India's efforts to promote defence industry making slow progress

The eight edition of Defexpo India, which kicked off in New Delhi on February 6, is a show of strength and grandeur. Some 624 companies are taking part in the expo to showcase their naval, air defence and artillery systems.

While the overwhelming presence of foreign companies is apparent, Indian companies such as Tata Motors, Larsen & Toubro (L&T), Bharat Forge and Ashok Leyland are also making their presence felt with long-range guns, combat vehicles and shipbuilding capabilities to woo potential customers.

Amidst this glitz, however, the burning issues facing the Indian defence sector remain unanswered. India imports about 70 per cent of its defence equipment. The government aims to reduce the share of imports to 30 per cent by 2021 by promoting the domestic defence industry.

India opened defence manufacturing to private and foreign players in 2001. Till then, only state-run companies such as Hindustan Aeronautics (HAL), Bharat Electronics and Bharat Earth Movers as well as ordnance factories produced defence equipment in the country.

These companies still account for more than 60 per cent of the country's defence manufacturing output. But, their performance is far from satisfactory. They have been unable to expand and have order books that extend 15 to 20 years.

HAL, for instance, doesn't have design capabilities and does licensed production, says Laxman Behera, a research fellow at the Institute for Defence Studies and Analysis.

M.V. Kotwal, President of Heavy Engineering at L&T, says that, in India, only HAL has aerospace capabilities. "Does it satisfy the country's needs? No. We have a need of huge number of aircraft whether in defence or civil domain," he says.

According to a 2012 report by Boston Consulting Group, the estimated output per employee for state-run defence companies and ordnance factories comes to Rs 15 lakh per year. In contrast, output for a range of manufacturing sectors within India stands at Rs 20-40 lakh per employee, according to data from the Ministry of Finance.

The need for increased private-sector participation is two-fold: state-run companies alone can't meet the requirements and a rising power like India should have a domestic industry to meet its needs. "We are very clear. We are not in a business to keep on waiting for things to happen. The signs of change are there but we are not happy with the pace of change," says Kotwal, referring to the defence procurement policy 2013 that was aimed at giving preference to Indian vendors under the 'Buy (Indian)' category.

Since 2005, the government has been trying to push for indigenization in the defence sector. In the last few years, some procedures have been simplified.

Experts say the government's intentions must be supported by actual changes on the ground. "So far, no contract has been signed under 'Make' or 'Buy and Make (Indian)' categories," says Behera.

Both 'Buy and Make (Indian)' and 'Make' categories are made to benefit Indian vendors. Under the 'Make' category, for instance, only domestic companies will compete and subsequently design and develop equipment for which the Ministry of Defence will fund 80 per cent of the development costs.

V.S. Norohna, Vice President (Defence and Government Business) at Tata Motors, is hopeful of better times ahead. He says that though the desired changes are taking time but the direction is set. "Rome wasn't built in a day. For 50-60 years, this industry was controlled by the government. Now they have to be convinced about the capabilities of the private sector. Ultimately, cooperation between private industry and the public sector is the only way forward."