India's Private Defence Companies

"Our endeavour must be to meet up with the twin imperatives of technical relevance and affordable delivery. Given the expansion of your private sector, both in technical and financial conditions, we are in the threshold of a future in which the private sector contributes to the national cause of high technology defence. There may be need for a new institutional platform to require the private sector, to ensure ongoing dialogue as well concerning provide incentives for risk taking. We have to encourage substantive investment in development capacities and also in defence related R&Ds. "

Manmohan Singh, PM of India

Introduction

The background of participation of private industry in defence development in India goes back to 1991 which was followed by government initiatives in 1998 to determine close connection of MoD and services with the Confederation of Indian Companies (CII). The constitution of 'Group of Ministers ' committee tasked to examine the Kargil debacle, the insurance plan reforms executed by the federal government since 2001 and the constitution of Kelkar committee in 2004, were generally targeted at overhauling the acquisition process and promoting indigenous development to achieve 70% defence requirements from indigenous sources by 2010. The major fallout of these was the Defence Procurement Procedures, DPP 2002, DPP 2004, DPP 2006 and DPP 2008.

The dramatic variations between technologies found in commercial and military services systems in the past have narrowed down with the changing pace of the methodical innovation in the commercial sector especially in the areas of nano-technology, robotics, computer simulation, and stealth technology. Because of this, military services organizations in developed countries have considered commercial sector for dual-use technology and new discovery medical discoveries especially with the decline in the defence spending in post Cold-War time for reasons monetary as well as politics.

Emerging Private Sector

In the previous 2 decades, the Private Sector has widened immensely with the DPSUs outsourcing more than 30% and OFs outsourcing 80%. The private sector can produce much more effectively in a significantly less time frame and therefore their role in Indian defence industry cannot be underestimated despite their constraints. Various private sector companies have ventured in to the defence sector and also have been issued license by the government. These companies have previously taken up development of defence equipment by entering into jv (JV) with many foreign companies. Some of these are :-

  • Mahindra & Mahindra Ltd, New Delhi.
  • Larsen & Toubro Ltd, Mumbai.
  • Max Aerospace & Aviation Ltd, Mumbai.
  • HBL Electric power Systems Ltd, Hyderabad.
  • Ramoss India, New Delhi.
  • Tata Motors Ltd, Mumbai.
  • Alpha Phazotron Radar Equipment & Systems Pvt Ltd, Bangalore

EADS's helicopter subsidiary Eurocopter is associated with HAL since 1962, processing more than 600 Alouette 3 and Lama (known as Cheetah and Chetak locally) helicopters. EADS has programs to set up pilot training facilities in India for the civil and armed forces segments and plans to invest $7-8 billion ($9. 5-11 billion) over the next a decade.

In Nov 2009, Mahindra Group created Mahindra Defence Systems in India which is a JV with BAE Systems. Mahindra Group has all together acquired majority stakes in two Australian defence companies, Aerostaff Australia and Gippsland Aeronautics, signalling its entrance into the defence and aerospace business. Tata has entered into JV with AgustaWestland to assemble the AW119 in India.

Honeywell Aerospace, which gives included avionics, engines, systems and service products for the aerospace industry, is one example. The US Company has a design and development centre in India it hopes to develop in the returning years. Airbus has setup the Airbus Engineering Centre India in Bangalore where local engineers help develop capabilities in modelling and simulation, covering areas such as airfare management systems and aerodynamics, to assist in the look and development of aircraft like the A380 and the A350. It is also dealing with Indian IT companies such as CADES, HCL, Infosys, Search and Satyam to provide support across various aircraft programmes.

India comes with an inherent border over other countries because of higher skills and lower costs of development. This makes India an ideal contender for joint projects. HAL has came into into joint projects with many overseas aviation system companies to undertake design and development of new systems in India. A few of these are the BaeHAL, HAL Edgewood, HELBIT etc. A great many other software and hardware giants mixed up in aviation hardware and software development especially in the embedded and real time system domain also have proven their facilities in Bangalore. A few of these are GE Intelligent Systems, Honeywell, etc.

Given their fast growth during the last decade, it could very well be no surprise that Indian software companies such as HCL, Infosys, Infotech, Tata Consultancy Services and Wipro have been active in the aerospace industry for quite some time. Increasingly, they are profiting from the engineering services outsourcing programmes. This can help India progress from IT and low-end business process outsourcing work to high-end design services. Abroad companies view the Indian companies as long-term partners rather than as mere suppliers/suppliers.

Initiatives

The initiatives performed by administration towards promoting involvement of private sector business towards top quality defence requirements are:-

Opening up of defence sector (in 2001) for 100% contribution by Indian private sector and upto 26% FDI.

Provision of the offset clause in DPP for just about any procurement from a foreign merchant beyond 300 crores.

Introduction of an procurement clause 'Buy and Make (Indian)'. This clause is expected to develop a positive effect on the private sector industry and may encourage formation of joint ventures or alliances for co-production with Indian companies.

Issue of RFP to Indian private sector and the companies having a greater say in negotiations, in obtaining technology from overseas Original Equipment Manufacturers (OEM) as well as in co-production.

Sharing of information on long-term perspective plan with the Indian industry and the participation of the local industry in acquisition planning.

Funding R&D cost to the extent of 80 % by the Government.

Non starters

Inspite of the many measures taken, there has been no remarkable change in today's express of indigenisation. Just a few of India's top private sector companies are involved in certain small value defence agreements. It requires to be realised that the goal of self applied reliance would remain a fantasy if it's to be performed by just banking on general public sector only.

The engagement of private sector is essential to harness the best technology available and reduce imports. Considering the measures taken over the last 2 decades, India presently is definately not reaching the indigenous number of 70%. Equipment well worth $50 billion has been bought from international suppliers within the last 10 years with the costs likely to touch $100 billion in the arriving decade. The reasons to these are:-

A quantity of defence-industry seminars, conferences and exhibitions have been presented in the recent years but old mindsets, complicated procurement procedures and clout wielded by the public sector have been acting as major deterrents to any important involvement of the private sector.

Inspite of plan reforms of 2001, at the Defence-Expo 2010 the international defence majors were still lined up to show their wares. Hence, the efficiency of the initiatives of 26% FDI must get a relook.

While we trust international suppliers (essentially because there are few alternatives) governed as they are by their individual national laws which have in-built sanction mechanisms to limit supplies in a variety of situations, we've not expanded the same trust quotient to Indian Industry.

As on time frame the private sector reaches a distinct disadvantage as against OFs and DPSUs. The OFs and DPSUs have a non-competitive edge, due to its close proximity to the MoD.

In all offers under TOT, default firm that receives the benefit is definitely a DPSU, even if an exclusive sector company is way better placed in terms of know-how to absorb the technology and the available infrastructure.

The private sector is also inhibited by complex limitations primarily because of its late entry into the defence industry and needs to institutionalise joint projects with established international defence majors. However, the FDI cap of 26% can be an impediment.

Way Ahead

The role of the Department of Defence Creation thus must be greatly retooled to evaluate India's requirements not in a open public sector context but a larger India paradigm. Basically the initiatives needed are:-

  • De-licensing. The licensing system needs to be given a relook or done away with for making of defence equipment by private companies except for very critical products.
  • Foreign Direct Investment. FDI restrictions should be improved to 49% for many defence creation with sensitive content and in non-sensitive areas raised to 76 or even 100 per cent. This might obviate the need for administration to defray 80 per cent of the R&D costs.
  • Private Equity Participation Government must you should think about private equity contribution in the defence-related open public sector to unlock their potential and maximise returns on sovereign investment over the decades
  • Developmental Partners. During development phase suitable industrial entities needs to be recognized to participate in the activity as developmental associates.
  • Limited Series Production (LSP). After joint development, the industry lovers must be co-opted for execution of LSP that can meet the service need.
  • Bulk Production Almost all production must be outsourced to private players in a phased manner over several years. This could alleviate the condition of available OFs and DPSUs while at exactly the same time utilise the resources available in these public establishments.
  • Spin-offs The spin-offs from the defence technology have to be exploited in the industry area by effecting required repackaging/adjustment.
  • Marketing. Scope also exists for industry to get potential market for these products in India/In foreign countries with credited approvals. Also the collaboration of private companies needs to be exploited for marketing of the products.
  • Tax benefits. The federal government needs to give a level taking part in field to private industry in terms of excise and custom exemptions for imports of certain components to be utilised in defence equipment.
  • Promoting Relationships. DRDO has been actively promoting private establishments involvement in its entire gamut of activities by regularly getting together with the interested players as well much like organizations such as CII, FICCI, ASOCHAM. DRDO has sorted out several DRDO-Industry meets to appraise industry veterans about opportunities awaiting them in Defence R&D. This would defineitely help in exploiting the available expertise in industry.
  • Sponsored Research. Government needs to consider orient the new brains in the IITs, NITs and other educational institutions in India towards R&D of the projects at hand as well as perspective projects. This is taken up through Sponsored Research as well as industrial consultancy.
  • Public Private Partnership. There's a need to promote public private relationship as the general public sector has excellent infrastructure, developing facilities and an extremely experienced task pressure. It'll be a waste material of national resources if these possessions are duplicated by the private sector. The private sector, on the other palm, may bring in most advanced technology, managerial methods, marketing skills and financial management. Therefore, a well-blended fusion of both will cause synergising of their advantages through economies of size and prove mutually beneficial.
  • Joint Projects. The Brahmos job, which is the governmental level collaboration between your GOI (Bharat) and Russia (Moscow), is one good exemplory case of putting into action organisational level change. The identical must be implemented up in other tasks in pipeline.

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