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12 March, 2015

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Home > News > Defence Industry > Make in India: Challenges Before Defence Manufacturing

Defence Industry

Make in India: Challenges Before Defence Manufacturing

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By S.N. MishraIssue Vol. 30.1 Jan-Mar 2015 | Date : 12 Mar , 2015


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There is a distinctive buzz about Prime Minister Modi’s new campaign for “Make in India”. The thrust is to increase share of manufacturing from the currentlevel of 15 per cent of Gross Domestic Product (GDP) to 25 per cent and create additional employment opportunity of ten million per year. This has led a fewcynics to observe that, “There is a lot of sizzle but where is the steak?” Columnists such as Swaminathan Iyer are of the view that “Make in India” is only anoutcome and not a policy while Governor of RBI Raghuram Rajan is of the view that the government is putting too much of thrust on export-led growth and should give primacy to “Make for India”. Discerning writers such as Debasis Basu however, feel that what is germane to the debate is the “cost of doing business” in India.

The defence services account for nearly Rs 2.29 lakh crore of the Central Government Budget…

Defence manufacturing came out of the stranglehold of Public Sector Undertakings-Ordnance Factories (PSU-OF) monopoly with major liberalisation in2001 with 100 per cent private sector participation and the recently announced 49 per cent in Foreign Direct Investment. Policy footprints such as theDefence Procurement Policy (DPP) 2013 have created a level playing field for the private sector. The Defence Production Policy 2011 aims at higher self reliance in critical technology and the Offsets Policy 2012 which seeks to leverage our big arms’ acquisition to bring in state-of-art technology, and long term partnership with Original Equipment Manufacturers (OEMs). The Self Reliance Index of our defence acquisition, however, remains at a wobbly 30 per centdespite spasmodic policy posturing to improve indigenisation.

Defence industry is a subset of a nation’s concern to ramp up manufacturing capability. The capability of our defence industry in terms of value addition, self


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reliance in critical technology and policy initiatives so far and their impact needs to examined and a possible synergy between “Make in India” policy and defence industry capability needs to be brought about.

Defence Manufacturing and Challenges in Self Reliance

The defence services account for nearly Rs 2.29 lakh crore of the Central Government Budget which is nearly 2.5 per cent of the GDP and 13 per cent of theCentral Government expenditure. The trend of allocation to revenue and capital acquisition schemes is given below.

Table 1: Service/Department-Wise Break Up Of Defence Expenditure (Rs.Cr.). Source: Annual Report 2013-2014, MOD

It would be worth to note that while the increase in the revenue allocation roughly matches with the wholesale price escalation, the capital acquisition budgethas witnessed significant growth of around 20 per cent per year, far outstripping the overall trend of increase in defence expenditure. Capital Acquisitionconstitutes nearly 40 per cent of the defence budget of which the value of production of the Defence PSUs and the OFs account for the following:


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Table 2: Value Of Production And Value Addition Psus And OFB (Rs. InCrore). Source: Annual Report 2013-2014, MOD

It would be seen from the above that while the average yearly increase in Value of Production (VOP) of Defence PSUs is around five per cent per year, incase of the OFs it is only two per cent. It would be interesting to note that the value addition of different defence PSUs varies between 23 per cent and 57 per cent; it is very high, about 85 per cent, for OFB. PSUs such as HAL and MDL show a poor level of value addition as they are largely system integratorswhile Midhani and BDL have contributed handsomely to indigenisation. The higher indigenisation in case of OFBs is largely attributable to the low end technology.

Historically, India has been availing of technology through licence agreements from Russia and a smattering of Western countries. The exceptions are someof the missile systems, small arms and their ammunition and tanks where technology has been indigenously developed by the Defence Research and Development Organisation (DRDO). The Light Combat Aircraft (LCA) Tejas with Final Operational Clearance (FOC) will hopefully be a major “Make inIndia” platform. It must be mentioned that indigenisation has effected a substantial reduction in cost of the systems due to India’s labour arbitrage, good

facilities and fairly well-trained labour force. The following table brings out the cost savings of a few major products through the Transfer of Technology(ToT) route.


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Table 3: Indigenisation & Cost Savings through ToT. Source: Table prepared

by Author based on data obtained from DPSUs/OF

Self-Reliance Trends

Self-reliance trends in defence acquisition present a dismal picture. A committee under Dr APJ Abdul Kalam, the then Scientific Advisor to the RakshaMantri, had recommended that India should ramp up this quotient from 30 per cent (1995) to 70 per cent by (2005). The following table, however, brings outhow the Self Reliance Index has remained sticky at around 30 per cent.

Table 4: Total Acquisition and SRI: Trends. Source: Table Prepared by Author based on data obtained from Ministry of Defence


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The principal reason for this state of affairs is our poor design capability in critical technologies, inadequate investment in R&D and our inability tomanufacture major sub-systems and components. The Transfer of Technology route has provided India with the know-how without providing the clue for know why. It is due to this that even for an upgrade of the systems, defence PSUs are critically dependent on the original licensors. A case in point is theSU-30 upgrade where the Russians often hold HAL to ransom.

The following table brings out the gaps in critical technology of different systems.

Table 5: Critical Technology & Gaps. Source: DRDO, BEL and HAL

From the table above, it would be seen that the major deficiency in terms of capability is in the areas of propulsion, weapons and sensors. Some of the criticaltechnologies where progress made by the DRDO has been abysmally poor are Focal Plane Array (FPA), Active Electronically Scanned Array (AESA) Radar and Stealth Technology. India is presently engaged in the design and production collaboration with Russia for a Fifth Generation Fighter Aircraft (FGFA),that will have stealth features.

India is presently engaged in the design and production collaboration with Russia for a Fifth Generation Fighter Aircraft.

Procurement, Production and Offsets Policy in Retrospect and Their Impact

The Defence Procurement Policy 2013 envisages higher preference to Buy (India), Buy and Make (India), and Make options over the earlier thrust towardsBuy (Global) or the import option. It ostensibly looks at creating a better level playing field between the Public and Private sector with greater impetustowards indigenisation. A major departure from the previous policy is allowing the private Indian industry to avail of ToT which was earlier the exclusivedomain of DPSUs/OFs. The policy also encourages Joint Venture with OEMs. Prime Minister Modi’s “Make in India” campaign has added another category


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to Defence Acquisition though it would include cases coming under the panoply of ‘Buy and Make’ and ‘Make’ where technology is indigenouslydeveloped.

The Offset Policy guidelines (2012) have for the first time allowed ToT through the JV or through non-equity route. It has also allowed multiplier for criticaltechnology areas such as FPAs, Nano Technology-based sensor, fiber laser technology and THZ technologies.

The Defence Production Policy (2011) aimed at achieving substantive self-reliance in design, development and production of critical sub-systems by forming

consortia, JVs by involving academia and R&D institutions. It also promised to set up a defence technology fund to support public, private sector as well asacademic and scientific institutions for pursuing high-end research. The impact of all such policies on FDI inflow, export, augmentation and long term partnership has been quite disappointing for reasons enumerated below.

Value addition in the global value chain for India was only one per cent in 2009 as against nine per cent in China and Germany…

FDI Policy

The OEMs for setting up business in India in partnership with public/private players want to have a major say in the management of manufacturing. Whilethe announcement to scale up the FDI limit from 26 per cent to 49 per cent in the last budget has been a step in the right direction, it is unlikely to enthusereputed global manufacturing houses to set up manufacturing bases and bring in front-end technology though some Joint Venture intents have been evinced

for companies like the Tatas. On the other hand, countries such as China and South Korea have become major manufacturing hubs in aeronautics and ship building technology by being very liberal in their FDI policy and providing high modicum of ‘Ease of Doing’ business compared to India.

R&D Allocation

Besides the FDI policy, inadequate investment in R&D and lip service to technology funding by making a token allocation of Rs100 crore to DefenceTechnology Fund in the last budget is adequate commentary on our lack of seriousness in the area of Research and Development. The allocation to DRDOremains sticky – around six per cent of defence expenditure though successive parliamentary committees have recommended a minimum allocation of ten per cent. Private sector giants such as the Tata, L&T and Mahindra and Mahindra invest less than one per cent of their turnover in R&D unlike in countriessuch as France where corporate organisations invest more than ten per cent in R&D. It would also be interesting to note that the overall allocation to R&D is

significantly lower (0.85 per cent) in India compared to advanced countries which spend in the range of 2.2 per cent to 3.5 per cent. The following tablewould bring out the trend.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

S.N. Mishra

Dr SN Misra, former Director DRDO and Joint Secretary – Aerospace, MOD

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5 thoughts on “Make in India: Challenges Before Defence Manufacturing”

Ravindra Nathan on March 12, 2015 at 2:13 pm said:

Firstly our curriculum from High School level should be changed to Skill based knowledge on practical applications.Howmany students can identify aspanner, screwdriver or electric current? Very few.Without basic knowledge students cannot pursue research.

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Devindra Sethi on March 12, 2015 at 2:13 pm said:

There is a major flaw in the author’s understanding of shipyards whether private or public sector. Shipyards are locations where the ship/ submarine is brought together . Shipyards do NOT make systems , or even valves ! They come from subcontractor MSME factories in the hinterland. Modular /Integrated construction is the way ahead for shipyards to speed up construction. That requires up gradation of facilities and land. Lastly we need orderson frozen staff requirements from users navies. Midway changes slows down production to a crawl. The IN is leading the Builders Navy concept for many years now and can do much more with a focused thrust in our public and private shipyards. HOW? Our strategic tasks are many as we stand challenged in the Indian Ocean as never before by China. Our need is numbers now as older units need to be replaced / retired in the next 25 years! Sotime to build is now for the next 25 years at a frenetic pace, whether it is ships , submarines or Naval LCA fighter aircraft.


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Rajkaran Singh Bhatti on February 20, 2015 at 5:02 pm said:

Certainly India has ignored R&D in this sector, but although it is a little too late, yet we can now rectify our strategy, collaborate with bestmanufacturers, set up specialised recruitment and training centres to exploit our best brains and in the next ten years make productive products for domestic and overseas use. Raising funds from the stock markets by manufacturers in due course of time may also be permitted. Long term benefitsclearly can come our way !


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Col JP Singh on February 17, 2015 at 8:40 pm said:

We dont have a good R&D base – we need to drastically improve and expand our R&D base. All IITs and Engineering Colleges in the country should be co -opted in expanding our defence tech base. We should also improve the intake of Scientists into the DRDO. They are lowly paid GovernmentServants with little motivation. I have met many during my service and was not at all impressed with them. Some of them even complained of beingshackled and not given the freedom to work.


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Col JP Singh on February 16, 2015 at 9:22 pm said:

The DRDO has been responsible for the armed forces not getting the latest technology. It has always lobbied with the govt that they will produce therequired system – One example is the INSAS weapon system. They took years to produce an out dated weapon – its basically cut paste technology.Even its manufacture at RFI is poor – its stamped cut rather than a moulded configuration. If you cant produce something of your own – stealtechnology as the Chinese have done but dont delay us. You cant even produce precision ammo for the artillery. Shabby job if you ask me.


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