management has a wider concept in terms of areas of interest, engagement and actions. SSB has been fairly successful and upto the challenge. For records, we have seized contraband worth more that Rs 500 crore since our new role. Smuggling of narcotics, human trafficking, fake Indian currency, arms peddling, wildlife poaching and smuggling have been on our radar and our troops deployed on the border have effectively kept these under check. While enforcement of law goes on, we are conscious that no violations of human rights take place and people at large perceive the force as their friends. Our civic action programmes to connect with the border people are in place and duly funded by the government of India. DSA: Smuggling of merchandise and fake currency into India has been increasing with a certain regularity. What steps is SSB taking to counter these nefarious anti-national activites? SSB: SSB since its inception has seized contraband items worth Rs 521 crore: this includes Narcotics worth Rs 259 crore, FICN of face value Rs 36.29 lakhs, Antique idols of Rs 73.6 crore, Prohibited items of Rs 121.21 crore and Forest

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries INTERVIEW national endeavours. What preventive and corrective measures is SSB taking to safeguard national interest and peace and harmony on the borders? SSB: With growing challenges and tasks at hand, SSB is on fast track to modernise and adequately equip itself for effective border guarding and internal security duties. A perspective modernisation plan is in place with sufﬁcient funding from MHA. This plan addresses areas of specialised equipment, arms and ammunition, communication, mobility and technology. The challenge lies in its timely implementation. If funds have to be surrendered for want of QRs and Trial Directives, then it becomes worrisome and our preparedness takes a hit. Pending this plan, SSB has augmented its technical resources from regular budget. More emphasis is placed on human intelligence and sharing the resources of sister agencies to ensure that our borders remain safe. DSA: In the prevailing security environment in the country and our neighbourhood, training and up scaling of our forces has assumed critical importance. Under your dynamic leadership, what initiatives have been taken to upgrade and modernise SSB to meet and surmount the escalating threats and challenges?

Mr Arun Chaudhary, Director General SSB with Mr Pawan Agrawal Publisher and CEO of Defence and Security Alert magazine

As head of the SSB, one of the premier border guarding forces, guarding 2,450 km long Indo-Nepal and Bhutan border, I want to develop SSB as the best border guarding force in terms of training, skills, intelligence collection, manpower strength, with latest equipment and weaponry to meet any challenge. We are also very keen to maintain our people friendly approach by winning over the hearts and minds of the border populations by our personal and professional conduct Products of Rs 36.04 crore. About 12,119 smugglers, including 3rd country nationals and criminals involved in various trans-border crimes were arrested by SSB. 54 militants have been neutralised on SSB’s information, inputs and actions. SSB has recovered more than 800 arms of various bore and seized large quantity of explosives. It is incorrect to state that smuggling is increasing. There are a few areas of concern like FICN and gold and of cource narcotics. You must understand that the borders being porous and devoid of force multipliers like a barbed wire fence and floodlighting, it is very difficult to keep an eye on every inch of the border. Some unscrupulous elements do take advantage of this. But I am sure the above figures would vindicate our efforts. For more effective vigil, we are expanding our force by decreasing the distance between BOPs. With strengthening of our INT networks along the border, INT based operations are likely to increase which will get more results. Further, with the use of technical gadgets like HHMDs, DFMDs, Drug detection kits, Fake currency detection kits etc, we are ensuring that no smuggler will get away from SSB. DSA: Encouraged by the good work the force has been

April 2014 DEFENCE AND SECURITY ALERT

doing, the government has roped in SSB to encounter insurgency operations in Jammu and Kashmir and ANO in Jharkhand and Bihar. Do you think this has overstretched the capabilities of the force and diluted its core competency? SSB: Giving new responsibility means the government has shown faith and trust in SSB. Five (05) Bns are deployed in Jammu and Kashmir. Three Bns are deployed in the state of Bihar (01 Bn) and Jharkhand (02 Bns) for ANO duties. The units deployed in Bihar and Jharkhand are engaged in CASO, Raid, ROP, area domination, security of vital installations and vulnerable areas with state police. Since deployment in 2013, the units have apprehended 105 numbers of hard core naxals / most wanted. These units have also recovered large number of weapons including AK 56 riﬂes. Six Bns of SSB are to be inducted for Anti-Naxal Operation duties in the state of Chhattisgarh. These Bns will be deployed in the stronghold areas of Naxals to combat the ultra-reds. Presently, 24th Bn of SSB is undergoing CTJW training and will be deployed soon for ANO duties in the district of Bijapur. These responsibilities have not really stretched SSB because we have been authorised 18 Reserve Bns. The only area of concern is tardy pace of procurement of crucial equipment like bulletproof jackets and helmets, wireless equipment, mineproof vehicles and so on. DSA: SSB is often called upon to perform internal security duties, managing law and order and election duties. With general elections almost upon us, how well prepared is SSB to take up this onerous responsibility? SSB: Yes, SSB troops are deployed in various IS duties in different states depending on the requirement and directions of MHA. Of late, troops deployed in BTAD areas of Assam have conducted various operations along with the

state police which has made considerable impact in those areas by making arrests of NDFB cadres. In respect of election duties, SSB is being deployed in various states for elections every year. This year, we are providing 125 coys for conducting smooth and peaceful voting in various states for general parliamentary elections. The troops are well trained and highly motivated. SSB will successfully perform the duties in these locations as always. DSA: India is a country of sub-continental size with long and expansive borders and many hostile neighbours. SSB has to share intelligence and other inputs with sister paramilitary organisations and defence forces, especially the army. How effective and productive is your relationship with other forces and how seamless and well orchestrated are joint operations? SSB: Contrary to what may appear in certain sections of media, the synergy between intelligence agencies and sister CAPFs is excellent. Most of the operations are jointly carried out. Our performance in Bodo areas of Assam and Naxal areas is a case in point. In these areas not even a single operation is carried out without the active cooperation of the civil police and vice versa.

SSB: In the prevailing security scenario we are upgrading our training centres, equipment, training programmes and introducing new cyber technologies for effective border security and management. We have added to our capacity to train our personnel in communications, special operations and are going to start our Intelligence Training School at Kolkata which will train our ﬁeld operatives and provide refresher training as well. BPR&D stands by us in up scaling our training institutes under a special scheme. To modernise the force we are procuring special equipment including night vision capability, bulletproof material for our troops going to Naxal areas, mine-protected vehicles and increasing their mobility by inducting a signiﬁcant number of vehicles. DSA: As head of SSB, India’s premier border guarding force, what ideas and insights you will like to share with the people of India and DSA readers around the world?

Quality intelligence is the key. With more induction of technology and faster means of communication, our operations are becoming surgical and fruitful.

SSB: As head of the SSB, one of the premier border guarding forces, guarding 2,450 km long Indo-Nepal and Bhutan border, I want to develop SSB as the best border guarding force in terms of training, skills, intelligence collection, manpower strength, with latest equipment and weaponry to meet any challenge.

DSA: Our enemies across the border and anti-national elements within the country have equipped themselves with the latest high technology weapons, gadgets and communication devices to disrupt and destabilise our

We are also very keen to maintain our people friendly approach by winning over the hearts and minds of the border populations by our personal and professional conduct.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries THE MAZE

UNRAVELLING THE

INDIAN POLICY

India has abrogated its right to select offset programmes in favour of the vendors, rendering its own needs inconsequential. The Indian policy quite unequivocally permits foreign vendors to choose methodology, areas and Indian partners to fulfill their offset obligations. Needless to say, foreign vendors would always opt for programmes that are easy to implement and cost the least.

Thus, offsets are business deals with built-in reciprocity clauses to provide partial relief to the buyer country. Opponents of the concept consider offsets to be some sort of a leverage exploited by a buyer to obtain compensatory benefits by asking the seller to undertake well-designated activities to boost the economy of the buying country. As it is a formal arrangement with inbuilt contractual obligations, the negotiated package consists of the primary contract and the compensatory offsets contract. Normally, both the contracts are signed simultaneously. Most of the countries have laid down offset threshold for defence imports. It implies that all arms deals above that value will necessarily have associated offsets. The value of an offset programme is generally expressed in terms of its offset credit value. It represents actual credit accruing to an offset provider against his offset obligation. Normally, countries demand offsets that are in consonance with their national economic objectives and help in fulfilling an economic / technological need. Therefore, it is for the purchaser to decide on the nature and type of offsets. Application of multipliers is a methodology used by purchasers to assign weightage to different offset programmes to provide vendors with incentives to offer offsets in targeted areas. A multiplier is a factor applied to the actual value of an offset transaction to calculate the offset credit value earned. Offsets can be direct or indirect. In direct offsets, the trade arrangement is related to the primary product sold. It implies that the compensatory dispensation remains confined to the main equipment, its sub-assemblies and components. It may include buy-back or co-production or licensed production or sub-contracts of the system and its sub-systems. Technology transfer is by far the most common and generally accepted to be the best form of direct offsets. Therefore, countries seeking to develop their own defence industrial base generally seek direct offsets.

lthough detailed guidelines for offsets in high value defence contracts were ﬁrst issued by the Ministry of Defence (MoD) in 2005, the policy continues to remain mired in ambiguities leading to multiple interpretations. There are a large number of provisions that defy explication. Resultantly, the offset regime has become a source of anxiety and dissuasion. This article attempts to clarify salient facets of the concept of offsets with special emphasis on the Indian policy. The end of cold war saw a considerable reduction in the demand for major weapon systems the world over. In addition, purchasing countries had to contend with hostile public opinion against defence spending. Consequently, the arms sellers were hard put to sell their products. They tried to make their offers virtually irresistible with promises of lucrative ‘add-ons’, collectively called offsets. Offsets helped importing governments in justifying

April 2014 DEFENCE AND SECURITY ALERT

purchase of arms by highlighting the beneﬁts accruing to their national economy by way of technology transfers and buy-backs. Thus, the twin conditions of limited arms market and hostile public opinion became the raison d'être for the popularity of offsets. Over 130 countries are obtaining offsets today.

Deﬁning Offsets

Offsets have been described in a number of ways. Different nations interpret the concept differently to suit their specific requirements. In its simplest form, an offset is a trade-off or a type of barter system. They can also be termed as formal arrangements of trade wherein a foreign supplier undertakes specified programmes with a view to compensate the buyer as regards his procurement expenditure and outflow of resources. In other words, the supplier undertakes programmes to generate benefits for the economy of the buyer country.

On the other hand, indirect offsets have a much wider scope and are not restricted to the product sold. They are more broad-based and transcend all economic or social activities and generally take the form of compensatory trading (reciprocal trade, counter purchase, switch trading, counter deliveries and parallel trade). Indirect offsets are highly popular with developing nations. A vendor may generate potential offset credits through programmes undertaken prior to the award of a supply contract for ‘banking’ purposes for future use against likely obligations. Bankable offsets can be created in two ways – either by excess generation through ongoing offset programmes or by undertaking fresh offset-centric programmes (in anticipation of bagging future defence contracts). Some countries allow trading of offset credits.

Unscrambling The Indian Policy

The latest Defence Offset Guidelines came into effect from 01 August 2012. It marked a paradigm shift in India’s basic approach towards offsets by accepting transfer of technology (ToT) as a viable mode of discharge of

their offset obligations. Quite appropriately, the stated objective of the policy is to leverage capital acquisitions to develop Indian defence industry by fostering development of internationally competitive business enterprises; augmenting capacity for research, design and development related to defence products and services; and encouraging development of synergistic sectors like civil aerospace and internal security.

MAJOR GENERAL (DR) MRINAL SUMAN AVSM, VSM (RETD)

The writer is India’s All capital acquisitions under foremost expert in myriad ‘Buy (Global)’ and ‘Buy and aspects of defence Make with ToT’, where the procurement procedures estimated cost of the proposal is and offsets. He heads Rs 300 crore or more attract a Defence Technical minimum offset obligation of Assessment and Advisory 30 per cent of the estimated cost. Services Group of the However, higher value can be Confederation of Indian stipulated for specific cases. For the Industry. A prolific writer, ongoing case for the procurement of his articles are regularly fighter aircraft, Ministry of Defence translated in many has laid down offset obligation languages and his views at 50 per cent. In case the contract command immense respect in India value gets increased or decreased, and abroad. quantum of offset obligation is adjusted proportionately. In the case of joint ventures where Indian firm is bidding, the foreign partner has to discharge offset obligation.

Quite appropriately, the stated objective of the policy is to leverage capital acquisitions to develop Indian defence industry by fostering development of internationally competitive enterprises; augmenting capacity for research, design and development related to defence products and services; and encouraging development of synergistic sectors like civil aerospace and internal security The above provisions also apply with appropriate modiﬁcations to ‘Buy’ and ‘Buy and Make with ToT’ components for warship construction where the estimated cost of individual contract is Rs 300 crore or more. For products which contain imported components, only the value addition in India counts towards offset obligations.

Ambiance

Foreign vendors are at liberty to select the mode of discharge of their offset obligations and it could be through any one or a combination of the following methods:  Direct purchase of or executing export orders for eligible products manufactured by or services provided by Indian enterprises (both public and private sectors).  Foreign Direct Investment (FDI) in joint ventures with Indian enterprises (equity investment) for the manufacture and / or maintenance of eligible products and the provision of eligible services.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries THE MAZE Industrial Policy and Promotion. Earlier offset obligations had to be fulﬁlled co-terminus with the main procurement contract. However, DOG allows offset obligations to be discharged within a time frame that can extend beyond the period of the main contract, but within two years of the deal being implemented.

 Investment in ‘kind’ in terms of ToT to Indian enterprises for the manufacture and / or maintenance of eligible products and provision of eligible services. ToT has to be provided without license fee and there should be no restriction on domestic production, sale or export. Offset credit has been pegged at 10 per cent of the value of buyback by the original equipment manufacturer during the period of the offset contract, to the extent of value addition in India.  Investment in ‘kind’ in Indian enterprises in terms of provision of equipment through the non-equity route for the manufacture and / or maintenance of eligible products and provision of eligible services. However, the vendor is required to buyback a minimum 40 per cent of the eligible product and / or services (by value) within the permissible period for discharge of offset obligations.  Provision of equipment and / or ToT to government entities engaged in the manufacture and / or maintenance of eligible products and provision of eligible services, including the Defence Research and Development Organisation (DRDO). This includes augmenting capacity for research; design and development; training; and education but exclude civil infrastructure.  Technology acquisition by DRDO in areas of high technology mentioned in the list made public. Products eligible for discharge of offsets relate to defence, internal security and civil aerospace. ‘Services’ mean maintenance, overhaul, upgradation, life extension, engineering, design, testing of eligible products and related software or quality assurance services with reference to the indicated eligible products and training. Training may include training services and training equipment but exclude civil infrastructure.

Government allowed 26 per cent FDI. It was hoped that foreign investors would find the policy highly irresistible. However, all hopes have been belied as there has been a total lack of enthusiasm amongst the foreign investors. Two-year Stipulation

A foreign vendor is at liberty to choose his Indian offset partner / partners. There is no requirement of prior license or registration. However, the Indian offset partner shall, besides any other extant regulations in force, also comply with the guidelines / licensing requirements for the defence industry issued by the Department of

April 2014 DEFENCE AND SECURITY ALERT

DOG has also increased the validity period of pre-approved banked offset credits to seven years from the date of acceptance by Defence Offsets Management Wing (DOMW). Banked offset credits are not transferable except between the main contractor and his sub-contractors within the same acquisition programme. The main contractor is required to submit a list of such sub-contractors at the time of signing the offset contract.

Defence Acquisition Council Approval

In case a vendor seeks re-phasing of offset programme within the currency of the main contract, Director General (Acquisition) may allow it after due consideration. In case re-phasing extends beyond the period of the main contract, the case has to be put up to the Defence Acquisition Council for decision. As per the policy guidelines, ‘if a vendor fails to fulfill his offset obligations in a particular year in accordance with the annual phasing as agreed in the offset contract, a penalty equivalent to five per cent of the unfulfilled offset obligation will be levied on the vendor’. Further, the unfulfilled offset value is re-phased over the remaining period of the offset contract. An overall limit on penalty has been capped at 20 per cent of the total offset obligation during the period of the main procurement contract. However, penalty for failure to implement offset obligations during the period beyond the main procurement contract will have no upper limit.

Multipliers

MoD has introduced two categories of multipliers. First, for technology acquisition by DRDO, multiplier of 2.0 to 3.0 can be assigned as per the liberty to use the technology, as shown below:  Multiplier of 2.0 when the technology is offered for use by Indian armed forces only but without any restriction on the numbers that can be produced.  Multiplier of 2.5 when the technology is offered for use only in Indian market but for both military and civil applications and without any restriction on the numbers that can be produced.  Multiplier of 3.0 when the technology is offered without any restriction and with full and unfettered rights, including right to export. Secondly, in case micro, small and medium enterprises (MSMEs) are selected as Indian offset partners, a multiplier of 1.50 is permitted. Thus, through the mechanism of multipliers, the government has tried to offer incentive to foreign vendors to select MSMEs as their Indian offset partners. At the time of submitting technical and commercial

proposals, a vendor is only required to confirm his readiness to comply with the offset requirements. Technical Offset Offer (TOO) and Commercial Offset Offer (COO) have to be submitted in separate sealed envelopes by a date to be specified in the Request for Proposals (RFP), which is not to be earlier than three months from the date of submission of the initial technical and commercial offers. TOO is scrutinised by a committee constituted by the concerned Technical Manager in the Acquisition Wing. COO is opened along with the main commercial offer by the Contract Negotiating Committee (CNC), which verifies that COO meets the stipulated offset obligations. No preference / credit is given for extra offsets offered. In other words, type and quantum of offsets on offer have no bearing on the determination of the successful vendor. All proposals which meet minimum offset requirements are considered at par. After CNC is satisfied that the offset offer is in accordance with the prescribed norms, the lowest bidder is invited to sign the main and the offset contracts. Vendors are required to submit quarterly reports on the progress of offset programmes to MoD. Where necessary, an audit by a nominated official or agency may be conducted to confirm the actual status of implementation.

Incongruities

Unfortunately, the policy continues to suffer from a number of ambiguities and infirmities. One, as highlighted earlier, selection of an offset programme is a crucial decision. Offsets must be sought to satisfy an important technological / economic need. Unfortunately, India has abrogated its right to select offset programmes in favour of the vendors, rendering its own needs inconsequential. The Indian policy quite unequivocally permits foreign vendors to choose methodology, areas and Indian partners to fulfill their offset obligations. Needless to say, foreign vendors would always opt for programmes that are easy to implement and cost the least. Two, although one of the routes specified for the fulfillment of offsets is through FDI in defence industry, the existing policy is highly dissuasive – a foreign investor is expected to invest his resources in a venture where he has no significant control, strict capacity / product constraints, no purchase guarantee and no open access to other markets (including exports). While opening the defence industry to the private sector in May 2001, the government allowed 26 per cent FDI. It was hoped that foreign investors would find the policy highly irresistible. However, all hopes have been belied as there has been a total lack of enthusiasm amongst the foreign investors. Three, in its zeal to perpetuate the monopoly of the public sector, the private sector has been given a raw deal. A number of stipulations are highly discriminatory. Worse, MoD has promulgated a highly complex procedure whose provisions lend themselves to multiple interpretations which may result in detrimental squabbles. Four, the indicative list provided by DRDO of the high-technologies and test facilities that it seeks against offsets is highly imprecise. It contains

The most startling and inexplicable feature of DOG is the division of responsibility between the Acquisition Wing and the newly created DOMW. Whereas the former has been allowed to exercise complete control till the signing of the offset contract, post-contract management is carried out under the aegis of DOMW. It has the potential to embroil the complete offset process in bureaucratic turf battle. open-ended description of a vast array of sub-technologies. Surprisingly, it has been left to the vendors to choose the technology they wish to offer and submit proposals accordingly to the concerned Technical Manager in a separate envelope, duly marked accordingly. A multi-disciplinary technology evaluation committee, established by DRDO, is required to process the proposal and make its recommendations. If the proposal is considered viable as regards range, depth and exclusivity of technology on offer and Indian capability to absorb it; a fair assessment of its cost and multiplier factor is made. On the other hand, if it is felt that the technology so indicated is already available and / or is of no further use by DRDO, the proposal is rejected. Resultantly, the vendor has to prepare and submit a fresh offset proposal. As the procurement case cannot be processed till the offset proposal is found acceptable, considerable delay can occur in this process. The most startling and inexplicable feature of DOG is the division of responsibility between the Acquisition Wing and the newly created DOMW. Whereas the former has been allowed to exercise complete control till the signing of the offset contract, post-contract management is carried out under the aegis of DOMW. Interestingly, DOMW has also been assigned the responsibility of formulating offset guidelines. It is a strange arrangement and has the potential to embroil the complete offset process in bureaucratic turf battle.

Finally

India is yet to appreciate the full potential of offsets. Offsets should not be viewed in isolation as one-time agreements, but as an important and integral element of long-term national policy. As all offsets carry a cost penalty, offset programmes must be selected and planned with utmost care. Ill-conceived, poorly implemented and indifferently monitored offset programmes invariably prove to be highly wasteful in national resources and uneconomical for their value. The arms market is a buyers’ market today. As per the latest report of the Stockholm International Peace Research Institute, India is world’s largest importer of conventional arms. India can use its immense leverage to use offsets as engines of national economic growth, by ensuring redirection of large outﬂows caused by defence procurements back into its economy. For that, it is absolutely essential to understand the dynamics of offsets. India must evolve a well thought-through, purposeful and workable offset policy.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries MODUS VIVENDI

Undoubtedly, all the stakeholders need to have a coordinated approach to optimally use the offset policy and contract. The ultimate objective should be to strengthen futuristic combat capability requirements and the defence industrial base of the country.

In August 2012, the government introduced major offset policy reforms. In the current DPP it has been listed in the body text. The 2013 DPP explicitly lays down the objectives of the offset policy as follows: “The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop Indian defence industry by (i) fostering development of internationally competitive enterprises, (ii) augmenting capacity for Research, Design and Development related to defence products and services and (iii) encouraging development of synergistic sectors like civil aerospace and internal security.”

Yet, taking into account the dynamism of the technological world, it is advisable to keep reviewing the list of items for the offset. Indian private defence industry needs to be strengthened so that the criticism that it cannot absorb technology, especially futuristic high-tech is addressed The policy categorises Capital Acquisitions as ‘Buy (Global)’ means total purchase from foreign or / and Indian seller, and ‘Buy and Make with Transfer of Technology’ means acquisition from foreign seller followed by Licensed Production. In both the cases, the estimated cost of the acquisition proposal needs to be Rs 300 crore or more. The ‘compensation’ or offset has to be 30 per cent of the estimated cost of the acquisition in ’Buy (Global)’ category and 30 per cent of the foreign exchange component in ‘Buy and Make with ToT’. For shipbuilding, the total cost has to take into account the basic cost of the vessel, cost of base and depot spares and the modiﬁcation cost.

ven the contemporary world lives under the shadow of the use of force. A nation develops or purchases arms in order to counter or mitigate the use of force against it. As arms trade involves transfer of huge money outside the purchaser country, very often it raises the issue of outﬂow of resources and the need for indigenous development of domestic defence industry so that the large scale drain of wealth is prevented. Gradually, offset has become part of global arms trade as more than 130 countries receive offset. Offset as the word suggests is considered a kind of compensation extended by the supplier to the recipient. Though the term is contested, yet defence offset suggests or refers to direct and indirect collaborations between the supplier and recipient resulting in engagement of activities such as joint production / licensed production and transfer of technology. Some talk of quasi-offset as well, which somewhat resembles indirect offset.

April 2014 DEFENCE AND SECURITY ALERT

Offsets As Steppingstones

India, predominantly an arms importer country, has evolved its offset policy over the years. One of the defence ministers stated: “the Defence Offset Policy will enable creation of local employment, upgradation of technology levels while ensuring substantial increase in both domestic production and export capability. Offset also provides leverage to the domestic industry speciﬁcally the SMEs [Small and Medium Enterprises] to enter the sophisticated markets of defence products.” A list with technology areas, in which offset will be received, has already been released by the government. Though activities resembling offset may have existed for long, yet for the ﬁrst time, in 2005, the government announced an Indian offset policy. Ever since then it has revised it a few times. But the 2005 policy yielded results only in 2007 when a defence contract was signed.

DOMW As Node

Under the Indian policy, the Indian Offset Partner (IOP) may be any Indian enterprise, institution and establishment, which can produce ‘eligible products and / or provision of eligible services’. The Defence Research and Development Organisation (DRDO) is also eligible for offset beneﬁts. Though the principal supplier or vendor is responsible for implementation of offset obligations, Defence Offsets Management Wing (DOMW) is the nodal institutional framework for operationalising offset operations in India. It operates under the Department of Defence Production. The DOMW prepares Defence Offset Guidelines and is basically responsible for post contract management activities. The post contract activities consist of monitoring of offset obligations, technical and commercial evaluation, implementation of Offset banking guidelines, imposing penalties, facilitating Indian industry-suppliers interface among other activities.

Exceptions

However, offset may differ in certain acquisitions of strategic DR RAJIV NAYAN significance or after the realisation The writer is a Senior that Indian industry may not absorb Research Associate at offset. The prescribed offset may the Institute for Defence have more flexibility depending on Studies and Analyses (IDSA), New Delhi other factors as well. The indigenous since 1993, where he content of 50 per cent and more in specialises in export a joint venture leads to exemption control, non-proliferation is an example in this regard. The and arms control. He Defence Acquisition Council was a Visiting Research takes the decision on changing the Fellow at Japan Institute percentage of offset after following of International Affairs, the proper procedures. The Tokyo, where he concerned parties have to fulfil the published his monograph offset obligations within prescribed Non-Proliferation Issues in South Asia. or agreed period; otherwise, penalty may be imposed on the defaulter. The policy, at the same time, provides incentives to the suppliers through offset banking credits. If a supplier facilitates offset more than the requirements, the accruing credits may be carried forward for seven years from the approved date. The offset policy has been receiving a very mixed reaction from different stakeholders which include mainly armed forces, Indian defence industry, Industry Associations and Original Equipment Manufacturers. A March 5, 2014 Press Information Bureau release for the Ministry of Defence informs that “At present, 23 offsets contracts worth US$ 4.6 billions are in various stages of execution.” Indian industry both public and private sector have been benefited by offset contracts. Shipbuilding industry is frequently cited as a case study of present and potential beneficiary of the offset system. It is expected that the impact of offset may become visible in the coming years on several critical areas. However, in general, the arrangement for offset has not convinced many of the stakeholders and concerned parties. Redressing grievances of the concerned parties is a major challenge.

Challenges

Although India has been publishing the list of technologies, yet the writings have been highlighting that the offset policy does not have a strategic focus. As the policy puts onus on the vendor to implement its offset obligations, it is viewed that the vendor will choose to go for an easy option. This option may not be really critical to India’s interest or defence priority. Foreign companies and Indian industry both want changes in the offset policy. Both articulate that certain provisions of the policy are against their interests. The foreign companies doubt the capacity of Indian private industry in absorbing high or advanced technology. These companies also have problems with private sector companies.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries MODUS VIVENDI

In general, the Indian research and development process is accused of not taking risk. At the same time, we need to appreciate that exposing the process to excessive risky venture will be a non-starter. The risky venture needs some government support so that industry is encouraged to take up research which has an element of risk. It is also true that some of the risky ventures may be undertaken by the DRDO-Defence Public Sector Undertakings The Comptroller and Auditor General (CAG) of India studied 16 offset contracts concluded before the current offset policy was announced. The CAG found lack of clarity about the ‘eligible’ foreign investment offset contracts. The CAG report acknowledged that the Ministry of Defence had issued a ‘guidance note for clarification’ in November 2010. The report noted that despite a clear cut standing on the restriction of in-kind investment through non-equity route for the Overseas Equipment Manufacturer, the restriction had been ignored. The CAG pointed out procedural problems with procuring a Transonic Wind Tunnel (TWT) test facility by the DRDO; safety, reliability and air worthiness seminars; establishment of fire finder classrooms; transfer of metallurgy and hydraulic lab facilities, etc under the offset agreements. CAG report also underlined that the invalid IOP enjoying the offset benefits. The Indian policy permitted 100 per cent participation of the Indian private sector in the defence sector, but it is allowed to engage FDI only up to 26 per cent. The CAG discovered that several companies with more than 26 per cent of the FDI also reaped the benefits. One foreign company, which was a beneficiary, was found ineligible by the CAG, but the Ministry of Defence had a different understanding on it. The procurement of Low Level Transportable Radar, Procurement of fleet tanker, monitoring mechanism, non-recovery of penal charges and so on are other problems discovered by the CAG. Besides, the very idea of offset has to deal with many of the grey areas of Indian defence industry. One of the government officials admitted that it is very difficult to give precise definition of many of the terms used for offset contracts. For example, there are difficulties in accurately valuing technology. At times, the different working cultures of the vendor countries or vendors and Indian recipients clash. This requires a great deal of patience and understanding between the two parties. On many occasions, even the Indian government did not receive proper data from the contacting parties to enforce the offset agreement.

Solution

Undoubtedly, all the stakeholders need to have a

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries

STRATEGIC CHANGES

coordinated approach to optimally use the offset policy and contract. The ultimate objective should be to strengthen futuristic combat capability requirements and the defence industrial base of the country. Admittedly, identifying key and critical technologies will always be contested. Yet, taking into account the dynamism of the technological world, it is advisable to keep reviewing the list of items for the offset. Indian private defence industry needs to be strengthened so that the criticism that it cannot absorb technology, especially futuristic high-tech is addressed. Lack of manpower is highlighted as another challenge or issue coming in the way of the successful implementation of offset. However, when the lack of manpower is talked about, discussions are not about a single issue, but multiple issues and dimensions. The first is the opening up of good scientific and technological educational institutions and further improving the quality and infrastructure of the existing educational institutions. Second is properly preparing fresh graduates from these institutions to undertake the job in industry. For the purpose, some pre-job customised training may be given to these graduates. Third, all those or others who are handling the offset business also need to be given special training. It means the country must have specially trained officials, issue specialists and even personnel from armed forces.

Graduated Risk-taking

LCA Tejas

CMDE S GOVIND (RETD)

SELF-RELIANCE IN DEFENCE A MYTH OR REALITY?

A committee had been set up under the chairmanship of Mr Vijay L Kelkar to examine various issues and make recommendations “Towards Strengthening Self-reliance in Defence Preparedness and Revitalising Defence Public Sector Undertakings and Ordnance Factories”. A majority of the recommendations advocating strategic changes have been buried deep in the cupboards of MoD as we continue to flounder in our quest to reduce dependence on foreign imports. “Greater participation of Indian industry in the defence sector is a must. Our government will encourage public-private partnerships as a catalyst towards achieving this objective.” – Dr Manmohan Singh, Prime Minister of India, on National Technology Day 2010 in New Delhi.

n 1992, a committee headed by Dr APJ Abdul Kalam, the then Scientiﬁc Advisor to the Defence Minister, had predicted that procurements from domestic sources would progressively increase from then 30 per cent to 70 per cent by 2005. That the target has not been achieved even today is evident from the remarks of Mr AK Antony, the Defence Minister, at the recent Defexpo 2014. Whilst everybody talks about the 70:30 syndrome and how this has to be reversed to achieve self-reliance, we continue to procure weapons and platforms from foreign sources, which gives us the dubious distinction of being a large importer of defence equipment if not the largest, among the top 10 military powers of the world. It is not that we have done nothing to build a defence industry in the country. The government made huge investments on setting up a plethora of Ordnance Factories (OFs), Defence Public Sector Undertakings

The writer is a submarine specialist with more than 3 decades experience. He commanded submarines, ships, submarine training establishment as well as operating base. He has also headed the directorates of submarine operations as well as submarine acquisition at Naval Headquarters. He retired from HQ IDS where he served in the Perspective Planning and Force Development branch.

(DPSUs) and DRDO laboratories, with the objective of equipping our armed forces with contemporary defence equipment. However, the returns on this investment have been dismal and this sentiment was echoed by Mr AK Antony at the Defexpo 2014 when he said that the Indian defence industry failed to deliver. We have not been able to progress beyond ‘licensed production’ and our tryst with LCA Tejas as well as MBT Arjun bears testimony to this fact. Except for the Integrated Guided Missile Development Programme (IGMDP), there has not been much to cheer about from this huge conglomeration. Ironically, everyone involved – the DRDO, DPSUs, OFs as well as the armed forces – has a list of grievances for this sad state of affairs. A committee had been set up under the chairmanship of Mr Vijay L Kelkar to examine various issues and make recommendations “Towards Strengthening Self-reliance in Defence Preparedness and Revitalising Defence Public Sector Undertakings and Ordnance Factories”. A majority of the recommendations advocating strategic changes have been buried deep in the cupboards of MoD as we continue to ﬂounder in our quest to reduce dependence on foreign imports.

Government Initiatives

To enhance the self-reliance index, the Ministry of Defence (MoD) has initiated various policy measures. In 2001, the government liberalised the defence industry by allowing 100 per cent participation by the Indian private sector and foreign direct investment up to 26 per cent. The government has also created opportunities for domestic enterprises to participate in defence contracts through the successive revision of its Defence Procurement Procedures

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries STRATEGIC CHANGES

Whilst we have been paying for ToT in every contract either for licensed production or for maintenance infrastructure, we seem to have neither seriously examined the scope of technology offered nor monitored its implementation to ensure proper transfer (DPP). The DPP concerning Capital Acquisitions has come into being in 2002 and over the last decade it transformed from being a purely “Buy” procedure to include others like “Buy and Make with Transfer of Technology (ToT)”, “Make” and “Buy and Make (Indian)” to give impetus to indigenisation. In 2005, the MoD articulated an offset policy which has been elaborated and revised in August 2012, which for the ﬁrst time states its key objective is to “Leverage Capital Acquisitions to develop Indian industry.” The recently released DPP-2013 purports to give a boost to the Indian industry as well as impetus to indigenisation by according higher preference to ‘Buy (Indian),’ ‘Buy and Make (Indian),’ and ‘Make’ categories. In January 2011, the MoD had for the ﬁrst time enunciated a ‘Defence Production Policy’. It states that ‘self-reliance in defence is of vital importance for both strategic and economic reasons’ and aims to achieve it ‘by harnessing the emerging dynamism of the Indian industry along with the capabilities available in academia as well as research and development institutions’. Accordingly, ‘preference will be given to indigenous design, development and manufacture of defence equipment’. Further, ‘government will endeavour to build-up a robust indigenous defence industrial base by proactively encouraging larger involvement of the Indian private sector in design, development and manufacture of defence equipment’. Finally, ‘in order to synergise and enhance the national competence in producing state-of-the-art defence equipment, all viable approaches such as formation of Consortia, Joint Ventures (JV) and Public-Private Partnerships (PPP) etc will be undertaken.’

Existing Scenario

Let us examine the reasons as to why we continue to depend on foreign imports, even though efforts are being made through provision of ToT, introduction of offsets as well as the ‘Make’ procedure. There are three major shortcomings that need to be highlighted. The first major shortcoming concerns ToT as it is pursued in the present form. A majority of our acquisition programmes hitherto had been under the “Buy and Make with ToT” category wherein any public or private sector entity can be nominated for receipt of ToT. However, the sole beneficiary of ToT has been the public sector in the form of DPSUs and OFs due to unjustifiable apprehensions regarding the capabilities of private sector on the part of DDP / MoD. Whilst we have been paying for ToT in every contract either for licensed production or for maintenance infrastructure, we seem to have neither seriously examined the scope of technology offered nor monitored its implementation to ensure proper transfer. No concerted audit has ever been undertaken to see if the desired results have been achieved over a period of time, thereby leading to similar types of ToT being acquired over and over again. It is ironic that despite being a country with abundant scientific and skilled manpower, we have not made any tangible progress in building on the acquired ToT. Consequently, a plethora of shortcomings and deficiencies involving equipment produced as well as huge time and cost overruns by these entities has resulted in voids in capabilities required by the

April 2014 DEFENCE AND SECURITY ALERT

armed forces. Needless to say that diffused responsibility and lack of motivation to excel due to captive market are the likely reasons for this state of affairs. The second shortcoming concerns the manner in which we deal in offsets. It is a recommendation of the Kelkar Committee and from the time of its inception to the latest revision in 2012, offsets represented a hurdle that had to be crossed before signing of the procurement contract. It is only in 2012 that detailed guidelines on offsets, including its objectives, have been officially articulated to justify their inclusion in DPP. It is a well known fact that offsets come at a price. The rationale for demanding offsets is to help build the defence industrial base of the country through FDI, ToT as well as ensuring participation of industry in the procurement contract. However, in the context of our acquisition programmes requiring offsets, the seller is free to choose his offset obligations through a combination of the prescribed avenues as well as the eligible products and services from the list provided, whilst conforming to the guidelines in the DPP. This leads to a peculiar situation wherein the foreign seller complies with the value, range and scope of his offset obligations necessitated by the contract, but may not actually benefit the country in its quest for self-reliance in defence sector. Basically it tantamounts to abrogating our right in demanding such offsets that are beneficial to the country whilst paying a price for those that are offered by the seller. The third shortcoming involves the ‘Make’ procedure. Even though introduced to encourage indigenous research, design, development and production of systems, the ‘Make’ procedure suffers from the fact that it is slow and cumbersome in many ways. It must be said that the procedure as it exists today is well thought out and comprehensive.

establishing Public-Private Partnerships (PPP) and nominating them for ToT. Whilst nomination goes against the grain of competition, we may need to follow this route for building the requisite industrial base, through judicious choice of ToT and avoiding the shortcomings observed earlier. Towards this end there is a need to carry out a SWOT analysis of the country’s capabilities in design, development as well as production / manufacturing fields in various disciplines and map the gaps / voids / deficiencies. Such a study could be utilised to choose and channel ToT as required and ensure targeted build-up of the industry. It is no secret that we have not produced any platform or weapon system in-house thus far. Therefore we must adopt a calibrated approach in the development of our defence industry to cater for long-term needs rather than giving into short-term gains. Such an approach must take into account the service life of the platforms and dovetail various actions accordingly. Towards this end the first step would be to develop expertise in terms of skills and infrastructure through licensed production, with an audited increase in indigenous content to optimal levels. The second step would be consolidating knowledge of the know-how and know-why aspects during the course of maintenance and upgradation of the platforms which aids in developing the R&D of the industry. The third step would be collaborating with the original equipment manufacturer for the joint design and development of the next version of the platform / system. Subsequently with the operational and manufacturing knowledge gained, expertise acquired and infrastructure built, we can embark on the journey of indigenous design and development. As can be seen it is a long and tedious process which requires patience and commitment.

Export Factor

Way Ahead

Further, we must realise that we cannot develop each and every capability required by the armed forces but concentrate on those that are vital for security reasons as well as those that make commercial sense. For the remainder, we should build strategic partnerships that ensure uninterrupted supply through the lifecycle of the equipment / platform. Any industry will invest resources if it is sure of returns on its investment. Planning for exports as part of investment strategy is necessary for competitiveness, taking care of technology changes and to maintain production lines when domestic demands are less. Therefore, the government would do well to examine the guidelines concerning the import / export of defence equipment and formulate a liberal policy for enabling Indian industry to enter the global mainstream and establish itself in the face of stiff foreign competition. Simultaneously, the government must examine various beneﬁts / concessions extended by other countries to their defence industry and extend similar concessions to Indian industry.

Taking into account that our public sector failed to deliver to expectations and the private sector is eager yet inexperienced, the best possible way would be through

Development of PPP model may be beneﬁcial for managing large numbers of equipment to be inducted or to cater for a wide range of capabilities in a platform. However, in all other cases opportunity should be accorded equally by creating a level playing ﬁeld between public and private sector by treating them at par and making no distinction during all acquisition process. Towards this end the existing mindset in the DDP needs to change and it needs to be designated as “Defence Industry Development Wing” to take a panoramic view of the whole Indian defence industry and take both public and private industry under its wing. This could further be achieved by granting autonomy to DPSUs and OFB and empowering them to prosper / perish in the competition.

However, the present procedure lays too much emphasis on the armed forces and MoD to identify capable agencies to undertake any project in the ‘Make’ category. It may not be completely wrong to say that both MoD and Services are not adequately staffed / equipped to undertake this onerous act despite the leeway to engage consultants as required. Going by the experience of various projects undertaken by DRDO for the armed forces, which are nothing but “Make” projects by a different name, there would always be frustrating time delays in development / trials of prototype. This acts as a deterrent for the armed forces to commit any major platform / system / equipment to such acquisition process. No wonder then that even after six years of its promulgation we are yet to hear of reports suggesting award of any contracts to the Indian industry using this methodology. The ongoing modernisation drive of the armed forces is stated to involve around US$ 100 billion and offers a golden opportunity for the country to evolve a strategy utilising all available options to develop a robust defence industrial base and thereby enhance self-reliance in defence. However, it is not enough for MoD to enunciate policy initiatives and wait for things to happen. The government being the sole procurement agency must proactively develop a diverse, broad-based industry that includes both public and private sector through acquisition programmes that envisage production / manufacture of equipment.

DRDO As Catalyst

DRDO and SMEs are very important entities in the development of the defence industrial base. Ideally, DRDO should concentrate on strategic technologies and capabilities that are of national importance and outsource all medium as well as low technology R&D to Indian industry / academic institutions like IITs. The DRDO Labs should evolve as Centres of Excellence in their respective disciplines and extend R&D support / facilities to Indian industry. In the normal course, as no individual concern manufactures everything by itself, the Tier-I industries would be responsible for developing Tier-II and Tier-III industries. Moreover, the SMEs are like the lifeline on which majority of the industry depends. In the case of defence industry, they would not only aid in enhancing the indigenous content of systems being produced under LP, but can also produce ‘import substitutes’ which are required by the maintenance authorities for existing weapon systems and equipment. It is in this context that the Defence Technology Product Development Fund must be set up to aid Design and Development work by SMEs. Finally, we must make offsets and FDI work for setting up the defence industry through a carrot and stick policy rather than just allowing things to drift. We could certainly consider creation of “Technology Parks” as is being done in some countries, for foreign OEMs to establish JVs with Indian entities. Unless the OEM is sure of returns on his investment as well as management control to protect IPR, there is little chance of him investing heavily. Therefore allowing FDI upto 74 per cent should be considered on case to case basis to ensure inﬂow of technology. Additionally, we could even provide varying incentives based on the criticality of technology being established in these ventures. Allow companies employing critical / dual-use technology to be managed and controlled by the foreign entity till such time our industry assimilates those technologies. In so far as offsets are concerned we need to state what we require through offsets, liberalise offset banking and see how to reward the seller in case he offers better offsets. We could also try the South Korean model of signing the offset contract prior to signing the procurement contract. Inaugurating the Defexpo 2014, Mr AK Antony, Minister of Defence called upon the private sector to make ‘meaningful and substantive contribution’ to defence production. He also stated that the Indian defence industry had not delivered and that India imported up to 70 per cent of its requirements which is not a happy situation. He hoped that with the purported shift in procurements to ‘Buy Indian’, ‘Make Indian’ and ‘Buy and Make Indian’, we would be able to build a robust defence industrial base in the country which would cater to the domestic requirements as well as for export markets. In addition to revision of procurement procedures, the MoD needs to actively engage the industry by building P-P Partnerships and award contracts for acquisition of equipment. Self-reliance cannot be just a ‘mantra’ that we invoke at public forums like Defexpo or seminars. Whilst it is given that adequate concern is shown by various stakeholders on the need to be self-reliant, the reality on ground continues to be different. This gives rise to the important question as to whether it is just lip service that is being indulged in or is there something basically wrong with our whole system of procurements. It requires commitment, dedication, patience and above all synergy between various stakeholders who need to chart concerted action through consensus for promoting self-reliance in defence for the sake of national interest.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries SELF-RELIANCE

INDIA'S MILITARY INDUSTRIAL COMPLEX

A LONG AND ARDUOUS JOURNEY

It is not for nothing that Indian Defence Minister AK Antony has been driving home the point that India cannot forever depend on imports to meet the needs of its defence forces. All said and done the periodic revision of DPP has not proved to be a major game changer for the Indian private sector keen on participating in the defence production sector of the country.

not only a slur on the fair name of India but also could lead to the possibility of blacklisting of defence ﬁrms resulting in the rapid narrowing down of the overseas vendors base. It is not for nothing that Indian Defence Minister AK Antony has been driving home the point that India cannot forever depend on imports to meet the needs of its defence forces. Antony is clear in his perception that India should take forward the legacy of the successful high-tech defence projects like Arjun Main Battle Tank(MBT),Tejas Light Combat Aircraft (LCA), Arihant nuclear powered submarine and Vikrant aircraft carrier to create a strong and resurgent military industrial complex capable of meeting the needs of Indian defence forces in an economically viable fashion. “The only way forward for the country

view that Indian Defence Ministry is to fulﬁl its promise of creating a level playing ﬁeld for both the public and private sector by ending the practice of “nominating” the defence public sectors in major defence programmes of the country. Private sector industries feel that the preference for the public sector is ingrained in the DNA of the Indian Defence Ministry. Of course, Indian Defence Ministry should initiate ground level action to prove its impartiality by removing this impression.

RADHAKRISHNA RAO

The writer specialises in space technology, aeronautics, defence and security issues. He is a Visiting Fellow at Vivekananda International Foundation. Before taking to full time writing he was associated with the Indian Space Research Organisation (ISRO) for about two decades.

All said and done the periodic revision of DPP has not proved to be a major game changer for the Indian private sector keen on participating in the defence production sector of the country. Though the Long Term Integrated Perspective Plan for 15 years into the future has been unveiled, there are many areas of concern for the Indian defence industry to take up the challenge of defence production. In particular, there is no mention of the mechanism whereby the private sector participants are insulated against a variety of risks. A study by the industry body ASSOCHAM (Associated Chamber of Commerce) reveals that the biggest hurdle facing the private participants in India’s defence production sector is the stipulation requiring 30-35 per cent indigenisation at trial stages. According to ASSOCHAM, “it needs to be reconsidered more so as currently India neither possesses any knowhow nor the infrastructure to manufacture high-end defence equipment.”

DRDO’S Patchy Record

hat a country which has launched a probe to Mars, successfully flight tested a cryogenic fuel driven launch vehicle and made its mark as a global IT and software powerhouse should continue to depend on imports to meet two third of the requirements of its defence forces reflects poorly on the state of Indian defence technology and production capability. What’s more, India’s emergence as the largest importer of defence hardware and fighting equipment including combat aircraft has its own pitfalls. To begin with, this massive import involves a huge outgo of precious foreign exchange with serious consequences for the economic well being of the country. Secondly, it makes for the continued dependence on the foreign original equipment manufacturers (OEMs) for the service, maintenance, spares supply and life cycle support of the imported hardware with a high degree of uncertainty and a high cost. And more importantly, the Damocles sword

April 2014 DEFENCE AND SECURITY ALERT

of technological denial regime as exempliﬁed by the US trade sanctions and technology embargo could render the imported equipment unserviceable. Incidentally, the US trade sanction that followed the 1998 twin Pokhran nuclear blasts had affected many of the Indian defence and space projects in varying degrees.

Kickback Syndrome

However, the most disturbing aspect of the dependence on imports is the “dubious and disturbing” role played by the shady middlemen lurking in the corridors of power in New Delhi in helping clinch the deals through “impropriety and kickbacks.” For instance, the cancellation of the contract awarded to the Anglo Italian defence enterprise AgustaWestland for the supply of 12 VVIP helicopters following the exposure of corrupt practices including alleged bribery points out to the “ugly face of the defence import”. Such an unpleasant development is

is the rapid indigenisation of defence production with both the public and private sectors playing pivotal roles in this endeavour. We will make all-out efforts to create genuine playing ﬁeld for India’s manufacturing industry vis-à-vis the global players” observes Antony. According to Antony, DPP (Defence Procurement Procedure)-2013 released in June 2013 aims to provide a boost to the Indian defence industry, both in the private and public sector. This is sought to be realised through steps such as priority to acquisition from Indian companies, simplifying the “buy and make “procurement category and revising the procedure. DPP-2013 stipulates that Indian defence companies will get access to meeting the future equipment requirements, creating the level playing ﬁeld between state owned public sector enterprises and private defence companies. But then FICCI (Federation of Indian Chambers of Commerce and Industry) is of the

Against this backdrop, late last year, Indian Prime Minister Manmohan Singh while pointing out to the pressing need to build a vibrant, indigenous defence production base, had made an impassioned plea to think in terms of aggregate national capacity that harnesses the full potentials of the country’s public sector, private enterprises, research laboratories and academic institutions to create a vibrant indigenous infrastructure for defence manufacturing. For long India’s defence development and production base had remained centred around 52 laboratories under the state owned Defence Research and Development Organisation (DRDO), 9 defence public sector undertakings and 40 units under the Ordnance Factory Board (OFB) with a very peripheral and insigniﬁcant role for the private sector companies. There is no denying the point that the poor track record of the state owned defence enterprises was one of the major factors responsible for India’s continued dependence on imported hardware. However it must be said to the credit of DRDO that it shed its “lethargy and complacency” to come out in ﬂying colours in the development of cutting edge technologies for a range of strategic and tactical missiles whose knowhow remains a closely guarded secret. The successful

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries SELF-RELIANCE development of the supersonic cruise missile BrahMos by BrahMos Aerospace, a joint venture that DRDO had ﬂoated in tie-up with the Russian ﬁrm NPO Mashinostroyenia stands out as a shining example of the collaborative route for realising a world-class missile.

But then FICCI is of the view that Indian Defence Ministry is to fulfil its promise of creating a level playing field for both the public and private sector by ending the practice of “nominating” the defence public sectors in major defence programmes of the country. Private sector industries feel that the preference for the public sector is ingrained in the DNA of the Indian Defence Ministry FDI Camel Wants More Space

To set right the glaring anomaly in India’s defence production sector, the government of India in 2001 took a momentous decision to open up the tightly controlled defence sector for private participation. However, for a foreign company willing to ﬂoat a joint venture with an Indian partner for defence production, the cap on the Foreign Direct Investment (FDI) was ﬁxed at 26 per cent. Though Indian industry has been advocating the need for an enhanced FDI limit in the Indian Defence sector, Antony has been consistently opposing the hike. Perhaps Antony is concerned about the possible security risk for the country from the enhanced FDI. Obviously, the domestic industry has been in favour of increasing the FDI limit to 49 per cent with the clear-cut rider for technology transfer and joint research for future development. There is of course a view that 26 per cent FDI limit is rather unattractive for a foreign defence and aerospace company to invest in India. In the face of sustained lobbying by Western defence equipment suppliers, the government of India is looking at the option of increasing the cap on defence FDI through FIPB (Foreign Investment Promotion Board) route. ”Foreign manufacturers such as Boeing Military, Saab, EADS do not wish to bring their proprietary technology for high-tech weapons or spares into a joint venture in India unless they have a larger say

in the running of the venture,” say sources in the Indian Industry Ministry. And as pointed out by Air Marshal PP Reddy, Director General (Inspection and Safety) of the Indian Air Force (IAF), 26 per cent FDI in the defence production area is not attractive enough for a foreign company to invest in the country. ”Why do we restrict FDI? We need to ponder over it,” says Reddy. Though 100 per cent FDI is neither feasible nor desirable, the government of India could conveniently set an FDI cap at 50 per cent which would make for a win win situation for both the Indian company and its foreign partner.

Foreign Partners’ Gamesmanship

In a major initiative aimed at boosting the prospects of Indian defence manufacturing sector, in July 2013, it was decided that in the event of a foreign company willing to make available “state-of-the-art technology” capable of improving the skill level of local defence industry, FDI above the stipulated 26 per cent would be allowed on a case by case basis. Interestingly, foreign defence firms are not quite enthusiastic about parting with the technology. For instance, Dassault Aviation, whose Rafale fighter jet has won the Indian tender for the supply of 126, Medium, Multi role Combat Aircraft (MMRCA) is trying to deck the tender specification that stipulates the transfer of aircraft technology to the state owned Indian aeronautical major HAL (Hindustan Aeronautics Limited). Under MMRCA tender, the finally selected vendor would need to transfer the technology to HAL which would produce 108 of these aircraft. But Rafale is insisting on transferring the technology to the defence and aerospace arm of Reliance Industries. Evidently, in comparison to HAL the expertise level and infrastructure strength of Reliance is quite poor, thereby implying that the technology transferred to India would be a “black box”. The worth of the final contract for Rafale aircraft, which is yet to be inked, is expected to be more than US$ 12 billion.The moral of the story is that it pays to develop the frontier technologies involved in developing combat platforms indigenously. Clearly and apparently, the skill level and technological resources base of the Indian companies cutting across

the structural jurisdiction needs to be boosted to help develop state-of-the-art defence technologies to transform India from an importer of ﬁghting equipment to a major exporter of defence hardware. As things stand now, there should be serious and all round efforts to harness the technological strength and corporate energy of India with a set of incentives to put in place a vibrant military industrial complex to make India self-reliant in all aspects of defence development and production. There is no denying the point that even if the country had invested a fraction of the mind boggling resources it had committed to the import of defence hardware since 1950s on boosting the research and development and creating the requisite manufacturing skill along with enhancing the infrastructure at academic institutions, the country would have not only become totally self-sufﬁcient in meeting its needs but would also have emerged a key player in the global defence market.

Tejas Experience

Significantly, the project to develop India’s fourth generation supersonic fighter aircraft, Tejas, which is expected to be inducted into IAF in the second half of this decade, has brought many benefits to the country that would ultimately serve as a game changer in the indigenisation of the defence production programme. Compared to the huge amount that India may be forced to shell down for acquiring 126 French Rafale fighter aircraft under MMRCA (Medium, Multi Role Combat Aircraft) deal, the money invested on Tejas development seems peanuts. And on the upside, the facilities set up, the technology base created, the skill level acquired and the quality control measures fine-tuned for Tejas are no doubt a precious national asset that could be scaled up as and when required with very little investment to build better and more lethal combat aircraft indigenously.

Unscientiﬁc Tax Regime

By all means, the most recent initiative that exempts SEZ (Special Economic Zone) units producing defence hardware from going to the Department of Industrial Policy and Promotion (DIPP) for an industrial license can be considered a small step towards reducing the delay by cutting the bureaucratic red tape. But then a harsh and unscientiﬁc tax regime that is not only far from transparent but also plays a spoilsport in so far as the growth of Indian defence industry is concerned could prove a big impediment in the growth of the Indian defence industry. For instance, India’s highly dynamic MRO (Maintenance, Repair and Overhaul) industry on account of the high level of duties and taxes including service tax cannot effectively compete with its counterparts in West Asia and South East Asia. Indian defence industry captains are clear in their view that without a drastic reformation in tax structure “the Indian defence sector will remain at sub-components level and not move up the value chain to achieve Systems Integration capabilities”. Of course on their part industry bodies and associations have made it clear that the high incidence of taxes and duties, from multiple points, is one of the major stumbling blocks in the way of private sector participation in India’s defence production scenario. Indeed, there is a bitterness that while defence equipment import enjoys tax exemption, a variety of taxes is levied on the home-grown ﬁghting hardware. Incidentally, the private

April 2014 DEFENCE AND SECURITY ALERT

On their part industry bodies and associations have made it clear that the high incidence of taxes and duties, from multiple points, is one of the major stumbling blocks in the way of private sector participation in India’s defence production scenario. Indeed, there is a bitterness that while defence equipment import enjoys tax exemption, a variety of taxes is levied on the home-grown fighting hardware industry engaged in defence production is taxed by both the centre and state governments. For the Indian defence industry to pick up the thread of production and forge ahead, there should be a simple, single point taxation that is both affordable and sustainable.

Test And Trial Facilities

Yet another critical issue that the Defence Ministry should address is how to overcome the hurdles that a private player in India’s defence production matrix would face in accessing the military facilities for testing and trials. For instance, whether Bharat Forge, which is currently developing a howitzer for the Indian Army would be allowed to subject its product to testing in defence facilities, there is no clarity as yet. Traditionally, the research and testing facilities under Indian Defence Ministry have remained out of bounds for private players. All said and done, the private sector too has its own shortcomings. The Indian private sector including those with deep pockets lack a “tradition and culture” of investing in R&D (research and development). Contrast this with the American scenario where investment in R&D has brought immense benefits to private industries participating in the military oriented projects. Lacking a sound technological base, the private Indian industry would need to go in for alliance with tech-savvy foreign companies. But then the catch is that foreign companies would be interested in investing in India only if they are assured of guaranteed returns and long-term benefits. What’s more there are possibilities of foreign partners creating hurdles in the way of smooth technology transfer. For there is no denying the point that at this stage of development, the Indian private industry foraying into defence sector needs both technical support and guarantee of financial viability. Moreover, to make their operations an economically viable proposition, they should also be allowed to produce and market civilian systems based on the modified version of the technologies developed for defence hardware. Clearly and apparently, the route to India’s transformation into a defence production hub lies in public-private partnership, floating of joint ventures with foreign partners, nurturing the talent in academic and research institutions, enhancing the precision manufacturing capabilities of the Indian industry and a pro-active government policy focused on making life easier for the players in India’s defence production matrix. Of course the challenges and opportunities ahead of the Indian defence industry are myriad and exciting. But then the journey to self-reliance in the crucial sector of defence production sector is long and arduous.

April 2014 DEFENCE AND SECURITY ALERT

defence offsets

EMERGING CHALLENGES Defence Procurement Policy (DPP) was put in place. The same was repeatedly revised / revisited to remove the kinks and allay the fears expressed both by Indian industry and foreign competitors. The national aim was to promote growth of Indian defence industry, introduction of new technologies through direct transfers, promote indigenisation and put in place a robust offsets mechanism. The ‘offsets’ were to ensure that for every dollar that went to a foreign arms supplier, 30 to 50 per cent of the same got infused back into India for a defence related investment or activity. Ministry of Defence’s key objective of the Defence Offset Guidelines was to leverage capital acquisitions to develop Indian defence industry, improve defence research and encourage development of synergistic sectors like civil aerospace and internal security. These guidelines were last revised in August 2012. And the latest DPP-2013 came into effect on 01 June, 2013.

OPPORTUNITIES FOR WIN-WIN SOLUTIONS Ministry of Defence’s key objective of the Defence Offset Guidelines was to leverage capital acquisitions to develop Indian defence industry, improve defence research and encourage development of synergistic sectors like civil aerospace and internal security. What constitutes a legitimate offset, is a question still searching for answers. The physical valuation of offsets is complex.

ndia started emerging as an economic power beginning of this century. Even though economic liberalisation hit India about two decades later than China, for the world it was the beginning of the Asian century. As the GDP grew, India could allot more resources to defence and budgets grew in real terms. India not only happens to be geopolitically in the most volatile region of the world, it has two nuclear neighbours with serious boundary disputes and with both of whom it has fought wars. Earlier Middle East and now Afghanistan-Pakistan regions are epicentres of world terrorism. In spite a good initial start after independence, India could not build itself into a state-of-the-art military-industrial power. Consequently India had to depend on imports for military hardware. Apprehensions and reluctance of the western world to support India’s ﬂedgling initiatives forced India into the Soviet bear hug for all its arms supplies. At one stage

April 2014 DEFENCE AND SECURITY ALERT

85 per cent of the Indian Air Force (IAF) and 95 per cent of Indian Navy were of Soviet origin. Only with the end of cold war and breakup of Soviet Union in mid 1990s were the western technologies open to Indian armed forces. China was the other emerging Asian power that was a big spender on arms, but the centralised military influenced leadership quickly began developing indigenous arms industry. They realised self-sufficiency in defence was a key result area for a super power. Soon India achieved the uncanny distinction of being the world’s biggest arms importer and saddled with a significant outflow of scarce foreign exchange. Albeit a little late and in short spurts, there was therefore a strong move to strengthen indigenous defence production capability both in public and private sector. The year 2001 saw India opening up defence sector to private players and allowing up to 26 per cent Foreign Direct Investment (FDI). Later in 2006, its first formal

Indian armed forces have a long shopping list. If all goes well, IAF itself is going to procure equipment and platforms worth US$ 150 billion in next 15 years. The MMRCA deal, with the Dassault Rafale as the ﬁnal shortlisted aircraft, is currently slated to be worth nearly US$ 20 billion. The Confederaton of Indian Industries has meanwhile welcomed the recent changes made to the DPP for making it more Indian industry friendly.

Global Trend

Defence offsets have been part of regulations of many countries around the world. These are meant to balance or compensate the purchasing country for the outgoes and get some of the beneﬁts of deal back in return. Some form of barter system has existed for centuries. India is known to have bought aircraft and naval vessels from Soviet Union in return for shiploads of shoes and hosiery. USA which has panache for coining fancy acronyms was the ﬁrst to use the term ‘offsets’. It was to be a form of inducement to sell arms to underdeveloped friendly countries and in return, either purchase goods or make local investments. After meeting initial partial success, the western arms sellers thought they had mistakenly created a monster that might eat the master. They soon started labelling such regulations as protectionist and were no more in favour of defence offsets. These include United States, United Kingdom, France and Germany. On the other hand, most countries of the world chose to introduce high percentages of defence offsets regulations. Those with 100 per cent or more offsets requirement are Austria, Belgium, Brazil, Czech Republic, Denmark, Finland, Greece, Netherlands, Switzerland, Spain, Sweden, Poland, Portugal and Norway. Offset policies of emerging countries like Brazil emphasise

Offsets are to be 30 per cent of estimated cost of acquisition in ‘Buy Global’ category and 30 per cent of foreign exchange component in ‘Buy and Make with ToT’ category. Offsets could be discharged through direct purchase, FDI in joint ventures and investment in kind in ToT to Indian manufacturer. Products and services have to be for defence, inland and coastal security, or for civil aerospace

technological development of its defence industry through full know-how transfers, cooperation and co-production. In India, defence offset obligations are applicable to all contracts above INR 300 crore (approx US$ 65 million). Offsets are to be 30 per cent of estimated cost of acquisition in ‘Buy Global’ category and 30 per cent of foreign exchange component in ‘Buy and AIR MARSHAL Make with ToT’ category. Offsets ANIL CHOPRA could be discharged through direct PVSM, AVSM, VM, VSM purchase, FDI in joint ventures and investment in kind in ToT to (RETD) Indian manufacturer. Products The writer is an ex NDA and services have to be for defence, Air Force officer who inland and coastal security, was a fighter pilot in the or for civil aerospace. Indian IAF. He is a Qualified companies and joint ventures are Flying Instructor and exempted from offset obligations Test Pilot who was provided the indigenous content among the initial lot to is over 50 per cent. For offsets train on Mirage 2000 in India also accepts subcontract France. He commanded in outsourced services, such as a Mirage Squadron, two engineering, design and defence operational air bases software. Offset requirements of and the IAF’s Flight Test some other countries are Israel Centre ASTE. He was the 35 per cent, Romania 80 per cent, Team Leader of MiG 21 Saudi 35 per cent, South Korea Upgrade programme in 30 per cent and Turkey 50 per cent. Russia for over 4 years. China has no formal offsets policy. He is currently a member Australia does not accept indirect of Armed Forces (civilian) offsets, unless such offsets Tribunal. He is also a bring benefits to the Australian member of Executive defence industry. It can be seen that Council of Jawaharlal every country is sensitive to the Nehru University, subject of defence offsets. Many India New Delhi. bashers are often very unreasonable when they pass adverse comments on India’s otherwise docile offset policy.

Inbuilt Roadblocks

Offset contracts signing and implementation are a complex exercise. It has to be managed to satisfaction of two parties. The ‘haves’ do not want to part with hard earned technical knowledge to the ‘have nots’. Invariably it ends up in years of negotiation and sometimes becomes a stumbling block or cause for contractual frictions. Nearly 122 open defence offset contracts signed around the world between 1997 and 2010 have only partially been executed due to various issues. Sometimes there are conﬂicting views on levels of transfers of sensitive technologies. US being one of the largest exporters of high technology weapons has been most vocally moderating the offset policies around the world. The Brazilian Minister for Strategic Affairs said in 2008, “We will not simply be buyers or clients, but partners.” Offsets are a powerful marketing tool to motivate a purchase. Major defence contractors are conscious of the psychological power of offsets in democracies. What constitutes a legitimate offset, is a question still searching for answers. The physical valuation of offsets is complex. Value of parts locally sourced could be straight forward but cost of Transfer of Technology (ToT) and helping

April 2014 DEFENCE AND SECURITY ALERT

defence offsets

EMERGING CHALLENGES

President Barack Obama has reaffirmed during his meeting with Prime Minister Manmohan Singh last year that the US would grant India the same privileges as reserved for its closest allies in respect of transfer of defence technology, co-production and co-development. US sales of military equipment to India have grown to around US$ 1.9 billion in 2013 and almost US$ 10 billion in the last decade setting up of Industrial base could be vague. Co-production and subcontracts are the best form of direct offsets. Technology transfer, military training, licensed productions are also often counted as sort of direct offsets. Through a US presidential decree of 1990, no offset clause can be applied to a Foreign Military Sale (FMS) agreement.

Offset Management Industry

There have emerged “offset” industry partnership management organisations. Offsets credits could be built into various contracts. These credits could be bought, sold or redeemed over specified periods. In short offsets could be traded. Surplus points collected in a particular contract could be redeemed on another contract or used up like the frequent flier miles. Offset India Solutions (OIS), an Indian company, extends a partnering approach to provide customised expertise to international companies for fulfilling their offset obligations throughout its lifecycle in India or abroad. A personalised and customised portfolio of advisory and management services related to strategy, policy, formulation, partnering, implementation, compliance and all related services for offset obligations by seasoned industry veterans with experience with the bureaucracy and services, ensures total customer satisfaction. There are other Indian business houses which are venturing into this arena. Offsets management itself has thus become an industry. The new offsets guidelines promote investment in Micro, Small and Medium Enterprises (MSMEs) by allowing a multiplier factor of 3.0 to the offset calculations. It also facilitates technology acquisition from a select list, by the Defence Research and Development Organisation (DRDO). The offset discharge banking period is extended to seven years. Period of execution of offset contracts is now allowed up to two years beyond the period of main procurement contract. Defence Offset Monitoring Wing (DOMW) has replaced the erstwhile Defence Offset Facilitation Agency (DOFA) with more powers and is expected to monitor and report progress of such programmes. The amounts involved in Defence deals have become very large and consequently, at 50 per cent, the servicing of the offset contracts is massive exercise with expert management required both for the officialdom and industry.

Effect of R&D Neglect

Even though defence is becoming a ‘sunrise’ industry, Indian manufacturer’s capability to absorb offsets is still evolving. Due to lack of investment in indigenous R&D, to achieve high indigenous content in high technology products is not easy. Exclusion of ‘Services’ for purposes of value addition in India is a dampener. All this results in complex extended negotiations. One would recall the long time that Indian agencies and French aerospace company Dassault had to

April 2014 DEFENCE AND SECURITY ALERT

engage to iron out the offset issues during the MMRCA negotiations. Full details would emerge after the contract is signed. One recent successful offsets management case was that of Pilatus Aircraft Ltd, Switzerland, setting up along with Bharat Electronics Ltd (BEL) an electrical harness manufacturing capability at BEL's Bangalore Complex. The electrical harnesses manufactured by BEL would be for the Pilatus global supply chain. The contract which includes an integrated ground based training system and a comprehensive logistics support package, covers the 30 per cent offset obligation. Pilatus Aircraft Ltd entered into a contract with the government of India in 2012 for the supply of 75 PC-7 Mk II turboprop basic trainer aircraft for IAF. There is a high possibility of IAF exercising the options clause for additional PC-7s. It can thus be seen that the companies which want to build long-term defence relations with an emerging power like India will ﬁnd good offsets solutions. We are all aware of the Boeing airliner doors that Hindustan Aeronautics has been producing for some years. There are many other examples of small Indian ﬁrms especially in Bangalore area which are making looms, connectors, aggregates and aviation grade software, among others that the foreign defence manufacturers are sourcing from India for their global supplies.

defence budget

SECURITY CONCERNS

IS NATION PREPARED? PM KAMATH

The writer is a former Professor of Politics in University of Bombay; he guided sixteen students for their PhD, one of which was on Terrorism as an Instrument of Foreign Policy. He is currently, Director, VPM’s Centre for International Studies and Adjunct Professor, Department of Geopolitics and International Relations, Manipal University, Manipal.

India as Major Non-NATO Ally?

A Jane’s-Financial Times study assesses 15,000 defence contracts in the decade ending 2022, with offset obligations of US$ 100 billion. Top five US defence contractors Boeing, General Dynamics, Lockheed Martin, Northrop-Grumman and Raytheon would be saddled with US$ 42 billion of the obligations. Even as Indo-US defence trade reaches new highs, offsets and defence FDI policies would continue to be a challenge and may act as a roadblock. President Barack Obama has reaffirmed during his meeting with Prime Minister Manmohan Singh last year that the US would grant India the same privileges as reserved for its closest allies in respect of transfer of defence technology, co-production and co-development. US sales of military equipment to India have grown to around US$ 1.9 billion in 2013 and almost US$ 10 billion in the last decade. Projects worth tens of billions are in the pipeline. Twenty-two Boeing AH-64D Apache helicopters (US$ 1.4 billion), 145 BAE Systems’ M-777 ultra-light howitzers (US$ 885 million), 15 Boeing CH-47 Chinook heavy-lift helicopters (US$ 1 billion), 6 additional Lockheed Martin C-130J Super Hercules aircraft, 236 Russian T-90S main-battle tanks and 4,400 new light-machine guns (LMGs). India’s expectation combined with a 26 per cent cap on foreign direct investment in the defence sector limits the interest of US companies to fulfill Indian requests for high-technology defence items. That is why FMS is the route for the present in many US contracts. The foreign defence contractors are not only worried about Intellectual Property Rights or the technology moving to unintended sources, they are also concerned about some of the recipients developing technologies and later becoming competitors at their expense. India has a significant manufacturing industrial base. It has license produced thousands of aircraft over five decades. It has a very successful space programme. Therefore it should not be difficult to find local offset partners. Offsets are here to stay. Win-win solutions have to be evolved.

Threat perceptions of policymakers at a given time govern the determination of budgetary allocations since national security is the first priority in the determination of budget. India is one of top importers of defence related equipment, arms and armories because it is confronted with a two-front threat posed by Pakistan and China. Democratic countries are governed more substantially by the question of political accountability. Within these limitations, what are the most important guiding principles?

n analysis of what kind of budget ideally we must have for our armed forces during the financial year 2014-15, is influenced by type of budget we had for them in the past during sixty-seven post-independence years and attitude of the policymakers in independent India. During the post-independence period, particularly, in the initial Congress-led 33 years those were dominated by the two powerful personalities of Pandit Jawaharlal Nehru and Mrs Indira Gandhi. The defence budget was highly influenced by two factors: One, a distrust of armed forces and second, resultant meagre provision for the defence forces, so that in keeping with the general trend in Afro-Asian developing countries which mostly became independent in the post-war period, army would not overthrow elected governments in military coups. Let us examine these two trends of Indian democratic governance. First, a generic distrust of armed forces. In the period soon after independence in the general context of then developments in Afro-Asian countries where military generals had assumed political power in quick succession; probably in hindsight skepticism was good for the health of Indian democracy. But now even after sixty-seven years of independence and self-governance, skepticism seems to have become a negative factor as a pre-assumed and unquestioned axiom in national security policy making.

This is evident in various instances in defence policy making. But two instances should suffice. First, a committee was created for Defence planning that was found necessary by then security policy makers, dominated by Prime Minister Nehru soon after humiliating experience of a debacle in Chinese imposed Border War in October 1962. After trying many permutations and combinations, beginning with planning cell within Ministry of Defence (MoD), in 1977 government set up a Committee for Defence Planning (CDP). Its composition again shows continued mistrust of defence personnel. It was packed with nine civilian officials including the Cabinet Secretary as the Chair but it had only three Service Chiefs representing armed forces! Second, in the post-Kargil period, the group of ministers appointed to examine K Subrahmanyam Committee recommendations, had approved creation of a unified Chief of Defence Staff. But as recent as in the present government Defence Minister, AK Antony did not show any inclination to implement the long pending proposal.

Guiding Principles

In any country, irrespective of democratic or non-democratic governance, defence budget making will always be guided by certain principles. Though I said these principles are guiding both democratic and non-democratic governments, in non-democratic countries, like China or Pakistan (even after it acquired a democratic facade) have a greater leeway in determining the implementation of April 2014 DEFENCE AND SECURITY ALERT

defence budget

SECURITY CONCERNS

Increasingly, growing sense of accountability in governance and continuous attacks by public opinion, in particular, under the constant fear of Right to Information (RTI), things are changing albeit slowly in democracies guidelines. On the other hand, democratic countries are governed more substantially by the question of political accountability. Within these limitations, what are the most important guiding principles? First and foremost of these is, the natural geopolitical costs imposed by the location of India. India has land frontiers of more than 15,500 km on the west, north and east. Other three sides are coastal frontiers running into 7,600 km together with an exclusive economic zone (EEZ) of almost over 2 million sq km. The vast seas and oceans all around, India also has cluster of islands – on the eastern side, Andaman Nicobar Islands and on the western side Lakshadweep Islands which are vital to protect and promote national security simply because they act as the ﬁrst line of defence of the vast territory of India. They also help India to protect sea lanes vital for India’s and international trade.

Threat Perception

Second, threat perceptions of policy makers at a given time govern the determination of budgetary allocations since national security is the first priority in the determination of budget. These perceptions are often exaggerated by the non-democratic systems; budgetary allocations are not fully reflected in the budget as some amounts are camouflaged under some innocuous headings. This could happen even in the democratic systems. But increasingly, growing sense of accountability in governance and continuous attacks by public opinion, in particular, under the constant fear of Right to Information (RTI), things are changing albeit slowly in democracies. Under these limiting factors, India has faced a national security threat from its very birth as an independent nation in 1947 as a pluralistic democracy from newly carved out nation – Pakistan which was created on ground of Muslims being separate from Indian-Hindus. Soon thereafter it attacked again in 1965 and in 1971 a major war took place over the issues of independence of Bangladesh. Though in 1998 India became the Nuclear Weapons State and Pakistan followed soon thereafter, there have been no direct confrontation of armies; Pakistan has adopted attack by stealth as an instrument of state policy. Pakistan’s policy of attack by stealth was manifested in 1999 at Kargil. The trend continues and it is a safe bet if I generalise that every effort made by Indian and Pakistani political set up is frustrated by the manoeuvres by the Pakistani Army.

Two-front Threat

Newly emerging Peoples Republic of China (henceforth referred only as China) attacked India in October 1962; later, Pakistan moved closer to China purely on the age-old dictum ‘Enemy’s Enemy is a Friend’ to make national security threat to India two-pronged. What is noteworthy is the fact that most of the military alliances in the region have dissolved in the dustbins of South Asian historians but not the one cementing Pakistan to China! I have mentioned in somewhat greater detail of India’s national security threat from Pakistan and China to show that Indian threat perceptions

April 2014 DEFENCE AND SECURITY ALERT

are not imaginary but real as India has suffered from four military conflicts unlike Pakistan’s self-created illusions of India-specific national security threat. After World War II, since the emergence of the United States as a global Super Power, it is always said to be in search of national security threats to keep military budgets at a level that it can fight a war on two fronts. Now it has in addition to Russia and China, added international terrorism of Al Qaeda as a new threat! Third, if India also considers Pakistan promoted terrorism in India, it is not an imitation of the US. For the one US experience of 9/11 India has instances of hundreds of terrorist attacks including 26/11 across her length and breadth; bleeding India to the core!

Private Sector Defence Production

Fourth, India is one of top importers of defence related equipment, arms and armories. According to a latest report, India is globally number one importer of arms. A nation dependent on foreign manufacturers, for its defence systems can never ever aspire to be a major emerging power as India does. What is required even now, therefore, is to invest in indigenous industries to produce at least 70 per cent of its needs instead of 70 per cent dependence on foreign imports! It is heartening to note that present Defence Minister, AK Antony is in favour of promoting national defence industries. He is motivated largely to support national industries in defence, because of his concern to minimise corruption involved in procurement procedures with foreign manufacturers. However, this has to be a main plank of our defence policy for the incoming new government after ensuing general elections. In the process, government must be proactively involved in making domestic industrial giants to come forward to invest in defence industries. Wherever, government has already invested huge national resources in promoting research and development government must share its research outputs with private industries on a ‘need to know basis’; in return the expectation could be that private industries would increase their own investments in defence sector industries and R&D.

National Security Policy

In the ultimate analysis, defence budget should be formulated on the basis of national security policy posture of the government. In December 1996, the Parliamentary Committee on Defence observed the need to have a defence / security policy and to make it public. Defence ministry in reply said: “Of course, we have a policy and that too a comprehensive one.” But declined to share it with the Committee! Since Indian nation has a publicly proclaimed nuclear deterrence policy which clearly lays down under what circumstance and in what manner Indian nuclear assets shall be used, it is high time that India also have a National Security Posture for ﬁve years, the normal term of the Lok Sabha. India had long back in 1995 accepted the fact that China is a potential national security threat to India. Pakistan’s armed forces which really determine foreign / national security policy declare by their action and words (and through its protégé mouthpieces in the vast ﬁeld of terrorist organisations) from roof tops that India is its only permanent enemy! As a democracy based on prior experience of national sufferings should not shy off to declare Pakistan, it’s promoted international terrorism and its international supporters and China-Pakistan collaboration against India are sources of national security threat to India. This does not and should not preclude Indian efforts to improve her relations with Pakistan, without forgetting past record of stabbing in the back.

It is also necessary from the perspective of the long-term Certain trends are clearly visible in the process interest of the nation and national security that a policy is of defence budget formulation. Briefly, these determined by the National Security Council (NSC) that are: Provide for inflation and at the end of the was created by the NDA government led by the BJP in 1998 financial year, reduce it by ten per cent; speak of with full participation of the three chiefs of army, navy and modernisation and indigenisation but provisions air force. Though the NSC was created by the NDA, it was used do not match promises. The tasks before only once during the Kargil conﬂict. However, UPA under the the incoming government are formidable Congress stewardship it was not even used once. Political alliances should 2013-14 2014-15(I) shed their animosity towards other – though politicians as a class are united Defence Budget (Rs in Crore) 203672.12 224000.00 to promote, preserve and protect their Growth of Defence Budget (%) 5.31 9.98 self-interest, they ought to learn to accept desirability of political power alternating Revenue Expenditure (Rs in Crore) 116931.41 134412.05 from one to the other to dispense the Growth of Revenue Expenditure (%) 2.73 14.95 feeling of TINA in national politics. And Share of Revenue Expenditure in Defence 57.41 60.01 more importantly, whichever alliance Budget (%) comes to power after the next general elections, should see to it as the national Capital Expenditure (Rs in Crore) 86740.71 89587.95 interest, to legislate the NSC into a Growth of Capital Expenditure (%) 9.00 3.28 permanent institution legally obligated Share of Capital Expenditure in Defence 42.59 39.99 by governments to use it in future. Budget (%)

Why Is The NSC Defunct?

Capital Acquisition (Rs in Crore)

73444.59

75779.66*

Furthermore, a question ought to be Growth of Capital Acquisition (%) 11.23 3.18* raised and answered: Why is it that Share of Defence Budget in GDP (%) 1.80 1.74 there is so much of hesitation in the Share of Defence Budget in Central 12.23 12.70 use of the NSC? For an outside analyst Government Expenditure (%) from long experience of interaction with bureaucrats and policy making politicians it seems that there are two the allocation for the armed forces never crossed 3 per cent of important reasons for this antipathy to the NSC. First, the GDP. On the other hand during latter’s last two years, 2011-12 strong fear of armed forces is deep rooted; as though it is and 2012-13, it declined to 1.83 and 1.93 per cent respectively. inherited amongst political policy making class. It should slowly learn to overcome this. At least policy makers involved Under the outgoing UPA II government of Prime Minister in national security policy making, broadly defined ought to Singh, finance minister, Chidambaram has presented be competent in their respective fields like defence, internal to the Parliament an interim budget. The features are in security, intelligence, foreign policy, science and technology, keeping with the budgets of earlier years. It provides for a atomic energy, space and budget. budgetary allocation of Rs 224,000 crore, ten per cent more than the last year. It does not even meet annual inflation Second, men in Indian Administrative Service and depreciation of rupee in terms of US dollar. In dollar (IAS) and their poor cousin, Indian Foreign terms, last budget had provided for US$ 37.86 billion Service (IFS) think themselves as the greatest while it is only US$ 36.13 in the interim budget. generalists-specialists that govern everything in administrative-political policy making! Therefore, Trends In Budgeting they think they do not need an NSC as an But certain trends are clearly visible in the process of defence interloper-agent in national security policy making. budget formulation. Briefly, these are: Provide for inflation However, to be fair it ought to be also added that it is and at the end of the financial year, reduce it by ten per cent; happening to some extent slowly and is evident from speak of modernisation and indigenisation but provisions the fact that after 1998 nuclear tests, two men from do not match promises. The tasks before the incoming armed forces are associated in the further development government are formidable. The government should appoint of nuclear weapons. These attitudes have to be changed a defence minister who knows of basic strands of national for the concept of NSC to succeed. security policy. In the 21st century defence ministers must know that India in on the move to emerge as a major power Reflections On Budgets In the light of the above discussion, it is a safe statement to in global politics; towards that goal defence budget be set to make that successive governments, have provided only move towards an allocation of 6 per cent of GDP in the next limited budgetary allocations under the civilian influence. ten years. Defence depends on quality of manpower; hence, In terms of GDP it was hovering around 1.83 in 1961-1962. it is necessary to allocate 6 per cent for education that was But after the Chinese aggression in October 1962 it went up spoken of by almost every prime minister since Pandit Nehru. to 2.56 in 1962-1963. It was only under Rajiv Gandhi that it Exponential growth in education will meet manpower was further raised to 2.83 per cent of GDP during 1984-85 shortage. Defence budget can be reduced only when Indian and 1985-1986. During his later years – 1986-87, 1987-88 and diplomacy has succeeded to resolve all outstanding issues 1988-1989 it was 3.32, 3.34 and 3.14 respectively to decline with China and Pakistan and the vicious nexus between them below 3 per cent. Economic bankruptcy reached under against India is broken. That in turn can happen only when successive UF governments and later under Prime Minister India develops its strength – economic and defence together Narasimha Rao, Atal Behari Vajpayee or Manmohan Singh with will power to stand up to bullying by neighbours.

April 2014 DEFENCE AND SECURITY ALERT

fdi in defence SECURITY HAZARD?

LEVERAGING FDI NATIONAL AEROSPACE AND DEFENCE INDUSTRY

For OEMs to set up plants and be organic to the national defence and industrial complex the FDI norms must be further liberalised. One method is to consolidate acquisition proposal of the three Services and group them towards providing the economies of scale that make for a viable business case to establish manufacturing facilities in India. The alleged apprehension that FDI in the aerospace and defence sector is a security hazard, that the country would be held ransom to the foreign OEMs. In the recent past, orders for 258 Mi17 helicopters and for 123+20 AJT Hawk and 272 Su-30 deals a licensed production facility at HAL has been created. In effect, the country is at the mercy of the foreign OEMs. It is the intent and objective of the Government of India to attract and promote foreign direct investment in order to supplement domestic capital, technology and skills, for accelerated economic growth. Consolidated FDI Policy April 2013

oing by the past trends and the clear requirement for much needed modernisation of the armed forces, the budgetary support covering the XII, XIII and XIV Five Year plans could be at least INR 2,000,000 crore. Assuming about 50 per cent of the allocation would be towards capital procurements and considering that the present delivery capacity of the national defence and aerospace industry is only about INR 35,000 crore annually, it is well understood that domestic capability alone would not meet the targeted acquisitions in the allocated 15 years. Therefore, in-country manufacturing capacity and technical capability has to be augmented or the country would remain dependent upon imports. By some calculations the capacity enhancement required would be the equivalent of two more Mazagon Dock Limiteds, three more Hindustan Aeronautics Ltds and four to six more Bharat Electronics Ltd / Bharat Dynamics Ltd units. A back of the envelope calculation puts the investment in new capacity at not less than INR 50,000 crore to meet these acquisition targets from within India. This investment would have to be in place by 2015-18 if the force level targets are to be met from largely indigenous sources. Since neither the government nor the Indian private sector has the risk appetite to make the investments required to build more infrastructure for the aerospace and defence sector inorganic growth must be recognised as a useful tool for the growth of this sector. Therefore, Foreign Direct Investment (FDI) is a logical answer.

Generating ‘Lasting Interest’

FDI, as different from FII, is intended to establish a “lasting

April 2014 DEFENCE AND SECURITY ALERT

interest” in the Indian defence and aerospace sector. From a corporate perspective “lasting interest” requires no emphasis. Under the Defence Procurement Procedure 2013 OEMs can fulﬁl offset obligations through FDI in joint ventures with Indian enterprises for the manufacture and / or maintenance of eligible products and services subject to guidelines / licensing requirements stipulated by the Department of Industrial Policy and Promotion. As per the existing policy FDI is restricted to 26 per cent for ventures established for manufacturing of defence products. Proposals likely to result in access to modern and state-of-the-art technology in the country would be decided by the Cabinet Committee on Security on case to case basis. No cap exists for ventures established for provision of services in the defence sector. In its meeting of September 7, 2013 the FIPB directed three companies to seek the automatic route for defence-related IT and ITES engineering services and technical and consultancy services in the defence sector which clearly vindicates the position that there is no cap on FDI in services and such investment is under automatic route.

Vulnerabilities

There is no doubt there are different views on FDI, on depending who is seeing what aspect from which angle but the crux of the matter is the alleged apprehension that FDI in the aerospace and defence sector is a security hazard, that the country would be held ransom to the foreign OEMs and the policies of the supplying country, would stymie the growth of the indigenous design and development and adversely impact the domestic industry. To see how far these are

legitimate apprehensions would be apparent from the narrative below. In the recent past, orders for 258 Mi17 helicopters from Russia have been signed but no production facility in India has been created. In effect, the induction of the Mi17s is at the mercy of the foreign OEMs, fortunately friendly. Likewise, 197 helicopters for the army, 56 utility helicopters of the navy and another 126 multi role helicopters for the navy are acceptable to be procured from foreign OEMs with their production facility abroad but amazingly, it is not acceptable that these OEMs set up a production facility, to manufacture these helicopters in India, either as a wholly owned subsidiary or even a majority JV in India, subject to the prevailing legal, compliance and regulatory requirements of the government of India. Which situation affords the larger security risk? Having these helicopters built in India by the OEMs even as a wholly owned subsidiary or built abroad by the OEMs and delivered in India? Which situation creates the defence industrial base and jobs in India?

CMDE SUJEET SAMADDAR NM (RETD)

The writer retired as the Principal Director Naval Plans. He served NOVA Integrated Systems – A TATA Enterprise as Vice President (Operations) until October 2011. He is presently Director and CEO, ShinMaywa Industries India Limited.

For the 123+20 AJT Hawk and 272 Su-30 deals a licensed production facility at HAL has been created. Again such a facility is at the mercy of the OEMs since there is no equity interest in this proposition and after the demit of the agreed number of license producedaircraftanewdealhastobenegotiated.Indigenisationinalicensedproductionagreementisagainstthebusinessinterest of the foreign OEM because it dilutes his IP, reduces his work share, requires certification, possibly creates a competitor in the long-run and directly impacts his business profits. Is it logical for a foreign OEM to empower the Indian vendor on these terms? Would not larger benefits be forthcoming if the OEM senses a business opportunity for growth through local production in its own subsidiary or joint venture or an SPV for a global market and structures his business case to be cost competitive by leveraging low cost manufacturing from India which does not impact his bottomlines, still protects his IP and generates legitimate wealth for his shareholders and yet builds Indian capacity and capability? Factor

LP Model / Sub Contract

JV Model

Prime Contractor

OEM

Indian JV / SPV

Accountability

OEM

Indian JV / SPV

National Vision

Short-term

Long-term

Business Model

Royalty and License Fee

Joint Revenue Generation for Growth and proﬁt sharing through dividends with investments

Termination

One off and at discretion of OEM

Not Possible due contractual and business commitments

Brand Ownership

OEM

Joint

Valuation

As an OEM Product. “Manufactured Under License from OEM”

Branded as a Joint “OEM-IIP” Product

Sustenance

Short and dependent upon Product life cycle

Longer sustenance and for more products

Relationship

Conﬁned and limited to immediate business opportunity on pure ﬁnancial terms

Larger and more comprehensive, stable and sustained relationship

Indigenisation

No scope as LP may be competitor to OEM Offsets may not go to LP ToT extremely limited and contractually driven

50 per cent indigenous content and in the interest of both companies to be cost and technologically competitive to do utmost to reduce production cost and increase technical features for second sale to existing customer or open new markets

Fig 1: Licensed Production and Joint Ventures In these matters Company Law and fair business practices cannot be overlooked. Such decisions require Board approval and shareholder acquiescence. Unlike pure equity investments capital investments through land and buildings, plant and machinery and tools and equipment plus the expenditure on human skill development add upto to a tidy number in terms of capital assets. Once committed expenditure, approved by the Board of Directors of the OEM, has been incurred towards

April 2014 DEFENCE AND SECURITY ALERT

fdi in defence SECURITY HAZARD? establishing a subsidiary and investing in building capital assets walking away from these assets whimsically is not at all an option for OEMs as this would directly impinge on Brand Equity and earn shareholders ire. On the other hand equity investments can be withdrawn at will. So higher the investment by the OEM the lesser the risk of asset or capital flight and better the chances of local production for the global market. Hindustan Aeronautics Limited (HAL) has rejected a proposal of the IAF to produce Pilatus aircraft in its facilities. HAL is in favour of developing the HTT-40 aircraft in-house by 2015, an unlikely milestone − since development, testing and certification are complex matters and invariably are bound by flying hours and flight safety considerations before air worthiness and type certificates are granted. IAF has already placed an order for 75 Pilatus trainer aircraft and is planning to procure 106 more of them after the completion of the delivery of first lot by the end of 2017. Of the total orders of about 500 Pilatus aircraft over 20 years the Indian order is itself more than 33 per cent covering half that span period. The Pilatus is also popular with several South East Asian and African Defence Forces. Therefore, combining the production of 106 PC-7MkII and undertaking the MRO for the entire fleet of 181 aircraft and possibly another 120 PC-21 aircraft in the region locating a manufacturing facility in India would be a very attractive business case for an intelligent investor. This would have been an ideal opportunity for pressing Pilatus aircraft to setup a facility in India to manufacture these and other Pilatus products as a JV with the private sector or even a wholly owned subsidiary if there are no takers from private sector. Would that not benefit the country? Would this not provide high skill jobs for Indian youth, potential export earnings and build Indian capability? Consolidation of acquisition cases is yet another means to develop the national defence industrial base through focused FDIs as the chart below depicts. If the three Services can be persuaded to select aircraft and helicopters with engines from a common source then more than 500 engines of a particular type (which may go upto 1,100 engines for fixed wing aircraft and another 500 engines for helicopter) would be on order. For this very attractive number is it logical that we should import and not allow the engine manufacturer to set up a production facility in India even if 100 per cent FDI in the enterprise is sought by the OEM? Also, each engine has maybe a set of 6 propellers? Would it not make sense to persuade the propeller manufacturer to set up a subsidiary in India for a potential domestic market of 3,000 propellers in the military aviation side and another 2,000 propellers in the civil aviation sector? This does not include servicing the pan-Afro-Asian regional demand which may well be at least twice that of Indian domestic demand.

Consolidate AERO ENGINES

SERVICE

TOTAL AC

ENG / AC

TOTAL ENG

SPARE ENG

GRAND TOTAL

Medium Transport

IAF

Light Transport (AVRO)

IAF

112

140

MRMR

Amphibious

9+9

36+36

108

Sub Total

301

Light Transport (An-32)

IAF

156

195

Medium Transport

IAF

Sub Total

225

Grand Total

526 SERVICE

TOTAL AC

ENG / AC

TOTAL ENG

SPARE ENG

GRAND TOTAL

Fig 2: Consolidation to Create Aero Engine Production Hub In India Incidentally in the Public Sector government has approved Joint Ventures with FDI in excess of the stipulated 26 per cent. BrahMos is a 50:50 JV, HAL/BAe is a 50:50 JV, HAL:RR is a 50:50 JV, FGFA is a 50:50 JV and these are all successful ventures. So, how do these Joint Ventures afford India to be not “dependent on foreign companies and vulnerable to policies of their country of origin” when these are not agreements between states? A similar dispensation is not extended to the private sector. The reasons are unclear if not illogical. The experience of other countries can also be helpful in appreciating the role that FDI plays in developing the indigenous industrial base. Brazil has the Embraer (earlier a 100 per cent government company and then with partnering with Alenia /Aeromachhi has now become the 4th largest aircraft manufacturer) and Helibras with Eurocopter success story. South Korea has the KAI-EC a 50:50 JV with Eurocopter and they are now developing the world’s most sophisticated sub 10 tonne helicopter, Surion, with 12 tonne performance! South Africa has also succeeded in the MEKO frigate

April 2014 DEFENCE AND SECURITY ALERT

programme, Infantry vehicles and the Rooivalk helicopter apart from being the world leaders in fuzing technology and GIS (Diamond aircraft). In the United States the third largest supplier of defence equipment to its armed forces is a wholly owned subsidiary of a British company. None of these countries have collapsed or their security compromised because of higher FDI in the sector, In fact all of them have beneﬁted and prospered. On the contrary having persuaded foreign OEMs to invest and set up in-country manufacturing facilities provides greater security. Similarly, orders for UAVs, SAM systems and armoured vehicles are being placed on foreign OEMs but as per the existing guidelines these OEMs are not allowed to set up a plant in India either by themselves or in partnership with Indian companies on fair equity participation to directly deliver to the Indian armed forces. Apart from the fact that all assembly and integration, testing and delivery of systems manufactured in India by a foreign OEM will require local industrial support the moot point is that it will also spawn a satellite of SMEs feeding the national defence industrial complex. This would create the larger ecosystem for a successful defence industrial complex. It is, therefore, quite simple to comprehend that greater security and national interest is best served if equipment is manufactured in India even by a foreign OEM than through reliance on imports. Of course if the Indian industry can undertake it by themselves would be the best option but, the sad state of affairs in the Indian aerospace sector is that even a simple trainer aircraft or a transport aircraft have to be imported into India and that is not only a security risk but a matter of national shame. Core national priorities such as job creation and getting the right technology also dovetail easily into making a stronger case for larger FDI in this high technology sector which has natural spinoffs in other sectors also. The case for a higher FDI in the defence sector is in the national interest provided foreign OEMs set up legitimate companies in India under the Companies Act and comply with the taxation and regulatory framework of the country. All of these provisions are highly regulated and infractions are easily visible and punishable. Infringements by the OEMs abroad are not subject to Indian law, not visible and neither subject to close oversight by Indian buyers. Hence, the country is often faced with alleged scams the investigation into which is endless and which have, as on date, not obtained a single conviction but placed foreign OEMs on a blacklist!! The heart wrenching story of the Indian artillery practically without guns for over 30 years is a strong case for local production whether by public, private or OEMs. Locating plants in India provides better leverage in such situations since even the plant itself can be attached for criminal or civil violations of Indian law. It is also worth noting that Indian companies – whether wholly owned subsidiaries and Joint Ventures with OEMs, domestic private or public sector entities – can only bid in Indian currency for MoD contracts. Therefore, domestic production with payments in INR, is inﬁnitely more preferential than imports requiring foreign exchange. However, industry bodies led by the big houses are against any increase in FDI caps. Their case for rejection

Industry bodies led by the big houses are against any increase in FDI caps. Their case for rejection is purely driven by narrow business interest of these companies in complete exclusion of the national interest. Their logic has business merit, though akin to the candle makers petition to ban electricity and the sun since they affect the candle business!! is purely driven by narrow business interest of these companies in complete exclusion of the national interest. Their logic has business merit, though akin to the candle makers petition to ban electricity and the sun since they affect the candle business!! Since they have already invested or are in the process of investing large sums in creating infrastructure and are yet to receive any substantial order allowing foreign OEMs to set up industry in India would queer their business interest. Of course. this logic is couched in terms of national security which these companies are hardly competent to comment on and on claims on self-reliance and capacity building of which there is little practical evidence. On the surface it would appear that the MoD has been motivated to side with the big business houses to the exclusion of the core national interest of building a vitally needed Indian defence industrial base. If foreign OEMs are willing to commit expenditure and accept the investment risk with no liability on the MoD then where is the problem in accepting higher FDI?

Export Angle

Whilst the sector has been opened to foreign investment the central debate is on the cap on FDI. At the moment it is a relative cap that limits investment upto 26 per cent in the manufacturing sector irrespective of the quantum of investment. So we see many foreign OEMs with 100 per cent equity into the services sector for example in engineering support services, creating many thousands of high skill jobs but none in the manufacturing in the private sector. Though the Indian acquisition programme is truly of gigantic proportions but clear incentives are required for foreign OEMs to locate manufacturing bases in India. A mere 26 JVs have been approved since opening up of the sector and the investment is a meagre US$ 4.8 million over 22 years. No matter how big the domestic demand maybe it is not possible for Indian industry to prepare a business case simply relying on Indian orders for the business to be sustainable and therefore addressing the larger global market is a must. Therefore, FDI has to be supported by a reasonable export policy. In addition, we also have a national target to get manufacturing sector to move to 22 per cent of GDP by the end of the XV Five Year plan, create 1 million jobs per month then the A&D sector cannot be ignored as it provides some opportunity to meet these daunting growth targets. But this requires investment in huge numbers and since these are not forthcoming from government or Indian industry the FDI route is a logical solution.

The Criminality Angle

In a refreshing and forward looking development the FIPB has decided not to reject proposals from a foreign OEM only because it or any group companies of their parent is under investigation in the country or abroad. It has held that

April 2014 DEFENCE AND SECURITY ALERT

fdi in defence SECURITY HAZARD?

Whilst the sector has been opened to foreign investment the central debate is on the cap on FDI. At the moment it is a relative cap that limits investment upto 26 per cent in the manufacturing sector irrespective of the quantum of investment. So we see many foreign OEMs with 100 per cent equity into the services sector for example in engineering support services, creating many thousands of high skill jobs but none in the manufacturing in the private sector “law would take its own course” and any FIPB approval would be without prejudice to any existing or future civil or criminal proceedings against the foreign investor or its parent. This has paved the way for clearing several crucial partnerships such as Bharat Forge and Elbit Advanced Systems for artillery guns and howitzers, Selex ES and Data Patterns for defence electronic products and the India Rotocraft-AW venture for helicopter production in India. A forward looking FDI policy in this sector is a must. Such a policy must address the core issues of both absolute and relative limits of investment, what that investment does towards building Indian capability and capacity and how that investment impacts the defence technology base of the country. Experience from the automobile, petrochemical and infrastructure sector show that FDI does bring in technology, creates jobs and most importantly spawns robust SME suppliers. Contrarily the liberal FDI policy in the Telecom sector has not spawned a manufacturing base but has brought in major improvements and efﬁciencies in the services segment of this sector.

Sector-wise FDI Limits

In deciding the appropriate threshold for FDI both percentage and the absolute investment number are important. For example, an investment of only US$ 500,000 which buys 90 per cent equity in a company is different from a US$ 2 billion investment that buys 10 per cent equity in another company. FDI decisions should be guided by three basic value propositions. First, FDI must build sustainable long-term in-country production capacity; second must build technical capability through higher level skill sets in manufacturing such as system integration and production planning and services such as quality assurance and programme management; and, ﬁnally create a viable and sustainable business model for the investor as well as the new entity. Considering that the Foreign Investment Promotion Board is empowered to take decisions on investments upto INR 1,200 crore (say, US$ 200 million) on balance the following FDI is policy is proposed:

Sectoral Relative Limits

 Upto 49 per cent no approval is required  50-74 per cent require approval of the FIPB  More than 74 per cent including 100 per cent wholly owned subsidiaries for manufacturing high technology products require approval of the Cabinet Committee on Economic Affairs

April 2014 DEFENCE AND SECURITY ALERT

 All proposals would attract the attendant matters of permanent establishment, transfer pricing, withholding tax and relevant provisions of the applicable Double Taxation Avoidance Treaty

Sectoral Absolute Limits

 Upto US$ 300 million no approval is required irrespective of the equity holding  Between US$ 300 to US$ 600 million requires approval of the FIPB  Investment of more than US$ 600 million requires CCEA / CCS approval

Segmental Rules

 FDI is only applicable to the manufacturing sector with its attendant tax and regulatory compliances of licenses etc  There are no restrictions for FDI in the services sector such as MRO, Engineering Support Services etc but with its attendant service tax compliances

China May Steal A March

Recent policy guidelines of the government of India on prioritising Buy and Buy and Make Indian as the default decision for procurements and the marginal concession regarding FDI in the defence and aerospace sector is an encouraging initiative in bringing together the requirements of the Services and of industry to work together in creating a defence industrial complex that India can be proud of. Tweaking it just a bit more would provide all the incentives for OEMs to relocate manufacturing facilities as JVs with Indian private or public sector companies or even as wholly owned subsidiaries to service the Indian and Asian market. That China is moving forward rapidly in opening up its state run sector to private domestic investors is evident from the fact that China Shipbuilding Industry Co, a state-run military contractor and the nation’s largest shipbuilder has announced plans to accept US$ 1.4 billion in private investment to fund building of warships. Presently, FDI is not permitted in the defence sector in China but this may soon change. Unless the FDI norms are more attractive China may well become the preferred destination and India would lose this headstart once again. The investments required to meet the acquisition targets are immense and are not within the capability of the government or Indian industry to make these investments at the cost of say, infrastructure development, or social or education expenditure. Hence, FDI is a necessity. It is a fallacy to believe that greater security is achieved through imports from OEMs and at the same time disallowing the OEMs to create a manufacturing base in India. For OEMs to set up plants and be organic to the national defence and industrial complex the FDI norms must be further liberalised. One method is to consolidate acquisition proposal of the three Services and group them towards providing the economies of scale that make for a viable business case to establish manufacturing facilities in India. The second is to address both relative and absolute caps in this sector. The third is to permit export of defence and aerospace equipment and lastly, as debated elsewhere provide tax exemptions, incentives and beneﬁts on the same lines as provided to infrastructure and related industries.

defence budget

MORE BUCKS FOR THE BANG

DEFENCE OF THE REALM

NEEDS MORE FOR DEFENCE FORCES The size and shape of the defence budget depends on the threat to the national security, both external and internal. Our main adversary on the northern front, China, has increased its operational capability four times in the last 20 years, it was capable of deploying 6 divisions against India in 1962; today it can launch operations with 35 divisions.

he Finance Minister, on 17th February 2014, presented an interim budget for ﬁscal year 2014-2015 in the Parliament in which he announced an increase of approximately 10 per cent over last year’s defence budget. Defence budget for the year 2013-2014 was Rs 2,03,672 crore. It has been raised to Rs 2,24,000 crore for the year 2014-2015. However, the Ministry of Finance, subsequently, slashed defence budget for year 2013-2014 by Rs 7,870 crore. In fact, it has been a practice with the Ministry of Finance to reduce the defence budget every year ranging from Rs seven to ten thousand crore from the announced outlay for the last eight years. In the ﬁscal year 2012-2013, the government had crossed all limits and had imposed a midyear reduction of Rs 14,903 crore over the original allocation of Rs 1.93 lakh crore.

Budget Cuts Affect Acquisitions

Generally, cuts in the defence budget affect outlays in capital expenditure which is meant for new weapons and equipment acquisitions. During the year 2013-2014 allocation for the capital expenditure was Rs 86,740 crore. This was cut by Rs 7,868 crore. The worst affected by the cut was the Indian Army, as many of it's projects were awaiting clearance by the Ministry of Defence. In comparison, the air force and the navy have been much more alert and much quicker in their efforts

April 2014 DEFENCE AND SECURITY ALERT

to get new weapons and equipment. The cut money was to purchase infantry new equipment, artillery guns and some other important secret projects. For the year 2013-2014, Rs 1,16,932 crore was to be spent on salaries and to meet day-to-day functional and operational needs of the forces which the government could ill afford to cut in view of growing frustration among forces due to very unsatisfactory conditions of living. This year’s defence budget has capital allocation of Rs 89,588 crore. It is only 3.28 per cent more than the original allocation for the year 2013-2014. Army has been given Rs 25,665 crore whereas the navy and the air force shares are Rs 22,822 and Rs 33,756 crore respectively. Other items towards capital expenditure have been allocated Rs 7,345 crore.

Devalued Rupee Affects Security

In my opinion, the projected 10 per cent increase over the last ﬁscal year is a hoax. When calculated in real terms, it comes out to be less than the last year. The hike will

be greatly affected by the change in the rupee-dollar exchange rates. Approximately 95 per cent of the weapons and equipment are imported and the price has to be paid in dollars. Last year when the budget was presented to the Parliament, rupee-dollar exchange rate was Rs 54.00 which this year has gone upto Rs 62.00 a difference of Rs 8 in one year. Hence in terms of dollars, next year’s defence budget will be less than US$ 35 billion. Inflation rate of 8 per cent will also affect. The size and shape of the defence budget depends on the threat to the national security, both external and internal. Our main adversary on the northern front, China, has increased its operational capability four times in the last 20 years, it was capable of deploying 6 divisions against India in 1962; today it can launch operations with 35 divisions. In 1962 it had no rail road or air communication with Tibet. Today it has a railway connecting Lhasa, the capital of Tibet, which is being extended upto Indo-Tibet border. A network of 58,000 km of internal roads provide adequate mobility and flexibility to its forces. Five airfields, which are capable of taking any size aircraft, are fully functional. Under four modernisation programmes, covering industry, agriculture, technology and military, it has not only achieved self-sufficiency in defence equipment but also has become one of the biggest exporters of weapons in the world. Air mobile capacity enables its forces to bring into Tibet additional forces upto a division from the neighbouring regions within 48 hours. It can launch heavy helicopter borne operations with a brigade group in Tibet. Its defence budget amounting to US$ 160 billion is four times that of India. It spends 7.5 per cent of the GDP on defence, while India spends only 1.74 per cent. We are, therefore, way behind China in defence preparedness and are almost at their mercy. It is a bluff that government of India is thrusting on the people in telling that we are fully prepared to take on the Chinese. To do that we will need four times of the force that we have today guarding our northern borders. It will take 15 years minimum to achieve that capability and if 3 per cent of the GDP is provided for defence preparedness continuously for 15 years. A parliamentary enquiry committee must investigate what led to such a lethargy in defence preparedness.

The debate ‘guns versus bread’ is as old as India's independence. About 35 crore Indians are below the poverty line and they have every right to demand improvements in their dismal way of living. But is it on account of defence spending? Delicate Security Environment

Pakistan has been building her defence capabilities with aid from the USA and China. She dares to indulge in terrorist and sabotage activities in the Indian state of Jammu and Kashmir and other parts of India. It is on account of her military build-up and constant interference in the Jammu and Kashmir that approximately 60 per cent of the Indian Army is committed in controlling and ﬁghting terrorist activities abetted by Pakistan. In terms of defence budget, Pakistan spends 5 per cent

of her GDP on defence. We also have to cater for disturbed security environment which has enveloped our other neighbours – Nepal, Myanmar, Bangladesh, Maldives and West Asian countries. Internally, counter insurgency commitments in the north-eastern LT GEN OP KAUSHIK states and volatile atmosphere PVSM, AVSM, VSM, M-IN-D created by terrorists, Naxalites and Maoists in the central part of India (RETD) The writer has been have substantially increased army’s the Chief of Staff of the commitments. Disturbed law and Eastern Command, order situation in the country, Indian Army and a requiring army being called out, former Vice Chancellor has been deteriorating. It is an of Maharshi Dayanand eye opener that whereas in the University, Rohtak, first 20 years of our independence Haryana. army was called out a total of 400 times; in the last four years alone it has been called over 500 times. All these commitments have caused adverse effects on army’s preparedness for its war worthiness. Army is neither prepared nor trained or rehearsed for fighting battles in the high hills of Himalyas. If the country wants to avoid another 1962, it must demand from the government immediate and adequate steps to prepare the country’s armed forces to fulfil their first obligation which is to defend the country against foreign invaders. This demands enhanced defence outlay to build our military capabilities. But will the armed forces get what they need? The lackadaisical attitude adopted by the government with regard to defence necessities is negative. The Prime Minister while addressing the army commanders in November 2013, had said that the country has to cut down on defence expenditure to save the government from the collapse that it faced on account of failed economic policies. He went on to advise to adopt wisdom in defence purchases and “cut our coat according to our cloth”. Attitude reflected by the present Prime Minister is not new. It has been passed on to him by all his predecessors and is 67 years old resulting in sorry state of our defence preparedness. Any army chief who dared to project a realistic picture and truth about the state of defence preparedness, as was done by Gen VK Singh, was snubbed publicly. Many parliamentary committees on defence in the past recommended 3 to 3.5 per cent of the GDP for defence needs, unfortunately, all their recommendations found a place in the pigeon holes of bureaucracy. Mr Narasimha Rao as Prime Minister in 1993, made a promise to give 3 per cent of the GDP for the defence needs but unfortunately, that figure was never reached and projections made for defence for the year 2014-2015 are only 1.74 per cent of the GDP.

Cost Of Corruption

The debate ‘guns versus bread’ is as old as India’s independence. About 35 crore Indians are below the poverty line and they have every right to demand

April 2014 DEFENCE AND SECURITY ALERT

defence budget

MORE BUCKS FOR THE BANG

Many a modernisation plan, which should have been completed by 10th Plan, is still incomplete. Due to these delays, officers working in the Service headquarters in designing excellent plans are frustrated and the forces, instead of becoming modern, remain static and in terms of effective operational competence have come down

Bureaucratic Delays

The Perspective Planning directorates of our three armed forces have the best of ofﬁcers. They have done an outstanding job in planning and preparing modernisation plans for their respective Services. No contribution is made or role played by dozens of bureaucrats in the Ministry in shaping these plans. On the contrary, they ﬁnd means to return these recommendations. It is because of these reasons that many a modernisation plan, which should have been completed by 10th Plan, is still incomplete and the forces, having prepared their

Tyres that go on even if bombed!

merican engineering group (AEG) has conﬁrmed that it is developing zero pressure tyres that will continue running even after being shredded by bombs or gunﬁre. AEG claims that when successfully launched, these tyres will help quickly move soldiers out of harm’s way and save lives.

improvements in their dismal way of living. But is it on account of defence spending? Many lakhs of crore of rupees of country’s money have been pocketed by corrupt politicians, high government officials. Scams involving lakhs of crores have been responsible for the current economic slowdown. These corruption issues are actually the real causes which have taken away the butter from the plates of India’s 35 crore poor. The Finance Minister needs to concentrate on these very serious issues which are eating away essential vitals of our economy rather than advising the army commanders to exercise more prudence in defence spending. May I caution the Prime Minister and the Finance Minister that in the absence of adequate security, not only will the country be left without even one pat of butter but the independence of the country will also be sacrificed. Majority of weaponry that India’s armed forces possess is what they used during 1971 War, that is, more than four decades old. Gestation period in weapon design, production and acquisition has been largely instrumental in lethargic modernisation of India’s armed forces. On an average, it takes four years for an acquisition proposal to get cleared by the Ministry of Defence. It passes through approximately a dozen channels and, if any one of them raises even a naive observation, it goes back again to all the twelve channels and thus causing delays not in days but in years. Why otherwise, many operationally essential demands, which include multi-role combat aircraft, light and heavy helicopters, light field guns for fighting in high altitude areas, submarines, new rifles for infantry and new communication systems, are lying pending in the Ministries of Defence and Finance on account of procedural and bureaucratic delays?

April 2014 DEFENCE AND SECURITY ALERT

plans for the 12th plan, have already sent those to the Ministry of Defence nearly two years ago. Due to these delays, officers working in the Service headquarters in designing excellent plans are frustrated and the forces, instead of becoming modern, remain static and in terms of effective operational competence have come down. For the year 2014-2015, there has been a meagre increase of only 3.2 per cent over the last year in capital outlay. It is feared among the forces that towards the end of the fiscal year substantial portion of this increase will be taken back as defence cuts to restore the country’s economy as it has been happening for the last eight years. Some operationally essential plans needed much higher allocation for capital expenditure and the low hike will cause adverse effects on modernisation plans. The country must know that we are many years behind the Chinese military preparedness in Tibet and Chinese combat power on Indo-Tibet border is four times more than that of India. They are, therefore, in a position to repeat 1962 at any time and any place of their choosing. It is a blessing that they are limiting their efforts to minor infiltration across the Line of Actual Control. The situation on our northern frontiers requires the same efforts as were made post 1962 defeat. In our old classic, ‘Panchtantra’, the disciple asks the guru a question “What is the best Army?” The guru replied, “the best army is one which is well-officered, well-equipped, well-trained and whose soldiers are fully contended”. The present state of our armed forces shows that they are lacking in all the four fields. Improvement in their conditions depends on availability of adequate funds and more than that on the attitude of bureaucrats and politicians towards these essential needs.

Boeing’s secure mobile

oeing Co has unveiled a smart phone that if tampered with encrypts calls, deletes all data and renders the device inoperable. Boeing tamper-proof phone is aimed at people working in defence and homeland security who need to keep all communications and data conﬁdential and secure. The phone can be conﬁgured to connect with biometric sensors or satellites. Other attachments can extend battery life or use solar power. This smart phone can operate on WCDMA, GSM and LTE frequency bands and offers Wi-Fi and Bluetooth connectivity.

Mahindra Defence Chakan Plant

ahindra Defence Naval Systems recently opened its underwater systems and naval applications manufacturing facility in Chakan near Pune. Mahindra Defence Systems now has a three dimensional capability encompassing land, sea and air domains and is also working to derive synergies between defence business and other Mahindra Group companies.

Army short of Ammunition

ndian Army is fast running out of ammunition. Tanks, air defence units, artillery batteries and infantry soldiers are all facing the crunch. The norm is to have adequate war wastage reserves (WWR) for 40 days of intense ﬁghting. As per Indian Army Chief, General Bikram Singh, the army should have 50 per cent WWR by 2015 which means Indian Army does not have even 20 days’ reserves right now. 100 per cent WWR should be reached by 2019 but only if the Indian government is prepared to spend Rs 19,250 crore.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries RESUSCITATING R&D etc. Details of the frequency of non-availability of a particular weapon indicate the Mean Time Between Failures (MTBF) which is an important measure of the reliability of the said system. All such data is stored formation wise at the HQ TG. Wear and tear, wastage, failures etc of the same equipment in desert formation are very different from that in a mountain formation. Again the same data will vary during war and peace time. Such abundant data pertaining to different weapon systems over the last six decades is a wealth of information. This database enables the equipment managers to lay down periodicity and usage norms for carrying out preventive maintenance. For example the gas ﬁlled recoil system of artillery and tank guns, irrespective of usage, have to be recharged after a certain period as laid down by EME based on the army’s experience and the manufacturer’s recommendations. With the help of this valuable database one can predict the life of the weapon system and allied equipment and also formulate the ‘discard policy’.

Training With The OEMs

A COMMON TECHNOLOGY HUB FOR THE FORCES

It is seen that after the TDEs were merged with DRDO, selected technical graduates became part of the Permanently Seconded Service Officers cadre (PSSOs). The PSSOs played a crucial role in the development projects of the 60’s and 70’s as they were the ones familiar and knowledgeable on all weapon systems. HQ TG keeps information of all weapon systems and their state of readiness for war. With the help of this valuable database one can predict the life of the weapon system and allied equipment and also formulate the ‘discard policy’.

ver the last two decades several attempts were made to energise our defence industries by jump-starting its primemover – DRDO. Today however India has the negative distinction of being the world’s largest arms importer. The global Arms Trade Treaty (ATT) under the UN initiative, when fully implemented will encroach into our sovereignty. This cannot be allowed at any cost. With this background an effort has been made to examine how certain assets that already exist within the MoD like HQ TG EME of the army, the Permanently Seconded Service Ofﬁcers (PSSo) cadre to DRDO and the successful project management experience of the navy can be brought into a mutually reinforcing relationship to provide a binding framework for the three services in their R&D activities. It is felt that a credible ‘inter service technical cadre’ and a ‘common technology hub’ would be prerequisites to ensure effective translation and implementation of projects within the defence industries.

Nucleus Of The Hub

The Indian Army inherited a unit called the ‘HQ Technical Group’ from the British Army. This is part of the Corps of Electrical and Mechanical Engineers (EME), the repair

April 2014 DEFENCE AND SECURITY ALERT

organisation of the army. The entire spectrum of weapons and equipment in use by the army is represented ‘technology wise’ at the HQ TG. The 155 mm Medium Artillery guns to small arms are grouped under different sub-groups such as Field Artillery, Air Defence (AD) Artillery, Mortars, small arms etc under the Armament wing. The second such group is the Vehicle wing where vehicles are classiﬁed and grouped under A, B and C vehicles. A-vehicles are armoured ﬁghting vehicles like Battle Tanks, APC’s etc. B-vehicles are logistics vehicles including heavy, medium and light utility vehicles, specialist vehicles, jeeps and also motorcycles. C-vehicles include engineer equipment, bulldozers, charging and generator sets etc. The third group is the Electronics wing comprising of electronic communication equipment, Electronic Warfare (EW) equipment, computers etc. The fourth is the Army Aviation wing and so on. HQ TG keeps information of all weapon systems and their state of readiness for war. This includes the ‘out of action / off road state’ which indicates how many days a weapon was unavailable due to repair / want of spare parts / minor assemblies / major assemblies

Army has been following a practice that whenever a new weapon system like a Battle Tank is imported from abroad, a team of officers, JCOs and NCOs from the Armoured Corps are sent for training to that country. This includes mainly tactical and operational details such as deployment in various situations, aiming and shooting, use of different types of ammunition, driving, maintenance etc. The technical and engineering part of such training is given to the EME which covers broad manufacturing methods, repair techniques, inspection procedures etc. Normally the EME team has one or two young officers (qualified engineers) / JCOs / NCOs with relevant background experience in armoured formation. These trained EME technicians on return will conduct courses to impart this knowledge to more technicians. This form of training is undertaken not only for major weapon systems but also relatively smaller equipment like the ‘Fly Catcher’ radar. EME has a specialist technician familiar with the relevant technologies for both conventional and new weapons. It is a relatively large Corps, almost 10 per cent of the army and follows the concept of ‘soldier-craftsman’. Due to this duality of responsibilities the technical element tends to get diluted. This state has to improve considerably by quality training, making the EME technicians more competent and proficient at all levels.

COL AG THOMAS (RETD)

The writer was commissioned in EME prior to the 1971 War and later seconded to DRDO. He served DRDO for 22 years in various capacities in different establishments. He was posted to the HCI London in a diplomatic assignment as Deputy Technical Advisor (Defence) – accredited to most West European countries and USA. Subsequently he was posted at CVRDE, Avadi and also as Registrar Academics and head of General Staff (GS) branch at the Institute of Armament Technology (IAT), Pune, India.

Table 1 shows a few weapons / systems and personnel with experience on these systems, regiment wise. This is at the grassroots level in various formations of the army. EME technicians are attached to all units – Infantry, Mechanised Infantry, Armoured Corps, Artillery, Engineers, Signals etc to give engineering support. The table shows that EME technicians are qualified in many fields of technology and hence found in larger number in the defence industry units like DRDO, Ordnance Factories and DPSUs in comparison to officers of other regiments.

Weapon / System

Regiments that are knowledgeable on the speciﬁc system

Artillery

Arty EME

A-vehicles (Armoured Fighting Vehicles) B-vehicles (Logistics Vehicles) C- vehicles (Engineer Equipment)

AC EME All Regts EME Engrs EME

Electronics Eqpt (Comn, EW)

Sig EME

Computers

Sig EME AD Arty EME

Radars

AAC* IAF

Aviation

Table 1: Army weapons and personnel with experience – Regiment wise * Army Aviation Corps

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries RESUSCITATING R&D Hands-on Experience Vital

In engineering practice, qualification in a specialised field is very important. Similarly, experience in that particular field is also equally vital. For this reason sometimes where a young officer may not be able to guide, an experienced JCO or NCO may be able to suggest a solution to a technical problem. Valuable clues or the solutions themselves could be shown by the user representatives – tank crews, gunners or signal men as the case may be. There is a wealth of this experience already in existence within the army. Both qualifications and experience are important factors in rendering engineering support. At the moment HQ TG being part of a Corps it is manned by 100 per cent EME technicians (Officers, JCOs, NCOs). In order to make full use of this vast experience pool it is felt that the HQ TG should be converted into an all arms unit by posting Signals, Engineers, Artillery, Armoured Corps and Mechanised Infantry personnel who are technically proficient to their respective technology appropriate wings.

Inter-service Technical Cadre

The Technical Development Establishments (TDEs) were part of the British Army as the first echelon R&D. During the 1950’s MoD created the Defence Science Organisation (DSO) with civilian scientists. In 1958 the TDEs and DSO were merged creating DRDO. Prof DS Kothari the then Head of Physics Dept at Delhi University was appointed as the first Scientific Advisor to Raksha Mantri (SA to RM). He continued the Defence Ministry job from his Delhi University office and had one Chief Controller R&D (CC R&D) from the army and a civilian Chief Scientist with their offices being in South Block. Dr Bhagavantham took over from Prof Kothari and established his office in South Block. He continued till 1974. In an ambitious move to kick-start the domestic military R&D activities the government of India appointed Dr Nag Choudhury as head of DRDO (SA to RM) in 1974. He introduced the concept of indigenously developing major weapon systems under MoD. Prior to this only modification of weapons with a view to enhance their performance were carried out, like the tweaking of the chemical composition of explosives / propellants and the improvement of certain ammunitions for range, lethality etc. These were undertaken utilising the proving and testing facilities. During this period the Guided Missiles project at DRDL Hyderabad under Air Cmde Ganeshan and the Main Battle Tank (MBT) project at CVRDE Avadi under Shri Mukherjee were initiated. Dr Nag Choudhury was followed by Prof MGK Menon FRS and subsequently by Dr Raja Ramanna. All three were eminent physicists and internationally well-known. They were recruited and brought to MoD from the Planning Commission, Dept of Electronics and Dept of Atomic Energy respectively. During their tenures DRDO established itself well. Subsequent SAs were all appointed from within DRDO. Soon after WW II in the late 40’s and early 50’s, the Indian Army inducted MSc (Chemistry) qualified officers as technical entry to the Corps of Ordnance and Artillery. Their knowledge of propellants and explosives was extremely useful in the production line

April 2014 DEFENCE AND SECURITY ALERT

of the ordnance factories and R&D labs designing new types of ammunition. The army has tried to recruit qualiﬁed technical graduates for Artillery and Armoured Corps. This has not worked regularly, however a small number have been commissioned into these regiments. On the other hand, a large number of engineers both from universities and army trained graduates are being commissioned every year in Engineers, Signals and EME.

Servicemen In Laboratories

It is seen that after the TDEs were merged with DRDO, selected technical graduates became part of the Permanently Seconded Service Officers cadre (PSSOs). The PSSOs played a crucial role in the development projects of the 60’s and 70’s as they were the ones familiar and knowledgeable on all weapon systems. Subsequently the civilian engineers recruited to DRDO as scientists were also trained on these systems. During this period most of the DRDO projects were headed by PSSOs. The cadre expanded in the 70’s and 80’s. By the 1990’s the intake dropped drastically due to a shortage of technical officers in the parent Services, the army, navy and air force. During the late 80’s DRDO had a list of 116 PSSOs, probably an all time high of the cadre. The breakup of these officers are: Four from the navy, 20 from the air force and 92 from the army. Out of this 54 from EME, 22 from Engineers, 9 from Signals, 5 from Artillery, 1 from Armoured Corps and 1 from Army Education Corps (AEC). This cadre survives today in a sub critical state. The induction and permanent secondment of technical officers is done after scrutiny and selection at different levels and stages. Normally qualified officers with specialised training and experience in the seniority bracket of 7-12 years in the rank of Capt / Maj equivalent are chosen for DRDO. The first level of screening is done at the directorate level of the respective Corps / Regiments / Services and the first level of selection is done by the DOP at DRDO HQ. They are then posted to a DRDO lab / establishment for a period of 3 years. During this period the lab / estt director along with his team assess the candidate for his suitability and potential for R&D work and makes the recommendation for his permanent induction. A high level board assembles annually under the chairmanship of SA to RM (and includes the Secretary Defence Production, all CC R&Ds and senior representatives of the army, navy and air force) to interview each officer and take the final decision to approve or reject their induction to DRDO. This makes the selected officers very special and hand-picked ones. With relevant project / industry experience they are groomed to be the leaders of defence industries. Once an officer is permanently inducted into DRDO they no longer belong to their parent Service. Their Service dossier is sent to the new department. Over a period of time a reasonably successful guideline has been evolved to bring about a common seniority list of these PSSOs. Their postings, promotions, retirement, disciplinary action if any will be dealt with by DRDO. But they remain in their original colour of uniform. Due to the technical nature of work in DRDO, the PSSOs are not as rank conscious as compared to the officers in regular services. Teams comprising of a major, wing commander,

brigadier and rear admiral can sit together and discuss subjects. It takes time to establish a trust bond between a senior and junior ofﬁcer belonging to different services. But once this trust has been earned one can get the full and wholehearted support of a cadre.

Proper Man Management

Without a cadre support and prior work experience it is difficult to perform the duties of a manager effectively in the defence industries. It is seen that successful heads of such an industrial unit have invariably had a tenure earlier in a lower rank, 2 or 3 steps below, which enables one to understand the dynamics of the organisation and also the organisation to have a brief prior knowledge of the officer. Indian Air Force is planning to appoint a serving 3 star officer as Head (CMD) of HAL in order to give a push to some projects that are of high value and vital to IAF. Posting a senior officer to a very large organisation like HAL may not be able to create the desired result as such officers lack work experience in the industry and also lack a cadre support. During the late 80’s and early 90’s the army posted a 3 star Armoured Corps General stationed in Delhi as the head of the MBT programme. CVRDE had more than half a dozen PSSOs in the ranks of Lt Cols / Cols / Brigs from EME and Armoured Corps. Somehow this 3 star General could not establish a trust link with the PSSOs and hence was unable to generate a momentum in the MBT project.

Continuity Of Tenure

On the other hand the naval project management approach and experience is totally different. During the early 80’s Vice Adm MK Roy former FOC-in-C Eastern Naval Command was appointed Director General of the Advanced Technology Vessel (DG ATV) programme. He had a set of bright naval technical officers in the project management team located in DRDO HQ at New Delhi. The secretarial sanctions were issued by SA to RM. ATV had several work centres including BARC for design and fabrication of the compact nuclear power plant, naval dockyard for fabrication of the hull, NSTL for weapons integration, BEL for electronics, control and communications etc. After Adm Roy retired, Adm Bhushan took charge of the project in the rank of Commodore having worked on the same earlier for many years in the rank of Captain. Bhushan continued in the ranks of Rear Adm and Vice Admiral. Even after his normal retirement, it is believed he remained the head of the ATV project at least on 3 two year extensions. Many a time continuity is most essential at certain phases of a project. The navy has successfully built India’s first indigenous aircraft carrier (IAC) which has an overall length of 260 meters. As a vessel of this size could not be accommodated in the existing naval shipyards, a search identified Cochin Shipyard as the most suitable. Though this is not under MoD, they made sure that a retired 2 star naval officer was appointed as the CMD during the period for smooth completion of the project. The keel was laid in February 2009 and the IAC was launched into water last year and is expected to be operational any time after 2018. Thus one can see that all naval projects including ATV, home-grown sonar, stealth warships and other battleships have been successfully completed

despite delays. The navy is fully aware of the importance of maintaining a tight control over its projects through the developmental stages upto ﬁnal induction. In order to prioritise this activity they have relaxed / modiﬁed the service rules with regard to the length of tenure, command report, post retirement appointments etc for the teams involved. Therefore in addition to replicating the naval project management experience, the revival of an inter-Service technical cadre could be effective in administration, planning of R&D projects, coordination, management and implementation of the same within the defence industries.

Inter-service Technology Hub

In an attempt to create a common technology hub for the army, navy and air force, HQ TG EME could be taken as a nucleus. In the first stage it is suggested that it be converted into an all arms unit. In the second stage naval and air force technicians are attached to the newly created naval wing and air force wing, thus making it an inter-Service unit. In addition four new wings are to be added. These are as under:  Weapons and Equipment (WE) Liaison Wing  Project Management Wing  Technical Training Wing  Academia and Private Sector Liaison Wing  WE Liaison Wing: The database available at HQ TG on army weapons and equipment could be gainfully utilised by the General Staff Branch at the army HQ (WE Directorate) and also MoD as a guideline for the induction by procurement or development of a new weapon system into the army. Therefore the link between HQ TG and WE directorate is vital for an informed and professional decision-making mechanism. In order to institutionalise this link it is proposed to create a small dedicated WE liaison wing at the new technology hub.  Project Management Wing: Till now army projects have been handled from the Corps / Regimental directorates at the army HQ. For example MBT project from the directorate of Armoured Corps, PLAN Aren Project from the directorate of Signals and so on. To promote sharing of knowledge and experience, it is proposed to bring all project management teams of the three Services under one roof. In this process the project management team of a slow moving project can learn lessons from observing and interacting with other teams, especially the fast moving projects. Navy has a successful track record and so it is felt that due to their acumen and experience in this area, the project management wing at the technology hub should be headed by a Naval Officer to begin with. Civilian scientist and engineers working in DRDO, Ordnance Factories and DPSUs with proven leadership qualities should be identified and given project management training along with the Service personnel to enhance cohesiveness over the entire defence industrial base.  Technical Training Wing: The directorate of Military Training (MT) at Army HQ controls all training activities of the army. In our effort to nurture a credible weapons development programme it is felt that special technical training has to be organised to improve the skills and

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries RESUSCITATING R&D knowledge of all ranks from top to bottom. This will also enable early identiﬁcation of bright talent from all branches of the forces for R&D activities. Table 2 gives the details of the levels of technical training, the place where it is conducted and the personnel who attend this training. The programmes mentioned in Table 2 Ser Nos 1 to 5 are conducted regularly at various army units / formations / regimental centres / schools / colleges. The erstwhile Institute of Armament Technology (IAT) Pune has been renamed Defence Institute of Advanced Technology (DIAT) and given a deemed university status. The masters programme is conducted here. In addition to this defence personnel also do their masters from IITs and other universities. DIAT is ideally suited to organise and conduct ‘serious research activities’ on weapon systems and futuristic technologies. It could benchmark itself to institutions like the UK’s Defence Academy – College of Management and Technology (DA–CMT) formerly known as the Royal Military College of Science (RMCS) and the Chinese Academy of Military Science. This would in turn provide the armed forces with an avenue to develop high quality technical talent and ﬁrmly root a culture of credible research.

S No

Levels of Tech Training

Place

ITI Level

Units, Formations

Diploma Engineering

Regt Centres Schools and Colleges

Basic Engineering

CME, MCTE, MCEME

contribute to their homeland. In addition the domestic situation has improved considerably with multiple avenues of employment. The youth represent the hopes and aspirations of a nation and are its most potent asset. The modern Indian student has shown aptitude in several ﬁelds most notably mathematics, software programming, robotics etc. We should tap this raw talent base from academia by emulating the success of US initiatives such as the DARPA Challenge, NASA Rover Challenge, Google X Prize, MIT App Inventor Prize etc in attracting the best ideas of the new generation.

Burgeoning Private Sector

The defence industrial base must be able to generate a large variety of hardware and software to support the complex task of national security. Our private sector has reached a stage where several large industrial houses like Tata, Mahindra, Ashok Leyland etc have established a global reach and are competing with the best in the respective areas. Their inclination to step up R&D activities for new production opportunities must be encouraged and nurtured carefully. In addition the dynamism and ﬂexibility of the small and medium scale enterprises (SMSEs) can prove useful in creating highly specialised technologies and niche applications vital in maintaining a strategic Personnel advantage. The young talent and new ideas emerging from these sectors must be hand-picked and Jawans / L-NK / NK incubated through entrepreneurial / Havildars startups and funding leading to infusion of fresh insights. These NK / Hav / JCO’s efforts should eventually create an environment for recruiting the brightest minds for defence R&D and restore the pride of place it Lt / Capt deserves in our S&T landscape.

The onus of indigenously developing weapons systems lies ultimately with the Services concerned as we are the primary 5. Advanced Courses (PG) - do - + - do Capt / Maj users. Reviving a small but credible inter-Service technical cadre 6. Masters Programme DIAT Capt and above together with a common technology hub and the lessons learnt from the successful naval project 7. Research Programme DIAT Capt and above management approach, it is hoped (PhD) that we may be able to reinvigorate our defence industries from within. 8. Post Doctoral Research DIAT Majors and above A first echelon R&D for the Services is very important in the present Table 2: List of Educational and Training Programmes context where weapon systems have become highly complex.  Academia and Private Sector Liaison Wing: India has Only by pursuing and nurturing talent from the Services been producing exceptional technical, entrepreneurial themselves will we be able to gear up for the task ahead. and managerial talent for several decades. Sadly these Our aim should not be to make India an overtly weaponised bright young minds had been migrating to the West state or a leading arms exporter but to ensure total lured by an attraction to a perceived better quality of self-reliance in the critical area of national defence. In life, wealth and professional gratification. Secondly in this effort we must tap the full potential of academia the past our own local environment was not sufficiently and the private sector with a view to plough back geared or conducive to such high order scientific and benefits to the civilian society. Combining strengths technological work. However, now we are witnessing to achieve a higher degree of professionalism and an influx of highly competent returnees eager to teamwork may be the best way forward. 4.

Specialised Courses

challenges for defence industries

MARINE RESOURCES

CHINA LEADS GLOBAL

SHIPBUILDING

INDUSTRY

DR VIJAY SAKHUJA

The writer is Director (Research) Indian Council of World Affairs, New Delhi.

- do - + EME School Capt / Maj Baroda

April 2014 DEFENCE AND SECURITY ALERT

China has excelled in several maritime sectors and is a global leader in a number of them. It ranks first in global shipbuilding industry with a 45 per cent share (154 million dead weight ton). By comparison the share of Indian shipbuilding industry in the global shipbuilding market is quite small. Further, the Indian shipyards have not been able to achieve global standards to compete in the international market due to a number of reasons such as inefficiency and cost escalation due to delayed delivery etc.

ceans have shaped China’s destiny since ancient times. Chinese traders sailed through the Indian Ocean for trade, facilitated a ﬂourishing maritime enterprise and built China’s maritime power. In the 21st century, China continues to use the sea for economic growth and prosperity and rediscover its maritime prowess that reached its pinnacle several centuries ago. Signiﬁcantly, nearly 40 per cent of the population, 50 per cent of cities, 70 per cent of GDP, 84 per cent of direct foreign investment and merchandise export products are generated along the coast that corresponds to a little less than 30 per cent of China’s landmass. In August 2013, during a study session of the Political Bureau of the Communist Party of China Central Committee, President Xi Jinping noted that ‘a developed marine economy is an important part of building maritime power.’

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries MARINE RESOURCES

However, Chinese shipyards also confront a number of challenges. First, major ship equipment is imported and at times this component could be as high as 60-70 per cent of equipment installed onboard Marine Economy

In China, marine economy includes 20 different sectors such as shipbuilding, shipping, ports and harbours, inland waterways, ﬁsh industry, offshore minerals and salt industry, offshore oil and gas resources, seabed minerals and marine leisure industry etc. The 12th Five-Year Development Plan for National Marine Economy states that China’s marine economy is expected to grow at 8 per cent annually up to 2015 and could contribute about 10 per cent to the gross national product (GNP) and the total marine output volume could double from Yuan 3.84 trillion in 2010 to Yuan 8 trillion in 2020. China has excelled in several maritime sectors and is a global leader in a number of them. It ranks ﬁrst in global shipbuilding industry with a 45 per cent share (154 million dead weight ton (dwt), South Korea is second with a 29 per cent market share (70 million dwt), Japan is at third place with 18 per cent (45 million dwt) followed by the European shipbuilders (3 million dwt) and the rest of the world’s shipyards comprise 7 per cent of the market share (17 million dwt). According to industry estimates, in 2013, China’s shipbuilding output dropped to 45.34 million dwt but China still held the top position with 41.4 per cent share of the global market. The delivery of new ships by Chinese shipyards in 2014 is expected to remain the same and according to DVB Shipping Research, Chinese shipbuilding capacity may reduce by about 25 per cent in the next two years due to ongoing global economic recession and oversupply. In such a case, the Chinese government can be expected to support state-owned shipyards who already have 50 per cent orders till 2015 and the worst affected would be the small privately owned shipbuilders that have only 20 per cent cover or less for 2015. The above statistics clearly showcase that the Chinese shipbuilding sector has witnessed impressive growth and the shipyards are able to build a variety of vessels for both domestic and international customers. The Chinese success in shipbuilding can be attributed to a number of factors; China has a long coastline of nearly 6,000 nautical miles which allows development of shipyards of various capacities. According to the National Development and Reform Commission (NDRC), China has 1,647 shipbuilding enterprises with an annual industrial output of nearly Yuan 800 billion (US$ 130.6 billion) and a workforce of around 1.5 million people. There are nine shipyard groups, 19 shipyards in North China, 33 shipyards in Central China and 24 shipyards in South China. Besides there are 7 ship design institutes.

Cheap Labour

China has abundance of skilled and semi-skilled cheap

April 2014 DEFENCE AND SECURITY ALERT

labour. According to a study, the average wage of China’s workers in 2001 was 1/20 that in South Korea and 1/25 that in Japan in terms of US dollars per man hour. However, after nearly a decade, the shipbuilding labour wages have increased by about 15 per cent in China, 7 per cent in Korea and 4 per cent in Japan. Even today, based on one dollar / hour / labour, the cost of construction is much less compared to South Korea and Japan and this distinctive advantage is the catalyst for large number of shipbuilding orders. Further, new technologies have been inducted and management techniques are being sharpened to deliver ships on time. Also, economic liberalisation of the economy and availability of funds have turned the Chinese shipyards into efﬁcient enterprises capable of building vessels tailored to the needs and speciﬁcations of the customers.

Imported Equipment

features, hybrid propulsion for greater efﬁciency and improved protection and survivable capabilities. The PLA Navy’s ﬁrst aircraft carrier the Liaoning (CV-16) (formerly the Soviet aircraft carrier Varyag) is a very good example of the capability of Chinese shipyards. China now plans to build aircraft carriers indigenously and the China Shipbuilding Industry Co Ltd (CSIC) is likely to build these platforms. Likewise, Chinese shipyards have built a number of destroyers, frigates and even hospital ships. China is also building ice breaker research vessel for undertaking voyages in the Arctic sea / ice. It will be jointly designed by the Finland-based Aker Arctic Technology Inc and the Chinese Arctic and Antarctic Administration (CAA), under the State Oceanic Administration (SOA) and the Polar Research Institute of China. Chinese shipyards have built merchant ships for international customers and warships for a number of navies in Asia and Africa.

Indian Comparison

Unlike China, India has 27 shipyards and these can build coastal and ocean going vessels. Among these,

Liaoning (CV-16)

sharp contrast to the Japanese built ships which have nearly 100 per cent indigenously produced equipment; likewise, the South Korean ships have about 85 per cent domestic component. Also, the Chinese domestic ancillary industry is able to support the shipbuilding industry in a limited way. Second, Chinese shipyard’s per capita productivity is low and ranges between 0.009 to 0.02 per man hour compared to the Japanese shipyard which is about 0.12 per man hour and the South Korean productivity about 0.07 per man hour. Chinese shipbuilders are capable of building sophisticated and complex naval platforms. After independence in 1949, the Chinese shipyards have built nuclear and conventional submarines, destroyers, frigates, logistic vessels, space monitoring ships and in recent times rebuilt aircraft carriers. Most of the new ship construction is based on indigenous ship designs and incorporates both indigenous and imported weapons and sensors. Further, they have closely followed the trends in transformation in naval warfare and are building platforms with stealth

eight are public owned (6 under the central and two under the state governments) and 19 private sector shipyards. They have also constructed warships for the Indian Navy and the Coast Guard. The share of Indian shipbuilding industry in the global shipbuilding market is quite small and was pegged at 1.3 per cent in 2006. Further, the Indian shipyards have not been able to achieve global standards to compete in the international market due to a number of reasons such as inefﬁciency and cost escalation due to delayed delivery etc. These have eroded the advantage of India’s low cost labour. Consequently, the Chinese, Japanese and South Korean shipyards have been able to outbid Indian shipyards. Also, the Indian shipbuilding industry remains unprotected since ninety per cent of all Indian-owned and Indian ﬂagged vessels are acquired from foreign shipyards and these are fully exempted from customs duty. In recent times, the private sector has made forays into the Indian shipbuilding market. Currently, there are

The share of Indian shipbuilding industry in the global shipbuilding market is quite small and was pegged at 1.3 per cent in 2006. Further, the Indian shipyards have not been able to achieve global standards to compete in the international market due to a number of reasons such as inefficiency and cost escalation due to delayed delivery etc 19 shipyards in the private sector and are capable of building ships of various sizes including ﬁshing craft. But their share in the Indian shipbuilding market is low due to lack of infrastructure to match that of the public sector. India also lacks ship design capability and imports these from overseas vendors. It is important to mention that a strong ship design capability can potentially cut costs and ensure timely delivery. India therefore requires a modern and technologically sophisticated National Ship Design Research Centre (NSDRC) to enhance its design and research capabilities.

Indian Order Book

Indian warship building programme is undertaken by both public and private sector shipyards. Among the public sector shipyards, the Ministry of Defence administers the (a) Mazagon Dock Limited, Mumbai (MDL), (b) Garden Reach Shipbuilders and Engineers, Kolkata (GRSE) and (c) Goa Shipyard Limited, Goa (GSL). These have built a variety of warships for the Indian Navy and the Coast Guard which include submarines, destroyers, frigates, corvettes, patrol vessels and auxiliaries. According to the Indian Navy sources, 46 warships including submarines are under construction in Indian shipyards. This is a good example of transformation from a ‘buyers’ navy to a ‘builders’ navy. The Cochin Shipyard Limited, with ISO 9001 Certiﬁcation for Shipbuilding is the biggest in India and is building an aircraft carrier INS Vikrant. The private shipyards are also being encouraged to participate in warship building programmes. For instance, in December 2013, the Indian Navy announced plans to build four 20,000-ton landing platform docks (LPDs) estimated to cost US$ 2.6 billion and Larsen & Toubro (L&T), Pipavav Defence and Offshore Engineering and ABG Shipyard have expressed interest. Apparently, these yards have tied-up with Navantia of Spain, France’s DCNS and Alion of the US respectively. In essence, India requires an integrated approach to revitalise the shipbuilding sector which can be achieved by removing structural weakness, developing infrastructure, proactive polices and by developing a trained human resource. Other areas which require attention are integration of design and engineering, production monitoring and project management. There is also a need to train in areas such as CAD / CAM designing and production. Likewise, the ancillary industry would have to gear up to the demands of the shipyards but for that a time bound supply chain and a captive market is critical.

April 2014 DEFENCE AND SECURITY ALERT

Combat Vehicles for Indian Army

he Indian Army has ﬁrmed up a requirement of over 7,000 combat vehicles of various types; 3,500 Light Bullet-proof Vehicles (LBPVs); 2,500 Infantry Mobility Vehicles; an unspeciﬁed number of Light Armoured Multi-purpose Vehicles (LAMVs); 500-600 Light Specialty Strike Vehicles and 228 Light Strike Vehicles. Tata Motors is in the reckoning for wheeled Armoured Amphibious Platform (WhAPs), LAMVs. The German company WEW is offering its LVM Light Vehicle with integral cooling, preservation and pumping. This light vehicle is a variant of modules being supplied to German and US armed forces.

Pipavav to make Heavy Weight Torpedo

Tatas to make Heavy Duty Trucks for Indian Army

ipavav Defence and Offshoring (PDOC) aims to offer a cutting edge heavy weight torpedo to the Indian Navy. Pipavav is developing this in collaboration with ATLAS ELEKTRONIK of Germany. The JV partners envision creating a Centre of Excellence for torpedo technology with DRDO and leading DPSUs such as BEL and BDL. This collaboration will go beyond licensed production and promote domestic absorption of advanced technology to pave the way for a truly indigenous Indian torpedo.

ata Motors is negotiating with the Ministry of Defence for the supply of 1,200 plus heavy duty trucks for the Indian Army. The contract for six wheel-drive high mobility vehicle (HMV) is likely to be concluded soon. Tatas emerged as the lowest bidder, beating three major contenders – Ashok Leyland with Vehicles Factory Jabalpur, Force Motors with MAN SE and BEML with Tatra. Tata Motors is also participating in trials for two other contracts involving trucks – eight-wheel drive high mobility trucks and a specialised platform called Field Artillery Tractor (FAT).

Russia cannot deliver FGFA?

he Indian Air Force has alleged that Russians are reluctant to share critical design information and other vital technical details on FGFA with Indians. FGFA is considered so important for the Indian Air Force’s future that defence minister AK Antony publicly rejected any prospect of buying the American ﬁfth generation F-35 Joint Strike Fighters. Sources not wishing to be named suggest that IAF is undermining the FGFA to free up ﬁnances for buying 126 Rafale MMRCAs for an estimated US$ 18 billion.

China hiking military spending to US$ 148 bn

he surge in China’s defence budget is palpable. Driven by its naked ambition to become a super power, China is slated to increase its defence budget and military spending to US$ 148 billion. HIS Jane’s has stated that China’s People’s Liberation Army is gearing up for the surge in response to escalation intention with its neighbours over long standing territorial disputes as well as US pivot shifting to Indo-Paciﬁc region. Military analyst Ian Easton of the project 2049 Institute in Arlington however said that China’s military is far less capable than its large military budget would suggest. China’s troops also lack combat experience and some of PLA’s projects including the aircraft carrier are plagued by many technical problems.

April 2014 DEFENCE AND SECURITY ALERT

Raytheon’s Next Generation Sonars

y integrating a host of capabilities in a single Sonar system, Raytheon promises to deliver an affordable solution that addresses critical naval challenges. Raytheon’s Modular Scalable Sonar System (MS3) is designed to provide search, detection, passive-threat ﬁltering, localisation and tracking capabilities without requiring human operation. MS3 enables Anti-submarine Warfare (ASW) and undersea warfare capabilities.

Pilatus to manufacture in India

ilatus, the Swiss aircraft manufacturer is supplying 75 basic training aircrafts PC-7 to Indian Air Force. To consolidate its operations in the burgeoning Indian market, Pilatus now intends to design, develop and manufacture the complete range of its products in India for the Indian market as well as for export. Pilatus has also entered into an offset agreement with the Indian government in accordance with Indian defence procurement policy.

Kalyani seeks access to defence testing facilities

he Kalyani Group which has invested huge resources to develop wide range of products and technologies for defence forces has requested government of India to allow the private sector access to its testing facilities. Kalyani Group is developing many critical defence systems and equipment for Indian defence forces and trying to create an Indian Artillery House that can supply requirements of artillery not only in India but in future export outside India also. Baba Kalyani, chairman of Kalyani Group has reiterated that indigenization is the only way to make our defence sector self-reliant. Kalyani Group has a JV with Israeli defence major Elbit System in high-tech area of artillery systems.

April 2014 DEFENCE AND SECURITY ALERT

Klashnikov to be produced in India

BAE Systems to modernise Indian Ordnance Factories?

rdnance Factory Board (OFB) has a network of 41 units to manufacture weapons, equipment and ammunition etc. OFB has been in the news for quality standards and missed delivery schedules. Now BAE Systems has offered to partner Indian Ordnance Factories Board in modernisation of its production facilities. With the present infrastructure and resources, OFB is hard-pressed to meet growing demands of the military and Central Armed Police Forces. Sartaj Singh, the OFB Chairman has indicated that he will not hesitate to collaborate with a foreign partner if there was a clear technological advantage for OFB.

lashnikov Concern that manufactures world famous AK-47 assault riﬂes has conﬁrmed its plans to produce Klashnikovs in India. Alexei Krivoruchko, CEO of the company said, “India is a very promising market and the best way to enter it is to set up production there”. Production is scheduled to start this year itself with a target of 50,000 weapons and an investment of US$ 20 million.

IAF to buy 14 Tejas Squadrons

oon after Tejas Indian LCA was cleared for operational service in the Indian Air Force, Defence Minister AK Antony declared that 200 Tejas ﬁghters would enter combat service. But now the indications are coming from the government that IAF may have at least 14 Tejas Squadrons. Tejas Mark I, Tejas Mark II and Naval Tejas are being developed for early induction into the armed forces to bolster defence preparedness.

DRDO developing UAV to support anti-Naxal operations

Rosoboronexport for joint production with India

DRDO is working with CRPF to ﬁne-tune the conﬁguration of a UAV it is developing for anti-Naxal operations in thickly forested areas. CRPF has projected a requirement of 16 UAVs and DRDO is planning for a demo at Jagdalpur by April 2014.

he Russian military behemoth Rosoboronexport has desired to expand cooperation with India for joint production and technology transfer for critical weapon systems. India accounted for about one third of all Russian arms exports in 2013 totalling US$ 15 billion. Products being offered for future collaboration are: an amphibious sub-machine guns; Kornet-E anti-tank missile system; self-propelled artillery systems like Msta-S 155 mm self-propelled Howitzer. A JV to manufacture Smerch multiple launch rocket system is also on the agenda.

ith the import of US$ 1.9 billion worth of US defence equipment in 2013, US has overtaken Russia to become India’s biggest arms supplier. According to IHS Jane’s, India has also supplanted Saudi Arabia as the biggest buyer of American defence equipment. With several high value US contracts in the pipeline including M777 guns, additional C-130J Super Hercules and C-17 Globemaster III and Javelin anti-tank missiles, the total import value is slated to rise further. IHS Jane’s has also conﬁrmed US narrowly beating Russia as the world’s biggest arms exporter in 2013.

India to develop smaller missile

rahMos Aerospace CEO and Managing Director Dr Pillai has conﬁrmed that India plans to develop a smaller missile with advanced technologies under the BrahMos vision 2050 programme. This is one of the three major programmes under vision 2050 and the smaller missile is likely to have the same characteristics as the larger missiles.

Now Smart Riﬂes!

ources in the US Army have confirmed ongoing testing of a new hi-tech rifle that incorporates “computer vision and object tracking technologies” that allow “any soldier to become an extraordinary marksman”. Texas based TrackingPoints technology consists of a scope with an on-board computer and a linked trigger. The device will measure 16 different variables including wind, rain, temperature and humidity etc. This new technology will help trained soldiers for a relatively small investment and will offer significant increase in probability of hit and overall effectiveness in advanced fire control.

April 2014 DEFENCE AND SECURITY ALERT

Now US India’s biggest arms supplier

New spy in the sky from British Army

atchkeeper, the new “spy in the sky” unmanned aircraft is ready for test ﬂight over UK skies ahead of its formal induction. It is a rear cognisance and surveillance aircraft which can ﬂy at 16,000 ft and provide pictures to troops on the ground even at night and in bad weather. All over the world, the use of unmanned aerial vehicles (UAVs), commonly known as drones has risen dramatically over the past few years and its application is poised to grow even more in the coming years

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries MODUS OPERANDI

PROBLEMS IN ACQUIRING HI-TECH MACHINE TOOLS

Agents are not allowed in Ordnance factories but to the best of my knowledge, more than 80 per cent machines procured from foreign manufacturers are well supported by Indian agents who work in the background and receive their commission in foreign exchange from their principals. There are many areas in the tender which cannot be completed by many foreign manufacturers and need help of Indian agents and their sales engineers. OFB can allot some number (similar to PAN or registration number) so that same can be used at all factories while filling e-tender.

any of us are aware that there are several challenges in the Defence industries in India, however we must expedite solutions which are in our interest. I highlight some of the issues in procurement of heavy duty machines supplied by foreign manufacturers required for various Ordnance factories, DRDO, DRDL etc. Since I worked in the machine tool trading company which represents various foreign manufacturers, I quote below some of the practical issues faced at various levels. The challenges in hi-tech machine tools if not addressed properly, most of our investment will not be rightly utilised or we will land up paying heavily but getting less returns. The various problems and practical difficulties are highlighted with possible solutions suggested.  In order to supply machines to any ordnance factory, foreign supplier has to register for e-tenders initially at OFB with all necessary documents and class III digital certificate and again with respective factory where he intends to supply the machines. This process becomes bit complicated especially for non-English speaking suppliers and many a time they take help from Indian agents and declare in tender that they do not have any agent in India though 99 per cent foreign suppliers have their agents working in background. Many foreign manufacturers ask their Indian agents to fill up the tender based on their proposed price and also give them class III digital certificate token to facilitate agent to do needful. The repetition of this tedious process at OFB and again at respective factories makes foreign manufacturers feel that Indian tendering system is not only complicated but also has abnormal delays and complex procedures. Hence to take care of such factors they do quote abnormal price. Suggestion: OFB can allot some number (similar to PAN or registration number) so that same can be used

April 2014 DEFENCE AND SECURITY ALERT

at all factories while filling e-tender. Serious thought to simplification is must. In fact there should be one common number registered and same should be valid for any government companies like Ordnance factories, BHEL, HAL, BARC, VSSC and Railways etc so that if any foreign manufacturer or agent is banned in any government organisation, all other doors will be closed for him as his registration number will not be activated during this period.  Agents are not allowed in Ordnance factories but to the best of my knowledge, more than 80 per cent machines procured from foreign manufacturers are well supported by Indian agents who work in the background and receive their commission in foreign exchange from their principals. Whereas agents are allowed in BARC, VSSC, DRDO, BHEL and Railways, only HAL and Ordnance factories do not allow agents. Several big companies who are working as agents and have offices all over India and are involved only in liaison work. These companies just have few sales engineers at all places and few commercial and service set up at their HO. There are many areas in the tender which cannot be completed by many foreign manufacturers and need help of Indian agents and their sales engineers (for promoting principal’s specifications in the tender formation to eliminate low cost Indian manufacturers and low cost competitors and get the competitor’s information, budget information for price etc) commercial officials (for expediting LC, payment, BG and giving draft letters for the queries of customer and build the cases against delay to avoid LD (Liquidity damage) etc and service work force (for coordination with foreign engineers during erection and commissioning to ensure completion certificate). In order to get the order and L1 being the only criteria, many a times these agents promote low quality manufacturers to bag the order and get their commission ultimately affecting the end users.

Suggestion: There has to be uniform policy about the agents related to procurement. In light of several areas in the tender agent also plays a vital role but the greed of agents just to get commission by promoting cheap manufacturers can be controlled in the following way. Agent should be made to get registered with class III digital certiﬁcate with the respective factory and agent should be made to pay bank guarantee of 5 per cent of the price of the supply order as a security deposit till the warranty completion. Agent and foreign manufacturing company should be jointly held responsible for recovery against LD, quality etc. Agent should be allowed to represent maximum 6 to 8 companies with different products so that no parallel offers can be submitted. (Many agents do offer parallel quotations from different manufacturers so that whosoever wins, agent is always assured of their share.) The burden of security deposit to agent will prevent them to represent limited cases and be utmost careful in promoting the manufacturer.  There are several such areas in the tender such as various local items, construction of civil foundation, laser calibration and production support which cannot be organised by any foreign manufacturer since foreign

Agent should be made to get registered with class III digital certificate with the respective factory and agent should be made to pay bank guarantee of 5 per cent of the price of the supply order as a security deposit till the warranty completion. Agent and foreign manufacturing company should be jointly held responsible for recovery against LD, quality etc

manufacturers normally never deal with local Indian suppliers and not aware of their correct pricing, quality, reliability and commitment to delivery. When the indigenous manufacturer is located in one state and he has to send the goods to ordnance factory in some other state then he needs to get the road permit MUKUND PURANIK which cannot be easily organised The writer is Director by foreign manufacturer Universal Engineering through respective ordnance Consultants, Mumbai. He factory. Usually equipment like is a Chartered Engineer voltage stabiliser and isolation and an expert and valuer transformer from Indian source of plant and machinery. are not acceptable to ordnance factories as the supply order is in foreign exchange though foreign manufacturer places order in foreign exchange on Indian vendors. Since power problem is mainly in India, there are hardly any companies abroad manufacturing such equipment. If the local equipment is delayed which is not even a 0.5 per cent price of the supply order but the customer slaps the LD on the whole contract value. Customer does not allow the change of local supplier in case of extreme problem saying the same has been quoted by the manufacturer. Similarly the site for foundation is either changed or there are some old machines lying at the site and customer asks manufacturer to clear these at their own cost. Such factors and additional cost can never be foreseen and normally never considered at the time of quotation. These are some big hurdles why foreign manufacturers quote with abnormal profit. Suggestion: Tender for such items, services should be separately floated within Indian companies or place the order in Indian currency on agent or Ordnance factories should organise themselves to avoid these issues. BHEL constructs their machine foundation on their own based on the structural design supplied by manufacturer based on the soil conditions already mentioned in the tender. BHEL also places local items order on Indian agent.  Delay in every activity is one of the biggest hurdles as we are too bureaucratic in our approach and actions. Usually, ordnance factories do treat foreign suppliers like local vendors and expect their engineers at a short notice. Delay in technical bid opening, price bid opening, issue of Letter of Intent (LOI), Supply orders, opening of LC, despatch of trial components, visit of engineers for pre-despatch inspection and return of bank guarantee etc. Manufacturers have to hold their price for abnormally long period and also wait to get their money through LC. Hence majority foreign manufacturers do not work for less than 50 per cent profit knowing the Indian conditions. Higher the price higher the commission so agents also are automatically benefited. This means if ordnance factories are procuring machinery for say Rs 5,000 crore, the real value of such machines would not be more than Rs 3,000 crore even considering reasonable profit to the manufacturers. The difference in above is just a loss of public tax payers money without any benefit either to OF unit or country.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries MODUS OPERANDI

Similarly the site for foundation is either changed or there are some old machines lying at the site and customer asks manufacturer to clear these at their own cost. Such factors and additional cost can never be foreseen and normally never considered at the time of quotation. These are some big hurdles why foreign manufacturers quote with abnormal profit

Jig Boring Machines

Suggestion: Hence serious thought has to be given on this issue to simplify process and fast decision-making. Instead of multiple bank guarantee at different stages, there can be only one BG till warranty period which will include even if the trial components are to be sent to the manufacturer. There should be deadline for every activity and concerned officers must be held responsible for no decision or delayed decision. In one of the e-tenders submitted in February 2012, the price bid was opened almost after one year. Factory was asking the assurance from manufacturers about export license confirmation. However unless the order is placed and certain documents required from the OF are submitted to the respective government authorities in foreign country, no foreign supplier can get confirmation on export license. Earlier website of DRDO clearly mentioned “Weapons of Mass Destruction” and look for machinery from Europe / USA. Which country will issue export license to any foreign suppliers when they notice such website. Some serious thought needs to be given on this matter. Same is also for small arms manufacturing factories where they need 5 Axis CNC machines and also Jig Boring Machines.  In order to depute the OF engineers for pre-despatch inspection, officials from various departments / plants are selected and there is hardly one official from end user’s plant. Though there is advance intimation by the foreign manufacturer, finalisation of their inspecting officials and getting their passport / visa after the permission from Factory, OFB, Defence Ministry and External affairs ministry is a very long and delayed process which can be otherwise finalised at particular factory. This will ensure a timely pre-despatch inspection without any delay. Many of these officials are first time visitors to foreign land and totally in the hands of foreign manufacturers

April 2014 DEFENCE AND SECURITY ALERT

global security

NATO EXPANSION

as they organise their pick up, drop, arrange hotels and sight seeing, mementos like camera, watch etc. Majority officials are equally interested in the same as it helps to save their foreign exchange. Many officials are zapped with their foreign trips and do not hold machine manufacturer responsible for lapses. Very few have dared to reject the machines during inspection. Many a times these officials do check certain unnecessary parameters and equipment than what is functionally required. Many times machines which are passed and despatched are taking very long time to commission, short supply, accuracy issues, machining issues, frequent breakdown issues. This is where OF

DOMINIKA COSIC

The writer is a journalist and political correspondent based in Brussels. She specialises in NATO and European Union affairs. She is correspondent (Europe) of Defence and Security Alert (DSA) magazine.

5 Axis CNC machines

can twist the arms if agents as well as manufacturers are jointly held responsible. However making visit for pure inspection and not a pleasure trip to the visitors seem to be difficult. Third party inspection could be one of the ways to ensure the machine as per tender.  As per the rules, any foreigner visiting any OF has to send the photo and various justifications which is being approved by Board. Here also there is substantial delay. Foreigners coming to India for business purpose get business visa whereas foreigners coming to India for service or erection and commissioning have to come on employment visa. Sometimes OF needs foreign engineers on urgent basis but getting the employment visa itself takes a long time. This matter can be sorted out between two ministries for prompt service. Indian visa is generally given on the basis of invitation letter issued by agents who are less known in Indian consulates abroad. Ordnance factory generally does not issue any invitation letter and approx period of work. Hence if agent has requested 20 days period considering work quantum, many a time visa is issued for a shorter period. Therefore if OF starts issuing invitation letters, Indian visa could be fast as well as for sufficient period as indicated in letter. Deep thought needs to be given on all the above issues with excellent coordination among all concerned and proper strategy needs to be evolved for procurement of capital goods which consumes large portion of our imports. Government should also promote the Indian manufacturers to collaborate with heavy industries with subsidy so that these companies can buy only basic machine from abroad and supply tooling, fixtures and peripherals locally. This will save lot of exchange and Indian companies can develop these machines in due course.

CONSENSUS IS THE VICTIM

The threat of Soviet intervention has been the cement in the eastwards expansion process of the North Atlantic Treaty Organisation but an internal contradiction has emerged in the difficulty in creating a consensus between ‘Old Europe’ as represented by France and Germany and the ‘New Europe’ as represented by states that broke away from the Soviet Union.

istorical enlargement of NATO in March 1999 was really one of the most important events of recent years. It was symbolical and real ﬁnal cutting of the Iron Curtain. Invitation into the NATO alliance of Poland, Czech Republic and Hungary – former communist countries, former members of communistic military alliance – was conﬁrmation of the arrival of the new order in Europe. Fifteen years after this event, it is clear that it was the right decision.

under NATO umbrella. After the fall of communism in several European countries including Poland, Czechoslovakia, Hungary and Romania and specially after collapse of the Soviet Union this goal became more realistic. The foremost political challenge on the continent after the cold war was the integration into European organisations of the countries previously included in the Soviet bloc and NATO stepped up to this challenge as part of its transformation.

All changes in central Europe started in 1980 by the creation in Poland of the independent syndicate “Solidarność”. It was the beginning of the end of communism. Martial Law which had been imposed in Poland by General Wojciech Jaruzelski in 1981, was not only for Poland a serious alert and that Soviet intervention was not a question of abstraction. Hopefully this worst scenario has not been fulﬁlled. But The United States and Western Europe understood that the fear is still real. And the best way to be sure that Soviet Army will not come into Europe, is to take central European countries

Within only ten years this idea became reality for three countries, the best prepared: Poland, Czech Republic and Hungary. All these countries had been determined to become members of the European Union – they joined it in 2004.

Poland

In size, geostrategic importance and the armed forces, Poland dwarfs all the other NATO aspirants. It is also the best prepared and the most serious prospective NATO member, a result of post-1989 Polish policy of forging

April 2014 DEFENCE AND SECURITY ALERT

global security

NATO EXPANSION forces and a greater reliance on motivated volunteers, the Czech military could be a small but valuable asset to the alliance. Very symbolic was a fact that in 1999 ratiﬁcation letter has been signed also by American Secretary of State – Madeline Albright who was born in Prague.

Hungary

The biggest problem with accession of Hungary was quite delicate relations between this country and neighbours. Like the Czech Republic, Hungary’s contribution to and its role in the alliance is limited by the small size and potential of the country. At most, it may contribute a brigade of reasonable quality for the alliance’s projection missions (roughly Portugal’s contribution). Although Hungarian interest in collective security since the end of the cold war has not matched the involvement of the Czechs or Poles, there are some special circumstances (war in neighbouring Yugoslavia and the potential for spillover) that explain Hungarian behaviour. Finally, the acceptance of Hungary into NATO costed less than expected because of the already existing NATO facilities in Hungary that have been put in place as part of operations in Bosnia-Herzegovina.

close links to NATO, with near uniformity among elites and the public about the need to join the Alliance. Poland's enviable position in Central Europe of having good relations with all of its neighbours is unlikely to change following its accession to NATO. Indeed, it is in the Polish interest to have good relations with its neighbours who remained outside of NATO after 1999. Thanks to this fact, Poland did not become a “front-line” state. Specially after another one enlargement of NATO, few years later when three former Soviet Union countries – Lithuania, Estonia and Latvia became members. And rather than an eastern bulwark of NATO, there is every indication that Poland is going to be a spokesperson within the alliance for continued enlargement and a kind of advocate. A Poland in NATO is regional actor and an important tool for the alliance in central and eastern Europe. Poland seems likely to contribute signiﬁcant forces to the alliance and to take the responsibilities of

Because of war in Iraq there was a temporary split inside NATO – so called New Europe (supported by United Kingdom and Spain) was loyal towards United States. Old Europe led by Germany and France was against. Sensitive moments were the independence of Kosovo (former Serbian province) in February 2008 and the same year, in August the events in Georgia

April 2014 DEFENCE AND SECURITY ALERT

being an alliance member seriously. Indeed, out of all the countries being considered for alliance membership, Poland stands out as the one country with a long-standing and demonstrated seriousness in collective security and one that brings important assets to the alliance. Far from being a “free rider,” Poland is likely to remain an above-average European contributor to NATO as a member. For a country similar to Spain in many respects (size of territory and population), Poland is likely to surpass Spain quickly in its importance and contribution to NATO. Polish engagement in mission in Afghanistan, Iraq, former Yugoslavia countries was signiﬁcant.

Czech Republic

The Czech Republic was probably the least controversial of the NATO aspirants, even though the acceptance of this country as a future NATO member went hand in hand with the knowledge that most Czechs did not care much about NATO and that the Czech Republic might become a below-average contributor once it secured membership. The Czech Republic has no territorial or minority problems with its neighbours and the cooperative Czech stance in the region is unlikely to be affected by either the invitation or membership. The Czech Republic is not an alliance member of any great importance. The country’s small size, low defence awareness and limited appreciation for the military act to constrain the Czech role. But the country may make a respectable contribution to NATO reaction forces and the Czech government has demonstrated seriousness about collective security since the end of the cold war. Assuming the continuing trend toward smaller armed

NATO’s metamorphosis and reinvention of itself involves new functions, new capacities and new challenges. Such an unprecedented transformation of an alliance for common defence towards a structure for collective security poses vexing policy dilemmas. Changes in what an “alliance” is and NATO’s adaptability, add up to a new phenomenon. Yet NATO’s principal members, especially the United States, have rejected any shift from the primacy of NATO after the cold war to a pan-European collective security organisation. Instead, NATO has incorporated elements of collective security, extending its functions and membership. From an instrument of realism, NATO is becoming an institution imbued with idealism. Put differently, NATO has been recast as something other than an alliance arrayed against a foe and increasingly as a collective entity “for” certain norms, values and behaviours. From an enterprise devoted to deterrence and, if necessary, war-fighting, the North Atlantic Alliance has moved irrevocably into arenas of peacemaking (Bosnia), civil-military socialisation (via the Partnership for Peace programme), confidence-building (through efforts to ensure resolution of tensions between neighbours) and other collective endeavours. And through holding out the possibility of membership and participation on equal footing with current NATO members, NATO has shaped the environment by putting in place a set of incentives for cooperative international behaviour that advances the goals of a more peaceful and integrated continent. How can we evaluate the past 15 years? They have been extremely difficult for NATO as an alliance because of the

Now one of the biggest issues both for NATO and new members is missile defence and relations with Russia. New countries wanted to support Euroatlantic ambitions of Georgia and Ukraine – unfortunately it was the very strong opposition of France and Germany and later on internal problems in both aspirant countries that made it difficult

new threat. Just few days after ceremony with Heads of Governments of Poland, Czech Republic and Hungary NATO attacked Yugoslavia, neighbour of Hungary. Hungary and even more the Czechs were very skeptical towards this operation. Until now peacekeeping groups are still present in Kosovo and Bosnia. Another four years later NATO decided to send troops to Afghanistan – Polish contribution was the most significant. Because of war in Iraq there was a temporary split inside NATO – so called New Europe (supported by United Kingdom and Spain) was loyal towards United States. Old Europe led by Germany and France was against. Sensitive moments were the independence of Kosovo (former Serbian province) in February 2008 and the same year, in August the events in Georgia. Now one of the biggest issues both for NATO and new members is missile defence and relations with Russia. New countries wanted to support Euroatlantic ambitions of Georgia and Ukraine – unfortunately it was the very strong opposition of France and Germany and later on internal problems in both aspirant countries that made it difficult. Bigger NATO is from one side stronger and more powerful. But from the other weaker because consensus is more difficult to reach. But decision from March 1999 was without any doubts one of the best in history of alliance. And it allowed to reunite Europe.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries MATERIALS TECHNOLOGY

PLUGGING GAP BETWEEN DEMAND AND SUPPLY

In the context of creating a modern military industrial complex India at the moment stands at a cusp when materials technology is undergoing a transformation brought about by nanotechnology. The entire spectrum of military materials requirement is about to be transformed. The new technology can propel India faster towards self-sufficiency which, it needs to be underscored is the final destination that Jawaharlal Nehru, Krishna Menon, Homi Bhabha and Sethna had envisaged. through the shoulders and the sides. The mixture of carbon nanotubes to other metals, ﬁbres and silica can improve strength and reduce weight well below the 7 to 12 kg that is the current norm. So weight loss and greater protection is a very real possibility with the inclusion of nanotechnology to body armour. Yet costs may go up which, given the invaluable resource that a fully trained soldier in the battleﬁeld represents, should not be a restraining factor in introducing nanotechnology to body armour.

“Mine-protected” Vehicles

rmed with a Defence Research and Development list of 26 wanted technologies a “ﬁshing expedition” at the recent Defexpo 2014 led to emerging possibilities that pit new requirements against old threats. High on the DRDOs list of critical defence technology are MEMS – micro-electromechanical systems – based sensors, actuators, RF (radio frequency) devices and focal plane arrays. Next came nanotechnology based sensors and displays and lower down (but equal in importance) is carbonﬁbre production facility.

Saving The Soldier

Since nanotechnology is the flavour of the season the search for applications led straight to the widespread and in-your-face displays of body armour and vehicle protection devices. Many were the types of “bulletproof” jackets on display that it was difficult to guage their utility except by comparision to the benchmark National Institute of Justice of the US gradation based on the ability to stop a Dragunov bullet of 7.62 mm calibre. It would be noticed that “bulletproof” has been inserted within inverted commas because irrespective of all the claims there is no such thing as a bulletproof jacket. Irrespective of whether the jacket uses ceramic shields front and back or Kevlar fibre to prevent penetration by lower calibre bullets to allow the soldier to operate even after being hit, fatalities do occur. While the best of bullets may be stopped by ceramic shields that cover the most vital parts of the human body – the heart and lungs – the configuration of the body armour leaves wide gaps along the flanks through which a bullet can penetrate to these vital organs, that is,

April 2014 DEFENCE AND SECURITY ALERT

In the context of the series of Maoist / Naxalite attacks that have taken a heavy toll of security forces mostly Central Armed Police Forces like the Central Reserve Police Force it seems that nearly all the private sector companies that have currently become interested in the defence procurement cake had decided to showcase one or another type of “mine-protected” vehicle though all of them were lookalikes of the original vehicle procured from South Africa before Denel was blacklisted for corruption. It would be noticed that mine-protected too is within inverted commas. This vehicle is supposed to withstand the blast of up to 15 kilogrammes of high explosives. Very soon after its deployment the Maoists / Naxalites began laying more than double that amount of explosives in their improvised explosive devices which they used as part of an ambush in which trees were placed across a jungle track. The innumerable times this has happened the vehicle has ended up with its undercarriage shattered and its passengers either killed or those wounded though still able to fire a rifle unable to do so because an overturned mine-protected vehicle has one side of firing ports pinned to the ground and the other pointing skywards incapable of being used to fire at terrorists hiding in the shrubbery below. A “mine protected” vehicle that has hit a landmine is usually in such a sorry state that it is amazing that the Indian Army decided to buy it in the first place. That the Central Armed Police Forces like the Border Security Force and the Central Reserve Police Force also framed their counter-insurgency strategy around this vehicle was clearly a copycat act with no connection with the realities on the ground. The situation is such that the CAPFs are caught in a cleft stick being damned for using “mine protected” vehicles and being

slaughtered when not using them as has happened in both the large scale slaughters of security forces by Maoists / Naxalites in Chhattisgarh. It is time the DRDO came up with an appropriate contraption to deal with the situation responding imaginatively rather than going along with the same old medicine as before in spite of what is happening on the ground. Some of the models on show appeared taller on wheels indicating an attempt to reduce the effect of the mineblast with V-shaped conﬁguration intended to deﬂect the blast away from the vehicle’s centre of gravity which lay at the bottom of the V. Nonetheless, the ability of the Maoists / Naxalites to lay improvised landmines with as much as 50 kg of explosives has so far rendered infructous all the so-called mine-protected capabilities of the vehicle. One effect of the explosive package is that the undercarriage is blown to smithereens and there is no way that the vehicle can travel in any direction on its own with its transmission destroyed and its twisted wheels lying dozens of meters from each other.

Product Improvement

Indian Aviation Mission

Confronted with this evidence from the many sites where these mine-protected vehicles had met such a fate, an ofﬁcial of the Defence Research and Development Organisation made the conﬁdent claim that the next generation of such vehicles would be able to withstand the blast effect of up to 100 kg of explosives. Hopefully so, if nanotechnology is being used to fashion mine resistant metallic materials from sheets for the chassis and the many nuts and bolts and connectors that hold the undercarriage with transmission and suspension to the chassis. It would indeed be great if the future vehicle is able to withstand the greater explosive force and be able to drive away on its own steam. That would be a true mine-protected vehicle. Knowing warfare, there is sure to be a counter-measure sooner or later and one comes immediately to mind given the context of the multifarious threats to Indian security pre-eminent at the moment being terrorism. One of the most favoured weapons of the Pakistan Army and its terrorist cohorts is the rocket propelled grenade. The mine-protected vehicle stands about 12 ft high and the behemoth can be seen from miles away and is an easy target for anyone with a rocket launcher at hand. It is known that tanks have survived several hits from rocket-propelled grenades but their armour is several centimeters thicker than that which covers the mine-protected vehicle and so the latter is an easy target. If nanotechnology is to be employed to strengthen the blast resistance of the vehicle at the bottom the DRDO will have to include the whole chassis as well. The need to take this precaution is dictated by kind of weaponry seized from Pakistani terrorists in Jammu and Kashmir. Most of them are grenade launchers.

Naval Mine-countermeasure Vessels

Nanotechnology can make metals stronger, harder and anti-magnetic and that is why many of the newer versions of MCM ships are being built around carbon nanotube technology intended to survive the explosive force of the waterjet caused by the undersea mine. India is gravely short of mine countermeasure vessels and with the accent on “make Indian” in the revised Defence Procurement Programme it should be possible to use any one of several private sector shipyards to marry the nanotechnology brought in through India divisions of foreign technology manufacturers to fashion the mine-resistant new boats for the Indian Navy and the Coast Guard.

CECIL VICTOR

The writer has covered all wars with Pakistan as War Correspondent and reported from the conﬂict zones in Vietnam, Laos and Cambodia in South East Asia as well as from Afghanistan. He is author of India: The Security Dilemma.

Foremost of India’s missions should be to revive the indigenous Kaveri engine with thrust to weight ratio sufﬁcient to allow the Tejas aircraft (for which it was intended since the birth of the concept of an indigenous aircraft) to carry at least one BrahMos missile (preferably two) with enough spare power in its engines to execute the high g (gravity) manoeuvres in keeping with the agility it was designed for. The major problem with the Kaveri gas turbine engine was that it was in the habit of spewing compressor blades. If the material used in these blades is redesigned with nanotechnology India will be able to create an engine that could have many uses in both military and civil aviation.

Reinventing The Monitor Lizard

Materials scientists have worked on a technology that Shivaji’s Maratha warriors had used extensively – the ability of the monitor lizard to grip a surface. They have replicated this tenacious grip using the tiny follicles fashioned out of carbon nanotubes. It should be recalled here that the Marathas used the monitor lizards, which reach lengths of more than one meter, to carry a rope up the steep slopes leading to hilltop bastions of Aurangzeb’s Mughal Army in the Sahyadri hills in the Deccan. The new material could be useful to improve the protection of armoured and mechanised infantry as it is configured today. The tenacious grip fashioned out of carbon nanotudes will help improve the fasteners required for add-on armour like the explosive reactive armour for tanks and infantry combat vehicles. The new technology would be even more relevant in the emerging robotics that are likely to play a prominent role in future wars. In the unconventional mode (especially after the manner in which Indian soldiers had climbed steep slopes to get to the entrenched Pakistan Army Northern Light Infantry on the Kargil) this kind of sticky stuff can improve the speed of climbing and the attainment both of surprise against an entrenched enemy or manage to reach the high ground first to dominate the surrounding battlefield. It has been said that what has been achieved so far is only one half of the monitor lizard’s amazing capability (tenacious stickness) but the ability of releasing the hold to reach out the next step has still to be achieved. Nonetheless it is still a useful invention if imaginatively deployed. With new kinds of materials becoming available warfare will have to reinvent itself.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries REFORMATION

INDIAN DEFENCE INDUSTRY

THE CONSTRAINTS

On 12 August 2013, the Union Defence Minister informed the Indian Parliament that the country spent a whopping Rs 49,588 crore on arms import between 2010-11 and 2012-13. Of note is that the import figure, mentioned by the Defence Minister, does not include what the Indian defence industry imports (in the form of critical raw materials, parts and components etc) for its production purpose.

In a move to further streamline the offset policy – which has so far resulted in 23 offset contracts with a committed investment inflow of US$ 4.6 billion – the MoD announced a series of changes with effect from 01 August 2012. The revised policy of 2012, spelt out for the first time the objectives of the offset policy, which include developing an ‘internationally competitive’ defence industry, enhancing domestic R&D and creating a ‘synergistic’ dual-use industrial base. The revised policy also added some new features besides modifying some existing ones. Among the new features, the new policy guidelines allow for the first time, transfer of both technology and equipment as valid mode of offset and multipliers upto three in select areas. Modification was done by way of extending the banking period from earlier maximum two and half-years to seven years. The new policy also replaced the earlier ineffective Defence Offset Facilitation Agency (DOFA) with a more powerful Defence Offset Management Wing (DOMW) which is now responsible for all aspects of post-offset contract monitoring and implementation. After several announcements, the MoD released in April 2013 the armed forces’ Technology Perspective and Capability Roadmap (TPCR). The TPCR, which is based on the armed forces’ 15-year Long-Term Integrated Perspective Plan 2012-2027, is intended to provide advance information to the local companies so as to enable them to make necessary planning and investment for product development and production.

ver the years, India has created a vast defence industrial base (DIB) presently consisting of nine giant Defence Public Sector Undertakings, 39 (plus two in making) Ordnance Factories and a small but growing number of private companies. In addition, there are 52 defence laboratories and establishments under the Defence Ministry’s Defence Research and Development Organisation (DRDO), which is mandated to design and develop state-of-the-art defence weapons and platforms for use by the Indian armed forces. For historical reasons the Indian defence production sector has been dominated by the state-owned entities (DPSUs and OFs), which continue to dominate the sector till now. With 175,000 employees on their payroll, the combined turnover of these enterprises grew by 10.4 per cent in 2011-12 to Rs 41,060 crore.

Poor Self-reliance

The vastness of the DIB has however not translated to desired level of indigenous production and self-reliance, the latter being the prime motive behind the creation of DIB and its subsequent expansion. Like ever before, India continues to depend on external sources for meeting the growing requirements of its armed forces, with the country having the dubious distinction of being the largest arms importer in the world. On 12 August 2013, the Union Defence Minister informed the Indian Parliament that the country spent a whopping Rs 49,588 crore on arms import between 2010-11 and 2012-13. Contracts were placed on a host of external sources, including countries like Bulgaria, Poland, Uzbekistan and even tiny Singapore. Of note is that the import ﬁgure, mentioned by the Defence Minister, does not include what the Indian defence industry imports (in the form of critical raw materials, parts and components etc) for

April 2014 DEFENCE AND SECURITY ALERT

its production purpose. A recent study of the Institute for Defence Studies and Analyses (IDSA) shows that the Indian defence industry’s import, which can be termed as India’s indirect arms import, is quite signiﬁcant and in some years exceeds the direct import reported to the Parliament from time to time for public consumption. The IDSA study also shows that India’s self-reliance index (during the period from 2006-07 to 2010-11) is around 36-48 per cent, much below the 70 per cent that a Committee under Dr Abdul Kalam (then Scientiﬁc Advisor to the Defence Minister) had planned to achieve by 2005.

Reforms

Since early 2011, India has taken a host of initiatives to encourage higher indigenous defence production. In a major policy announcement, the MoD made it known on 01 January 2011 the ﬁrst ever Defence Production Policy (DPrP). The DPrP aims at four broad objectives: Achieving ‘substantive’ indigenous capability in design, development and production of armaments; facilitating private companies to undertake higher responsibility, including for design and development; enhancing the participation of small and medium enterprises in the defence production; and expanding country’s defence R&D base. The January 2011 policy statement was followed by the MoD’s February 2012 guidelines for establishing joint venture (JV) companies by the DPSUs. The guidelines, which came after a controversy over the MoD-owned Mazagon Dock Ltd’s (MDL) selection of a private shipyard – Pipavav – is intended to facilitate DPSU’s such selection of JV partners in a ‘fair and transparent manner’. Consequent to the JV guidelines, the MDL has signed JV agreements with two private shipyards – Pipavav and L&T – for construction of surface ships and submarines, respectively.

A series of further measures were unveiled by the Defence Acquisition Council (DAC), the highest decision-making body of MoD, on 20 April 2013. Most of the measures were formally incorporated in the MoD’s revised defence procurement procedure (DPP) promulgated on 01 June 2013. Among other changes, the DPP-2013 introduced a ‘preferred order of categorisation’ that places indigenous-centric procurement categories above the import-oriented ones. The armed forces, which are responsible for initiating procurement proposal with the initial suggestion regarding the source of procurement, are now required to justify the reasons of excluding the indigenous option while processing their respective proposal. The MoD expects the order of preference would put pressure on the procurement authorities to look for indigenous solution which would provide an impetus to the domestic defence industry. To provide further ﬁllip to the local industry, the DPP-2013 has also simpliﬁed the ‘Buy and Make (Indian)’ procurement category under which contracts are to be awarded to the local industry players who in turn are free to forge partnerships with global companies for technology and other arrangements. Apart from this, the DPP-2013 also promises to simplify the existing ‘Make’ category, which gives exclusive rights to the Indian industry for design and development of ‘high-technology complex systems’, for which the MoD is committed to share up to 80 per cent of developmental cost.

Constraints

Notwithstanding the above reform measures, the Indian defence industry continues to suffer from a wide array of weaknesses, ranging from low investment in defence R&D, organisational deﬁciency, lack of reforms in state-owned defence entities, sluggish participation of private sector and lack of foreign investment in Indian defence sector. Compared to the US and China, which spend in excess of the 10 per cent

of their defence budget on R&D, India’s R&D spending as accounted for by the DRDO is only 5.2 per cent (in 2013-14). The DRDO’s miniscule budget along with negligible R&D spending by the industry has limited India’s defence technological progress. The poor performance of the industrial sector is also DR LAXMAN K BEHERA due to lack of reforms of the The writer is Research state-owned entities. Fundamental Fellow at Institute for reforms, as suggested by several Defence Studies and Analyses (IDSA), high-level committees, pertaining to New Delhi. efficiency and accountability of the DRDO, DPSUs and OFs have not been pursued seriously. For instance, the creation of the Defence Technology Commission, which was recommended by the Rama Rao Committee (in its report submitted in 2008) to lead India’s self-reliance endeavour by way of providing policy direction, setting out R&D target and constantly monitoring indigenous projects is yet to be implemented. Similarly the corporatisation of the OFs and the listing of DPSUs in the stock exchange market as suggested by Kelkar and some other committees for bringing about accountability and efficiency have also not taken any effect so far. Although the Indian private sector is allowed since 2001 to participate in the defence production, it continuous to play a marginal role in the sector. Its peripheral role is because of its relatively less experience (vis-à-vis the established DPSUs and OFs) and more importantly due to lack of level-playing field. Unlike the DPSUs and OFs for which the MoD’s Department of Defence Production takes a natural interest in ensuring orders, the private sector has no such privilege. It thus gets marginalised in the key procurement decisions which invariably go in favour of the state-owned defence enterprises. The private sector also gets marginalised because of the existing licensing and tax regimes, which prohibit its meaningful participation. Since the 2001 liberalisation of the defence industry to foreign investors, India continues to refrain from any major relaxation even though the 26 per cent FDI cap has not resulted in any major inflow of technology or resources (by May 2013, the cumulative FDI inflows into the Indian defence industry stand at US$ 4.94 million. In a meeting chaired by the Prime Minister on 16 July 2013, it was decided that any increase beyond the existing 26 per cent is to be approved by the Cabinet Committee on Security on a ‘case-to-case basis’ subject to ‘access to modern and state-of-the-art technology’. It is however noteworthy that the above decision is a mere repetition of the MoD’s stated position on the issue and is widely believed to retain the status quo. The status-quoist approach, which is perceived to retain the monopoly of few government-owned enterprises, is not the one that the Indian defence industry, particularly the private sector, is looking for. Given that the private sector is already discriminated vis-à-vis their public sector counterparts, any cosmetic changes to elicit its participation would only highlight India’s lingering backwardness in defence production.

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries SYNERGY (CSOs) Cooperation suggesting cooperative endeavours in non-traditional security domains. More recently, under the aegis of ADMM, the Southeast Asian nations have started conducting Table-top Exercise in HADR under the rubric of ASEAN Defence Establishments and CSOs Cooperation in Non-traditional Security. In 2013, the exercises have taken a more concrete shape with Southeast Asian countries along with the dialogue partners conducting HADR exercises along the coast of Indonesia.

The Military Angle

While HADR provided the necessary incentive to work together, the effort to work on feasibility of integrating Defence industrial complex and enhance security cooperation within the ASEAN received a ﬁllip when during the 5th ADMM meeting at the proposal was mooted (2011-2013) for institutionalisation of ASEAN Defence Industry Collaboration (ADIC) and ASEAN Peacekeeping Centres Network.

ASEAN DEFENCE INDUSTRY AND INDIA

Institutions like Defence Science and Technology Agency (DSTA) in Singapore have been doing pioneering work and there is interaction at highest levels between DRDO and DSTA. However, there are still not many joint venture R&D projects between the two agencies. India needs to effectively scrutinise and audit the defence manufacturing capabilities in ASEAN nations primarily to seek the outsourcing avenues to these nations and also work towards assigning few of the projects to these nations under the supervision of the Indian defence agencies and DRDO.

he concept of ASEAN defence industry germinated from the initiatives that have been taken in the past relating to the ASEAN Economic Community, Socio-cultural and Politico-security Community. It was felt that a similar initiative can be undertaken from the ASEAN platform related to defence cooperation. This would help in trust building and also create a defence value addition network. This was also encouraged by the successful EU defence industry example in which different components have acted as the elements of the value addition network which have created niche market for high technology products especially space, aviation and ships.

Disaster Management Prime Mover

The proposal for cooperation in the defence sector in ASEAN was ﬁrst mooted in 2006. The common

April 2014 DEFENCE AND SECURITY ALERT

denominator for enhancing cooperation has been the challenge of humanitarian disaster and need for timely assistance and disaster relief. This has also been addressed in the prime defence forum such as the ASEAN Defence Ministers Meeting (ADMM). ADMM acted as a catalyst for cooperation among the defence agencies of the ten Southeast Asian nations and created better understanding among the defence ministries as a number of Southeast Asian nations have territorial and maritime disputes with their neighbours. In the subsequent meetings of ADMM, the defence ministers commissioned and subsequently adopted concept papers suggesting enhancement of cooperation. The primary feasibility and suggestive papers included Composite Use of ASEAN Military Assets and Capacities in Humanitarian Assistance and Disaster Relief (HADR) and later the Working Paper on Defence Establishments and Civil Society Organisations

Subsequently, the ASEAN Defence Industry Collaboration (ADIC) proposal was concretised in May 2011 and was adopted during the Fifth ASEAN Defence Ministers Meeting in Jakarta. ADIC was the brainchild of the then Malaysian Defence Minister Ahmad Zahid Hamidi, who saw a future in defence sector after the Regional Cyber Security Network took shape in ASEAN. There have been calls to scrutinise the cooperation initiative and remove the stumbling blocks. The calls for joint research and development in defence sector has been advocated owing to the rising cost of military equipment and inter-state disputes between the Southeast Asian nations. The prime example of nagging territorial issue is South China Sea. ADIC has been aimed at fostering the value addition network and create a mirror image of European Defence Network within Southeast Asia and initiate feasibility studies for regional indigenisation and technological independence. Among the ASEAN countries, Singapore has been the largest importer of arms and military equipment followed by Indonesia, Malaysia and Thailand. Vietnam has also taken steps towards military modernisation through the purchase of a squadron of Sukhoi-30MKV aircraft and has placed purchase order for few Kilo class submarines and Russian frigates. According to one of the estimates, Southeast Asian nations currently procure more than 85 per cent of their defence weapons and

More recently, under the aegis of ADMM, the Southeast Asian nations have started conducting Table-top Exercise in HADR under the rubric of ASEAN Defence Establishments and CSOs Cooperation in Non-traditional Security. In 2013, the exercises have taken a more concrete shape with Southeast Asian countries along with the dialogue partners conducting HADR exercises along the coast of Indonesia

equipment from abroad, primarily the United States, Russia, Israel and European nations. ADIC was also aimed at saving the foreign exchange outﬂow of the ASEAN nations annually. Each year the total defence budget of all the Southeast Asian nations surpasses US$ 12 billion. It was expected that ADIC would create conditions for DR PANKAJ JHA economies of scale while producing The writer is Research necessary defence products; assist Fellow at Indian Council of in training and capacity building World Affairs (ICWA), New Delhi. of skilled labour force, essential for the defence industrial complex in ASEAN nations. Primarily, it could be a catalyst for bringing up a comprehensive defence production network which will assist in building conﬁdence among ASEAN nations and subsequently a larger defence and security community in the region.

Marketing ASEAN Products

The initial layout about the ADIC was to promote participative role in each other’s defence shows, aerospace exhibitions, fleet reviews and later foster healthy competition through value addition network and development of ancillary industry. ADIC has also made provisions for training, education, adaptation and skill development in the defence sector, through bilateral and trilateral partnerships, sector specific joint ventures and co-production of niche military weapons like Europe, promote collaborative research and development, defence industrial zones and sales and marketing of ASEAN defence products. However, ADIC has ben facing issues which have been very similar to the Regional Special Economic Zones and Trilateral Export Promotion Zones where there have been apprehensions about the manufacturing and technical capability of each state and the question of how the benefits would be shared among the participating nations. As is well known there are reasons for intrinsic mistrust among a number of ASEAN nations due to historical factors and current alliance systems. One of the reasons also has been the increasing militarisation in Southeast Asia. For an institution like ADIC, the primary burden is to create a congenial environment for cooperation, address intra-regional security challenges, dispel mistrust and project larger socio-economic benefits. As an example the European Union (EU) has successfully reduced the defence budgets of all the member nations through building trust and acting as an intermediary and therefore has been successful in niche arms products. In order to consolidate cooperation, the EU has strengthened institutions such as the European Defence Agency (EDA) to accelerate industrial cooperation, promote co-production, marketing, sales, repairs and streamline joint acquisition. This can be seen as the way for the future of ADIC but for that it requires a strong political will and a cooperation within the intra ASEAN military establishment. ADICs

April 2014 DEFENCE AND SECURITY ALERT

challenges for defence industries SYNERGY

For an institution like ADIC, the primary burden is to create a congenial environment for cooperation, address intra-regional security challenges, dispel mistrust and project larger socio-economic benefits can play a pivotal role in creating space for advanced defence technology within the region. Therefore, ADIC should work on an institution similar to EDA.

Defence Industrial Efforts

On the other side, Southeast Asian nations have been increasing defence cooperation with foreign defence industrial partners. These collaborative efforts are seen as a panacea to promote local industry and accelerate trickle down effects of the transfer of technology which is a part of any purchase of imported military equipment. Countries such as Indonesia and Vietnam have been collaborating in joint shipbuilding with Damen Schelde. Vietnam is also seeking South Korean and French

submarine building facility in Surabaya. Malaysia, in turn has been working on Patrol Vessel–Littoral Combat Ship with technical assistance from France’s DCNS. Malaysia’s Deftech and Turkey’s FNSS Defence Systems have prepared a blueprint for an eight-wheel drive AV-8 Armoured Fighting Vehicle. Singapore has a full-fledged Defence Industrial Complex under the single entity Singapore Technology. This private defence complex is under the monitoring of DSTA. Singapore has also placed order for F-35 fifth generation fighter which is a multi-nation initiative. With serious doubts over the ADIC, the question which still needs to be answered is how India can benefit from such an initiative and why India should look to ASEAN Defence Industry.

Indian Interests

Within India, the indigenisation has been facing severe structural and technical bottlenecks. Many government and private shipyards have not been able to meet the demand of the Indian Navy and Coast Guard and there are cost overruns and project delays in shipbuilding and integration of technical systems. This can be attributed

been doing pioneering work and there is interaction at highest levels between DRDO and DSTA. However, there are still not many joint venture R&D projects between the two agencies. India needs to effectively scrutinise and audit the defence manufacturing capabilities in ASEAN nations primarily to seek the outsourcing avenues to these nations and also work towards assigning few of the projects to these nations under the supervision of the Indian defence agencies and DRDO. This would create a necessary goodwill and also help in streamlining the projects through better acquisition and facilitation of systems integration at all levels. In terms of shipbuilding the facilities in Malaysia, Indonesia and Vietnam can be looked into while in case of other areas Singapore can be a good option. In terms of defence devise a concrete policy Already countries like European nations have

exports also, India needs to to engage the ASEAN nations. China, Israel and even East been exploring arms exports

Also, Vietnam, Malaysia and India could work on a joint facility albeit with a technology transfer from Russia to set up a spare parts building facility in any of the ASEAN countries. These three countries have been using Russian aircraft and have faced problems with regard to supply of spares. Also with Singapore and Indonesia, India can build a comprehensive maintenance and repair facility of the US equipment. These initial projects would give the necessary impetus to the ASEAN defence industry and India, by virtue of these joint ventures would be seen as a necessary partner options in Southeast Asia. India can provide non-lethal weapons and even can commission joint ventures between companies such as Tata, Larsen and Toubro, Mahindra to work on joint venture projects for manufacturing non-lethal defence and security equipment and communication sets with their private sector counterparts in ASEAN region. Countries like Vietnam have been looking for shipbuilding projects of more than 30,000 DWT and India could look into Vietnamese shipbuilding facilities. Even in terms of small arms like carbines, the Southeast Asian nations want a cheaper and reliable option.

Tata Trucks In Thailand

investment to develop its shipbuilding industry. Indonesia is also seeking foreign investment for its shipbuilding industry and set up repair facility for South Korean submarines imported by Indonesia Navy. Indonesia and China have been collaborating through Military Technology Forum for manufacturing of select defence equipment and research. In fact, Indonesia is also seeking foreign investment from South Korea and Germany for its

April 2014 DEFENCE AND SECURITY ALERT

to the technical barriers and the delay in commitments made by contractors in meeting the local supply of the materials. Moreover, in terms of basic structure there have been unwanted delays. In the sectors such as military equipment and technical communication equipment, the defence R&D has not been able to meet the expectations. On the other hand, institutions like Defence Science and Technology Agency (DSTA) in Singapore have

In the civilian sector, Tata Trucks (Thailand), a subsidiary of TATA Company have slowly captured a small percentage of trucks market in Southeast Asia. Similar arrangement can be explored in the case of manufacturing military trucks. As already, a number of cases of kickbacks in Tatra truck deal have hogged the headlines in the last couple of years. Also, Vietnam, Malaysia and India could work on a joint facility albeit with a technology transfer from Russia to set up a spare parts building facility in any of the ASEAN countries. These three countries have been using Russian aircraft and have faced problems with regard to supply of spares. With Singapore and Indonesia, India can build a comprehensive maintenance and repair facility of the US equipment. These initial projects would give the necessary impetus to the ASEAN defence industry and India, by virtue of these joint ventures would be seen as a necessary partner. The time has come for India to adopt a visionary policy towards arms exports and also outsourcing its basic platform fabrication to these neighbouring countries to cut on costs and curb delays in a number of projects.

April 2014 DEFENCE AND SECURITY ALERT

cyber security

STRATEGIC ADVANTAGE

MILITARISATION OF THE INDIAN CYBER SPACE

As witnessed in the past, we’ve seen such related tensions involving cyber-attacks against Estonia and Georgia, so it is highly possible that we may once again see the focus shift towards achieving and maintaining superiority and dominance in the cyber space as it is a source of strategic advantage both during peace and times of conflict. Arguably, the cyber space is also viewed as a ‘war domain’.

he growing sectarian conﬂicts and the political crisis in Africa and the Middle East have forced the international community to intervene and seek suitable policy options in their efforts to broker a peace deal. Some analysts would say that an arms race is being witnessed in the Middle East and if not contained despite continued intervention by the international community, we may see this spill into Asia despite the ongoing efforts.

Upscaling Or Downsizing?

Developed countries such as the United States may have cut back on defence spending (which is currently estimated to be at approx US$ 633 billion). Despite being the largest defence spender, recent reports suggest that the US intends to scale down its military growth and give even more importance to the cyber space; as a result this move would downsize the US military to post World War II era. Followed by the US, are other emerging markets namely Russia, China and Saudi Arabia (the latter having tripled its defence spending in the past 10 years) and lastly the UK and France joining forces on various programmes. All of these countries feature as top global spenders. Given the Indian context, the recently concluded Defexpo 2014, hosted in February in New Delhi, re-afﬁrms the fact that the Indian defence sector is poised for high growth. As a result of which, over 600 defence (foreign and domestic)

April 2014 DEFENCE AND SECURITY ALERT

contractors participated in this exhibition. However, there have been setbacks in the past as far as this sector is concerned with complex set of challenges being dealt within the areas of modernisation of defence forces, discharge of offset obligations, procurement delays, ﬁnalisation of the 15 year Long Term Integrated Perspective Plan (LTIPP) and so forth.

Crimea Effect

Given the most recent Ukraine crisis, the reaction by the United States and its G-8 member allies mainly the UK, France and Germany towards Russia, involves imposing economic sanctions, such as ban on the issuance of visas, cancellation of trade agreements and even possible expulsion of Russia from the United Nations Security Council. Russia has countered this by threatening to seize US and European Union assets (which may not be limited to information and other critical equipment) within the country and is in the process of drafting anti-sanctions law. As of 4th March, it was also reported by the media that Ukraine’s telecommunication systems were under a cyber-attack (by means of physical intrusion and tampering of equipment), resulting in disruption of services. A closer view of these two events will lead one to believe that the two are no different; resulting in further cause for concern as far as economic interests, intellectual property, trade secrets etc is concerned. While, diplomatic and economic options are being explored to diffuse the Ukraine crisis, US and NATO backed military presence is expected to increase

in Eastern Europe with Poland showing concerns over Russia’s current stand and provide further protection for the Baltic states that are NATO members. As witnessed in the past, we’ve seen such related tensions involving cyber-attacks against Estonia and Georgia, so it is highly possible that we may once again see the focus shift towards achieving and maintaining superiority and dominance in the cyber space as it is a source of strategic advantage both during peace and times of conﬂict. Arguably, the cyber space is also viewed as a ‘war domain’.

Another Restrictive Regime

While there are growing concerns regarding cyber-threats, 15 countries (including the US and China) have arrived at a consensus that the UN charter (International Law) also applies to the cyber space, which is being viewed as a positive step towards promoting confidence and stability. In December 2013, the Wassennaar arrangement was agreed upon by 41 countries, of which India is not a signatory amongst others such as Israel. While the implementation of the arrangement is left to individual countries to enforce export controls on software and deter the proliferation of cyber weapons as a consequence to the development of the global cyber-weapons market (estimated to be anywhere in the range of US$ 4 trillion over the next decade) with players from both the aerospace and defence as well as global software companies establishing their foothold. Select companies have already made their intentions clear by stating their policy facts dealing with the sale of cyber weapons to their governments only and further reserving their right to sell cyber-weaponry. Though in its early stages, the implications of this need to be understood and examined thoroughly from India’s perspective. I will attempt to highlight some of those that may have a profound impact. These are as follows: Compared with the more developed countries, fortunately for India, despite its known shortcomings, India does not rank high amongst countries such as Indonesia, Vietnam, China and the US as far as cyber-intrusions are concerned. This can be largely attributed to historical events that go back as far as 1,000 year (Sino-Vietnam sea wars, colonialism etc) till date competing for territorial resources or lack of enforcement of controls framework or even foreign policies. The recent state visit made by the South Korean President Park Geun-hye expressed her interest to Prime Minister Manmohan Singh for South Korean banks to enter the Indian market. At first hand, this development would lead one to believe that this move makes economic sense. However, as someone familiar with cyber and information assurance domain and the fact that South Korea has been targeted more often than not by its adversaries in the cyber space affecting its banking and financial institutions and therefore diversifying its critical infrastructure bearing in mind economic and security interests, offshoring operations serves to be dual purpose. Could this then imply that India is reasonably well positioned

Compared with the more developed countries, fortunately for India, despite its known shortcomings, India does not rank high amongst countries such as Indonesia, Vietnam, China and the US as far as cyber-intrusions are concerned

to maintain its global competitiveness despite its diverse challenges and constraints? Various e-governance initiatives in securing our assets brings in a high degree of confidence and therefore it would be interesting to bring in an additional dimension which is militarising our cyber space keeping in view my earlier comments indicating the linkage between the military and the cyber domain. In other words, could one expect regulators, policy and decision-makers to further fine-tune, limit or expand the scope of the existing Defence Procurement Procedure (DPP 2013) in accordance with the primary objective of developing indigenous content. This could be it in terms of defining requirements and specifications for home-grown systems and applications, revamping the Internet architecture (in cases where the need arises) etc, thereby involving much greater participation of the Indian software sector and being less reliant on foreign contracts for software and back office services. As a consequence of this, despite slow economic activity there is a sense of confidence which in turn may prove to attract investors to engage in more business activity as online presence and digital media push the frontiers.

ARJUN SINGH

The writer is an Independent Cyber Advisor with close to 15 years of combined experience in management consulting, business development, programme management, IT Due Diligence, cyber-(critical infrastructure protection), anti-fraud (process validation, Sarbanes-Oxley audits), computer forensics, penetration testing, third party risk management, global and regional IT transformation projects (includes design and response to Request for Proposal, vender evaluation and selection, solution architecture and deployment, services and security management standards). He has previously worked with Ernst & Young, KMPG, Accenture and Xansa.

Both public and private sectors will undoubtedly beneﬁt the most given a shared platform wherein resources can best be leveraged. So, it would be worthwhile exploring options where both the government and the private sector together pursue foreign target acquisitions involved in software research and product development that bolster our cyber capabilities by means of support of political will, leadership, expertise etc.

Lastly, while it is estimated that there is a huge demand for ‘cyber security’ professionals over the next few years, the growing emphasis on the future of 'cyber leadership' that will lead this future workforce cannot be ignored. This is an area of focus that is not just subject to any one country considering the fact that the skills gap continues to be a challenge and competences required as this role evolves over the years. Although, the issue of the demand for and equipping the future cyber workforce with ‘cyber security’ skill sets and resources has been highlighted on many counts in the past, the larger concern however is in terms of how “cyber leadership” competences within and across (especially critical) sectors is going to be achieved. Clearly, it is the latter which is more likely to play a more important role. Given all of the above and ongoing related developments, the opportunity couldn’t be more prime to invest, integrate and scale our resources.

April 2014 DEFENCE AND SECURITY ALERT

Tropex monitored through GSAT-7

ndian Navy kicked off its largest exercise Tropex with both Western and Eastern fleets joining in the Bay of Bengal for combat manoeuvres. Several major platforms like aircraft carriers INS Viraat, nuclear submarine INS Chakra and recently acquired long-range maritime reconnaissance aircraft P8I, Jaguars and Sukhoi-30MKI fighters along with mid-air refuellers took part in the exercise under the gaze of India’s first dedicated military satellite GSAT-7 which has a 2,000-nautical mile footprint over the critical Indian Ocean Region.

JN Choudhury takes over as new NSG Chief.

N Choudhury, former DGP Assam has taken over as the new chief of National Security Guard (NSG) the elite counter-terror commando force of the country. He is a 1978 batch IPS ofﬁcer of the Assam-Meghalaya cadre. He is a postgraduate in economics from Delhi University and has served for many years in the Intelligence Bureau.

Strengthening Defence Ties

ndia and Japan have broken new ground by discussing and agreeing to strengthen bilateral defence relationship. Now both the countries will collaborate in joint development and production of defence equipment. Defence and security relations between India and Japan have evolved steadily over the years and now constitute a strong pillar of India Japan strategic partnership. Indo-Japanese defence cooperation will receive further boost following the setting up of a Joint Working Group (JWG) for cooperation on US-2 amphibian aircraft.

Aruna Bahuguna, who was till recently special DG, CRPF has taken over as the director of Sardar Vallabhbhai Patel National Police Academy (NPA). She is the ﬁrst woman chief of NPA in its 65 year old history.

ndia and Russia are in serious discussions to ﬁnd a way to offer defence and security equipment so urgently needed by Afghanistan. Both the countries are converging on the view that Russia could supply the weapons and India could foot the bill. Hamid Karzai’s wish list is pretty long and all the items listed cannot be supplied but India is talking to Afghanistan to narrow down the list so that the weapons most needed and the ones that will not create any controversy are taken up for early supply. To make a beginning, India and Russia have already decided to revive a weapons maintenance factory in Afghanistan.

uring the 17th round of Boundary Confab, India and China have agreed to begin a bilateral dialogue on maritime security, one of the most talked about and high proﬁle subject areas in the growing rivalry between Asian giants. China has proposed a high decibel celebration of 60th anniversary of 1954 Panchsheel Agreement. China’s foreign ministry spokesperson also hinted that “exciting items are on this year’s agenda of China-India relations”. Also on the wish list is a code of conduct for troops coming into contact while patrolling on the LAC.

April 2014 DEFENCE AND SECURITY ALERT

n Indian Air Force officer has in a startling revelation informed the Parliamentary Standing Committee on Defence that it will be difficult for India to tackle a Sino-Pak “collusive threat”, but IAF was prepared for such an eventuality. “We have made plans in case of Contingency-III (two-front war)”, the officer claimed. A joint China Pakistan threat is a matter of grave concern for India. There is an obvious capacity and capability deficit as India currently operates 34 fighter squadrons against desirable 42. The panel asked the IAF to scale up its capabilities and accelerate its acquisition and modernisation programme.

Weapons for Afghanistan Indo-Russian Solution

India China to begin maritime dialogue

India not ready for two-front war?

Aruna Bahuguna, the new National Police Academy Chief

Masood Azhar dares India again

he Pakistani Islamic hardliner Masood Azhar, allegedly the mastermind behind Indian Parliament attack has resurfaced and declared war on India. Jaish-e Mohammed, the terrorist group he leads has been reactivated to create mayhem in India. The anti-India cleric who has been mostly conﬁned to his home city of Bahawalpur in Pakistan recently addressed his supporters and exhorted them to resume Jihad against India.

US decides to cut army to pre-World War II level

he US administration proposes to push its military off the war footing adopted after 9/11. The proposed cuts in the army level fit the Bipartisan Budget Act reached by president Obama and US Congress in December 2013 to impose a military spending cap of about US$ 496 billion for fiscal 2015. From a post 9/11 peak of 570,000 personnel the US Army would be shrunk over the coming years to 450,000-440,000 personnel that would make it the smallest US Army since 1940. Also the entire fleet of Air Force A-10 attack aircraft designed to destroy Soviet tanks in case of an invasion of Western Europe would be eliminated. The planned cut in the US Army strength comes as the defence department is in the process of reducing projected spending by nearly a trillion US Dollars over a ten year period.

April 2014 DEFENCE AND SECURITY ALERT

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