Business Today

Missing The Mark

In spite of the Make-in-India initiative, the Indian private sector is awaiting big-ticket defence orders.
twitter-logoGoutam Das | Print Edition: April 21, 2019
Missing The Mark
Illustration by Ajay Thakuri

Not long ago, during the last winter session of the Parliament, Gaurav Gogoi and Jyotiraditya Madhavrao Scindia, politicians from the Indian National Congress, had several questions for the Minister of Defence.

There was a lot of noise around Make In India but what exactly was going on: "Whether it is a fact that no major Make-in-India projects in defence have kicked off over the last three years, and why?"

"Whether several mega defence projects, collectively worth over Rs 3.5 lakh crore, remain stuck at different stages without the final contract being inked."

Nirmala Sitharaman, Minister of Defence, laid a statement on the Table of the House. Several Make-in-India projects have taken off, the statement stated. "These include Surface to Air Missile System Akash, 155 mm x 45 calibre Artillery Gun Dhanush, Attack Submarine INS Kalvari, Weapon Locating Radar Swati, High Speed Heavy Weight Ship launched Torpedo Varunastra, etc."

The minister further stated that over the last three financial years - 2015/16 to 2017/18 - the "government has accorded Acceptance of Necessity to 111 proposals, worth Rs 1,78,900 crore approximately under 'Buy (Indian-IDDM {Indigenously Designed, Developed and Manufactured})', 'Buy (Indian)', 'Buy and Make (Indian)' or 'Make' categories of capital procurement as per Defence Procurement Procedure, which means Request for Proposal is issued only to the Indian vendors".

Skewed Scale

A revised Defence Procurement Procedure (DPP) came into effect from April 2016, with the aim to fast-track capital acquisition projects. The Buy (Indian-IDDM) category was introduced. Similarly, the other 'Buy' categories were meant to promote Indian manufacturing.

However, companies in defence manufacturing say that both Acceptance of Necessity or Request for Proposals don't necessarily translate into orders. There have been numerous cases, over the past decade, when RFPs have been withdrawn leading to long delays in awarding projects.

A glance at the major projects awarded over the past five years reveal two things: chunkier orders have been bagged by foreign original equipment manufacturers (OEMs); and, among Indian vendors, public sector units have bagged most of the projects.

During the last three years and the current year (up to October 2018), 121 contracts were signed with Indian vendors worth about Rs 73,918 crore. Multinationals bagged contracts of more than double this amount - about 67 contracts worth Rs 1.66 lakh crore.

Over the last five years, major defence deals with foreign OEMs include the Rafale fighter jets, estimated at $8.7 billion, and the S-400 air defence system, a $5.2 billion-deal with Russia's state-owned company Almaz-Antey. The S-400 Triumf is an advanced surface-to-air missile system with an estimated range of 250 kilometres.

There are 41 Ordnance Factories and nine Defence Public Sector Undertakings in defence production - whose overall production since 2010/11 totals to about Rs 3.5 lakh crore. HAL is producing lightweight combat aircrafts while the government's shipyards are building aircraft carriers and developing other naval programmes.

The lack of large orders to the domestic private sector are worrying both companies and analysts.

Rahul Gangal, Global Partner at strategy consulting firm Roland Berger, says the private sector runs business cases that have to make economic sense. "That is becoming difficult because there are very few orders on the table today. There is a large pipeline but having a large pipeline or a potential pipeline doesn't benefit the private sector. Apart from a few areas, like an initial set of orders on artillery, the rest of the system is struggling," he says.

One big-ticket contract to the private sector that went through was bagged by Larsen & Toubro. In 2017, L&T and South Korean firm Hanwha Techwin signed a $720 million deal for executing an artillery gun programme for the Indian Army. The company would supply 100 K9 VAJRA-T guns.

It is "lighthouse" programmes such as this that define growth of the industry, Gangal says. "If they happen, the industry takes off. Too many of these lighthouse programmes haven't happened. It is taking far too long for any contract to be awarded. There is a two-fold risk in this. One, by the time the contract is awarded, the technology gets outdated. Two, Indian entities that are younger than their global counterparts find it difficult to sustain interest and commitment, and burn cash. In my interaction with large Indian groups, I can see enthusiasm waning. I see even small- to mid-sized Indian enterprises starting to hedge bets," he adds.


Even L&T has been struggling for years to make headway in defence manufacturing, observers say. The company invested and created infrastructure for three decades for defence and ship building orders, but it has not got commensurate orders. As of the December quarter of 2018/19, L&T had an order book of Rs 2.84 lakh crore; mostly infrastructure projects; only about 4 per cent could be attributed to defence engineering, industry experts note.

A Pune-based company - which supplies critical components to various defence establishments - has also seen a decline in its defence business. A spokesperson says that the government's intent to promote Make in India hasn't translated into higher orders for domestic manufacturers because the Indian defence establishment is not open to more participation by the private sector. Today, the company's share of defence in its total revenues is around 15 per cent (40 per cent from engineered products, 35 per cent from space and 10 per cent from nuclear).

The overall sector is hopeful that the defence business will pick up in the future as India needs more equipment for defence preparedness and just imports cannot be relied upon. But analysts are not that optimistic. Gangal of Roland Berger, for instance, feels that India is going back to a global buy scenario even for products its has competence in.

"Well laid out programmes in land systems and specialised naval platform manufacturing - both being areas where Indian companies have necessary, even if not complete, competence to deliver full platforms for the user - now run the risk of becoming global buys," he says. "This is eventually needed because the user services are very short on equipment and our procurement agencies are unable to decide in time. Operational requirement has to be met. To safeguard against possible contractual challenges and risk of future enquiries (investigations), most of these contracts appear to be shifting to a government-to-government (G2G) mode. It makes it safer," he adds.

While G2G is safer, and a faster way to procure, the casualty seems to be the domestic defence manufacturing industry.

(With inputs from E. Kumar Sharma)


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