penditure, and set a target of 70 per cent

self-reliance by 2005, now pushed to 2020.

The rst instance of opening up of the de-
fence sector came in 2001, with the domestic
private sector being allowed to produce de-
fence items with FDI up to 26 per cent, sub-
ject to industrial licensing and security
clearances. This was followed by the announ-
cement of a Defence Procurement Procedure
in 2002, a Defence Offsets Policy in 2006, a
Long Term Integrated Perspective Plan
(LTIPP) in 2009, a Defence Production Pol-
icy in 2011, and eight committees/task forces
set up to look into various aspects of national
defence, including defence production and
self-reliance, since 2000. Clearly, the issue
remained a priority for various governments,
but the outcome has been meagre. Certainly,
some responsibility rests with former De-
fence Minister A.K. Antonys tendency to
avoid decision-making if it could be post-
poned, but there are underlying structural
reasons too. Consequently, forward move-
ment during the last decade has lacked
purpose.
Growing defence expenditure
Since 2001, the total FDI received in the
defence sector is below $5 million. Mean-
while, Indias defence expenditure has been
growing every year; today, India has the
eighth largest defence budget in the world,
accounting for 3 per cent of global defence
expenditures and, in recent years, has also
emerged as the largest defence importer, with
nearly 10 per cent of global defence imports.
With growing obsolescence and a 10 per cent
annual rise in the capital budget for equip-
ment procurement, a conservative estimate
indicates that India will spend nearly $100
The Narendra Modi government needs to set up
a national committee to resolve turf battles
between various government agencies and
reconcile competing interests of small and
medium enterprises and industry majors
billion over the next eight years to modernise
and equip its armed forces. During the 12th
Five Year Plan, the defence capital account
budget is expected to go up from $15.9 billion
to $25.6 billion. By the end of the 14th Five
Year Plan, the cumulative capital expendi-
tures over 201227 are projected to exceed
$235 billion. Assuming that 80 per cent is
meant for platform acquisitions, of which 60-
70 per cent is earmarked for committed lia-
bilities, this still leaves 30-40per cent for new
schemes. To meet the target of 70 per cent
self-reliance by 2020 requires an indigenous
defence industry worth $80-$100 billion,
with a direct employment potential of 1.25
lakh skilled workers and indirect support to a
workforce of another ve lakh.
In addition are investments via the De-
fence Offsets Policy. This policy, announced
in 2005, requires the foreign company to in-
vest 30 per cent of the indicative cost in the
request for proposals when the indicative
cost is Rs.300 crore or more. Initially, the
offsets were for the defence sector, but in
2009, the policy was diluted to permit offsets
to civil aviation and internal and coastal secu-
rity sectors too. Its objectives are to improve
the domestic defence R&D base; develop an
internationally competitive defence industry,
and an industrial base covering dual use tech-
nologies (i.e. having both civilian and defence
applications). Offsets are implemented by
raising domestic procurement, generating
exports, bringing FDI into related services
and building local supply chains, transferring
technology/equipment to Indian entities, etc.
The DRDO has identied a list of 15 critical
technologies that it seeks to acquire through
offsets; incidentally, exports of most of these
technologies are controlled and require spe-
Rakesh Sood cial approvals by the foreign vendors govern-
ment. Till 2012, 16 offset contracts, worth
$4.3 billion, were signed and this is expected
to cross $25 billion by 2020.
Manipulation
In the Defence Procurement Policy, special
incentives to encourage the domestic private
sector, including government R&D funding
for product development, were announced.
Some of the larger enterprises (including
TCS, Tata Power, Godrej, HCL, L&T, Ma-
hindra, Kirloskar) are to be classied as
Raksha Udyog Ratnas to enable them to be
treated on a par with DPSUs. In addition
there are about 6,000 Small and Medium En-
terprises (SME), many of whom feel that they
are nimbler and better suited to innovate in
niche areas. In fact, they oppose limiting FDI
to 49 per cent, the position supported by
domestic majors and the MoD.
By themselves, many of these measures are
unexceptionable, but together, these have
failed to create a military-capable, dual-use
manufacturing technology base. Different
lists of defence products in the MoD, the
DIPP and the Directorate General of Foreign
Trade (DGFT) add to the confusion. Further,
most of these technologies are controlled un-
der the Wassenaar Arrangement (a grouping
of major arms and dual-use technology ex-
porting countries); India is not a member of
this group, which makes it more difficult to
acquire such technologies. (China and Israel
are also not members, but they have aligned
their export controls with Wassenaar lists,
and are signicant arms exporters.) With
multiple players pulling in different direc-
tions, it is easy for vested interests to tweak
specications of items to be procured to fa-
vour a certain vendor and derail debates to
the limits of FDI in defence.
Way forward
To make a new beginning, the Modi gov-
ernment needs to take charge by setting up a
national defence industry committee which
should resolve turf battles between various
government agencies, reconcile competing
interests of SMEs and industry majors, set
targets (including for SRI, intellectual prop-
erty rights (IPR) generation, integration of
SMEs, technology acquisition through off-
sets), monitor implementation, and coordi-
nate policy approaches by: a) creating
uniform lists of defence products and related
technologies; b) enabling the harmonisation
of Indian lists with the Munitions List and
Dual Use Technology List of the Wassenaar
Arrangement, with the eventual aim of secu-
ring Indias membership. An enabling frame-
work already exists with Indias Special
Chemicals, Organisms, Materials, Equipment
and Technologies (SCOMET) export control
lists; c) amending the Industries (Develop-
ment and Regulation) Act to bring defence
and dual-use technology-related Industrial
Licensing into sync with the above; d) amend-
ing the terms of the production licence for
defence items to ensure that control of the
entity cannot be transferred without Govern-
ment of India (GoI) approval, that all expor-
table items and services will be available
domestically, and that exploitation of IP gen-
erated will not be denied in India. These con-
ditions would render the debate of FDI levels
irrelevant; e) promoting the clustering of
SMEs with industry majors through targeted
policies; f) changing the role of the Depart-
ment of Defence Production, whose structure
limits it to a mere administrative unit for OFs
and DPSUs; g) integrating the working of the
LTIPP with defence R&D, production, pro-
curement and offsets policies; h) providing a
degree of continuity and predictability in the
policy framework for the next 10 years in-
stead of the annual revisions that have afflict-
ed the sector in recent years.
(Rakesh Sood, a former Ambassador, was
the Prime Ministers Special Envoy for
Disarmament and Non-Proliferation till May
2014. E-mail: rakeshsood2001@yahoo.com)
A blueprint for the defence industry
A
s the new government prepares to
present its rst general budget,
there is expectation that foreign di-
rect investment (FDI) in the de-
fence sector will be liberalised, but by itself,
this is unlikely to contribute much towards
the goals of self-sufficiency and self-reliance.
There are reports that the Department of
Industrial Policy and Promotion (DIPP) is
pushing to allow 49 per cent FDI without
transfer of technology, 74per cent with trans-
fer of technology, and even 100 per cent in
cases involving the transfer of state-of-the-
art technology and equipment, while the De-
fence Ministry would like it to be restricted to
49 per cent. This debate is sterile because
merely liberalising FDI will not help. What is
needed is an appreciation of the character-
istics of the defence industry and coordina-
tion among the multiple stakeholders who
drive, and have often distorted the decision-
making process.
Distant goals, continuing imports
The twin objectives of self-sufficiency and
self-reliance have been articulated, some-
times interchangeably and at times separate-
ly, since the early 1950s. In 1947, India
inherited the Ordnance Factories (OF) Orga-
nisation, which today consists of 41 OFs, nine
Defence Public Sector Undertakings (DPSU)
and 50 or so defence R&D laboratories under
the Defence Research and Development Or-
ganisation (DRDO). The model followed was
production of technologies conceptualised
by the DRDO; projects nominated by MoD
[Ministry of Defence] after consulting the
Services; and assembly and production of
platforms under licence from foreign OEMs
(Original Equipment Manufacturers). Cur-
rently, with about two lakh employees, the
OFs and DPSUs have a modest turnover of
$7.6 billion. The goals of self-reliance and
self-sufficiency remain distant, with almost
70 per cent of defence equipment still being
imported.
A task force set up in 1998 concluded that
the public sector alone could not deliver; li-
censed production had fostered neither in-
digenisation nor innovation; and frequent
blame games between the Services, the
DRDO and the DPSUs were leading to delays
in acquisition. A self-reliance review commit-
tee set up in 1992, under Dr. Abdul Kalams
chairmanship developed a self-reliance index
(SRI), dened as the percentage share of in-
digenous content in total procurement ex-

appreciation of the characteristics of the defence industry and

coordination among the multiple stakeholders who drive, and
have often distorted the decision-making process.
Merely liberalising FDI will not help. What is needed is an