Home / Opinion / A dual approach to defence production

The defence procurement policy (DPP) is set for a churn as the government mulls bringing in major changes in its 2015 avatar.

The importance of this policy can be gauged from two seemingly disparate statistical facts.

First, in the next seven to eight years, DPP will govern investments to the tune of 25,000 crore, an amount that eclipses the gross domestic product of 25 countries.

Second, Indigo, among other domestic airlines, intends to emblematically purchase “one aircraft per week" over the next 10 years. This is post the government’s approval of their purchase of additional 550 aircraft. Such deals will propel India to be the third largest aviation sector by 2020. Both developments are interconnected and can enable Indian manufacturing to move up the value chain by leveraging defence offsets generated from defence procurement to Buy and Make (Indian) category in the fast expanding aerospace sector.

The green shoots are visible in the recently concluded Tata-Airbus venture to manufacture 40 transport aircraft in India.

It is a stated fact that smaller, nimble companies live innovation and the big flat-footed behemoths buy it. To acquire self reliance in military technology, India needs to set free its 48 million odd small and medium enterprises in the defence production arena. To unleash them, two glaring inefficiencies/shortcomings in DPP need to be overcome:

• Business sustainability: The private sector needs repeat orders on large orders when made in India. Capital expenses for research and development (R&D), especially in the aerospace sector, are high and no industry would be ready to invest without assurance of repeat orders.

• Transfer of technology: This concept needs refinement as India continues to purchase critical components from foreign original equipment manufacturers (OEMs) rather than developing them.

In a span of over 15 years, we could not obtain 100% indigenization in manufacturing components of Flycatcher radars purchased from Thales Group. It could be enhanced only by 45% and in case of USFM radars (Contraves) by only 42%.

Two aspects, amongst all others, need urgent redressing in the new policy.

First, the necessity to make private industry an equal business partner and second, the potency to draw in new technology. The way forward is for the government to bear a large share of the risk in R&D investments, irrespective of results. It should not be presumed that a few bad apples will spoil the barrel; for a few good ones will compensate many times over. Another tool for the government is public private partnership such as that between Pipavav Shipyards and Mazagaon Dock.

Second, since OEMs are finding ways to bypass their offset obligation of technology transfer, it may be more appropriate to involve them directly in the buy and make category through joint ventures with the industry. The joint ventures of Thales with L&T and BAE Systems possibly with Mahindra are a case in point. The value of investment by OEM and the eligible products being manufactured may be counted against offset obligations.

While the Make in India chord sounds sonorous to many, we need to make it musical for defence production through a harmonious partnership between the government and the private industry. DPP 2015 is an ideal platform to set things in motion, or to say in manufacturing terms, we need to strike the iron when it’s hot.

Rajiv Bhargava is associate director with Munjal Institute for Global Manufacturing at Indian School of Business.

Comments are welcome at otherviews@livemint.com

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