ATMANIRBHAR BHARAT IN DEFENSE MANUFACTURING
Given recent events, one would be concerned about the implications of having private defense producers. India has nine public-sector defense enterprises, and the government owns the vast majority of the country’s indigenous defense production. However, with the private sector ready to play a larger role in defense production, it will be prudent to examine defense manufacturing in India, as well as the implications of privatization.
Former Defense Minister Arun Jaitley met with representatives from defense arms of companies such as Larsen and Toubro, Ashok Leyland, Mahindra and Mahindra, Reliance Infra, Tata Group, Adani Group, and Chambers of Commerce and Industry (CII) to discuss the anticipated Strategic Model for bringing the private sector into defense manufacturing to produce military platforms such as fighter jets and submarines in India. The government plans to use the Make in India framework to highlight private engagement and develop domestic competence in important fields like fighter aircraft, helicopters, submarines, armored vehicles, and main battle tanks.
- Why Privatization?
Until 2001, when the Vajpayee government, to foster indigenous defense manufacture, authorized 100 percent private sector participation and up to 26 percent FDI. India is the world’s greatest importer of weaponry. Imports provide for the majority of India’s existing defense requirements. The government has altered its present defense procurement policy as part of the ‘Make in India’ initiative, with an emphasis on reducing the import content of weapon systems and defense equipment.
High-end products, such as aircraft, submarines, and tanks, are not produced by the existing players. Because most of these products are highly specialized and require significant R&D investments for a single product, it will take a long time for Indian manufacturers to establish themselves and then enter the high-end product market. The Bofors scandal, submarine deals, chopper transactions, and other corruption scandals raise concerns about the country’s defense sector. India has been the world’s greatest importer of weaponry for the past three years. Countries such as China have begun to develop their defense sectors, but India continues to rely on PSUs such as the Defence Research and Development Organization (DRDO).
The privatization of the Indian defense sector began with the dawn of the twenty-first century, as India ushered in liberalization and economic changes across the board. These initiatives at liberalization and reform were meant to encourage a shift away from the Cold War-era state-run command economy. In order to improve efficiency and quality, this change away from a command economy would also mean handing over the keys of several state-owned firms to the private sector.
However, India’s defense sector remains largely dependent on both the Indian government and technologically advanced nations such as Russia and, more recently, the United States for the most part. India’s reliance on Russia for defense capabilities began in 1965 after India’s war with Pakistan. Because of the Cold War context, the United States in 1965 imposed an embargo on weapons sales to India as a concession to its Pakistani ally, and as a result, India turned to the former Soviet Union and thus Russia for defense support.
- Current Scenario
The minister would be informed about the progress made in the privatization of BEML, in which the government plans to sell 26% of its 54 percent stake in exchange for management control. According to the company’s stock price, selling a 26% interest to a strategic buyer might net the government Rs 1,440 crore.
The government will soon approve the draught request for proposal and the share purchase agreement to privatize the PSU that has interests in defense, mining, construction, and making rail coaches, said an official. The document will clarify the liabilities that the shortlisted bidders will be responsible for.
There has been an increase of approximately 26 percent in ‘Foreign Direct Investment’ (FDI) in India’s defense sector. Tata and Airbus are believed to be the two private companies that have procured the weightiest contracts for private defense development in India.
During the last three financial years i.e. from 2018-19 to 2019-2020 and the financial year 2020-21 the Government has accorded Acceptance of Necessity (AoN) to 112 defense proposals, worth Rs 1,99,860 crore approximately, under the various categories of capital acquisition, which promotes domestic manufacturing as per the Defence Acquisition/Procurement Procedure.
The government is planning to decrease shareholding in Defence Public Sector Undertakings (DPSUs) namely, BEML Ltd, Garden Reach Shipbuilders & Engineers Limited (GRSE), and Mishra Dhatu Nigam Limited (MIDHANI). The completion of a transaction depends on market conditions.
- SP MODEL
The Strategic Model was proposed by the Dhirendra Singh Committee in July 2015. The model was introduced to outspread the ‘Make in India’ initiative in the defense sector. The former defense minister stated that the proposed strategic partner model is intended to enhance competition, increase efficiencies, and facilitate faster and more significant absorption of technology. Also to create a tiered industrial ecosystem, ensure the development of a wider skill base, trigger innovation and enable participation in global value chains as well as promote exports.
- Problems That Beset the Indian Defence Manufacturing Sector
Strengthening the country’s defense manufacturing and production capacity was never a priority for any of the governments from independence until the early twenty-first century. Instead of investing in their own capabilities, policymakers focused on purchasing weapons, technologies, and machinery from other countries, leaving India’s armed forces fully reliant on foreign allies during wartime.
In 1991, the industrial sector suffered another defeat when India opened its economy, exposing the country’s fledgling companies to worldwide competition, effectively killing any private manufacturing firms that remained. Thus, India never really had a dedicated defense manufacturing sector or private companies that can produce quality defense products for the country and so India never really got a chance to become a major manufacturing hub but had depended on others for major engineering and defense products.
Advantages of Privatization of the Defense Sector
In India’s defense sector, Public Sector Undertakings (PSUs) have a poor track record in terms of efficiency. Ordinance factory boards are frequently chastised for their inefficiency. Hindustan Aeronautics Limited has a reputation for completing orders on schedule. The PSUs are unable to meet the needs of the armed forces despite having a huge and skilled workforce.
Another factor contributing to PSU inefficiency is corruption. The audit must be meticulously carried out, and the vigilance agencies must be extremely vigilant in this regard. Because it is directly involved in national security and integrity, no compromises may be made in the defense sector.
To establish themselves in a market like India, private businesses must provide exceptional efficiency and on-time delivery. Historically, the government has been cautious to allow private actors into the defense sector, mostly because of security concerns. However, policies are changing at a rapid pace right now. Privatization of the defense sector is a requirement in today’s society.
Private companies have to be profit-oriented in order to survive in the market. Maintaining proper efficiency is very essential for reaping huge profits. Most of the private players present in India’s defense sector today have a very good track record in terms of efficiency. For example, Larsen & Tubro has almost delivered the 100 K9 howitzers on time.
Private businesses must maintain their quality standards in order to be competitive. OFB is accused in India of producing defective and low-quality ammunition. Despite several complaints, OFB has taken no action to rectify the situation. Despite this, the army is compelled to purchase ammunition from OFB because it has no other choice. When there are multiple sellers, quality and pricing become highly critical considerations.
- Export Opportunities
The floodgates to the global market outside the home market open whenever there is a manufacturing ecosystem capable of surplus production. With numerous enterprises producing the same defense equipment, India will be able to export it to other countries. This would result in more revenue for the businesses, ensuring their continued expansion. Increased exports would position India as a major military force with which all nations would be ready to maintain strong defense ties.
Disadvantages of Privatization of Defence Sector
For a very long time, the Indian government was reluctant to privatize the defense sector. This was primarily due to security concerns. It is very difficult to protect sensitive data when it goes to a private company. There are many examples where private defense companies compromised sensitive information just for money. In India, the government is planning to transfer various technologies developed by DRDO to private players to ensure a faster and more cost-effective production. However, the danger of the sensitive data ending up in the wrong hands could not be neglected. Private companies along with state-owned companies are vulnerable to cyber-attacks as well.
- Lobbyists To Promote Arms Sale
Private companies often hire lobbyists to promote arms sales. Let us understand it by an example. Ever wondered why the USA is always at a war? One reason is that it has established itself as a global superpower but things are not always like what it seems to be. The defense manufacturing giants in the US like General Dynamics, Lockheed Martin, Colt, Heckler, and Koch US, have their own lobbyists in the senate of the US government. They promote America’s participation in various conflicts to ensure their arms sales. After a defense ecosystem comprising private firms develops in India, it will not be surprising to have a similar scenario here.
- Reduced Control
When a private company manufactures a certain defense product, it will remain in control of a country as long as it produces that particular product on that country’s soil. There is a possibility that the private companies in the Indian defense sector might cease operations in India and migrate to some other country. From there it could sell weapons to some customers which may not be in India’s national interest. As long as the companies remain ethical, there is no problem but as soon as they start compromising their ethics for greater profit, they become a national threat.
Given India’s internal challenges and disagreements, including terrorism in Kashmir and Maoist insurgency in the North-East, FDI engagement might risk the country’s security. Privatization would encourage players to pursue commercial objectives, resulting in the illicit transfer of firearms to these groups. As a result, public-private cooperation would be a better alternative to avoid illicit weapon supply, or private actors should just produce components rather than whole weapons to avoid such a predicament.
The privatization of the defense sector is urgently required. It has its own set of advantages and disadvantages. It should be carried out with extreme caution. Privatization of the defense industry should not imply the elimination of state-owned enterprises. Privatization should be carried out only to the extent that it allows state-owned firms to compete fairly. The most sensitive technologies, such as missile technology, should never be given to a private company. Private firms should be closely monitored…
The Indian defense sector will flourish as long as private enterprises stay ethical and work in the national interest. India will become Atmanirbhar as a result of the combined efforts of private and public companies. In the not-too-distant future, all defense equipment will be built in the country, with no imports. The first step toward fulfilling Atmanirbhar and Sashakt Bharat’s dreams is to privatize the defense sector.
WRITTEN BY –
Ms. Prakhya Shah