penditure, and set a target of 70 per centself-reliance by 2005, now pushed to 2020.

The first instance of opening up of the de-fence sector came in 2001, with the domesticprivate sector being allowed to produce de-fence items with FDI up to 26 per cent, sub-ject to industrial licensing and securityclearances. This was followed by the announ-cement of a Defence Procurement Procedurein 2002, a Defence Offsets Policy in 2006, aLong Term Integrated Perspective Plan(LTIPP) in 2009, a Defence Production Pol-icy in 2011, and eight committees/task forcesset up to look into various aspects of nationaldefence, including defence production andself-reliance, since 2000. Clearly, the issueremained a priority for various governments,but the outcome has been meagre. Certainly,some responsibility rests with former De-fence Minister A.K. Antony’s tendency to

avoid decision-making if it could be post-poned, but there are underlying structuralreasons too. Consequently, forward move-ment during the last decade has lackedpurpose.

Growing defence expenditureSince 2001, the total FDI received in the

defence sector is below $5 million. Mean-while, India’s defence expenditure has beengrowing every year; today, India has theeighth largest defence budget in the world,accounting for 3 per cent of global defenceexpenditures and, in recent years, has alsoemerged as the largest defence importer, withnearly 10 per cent of global defence imports.With growing obsolescence and a 10 per centannual rise in the capital budget for equip-ment procurement, a conservative estimateindicates that India will spend nearly $100

The Narendra Modi government needs to set up a national committee to resolve turf battlesbetween various government agencies andreconcile competing interests of small andmedium enterprises and industry majors

billion over the next eight years to moderniseand equip its armed forces. During the 12thFive Year Plan, the defence capital accountbudget is expected to go up from $15.9 billionto $25.6 billion. By the end of the 14th FiveYear Plan, the cumulative capital expendi-tures over 2012–27 are projected to exceed$235 billion. Assuming that 80 per cent ismeant for platform acquisitions, of which 60-70 per cent is earmarked for committed lia-bilities, this still leaves 30-40 per cent for newschemes. To meet the target of 70 per centself-reliance by 2020 requires an indigenousdefence industry worth $80-$100 billion,with a direct employment potential of 1.25lakh skilled workers and indirect support to aworkforce of another five lakh.

In addition are investments via the De-fence Offsets Policy. This policy, announcedin 2005, requires the foreign company to in-

vest 30 per cent of the indicative cost in therequest for proposals when the indicativecost is Rs.300 crore or more. Initially, theoffsets were for the defence sector, but in2009, the policy was diluted to permit offsetsto civil aviation and internal and coastal secu-rity sectors too. Its objectives are to improvethe domestic defence R&D base; develop aninternationally competitive defence industry,and an industrial base covering dual use tech-nologies (i.e. having both civilian and defenceapplications). Offsets are implemented byraising domestic procurement, generatingexports, bringing FDI into related servicesand building local supply chains, transferringtechnology/equipment to Indian entities, etc.The DRDO has identified a list of 15 criticaltechnologies that it seeks to acquire throughoffsets; incidentally, exports of most of thesetechnologies are controlled and require spe-

Rakesh Sood cial approvals by the foreign vendor’s govern-ment. Till 2012, 16 offset contracts, worth$4.3 billion, were signed and this is expectedto cross $25 billion by 2020.

ManipulationIn the Defence Procurement Policy, special

incentives to encourage the domestic privatesector, including government R&D fundingfor product development, were announced.Some of the larger enterprises (includingTCS, Tata Power, Godrej, HCL, L&T, Ma-hindra, Kirloskar) are to be classified asRaksha Udyog Ratnas to enable them to betreated on a par with DPSUs. In additionthere are about 6,000 Small and Medium En-terprises (SME), many of whom feel that theyare nimbler and better suited to innovate inniche areas. In fact, they oppose limiting FDIto 49 per cent, the position supported bydomestic majors and the MoD.

By themselves, many of these measures areunexceptionable, but together, these havefailed to create a military-capable, dual-usemanufacturing technology base. Differentlists of defence products in the MoD, theDIPP and the Directorate General of ForeignTrade (DGFT) add to the confusion. Further,most of these technologies are controlled un-der the Wassenaar Arrangement (a groupingof major arms and dual-use technology ex-porting countries); India is not a member ofthis group, which makes it more difficult toacquire such technologies. (China and Israelare also not members, but they have alignedtheir export controls with Wassenaar lists,and are significant arms exporters.) Withmultiple players pulling in different direc-tions, it is easy for vested interests to tweakspecifications of items to be procured to fa-vour a certain vendor and derail debates tothe limits of FDI in defence.

Way forwardTo make a new beginning, the Modi gov-

ernment needs to take charge by setting up anational defence industry committee whichshould resolve turf battles between variousgovernment agencies, reconcile competinginterests of SMEs and industry majors, settargets (including for SRI, intellectual prop-erty rights (IPR) generation, integration ofSMEs, technology acquisition through off-sets), monitor implementation, and coordi-nate policy approaches by: a) creatinguniform lists of defence products and relatedtechnologies; b) enabling the harmonisationof Indian lists with the Munitions List andDual Use Technology List of the WassenaarArrangement, with the eventual aim of secu-ring India’s membership. An enabling frame-work already exists with India’s SpecialChemicals, Organisms, Materials, Equipmentand Technologies (SCOMET) export controllists; c) amending the Industries (Develop-ment and Regulation) Act to bring defenceand dual-use technology-related IndustrialLicensing into sync with the above; d) amend-ing the terms of the production licence fordefence items to ensure that control of theentity cannot be transferred without Govern-ment of India (GoI) approval, that all expor-table items and services will be availabledomestically, and that exploitation of IP gen-erated will not be denied in India. These con-ditions would render the debate of FDI levelsirrelevant; e) promoting the clustering ofSMEs with industry majors through targetedpolicies; f) changing the role of the Depart-ment of Defence Production, whose structurelimits it to a mere administrative unit for OFsand DPSUs; g) integrating the working of theLTIPP with defence R&D, production, pro-curement and offsets policies; h) providing adegree of continuity and predictability in thepolicy 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, wasthe Prime Minister’s Special Envoy for Disarmament and Non-Proliferation till May2014. E-mail: rakeshsood2001@yahoo.com)

A blueprint for the defence industryAs the new government prepares to

present its first 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 towardsthe goals of self-sufficiency and self-reliance.

There are reports that the Department ofIndustrial Policy and Promotion (DIPP) ispushing to allow 49 per cent FDI withouttransfer of technology, 74 per cent with trans-fer of technology, and even 100 per cent incases involving the transfer of state-of-the-art technology and equipment, while the De-fence Ministry would like it to be restricted to49 per cent. This debate is sterile becausemerely liberalising FDI will not help. What isneeded is an appreciation of the character-istics of the defence industry and coordina-tion among the multiple stakeholders whodrive, and have often distorted the decision-making process.

Distant goals, continuing importsThe 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, Indiainherited the Ordnance Factories (OF) Orga-nisation, which today consists of 41 OFs, nineDefence Public Sector Undertakings (DPSU)and 50 or so defence R&D laboratories underthe Defence Research and Development Or-ganisation (DRDO). The model followed was“production of technologies conceptualisedby the DRDO; projects nominated by MoD[Ministry of Defence] after consulting theServices; and assembly and production ofplatforms under licence from foreign OEMs(Original Equipment Manufacturers).” Cur-rently, with about two lakh employees, theOFs and DPSUs have a modest turnover of$7.6 billion. The goals of self-reliance andself-sufficiency remain distant, with almost70 per cent of defence equipment still beingimported.

A task force set up in 1998 concluded thatthe public sector alone could not deliver; li-censed production had fostered neither in-digenisation nor innovation; and frequentblame games between the Services, theDRDO and the DPSUs were leading to delaysin acquisition. A self-reliance review commit-tee set up in 1992, under Dr. Abdul Kalam’schairmanship developed a self-reliance index(SRI), defined as the percentage share of in-digenous content in total procurement ex-

”“appreciation of the characteristics of the defence industry andcoordination among the multiple stakeholders who drive, andhave often distorted the decision-making process.

Merely liberalising FDI will not help. What is needed is an