A single defence deal is emblematic of the delays affecting India’s defence modernisation plan. On September 8, the Cabinet Committee on Security cleared a Rs 20,000 crore proposal to buy 56 C295 military transport aircraft for the Indian Air Force from Airbus Industries. The deal, cleared by the Defence Acquisition Council in 2015, has been waiting for the green light for six years. After a contract is eventually inked, Airbus will assemble 40 of the 56 military transport aircraft in India with its partner, Tata Advanced Systems Ltd (TASL).

It is a significant step because the state-owned Hindustan Aeronautics Ltd (HAL) is the only Indian company that builds military aircraft. But momentous as this deal might be, it will not instantly spur defence indigenisation within the country—what the government calls ‘Aatmanirbhar Bharat’, where it wants Indian defence firms to not just produce military hardware but export them as well. TASL, for instance, will not be able to build copies of the C295, upgrade it or even export it without its foreign partner because it does not own the design. The inability to break out of licensed production is a problem that has bedevilled India’s defence indigenisation process. The reasons range from a dysfunctional military industrial complex dominated by the public sector and a lack of indigenous defence R&D to produce indigenous design, to patchy support for such products from the armed forces.

The result? India has the dubious distinction of being the world’s second largest arms importer. Between 2016 and 2020, India accounted for 9.5 per cent of all global arms imports, bringing in fighter jets, warships and missiles from the US, Russia, France and Israel.

Over this decade, the three services will buy over $100 billion (Rs 7 lakh crore) worth of fighter jets, helicopters, tanks and submarines to upgrade their ageing hardware. To ensure that these are produced within India—to lower costs and increase local manufacturing capabilities—the government launched its Strategic Partnership (SP) model in 2017. Under this, the ministry of defence (MoD) would team up with a strategic partner—a private sector manufacturer selected after a laid down procedure—which would then partner with a foreign OEM (original equipment manufacturer) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains, R&D for modernisation and upgrades and an ecosystem of suppliers.

The inability to break out of licensed production is a problem that has bedevilled India’s defence indigenisation process

In 2017, the MoD identified four of its biggest procurements, collectively worth over Rs 2.2 lakh crore, which it would hand over to the private sector. These included the navy’s plan to acquire six submarines and 123 utility helicopters to operate from warships, the army’s replacements for its fleet of 1,700 T-72 tanks and the air force’s demand for 110 fighter jets to replace its dwindling fighter squadrons (see above: Slow Burner Partnerships).

Five years on, though, this partnership model is mired in delays. Three of the four projects are still in their first stage, where a service issues RFIs or requests for information. (It takes five to seven years for a deal to go from initiation of a case to contract signing.) The navy’s P75 (I) project to build submarines is the only one at stage 2—asking production partners to submit proposals. Cutting the steel for the first submarine, though, is still years away.

Another project, to build naval utility helicopters, is caught in a tailspin. Public sector HAL wants to participate in the contest, fielding a variant of its indigenously designed ALH Dhruv, but the navy wants the PSU kept out, citing the fact that SPs are meant only for the private sector. HAL has cited the precedent set by the state-owned Mazagon Docks Ltd (MDL) being in the P75 (I) submarine race to justify its inclusion. The government is believed to have pressed pause on the NUH (Naval Utility Helicopters) programme and allowed the navy to lease helicopters to tide over its shortfall.

Knowhow And Know-Why

As part of its Aatmanirbhar Bharat drive, the government is converting its 41 ordnance factories into defence public sector corporations, setting up defence corridors in Uttar Pradesh and Tamil Nadu to give out land to defence industries to set up manufacturing facilities. The MoD has notified a positive indigenisation list of 209 items, from warships to howitzers, and embargoed imports and assured domestic industry of orders worth Rs 4 lakh crore over the next five to seven years.

This is meant to jumpstart local manufacturing by domestic industry. The government has fixed a target of Rs 35,000 crore ($5 billion) exports each year by 2025. The SP model should have fitted right in with this policy, but the MoD now feels it could be out of sync with its ambitious indigenisation policy.

“The SP model is from a different era. It is a more advanced version of licensed production. Whereas, under Aatmanirbhar Bharat, we want companies to have the knowhow and know-why,” says a senior defence ministry official. Knowhow enables licensed production while know-why brings the capability to independently design hardware that comes when design technology is transferred. As is the case with the Airbus C295 deal, the foreign OEM will continue to be in the driver’s seat.

This, defence officials say, is the result of a structural flaw in the SP model. The original ‘cost plus’ model (which estimates the total cost of a product over its life cycle) recommended by several MoD-appointed committees was converted into an ‘L1’ model where the ministry gives the contract to the lowest bidder. An L1 model is, therefore, no different from any other defence contract and the collaboration between the Indian and foreign partner becomes one-time. There is no incentive for the Indian company to develop indigenous hardware.

The government’s strategic partnership model has been mired in delays, with three of the four projects still in their first stage

While the MoD calls its tie-up with the private defence industry a ‘strategic partnership’, it is acutely aware that, for the private sector, it is just a business investment. “Defence industry is just one of the many options for the private sector player, which can invest its resources in real estate or airlines,” a defence ministry official says. This is also why private firms are wary of the SP model. “I am answerable to my shareholders, I have to pay interest on capital and I get no tax breaks from the government for investing in defence industry,” says the CEO of a private sector defence firm. “The SP model is not at all workable because it breaks the basic defence contracting principle where the government pays money to the prime contractor,” says Rahul Chaudhry, former CEO, Tata Power SED, and chair, FICCI Committee on Homeland Security.

The lack of assurance of further orders and uncertainty over what will happen to investments in plant and machinery also worries private players. Larsen & Toubro (L&T), for instance, invested in setting up a howitzer assembly line after a ‘Buy and Make’ tie-up with South Korea’s Hanwha Techwin to supply 100 self-propelled howitzers for the Indian Army in 2015. This year, it delivered the last guns to the army and now its assembly line in Hazira, Gujarat, is idle. It will soon get a repeat order for 40 more howitzers, but after that, nothing.

Learning From The South Korean Model

South Korea’s Daewoo Shipbuilding and Marine Engineering is one of five contenders offering to supply submarines for India’s Project 75 (I) submarine-building programme (see graphic above). This offer is not without its irony. South Korea and India both bought submarine-building knowhow from the same West German firm, HDW, in the early 1980s. While the Indian conventional submarine programme floundered for decades, embroiled in corruption scandals and bureaucratic indecision, the South Korean programme developed improved variants and mastered the design till it fielded the DSME-3000, a version it is now offering the Indian Navy.

Over the past decade, South Korea, has been a surprising entrant into the Indian defence market

This is not a one-off. Over the past decade, South Korea has been a surprising entrant into the Indian defence market. Korean firms have won a Rs 4,500 crore contract to supply 100 K-9 howitzers to the Indian Army and emerged the cheapest bidders in contests to supply minesweepers for the Indian Navy and self-propelled air defence gun missile systems for the Indian Army. It has mastered the ability to manufacture sophisticated military hardware across all three domains—land, sea and air—a feat accomplished only by big countries with deep pockets, like China, Russia, and the US.

In its March 2021 report, the Stockholm Peace Research Institute noted that South Korea was the ninth largest arms exporter in 201620 with a 2.7 per cent share of the global total. Its arms exports in 2016-20 were 210 per cent higher than in 2011-15 and 649 per cent higher than in 2001-2005. ‘South Korea implemented wide-ranging reforms to improve its defence industry’s competitiveness, promoted greater competition among South Korea’s chaebols and nurtured small- and mid-sized defence companies that could efficiently produce the components for combat systems. These reforms enabled not only its large defence integrators to lower their prices but also its smaller companies to enter global defence supply chains,’ notes a 2019 paper by Felix K. Chang, senior fellow at the Foreign Policy Research Institute in Philadelphia.

These are lessons the MoD needs to learn. India’s first attempt to create a level playing field for the private sector with the public sector—the Raksha Udyog Ratna (RUR) scheme in 2006—had proposed to designate select private sector majors as RURs to enable them to compete for defence contracts on par with the public sector. The scheme was scrapped in 2013 after private firms left out of the process said the government was creating monopolies within the private sector. The defence ministry needs to ensure its second attempt to energise the private defence manufacturing sector does not meet the same fate.