The unfinished defence reform agenda
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At Aero India 2015, when Prime Minister Narendra Modi emphatically said the defence industry was at the heart of the ‘Make in India’ programme, he conveyed his government’s intent to reform an archaic arms production base whose inefficiency has earned India the dubious distinction of being the world’s largest arms importer. To be sure, the government has taken a host of measures to incentivise local arms production.
These measures include a simplified and streamlined industrial licensing process, improvements to the taxation system, a set of export promotion measures, a liberalised defence foreign direct investment (FDI) policy and comprehensively revised defence procurement procedures. Are these measures sufficient to change the fortunes of the Indian arms industry, enable the country to not meet its own defence needs but also export to others?
The conclusive answer to the above question is ‘no’. The reasons are two-fold. The first and foremost is the lack of reform in state-owned entities engaged in research and development (R&D) and production. Comprising 40-odd ordnance factories, nine defence public sector undertakings, and over 50 dedicated research labs and establishments under the umbrella of the Defence Research and Development Organization (DRDO), these government-owned/controlled entities have an overwhelming share of India’s defence industrial base.
At the same time, they are also hugely inefficient and are directly responsible for India’s poor self-reliance index. Measured by any parameter, be it innovation, timely execution, labour productivity, foreign exchange earnings, and customer satisfaction, they paint a dismal picture.
Given the poor performance of the ordnance factories, defence public sector undertakings and the DRDO, one would have expected some meaningful reforms under the guidance of the ‘Make in India’ programme, which is now running into its third year. However, to the dismay of many, the government has been extremely slow on this crucial front, with the only piece of reform being a plan to privatize BEML (formerly Bharat Earth Movers Ltd), one of the public sector units that function under the defence ministry. Even though it is late, one would hope that the BEML model of privatization is applied to other government-owned production agencies to bring about a marked improvement in their functioning. For the DRDO, which has a complete monopoly over defence R&D, a crucial piece of reform is needed to make the organization accountable for all the projects it is involved in.
Second, the ‘Make in India’ programme is yet to create a conducive climate for the private sector to contribute in a meaningful manner. The biggest challenge for the private sector is the step-motherly attitude of the government. Despite numerous policy announcements, the private sector is still treated as a poor cousin of the public sector.
When it comes to big-ticket procurement contracts, it is the public sector which gets preferential treatment. The apathy towards the private sector is also seen in the extremely slow decision making process of the defence ministry. It is an irony that for all the hue and cry about ‘Make in India’, the private sector is yet to bag a big defence contract. It is high time the government took some bold decisions to create a thriving defence industrial base.
The author is a senior research fellow at the Institute for Defence Studies and Analyses (IDSA), New Delhi.