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Make in India in Defence - Not an option, but an imperative

The width and magnitude of India's security concerns requires us to continuously modernise our defence forces and take up new asset procurement.

Anurag Garg | February 16, 2016 | Updated 17:05 IST

Anurag Garg, Director -PwC Strategy and Defence Leader
Defence is a sector of strategic importance for any nation. The width and magnitude of India's security concerns requires us to continuously modernise our defence forces and take up new asset procurement to maintain balance of power and achieve adequate level of operational preparedness. This ultimately translates into India being one of the top 10 defence spenders in the world, with $200 billion-plus expected to be spent on capital acquisitions over the next eight to 10 years.

The government has a responsibility to balance dual priorities:

a. Enhancing military capability, and
b. Increasing industrial capacity.

Priority has been given to the former to manage mission-critical asset deficit of the forces, due to which we have seen G2G purchases of platforms and recent relaxation of offset limits by DAC. To address the priority of increasing industrial capacity and capability, and make India an attractive destination for private investments and participation in defence, the government has brought about certain refreshing shifts in policy over the past 1.5 years:

  • Strategic partnership model: From a very transactional approach to a strategic partnership approach (private sector primes in six platform categories).
  • Driving local content and IP: Highest preference given to a new 'Buy Indian' category, which drives 60 per cent local manufactured / 40 per cent local designed and manufactured content.
  • Performance orientation with DPSUs: Part divestment proposed in some DPSUs expected to introduce further efficiency and transparency, greater outsourcing to private.
  • Inclusion of MSMEs: Specific 'Make III' category reserved for MSMEs, though the aspect of funding to MSMEs at attractive rates needs to be addressed.
  • Driving pace and balancing risk: In 'Make' programmes, defined 24-month timeline between 'prototype developed' and 'RFP issued' stage, investments reimbursed in case of delays, brings sense of urgency.
  • Improved ease of doing business: Slew of measures - export NOCs online; reduced list of items requiring licenses, licenses granted fast, increased validity; up to one year to select offset partners, allowing to change offset partners; States competing to attract investments - acting as a catalyst.
  • Liberalisation of policies: 49 per cent FDI under automatic route simplifying the process. Allowed ToT to private sector earlier restricted to government establishments. Allowed services as an eligible avenue for offsets.
Some points are still to be addressed - rolling out of the new DPP, taking tangible measures to make MRO cost-effective in India currently prohibitive due to high taxation, issuing list of 'friendly countries' for exports.

 

While these measures are expected to draw in the Indian private sector companies to participate in defence production, it also means that the foreign OEMs and their value chain partners need to shift their strategy - an imperative to be able to qualify and to continue to play in most defence programmes in India by having some local presence via ToT, co-development, manufacturing or MRO services. Global OEMs are forging relationships to 'Make in India', and to be seen as 'originating' from here rather than 'exporting' into India to (a) drive growth, (b) leverage low manufacturing cost for global supply chain, and (c) improve efficiency on current platforms via ER&D as new platforms are not coming up due to declining global budgets.

However, it is required that the government enablers and private sector efforts go much beyond this, as Make in India in defence is not an option anymore; it's rather an imperative, and that's where the incentives get aligned.

  • Design to win: Make in India, in its true sense, will happen only when we 'Design in India' - respect and own our designs, be tolerant to failures and provide visibility of orders to successful companies.
  • Promote like-to-like interactions: Between value chain partners of large foreign OEMs and Indian companies to up-skill the entire value chain, than restricting dialogue at OEM levels.
  • Train talent with focus: Goes beyond the need for talent for business development, design or manufacturing. Needs understanding of the nature of defence business, systematic risks, and devising smart ways to build a sustainable franchise within any constraints of the ecosystem.
  • Create defence hubs: Companies have realised that they are better off joining forces than pitching individually to the defence sector customers, and in turn reduce their cost base and improve success probability. The need is to create self-sustaining A&D hubs, similar to the ones that exist in the auto industry.
  • Drive exports: Become globally competitive in the defence export market. This will be a true test of the strength and competitiveness of our defence industrial machinery, and will also provide go-to-market avenues for the private companies to make money beyond domestic orders. Exports is one of the best ways to make friends.
Past performance or situation must not be the barometer of future performance and possibilities in the Indian defence sector. Given the demand-supply gap, opportunities are endless, and the right time to enter the Indian market and to 'Make in India' is now - later may be too late when things are sorted and entry barriers / longer gestation period may exist for newer entrants.

 

(The author is Director -PwC Strategy and Defence Leader)


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