Private Sector In Indian Defence Production Finance Essay

11. Defense mechanism is a strategic sector for any state and autochthonal military industry is cardinal to its operational readiness. Indian authorities has been taking stairss to accomplish the mark of securing 70 per centum of its defense mechanism demands from autochthonal sources.India is likely to pass USD 80 -100 Billion in the following five old ages “ with the likely initiation of new equipment and modernization programmes ”[ 1 ]. Despite its best attempts, India is nowhere nigh 70 per centum mark. The Government is good cognizant of the outgrowth of private sector as a vibrant and dynamic force. It has come to gain that ego trust would stay a pipe dream if it continued to bank on public sector entirely.

12. One of the aims mentioned in the new defense mechanism procurement process is to accomplish ego trust in defense mechanism equipment. But the whole process is soundless about the function of the private sector and no worthwhile enterprises have been proposed to incorporate its possible in India ‘s quest for ego trust. In add-on to economic factors, defense mechanism industry is by and large considered to be an instrument of national sovereignty and pride. “ No state can accomplish great power position on bought out weapon systems and 2nd manus engineering ”[ 2 ].

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13. Industry of constituents, assemblies and sub-assemblies was allowed to the private industry in 1991. With a position to advance defense mechanism – industry partnership, the MoD constituted six joint undertaking forces in coaction with Confederation of Indian Industry in 1998. Consequent to their recommendations, the Government opened defense mechanism production to the private sector in January 2002. “ It allowed 100 percent private equity with 26 per centum FDI ”[ 3 ]. Subsequently, guidelines for the issue of license for the production of weaponries and ammo were given by the Department of Industrial Policy and Promotion ( DIPP ) .

14. The Kelkar Committee constituted in 2004 made many extremist recommendations. The Government has accepted a bulk of them but their execution has lacked seriousness and focal point. The DIPP, in audience with MoD, “ has so far issued 200Letters of Intent / Industrial Licenses for the industry of assorted types of defense mechanism hardware which include armoured and combat vehicles, radio detection and rangings, electronic warfare equipment, war vessels, pigboats, avionics, military aircraft, safety and ballistic merchandises, armaments and ammo with proposed investing Rs 11,773 crore and likely employment chances for 38579 people ”[ 4 ].

Defense mechanism Requirements of the Future

15. Defence budget has risen to 17 per centum since 2007 and is likely to increase farther as shown below ( see Exhibit 1 ) . The defense mechanism demands from capital acquisitions are likely to be about 3, 56,400 crore. Projected outgo of each service in the following five old ages are given below ( see Table 1 ) . Capital investings in the grapevine for the following two old ages are shown below ( see Table 2 ) . The growing form of defense mechanism sector is likely to follow the same tendency in the 13th five twelvemonth program as good. In order to run into the demands of the forces and to accomplish ego trust engagement of private sector in a big graduated table is required.

Role of Private Sector in Defence Production

16. Despite the above steps, there has been no discernable alteration in the land state of affairs. Merely a smattering of India ‘s top companies are involved in little value defense mechanism contracts. The private sector has to stay content with the supply of some low engineering points to the populace sector. Its supplies to DPSUs and OFs grossed over Rs 1200 crores and Rs 1900 crores last twelvemonth. Whereas, these figures signify the part made by the private sector, they besides highlight the fact that the private sector continues to be simply an outsourcing base for the public sector. “ As the DPSUs outsource more than 30 per centum and the Ordnance Factories about 80 per centum ”[ 5 ], therefore the function of private sector in defense mechanism production should non be underestimated. They have the ability to assist the state accomplish self trust.

Reasons for Non Participation of the Private Sector

17. A figure of defense mechanism industry seminars, conferences and exhibitions have been held in the recent old ages. “ Our defense mechanism industry is now unfastened to 100 % for private sector engagement and the authorities has been sporadically reexamining the defense mechanism procurance processs to show in transparence and velocity in acquisition ”[ 6 ]. Given decennaries of insularity and biass, this was no little accomplishment. The old mentalities, complexness of procurance processs and clout wielded by the populace sector have been moving as major hindrances to any meaningful engagement of the private sector. New aspirers find the whole government to be extremely prohibiting. Reasons for non engagement of private sector are covered under assorted caputs in the subsequent paragraphs.

Policy Issues

18. Few policy issues which prevent the entry of private sector are given below: –

( a ) The private defense mechanism industry is in the infant phases of growing and requires support from authorities which is non available to them. “ The analysis of growing of private defense mechanism industries of developed states and Asiatic Liberation Tigers of Tamil Eelams reveal that their authorities policies have protected their nascent private industry from foreign competition ”[ 7 ].

( B ) Industrial Licence ( IL ) . “ Applications from 49 top private companies for IL have been kept pending since 2008 by Department of Defence Production ”[ 8 ]. It takes four to six months to obtain an IL and there is no certainty that the blessing will be given even after hold. Most private investors find it disputing to put money and resources in an unsure environment. “ Furthermore over the last few old ages the Department of Defence Production refused to publish licenses some of which dates back to March 2008 ”[ 9 ].

( degree Celsius ) Beginning Policy. As per Defence Procurement Policy ( DPP ) 2011, at least 30 per centum of the contract value ( those transcending 300 crore rupees ) has to be invested in the Indian defense mechanism industry. There exists ambiguity in implementing the beginning policy and the benefits do n’t make the private investors.

( vitamin D ) Decisions taken by the Defence Acquisition Council ( DAC ) to categorize a proposal as ‘Buy ‘ or ‘Buy and Make ‘ or ‘Make ‘ are based on the advice given by DRDOand the populace sector. No inputs are sought from the private sector.

( vitamin E ) In all trades where transportation of engineering is negotiated, the nominative receiver is ever a DPSU, even if a private sector company is better placed in footings of substructure and cognize how to absorb the engineering. A DPSU may hold to set up complete installations ab-initio, whereas a private sector company may necessitate merely incremental engineering.

( degree Fahrenheit ) Tax Government. Imports by the DPSUs are duty free but no inducements for the private sector. Government policies create really high entry limitations for them. “ DPSUs acquire Excise Duty freedoms and 10 per centum monetary value penchant ”[ 10 ].

( g ) Most of the demands of armed forces are linked with some grade of sensed security and are normally non unfastened to private sector. This cloud of enigma ever proves counter-productive.

( H ) FDI Policy. The cap of 26 percenthas deterred the flow of FDI. OEMs are non acute to put and portion engineering where they have no important control. The critical country of concern for foreign companies is the “ beginnings which have been placed at 30 per centum and in some instances like MMRCA at 50 per centum ”[ 11 ].

( J ) Export and Import Policy. The policy is equivocal about the export or import license for a double usage point. The clip slowdown for obtaining a licence varies from three to six months and there is no certainty even after the hold. Private participants want the exports for fiscal additions. However, they are non allowed to export and they need to obtain license every clip they export a new point.

Procedural Issues

19. Government bureaus associated with defense mechanism and other interest holders in the defense mechanism sector are responsible for the bing province of defense mechanism production. All the three services are besides to be blamed for the hapless path record in autochthonal production. Few procedural issues are given below: –

( a ) Requirements are spelt out to the highest possible grade of flawlessness with respects to every property of the system being procured. “ Armed forces are prone to over stipulate the modification demands ”[ 12 ]and they besides modify the demands midway through the class of merchandise development.

( B ) The demands of the armed forces are non made known to the private sector sufficiently in progress, with the consequence that it does non acquire equal clip either to lookout for foreign tie ups or to set up the necessary installations. The clip given for the entry of proficient and commercial proposals is grossly unequal for a new entrant.

( degree Celsius ) Complicated processs, engagement of big figure of bureaus in finalizing the trade and ruddy tape to invest or sell an point to defence. Cumbersome and long way of procurances deter private enterprisers from come ining into defense mechanism supplies.

( vitamin D ) Procurement process requires the supply order to be placed on the lowest bidder. An enterpriser who sets up the production line quotes the rates based on the just premise of return of orders so that he may retrieve the costs over sustained orders. However, the uncertainness in having order for sufficient measure deters him from come ining defense mechanism production.

( vitamin E ) Industries opine that the processs are conditioned to welcome outside engineering criterions instead than specifying ain demands. “ The mentality that foreign merchandises will be good any twenty-four hours must be removed if India targets self trust ”[ 13 ]. Parameters are formulated with foreign equipment in head, and private sector is non consulted in this procedure, whereas minor acceptable alterations in parametric quantities may do the Indian equipment eligible for consideration.

( degree Fahrenheit ) As RFPs are issued to foreign original equipment makers every bit good, they prefer direct command. “ However OEMs are non acute to put and portion critical engineerings in a Joint Venture where they have merely 26 % interest with no important control over their rational belongings, rigorous merchandise restraints and a sensed unjust advantage to the populace sector ”[ 14 ]. They decline joint ventures with Indian companies as it helps them to guard their engineering.

( g ) Heavy limitations have been placed on place grown private sector that they have non been able to vie efficaciously. Minor relaxation in parametric quantities within the acceptable bounds would hold made the Indian merchandise eligible for consideration, where they have been soon rejected. “ Indian private sector contributed to merely 10 % of the defense mechanism sheathing for the twelvemonth 2009 chiefly as Tier-II and Tier-III providers ”[ 15 ].

Functional Issues

20. Due to the really nature of its use, defense mechanism equipment has to run into extremely demanding criterions. There can be no failure in the face of the enemy. Unfortunately, many Indian sellers have non to the full grasped the importance of this demand and happen the quality control government to be highly boring.

( a ) Every manufacturer seeks economic systems of graduated table and assured uninterrupted orders. Unfortunately, Indian procurance government precludes both.

( B ) Services by and large work on short term footing. Measures that are slated for telling are really little and economically non feasible for a private participant to put up a production line for defense mechanism demands.

( degree Celsius ) RFPs are issued for erstwhile piecemeal measures without bespeaking the envisaged entire demand over a period of clip. Additionally, no long term committedness is made sing regular flow of orders. This deters Indian companies from perpetrating resources for set uping production installations as the venture can turn out both expensive and hazardous.

( vitamin D ) RFPs one time issued are recluse figure of times and issued once more after integrating many alterations. This affects the timelines for completion of the undertaking and overall profitableness for the command company.

( vitamin E ) Technology and production costs are really high. “ The biggestroadblock to private sector engagement is the extortionate cost of of R & A ; D for a merchandise that may ne’er be accepted in service ”[ 16 ]. Private companies do n’t desire to put in a merchandise without assured supply.

Lack of Mutual Confidence

21. Traditionally, the Indian Government has ever favoured the populace sector over private sector in defense mechanism production. “ The existingresponsibility of the Department of Defence Production ( DDP ) supervising the involvements of both public and private sector needs a re-look as there is a prejudice to protect the involvements of the DPSUs/OFs to guarantee their capacity use ”[ 17 ].The Indian populace sector has hold over defence orders. It thrives because of its monopolistic clout and non because of any displayed excellence. This sense of insecurity makes it wary of any move to ease the entry of the private sector and it tries all ploies to barricade it.

22. On the other manus, many officials feel that the private sector is out to do a speedy vaulting horse and deficiencies required doggedness. They tend to see the private sector as bargainers instead than committed makers who can digest the parturiencies of long drawn procurance process. Harmonizing to them, anyone wishful of come ining defense mechanism industry has to be to the full cognizant of the fact that defense mechanism orders take extraordinarily long to happen and hesitation constantly proves unproductive.

The Communication Gap

23. There is a entire absence of an effectual institutionalized interface between the MoD, the services and the private sector for regular interaction at the policy doing degree. There are a figure of groups or partnership forums in topographic point, but their public-service corporation is limited to exchange of positions merely. The major drawbacks are as listed below: –

( a ) The procurance bureaus are highly acute to promote autochthonal production and bound imports to the lower limit ineluctable demands. “ They, nevertheless, are incognizant of the capablenesss and potency of different private sector companies, as the competency of Indian companies has non been genuinely catalogued as yet ”[ 18 ].

( B ) There is no data bank of Indian industries available with the MoD. RFPs are issued merely to a few extremely seeable companies, while many others lose by default.

( degree Celsius ) Many private sector companies have the capableness to fabricate the whole scope of defense mechanism demands but are nescient of the procurance bureaus, their policies and processs. This ignorance makes them wary of covering with the defense mechanism.

( vitamin D ) To intensify the job, there are over 150 different defense mechanism procurance bureaus with different processs. There is no system of centralized presentment of demands and seller enrollment.

Other Hindrances for Private Sector Participation

24. Other hindrances for private sector engagement are legion and noteworthy 1s are given as under: –

Economic Influence. Due to the unstable demand process, competition with abroad administrations and rigorous quality demands, the private sector is non really acute in doing investings and therefore delaies for a long clip to acquire the acceptable returns. It is looking for immediate returns in the short term for the growing of the industry.

Government Procedures. The private sector is besides concerned with the processs of tendering and of non holding a changeless influx of orders. Besides the human concatenation, within these administrations every bit good as the seller ‘s back uping the administration can go a beginning and via media security.

Quality Control. It is besides combative about the care of quality and upgrading the production and services on a regular footing. Besides there is a fright that during an exigency, the unreasonable hiking in monetary value of production and services would be imposed over which neither the Government nor the user has any control.

Obsolescent Rate. Another overruling factor is that the industry has to infest the rapid obsolescent rate. The user of course wants the latest technological ascents for his equipment. Sing the ongoing development, it is indispensable to upgrade equipment at least one time in five old ages and therefore the industry finds it hard to get by with rising demands.

( vitamin E ) Security. Most of the demands of armed forces are linked with some grade of sensed security and are normally non unfastened to private sector. “ There is a feeling that the private sector in coaction with foreign participants may derive entree to sensitive information and abuse it ”[ 19 ]. Hence in every contract, there are secret clauses which the industry has to stay by and some find it hard to adhere to these clauses.

Advantages of Private Sector Participation

25. The advantages of engagement of private industry in defense mechanism production are as under: –

Technological Upgradation. The private sector quickly builds up expertness in engineering and has grown in size and range. It has over the period gained expertise towards doing meaningful part towards defense mechanism.

Enhanced R & A ; D. The private sector keeps up gait with the increasing demands in R & A ; D and hence it is imperative to affect the private sector in defense mechanism production and fabrication by constructing an digesting partnership between industry and defense mechanism.

Increased Equipment Requirements. The of all time increasing equipment demand and future battleground demands are chiefly being relied on imports. Besides there is a big spread between the defense mechanism demands and ability of the populace sector to run into the demands. Private sector will be able to run into the increased demands.

Importance of Information Warfare ( IW ) . The future battleground will be filled with the of import facets of IW and C4ISR challenges. The common platform in these Fieldss is the package. Our private sector has huge potency in this sector and it is imperative for our defense mechanism services to construct a partnership with these major participants to give us an border over the others.

Dependency.To map independently, it is indispensable to hike our autochthonal defense mechanism production capableness. It would be hard for the DPSUs to manage such a demand and hence would originate engagement of private sector. The needed coactions can be thought away to outsource a portion of undertaking to the private sector to rush up the advancement already made by public sector.

Doubling Gains. To heighten our economic base and besides strive towards accomplishing economic high quality, the equipment manufactured for Indian defense mechanism services could be exported to other developing states with a scaled down version. This would non merely give a encouragement for the industries set abouting such undertakings but besides heighten defense mechanism cooperation with other states.

( g ) Timeliness. Alternatively of seeing the visible radiation after 20 old ages of construct, consequences may emerge in merely five to seven old ages by incorporating private sector. It would besides give the user adequate border over the antagonist in the battleground.

( H ) Job Creation. If India desires to accomplish the strategic aim of 70 – 80 per centum autochthonal production, so it needs to turn the defense mechanism industrial base. This would necessitate the local industry to duplicate in size in five old ages. “ Even with current degrees of efficiency this would make about 1.2 lakhs new occupations ”[ 20 ]. See Table below. “ Manufacturing industry has a higher employment multiplier consequence that for every 1000 individuals employed in fabricating units, created employment for 3200 individuals in related industries ”[ 21 ]. Additionally several indirect occupations ( about 3.5 hundred thousand ) will besides be created through sub-contractors, sellers and other allied bureaus.

Forecast Growth of Imported vs Indigenous Production






Capital Expenditure ( USDmillion )






Autochthonal growing rate

39.33 %

33.16 %

29.13 %

26.30 %

24.19 %

Imported growing rate

-2.57 %





Potential New Direct Jobs Created in Domestic Sector






Potential New Indirect Jobs Created in Domestic Secor






Beginning: Indian 13th Finance Commission Report, Dec 2009


26. The present antediluvian theoretical account of the DRDO research labs transporting out research and the DPSUs fabrication consequences in inordinate holds and production of out-of-date equipment at an highly high cost. It is imperative that the function of private engagement in the Indian defense mechanism production be increased by transporting out necessary alterations in the Indian defense mechanism production policies. The present state of affairs makes it pertinent to transport out a critical analysis of the defense mechanism production theoretical accounts being followed in some of the selected states of the universe viz. USA, France, Israel, South Africa and Russia to pull out of import lessons. A successful theoretical account for Indian defense mechanism production with a much incorporate private engagement can therefore be adopted which can efficaciously run into the defense mechanism demands of the state.

US Private Defence Production Model

27. United States has a successful private production theoretical account which provides a competitory environment to guarantee a healthy competition every bit good as private sector R & A ; D houses supplying province of the art engineering. The construct of private engagement originated in 1984 when a survey contended that public sector shipyards were less efficient than their private sector opposite numbers, mostly due to the absence of competition.

28. The US private sector production theoretical account has a process in which the defense mechanism service demands are spelt out to the private houses who develop and make the merchandise after transporting out their ain R & A ; D. ” Defence Production Division has been created in the Ministry of Defence Production to affect local industry in defense mechanism production ”[ 22 ]. The Defence Logistics Agency ( DLA ) is the bureau in the US DoD which looks after the complete logistic facets.

29. Single Manager Concept. In July 1955, the Hoover Commission recommended centralizing direction of logistics support and presenting commonfinancial direction processs. The solution was to name “ individual directors ” for common supply and other service activities. Under a Defence directiveapproved by the Assistant Secretary of Defence for Supply and Logistics, the Secretary of Defence would officially name one of the three service secretaries as individual director for selected group of trade goods or common service activities. The Air Force handled electronic points, the Navy arranged medical shops, fuel and technology parts andthe Army managed nutrient and vesture. Single director reduced investing by centralizing sweeping stocks and simplified the supply procedure by following the standard points.

30. In add-on to the individual director construct, the US Government established its Defence Advanced Research Projects Agency ( DARPA ) to develop new engineering for the armed forces. It is different from other military R & A ; D and studies straight to senior Management of Defence Department. “ This enabled the scientists to bond good with the military and was given the freedom to be originative and imaginative which resulted in the production of existent new system ”[ 23 ]. This system avoids hierarchy, byfunctioning at two direction degrees for rapid flow of thoughts and faster determinations. This plans for the initiation and integrating of the latest film editing border engineering for the US defense mechanism forces for nowadays every bit good as future.

31. The cardinal takeouts from this theoretical account are as under: –

( a ) R & A ; D by Private Firms. Once the defense mechanism services demands are given, the private houses carry out extended research which helps in acquiring the province of the art engineering.

( B ) Defense mechanism Industry Polarisation. During the 1990s in US, 22 companies were amalgamate, go forthing behind four major participants in the market, i.e. , Boeing, Lockheed Martin, Raytheon and Northrop Grumman. Similar consolidations were taking topographic point all over Europe and the remainder of the developed universe. This tendency indicated an industrial polarisation towards pooling of resources, corporate consolidation, particular advantages of economic systems of graduated table and a sustainable defense mechanism production industry.

( degree Celsius ) Undertaking Monitoring. Each undertaking has a undertaking proctor who looks after the complete undertaking till its completion and keeps a cheque on its advancement. Any hold is the duty of the house who pays for the default.

( vitamin D ) Transparency in Defence Production. Entire defense mechanism production every bit good as procurance is through an unfastened and crystalline competitory command, therefore doing full procedure transparent.

( vitamin E ) DARPA as a Vehicle for Induction of Latest Technology. DARPA acts an interface between the latest engineering being invented in the civil sphere and the defense mechanism forces. It recruits undertaking directors, scientists and even university and school pupils for making research and implement the same in the defense mechanism forces.

Gallic Public – Private Defence Production Model

32. The Gallic theoretical account is based on a combination of the “ Public – Private ” theoretical account. US defense mechanism industry is chiefly in private custodies and the Government emphasises market mechanisms, nevertheless, about four-fifth of the Gallic defense mechanism industry is controlled by the province and loosely managed by the Government. France defense mechanism industry has been the chief provider to the Gallic Armed Forces. There are about 1, 75,000 forces employed in the Gallic defense mechanism industry, which represents 4.5 per centum of entire industrial employment. The chief duty for all armament plans and military procurance lies with the Delegation Generale d’Armement ( DGA ) . R & A ; D and production are controlled by DGA. It executes R & A ; D for armed forces and proctors the advancement of private and public sector. DGA functionaries believe that in the province dominated defense mechanism field, administrative controls on quality and cost are superior to trusting on market mechanisms such as competition.

33. A drawback of the Gallic procurance system is that determinations tend to be made in a close, top-down mode with limited answerability to parliament or the populace. The Gallic defense mechanism production is based upon a combination of public and private partnership with province keeping 25-30 per centum interest in these companies. The end of national liberty in defense mechanism procurance has resulted in the acquisition of about all Gallic arms from domestic beginnings or joint ventures affecting Gallic companies, even when superior or less expensive options were available from abroad. The Gallic defense mechanism industry besides relies to a great extent on export gross revenues to amortise overhead costs and allow the economic production of arms for its ain usage.

34. Restructuring of Gallic Defence Industry. Currently, the Gallic defense mechanism industry is reconstituting in response to budget cuts, shriveling export and rapid technological progresss, driven by commercial applications. To pull off the passage and extenuate its inauspicious effects on employment and regional economic systems, the DGA is prosecuting an active defence-industrial policyfocused around two axes. The first policy axis seeks to continue and advance the technological competences of the defense mechanism industry. To this terminal, the DGA is promoting defense mechanism contractors to diversify into the civil sector, puting in defense mechanism R & A ; D at the disbursal of current production, urging houses to concentrate on countries of excellence to better their competitory advantage. The 2nd policy axis aims to enable Gallic defense mechanism houses to play a prima function in the restructuring of defense mechanism production on the European graduated table.

35. The positive facets of the Gallic theoretical account which can be imbibed in the Indian industry are as under: –

( a ) Diversification of Defence Industry. Post 1990, there has been a gradual displacement in the Gallic defense mechanism industry and variegation has taken topographic point. The Gallic Government strongly supports the defense mechanism sector and encourages private engagement.

( B ) Strong Checks and Balances by the DGA. The DGA acts as a professional acquisition corps, provides equal cheques and balances between Government and industrial power, answerability to the legislative assembly and the populace.

( degree Celsius ) Synergy between Private and Public Sector.DGA still remains the critical nexus between the Private and Public sector and ensures that national purposes, defense mechanism demands and timelines are adhered by the private participants.

( vitamin D ) Reliance and Promotion of Dual Use Technology. France has been successful in diversifying its defense mechanism industry into commercial markets, advancing the integrating of civil and military production by shuning regulative barriers and puting greater trust on dual-use engineerings.

( vitamin E ) Strategic Alliances and Collaboration. The Gallic theoretical account has besides been successful in prosecuting diversified strategic confederations and other signifiers of international coaction in defense mechanism R & A ; D and procurance.

Israel ‘s Public – Private Defence Production Model

36. The Israel ‘s defense mechanism production theoretical account is similar to the US theoretical account and receives enormous technological support from it. Gallic weaponries trade stoppage was the accelerator for Israel ‘s metabolism after the Six-Day War. Israel moved forself sufficiencyby developing and bring forthing all its defense mechanism demands. The chief push of their industrial revolution was directed towards autochthonal production. The military industry within three old ages after 1967, quadrupled its production. R & A ; D intensified and the industry of major subsystems was favoured over licensing or co-production with foreign companies.

37. Today “ Israel has 150 defense mechanism houses with a combined gross of about $ 3.5 billion ”[ 24 ]. Procurement and Production Directorate ( PPD ) handles the industry and procurance of systems and care services for the defense mechanism systems. The cardinal issues from this public – private theoretical account are: –

( a ) High Foreign Investment in Defence Sector. The Israel Government promotes and facilitates a really high grade of foreign investing in defense mechanism production. This provides greater handiness of new engineering and faster development of systems.

( B ) Rigorous Government Control. The Israel Government ensures a rigorous governmental control on the defense mechanism production sector which helps in proliferation.

( degree Celsius ) Spill Over of R & A ; D Activities into Civil Industry. The engineering development by the Government owned R & A ; D activities had progressive consequence in the non-military sector by directing towards the technological promotion of sophisticated industry.

( vitamin D ) Foreign Military Gross saless. Israel Government allows foreign military gross revenues and its net income is used for farther R & A ; D every bit good as to cut down cost for ain defense mechanism procurance.

South African Public – Private Defence Production Model

38. In the early 1960s, South Africa during international isolation planned to spread out the defense mechanism sector industries. By mid-1960, about 1000 private companies were involved in defense mechanism production. In the 1990s, due to jobs defense mechanism industry lost province protection and its chief consumer, the South African Defence Force ( SADF ) , but had to commercialize and organize portion of the planetary industry which was faced with challenges in supply and restructuring.

39. Denationalization of South African Defence Industry. In the early 1990s, the Government began the denationalization thrust of the defense mechanism sector. In April 1992, independent arms fabricating company, “ Denel ” was formed by reorganising a portion of Armaments Corporation ( ARMSCOR ) and several other fabricating subordinates. Denel manufactured systems for ARMSCOR, which was overall responsible for military acquisitions. ARMSCOR functioned as a province bureau modulating defense mechanism exports and imports, giving selling licenses and supervising attachment to international understandings.

40. The authorities owned Armaments Corporation Limited is the officially appointed acquisition administration for Department of Defence. It renders advices to the authorities sections and public entities on new acquisition. The cardinal take away from the South African theoretical account are as under: –

( a ) Designation of Core Products. In 1994, after a serious crisis in South African defense mechanism Industry, nucleus merchandises like the G-8 heavy weapon systems and vehicles were identified and others such as ship building were discontinued.

( B ) Focus on Second Tier Industries. South African defense mechanism industry shifted its focal point from high engineering points to back grade merchandises which were more easy and profitable to bring forth.

( degree Celsius ) International Collaborations. Another singular facet is the tie up of South African defense mechanism industries with prima defense mechanism merchandise fabricating giants of the universe which has provided it entree to latest engineering.

( vitamin D ) Investments in Dual Use Technology and Strategic Foreign Industries. South Africa recruited foreign technicians to plan, develop and fabricate arms. It provided proficient aid to supervise delusory patterns, outright smuggling and buccaneering to run into its defense mechanism demands. Dual usage engineering and equipment like communications, computing machines, industrial equipment and fabrication techniques were non subjected to limitations.

Defense mechanism Production Model of Russia.

41. Soviet union is the following largest defense mechanism provider after the United States, with more than $ 18 billion worth of exports in 2008. The military-industrial sector was larger than other states and produced about all civilian merchandises with engineering content. As the state has moved to a market economic system and privatised much of its economic potency, the directors of the endeavors have found it necessary to change over most of their end product to non military merchandises and services every bit good as to reconstitute the endeavors.

42 Post Cold War Conversions in Russian Defence Industry. The transition in the Russian defense mechanism industry after the cold war epoch has been both active and inactive. The active transition is taking to production of civilian merchandises and the inactive transition is chiefly constructing up the service and trade sectors. The endeavors have borne the major load for transition and reconstituting without much organised aid from the province.

43. The Russian theoretical account of defense mechanism production is based upon the populace sector wherein Government mills produce defense mechanism equipment with proficient support from the Government research bureaus. Equally far as the defense mechanism industry and weaponries exports are concerned, there continues to be a deficiency of scheme or coherence of any kind on the portion of the Government. It is neither being closed down nor supported. Under these conditions, it has proved peculiarly hard to rationalize and modernize.

44. The cardinal issues to be imbibed from the Russian theoretical account are as under: –

( a ) Importance of Efficiency of State Owned R & A ; D Agencies. This theoretical account of public defense mechanism production has been successful mostly due to the ability of the province owned research bureaus to develop new and advanced engineering.

( B ) Export Oriented Industry to Lower the Cost of Production. The bureaus focus on export to friendly foreign states under the control of the Government. This provides the much needed financess for transporting out the R & A ; D every bit good as to prolong the industry in instance of decreased Government support.

45. The above analysis and the lessons that can be derived out of the successful defense mechanism production theoretical accounts of selected states can be appropriately modified to accommodate the Indian defense mechanism production demands. The needed policy support steps to heighten private sector engagement in defense mechanism production sphere are being looked into in the following portion.



Defence Procurement Policy ( DPP )

46. Development of DPP. The DPP 2011 is a modified version of the progressive DPP 2008. “ Make ” process, “ Buy Indian ” class and guidelines for beginnings were introduced in DPP 2008. “ Buy Indian ” class was introduced to supply way for private sector. In 2009, the MoD made alterations and introduced a new class of procurance, i.e. , “ Buy and Make Indian ” . This is a frontward looking measure in actuating private industry to set up relationships with foreign OEMs and bring forth indigenously ; the RFP will be given to home grown industries merely. The MoD has boosted autochthonal industry with an increased focal point on procurance from autochthonal beginnings.

47. DPP-2011. It incorporates steps aimed at simplifying processs, rushing up procurance and heightening benefits for the Indian defense mechanism industry. New guidelines for ship edifice by private shipyards and new classs to the production list for beginnings viz. Civil Aerospace, Internal Security and Training have been included. Other alterations have been incorporated with regard to the cogency of RFP, station agreement of Acceptance of Necessity ( AON ) , Exchange Rate Variation ( ERV ) , the fundamental law of a Technical Oversight Committee ( TOC ) , Transfer of Technology ( ToT ) for care substructure, test ratings, public presentation and guarantee bond, and fast track process. Key issues are enumerated below: –

( a ) Beginning Policy. This policy covered in DPP-2011 purposes at hiking the Indian industry by guaranting concern ; directs the OEMs to reinvest 30 per centum of all capital acquisitions in the Indian defense mechanism sector. There has been exponential addition in private companies using for IL, joint ventures, increased consciousness and exports. MoD facilitated SMEs and MSMEs to set up partnerships with foreign companies straight. Today about 5000 companies have shown involvement in engagement in beginnings programmes, partnerships and engineering as they have found necessary policy to take the spring.

( B ) Capital Procurements. To supply enabling commissariats and to better private engagement, DPP 2011 is extremely progressive for developing autochthonal industry. The concerns of the Armed Forces have non been adequately addressed. Capital procurances have resulted in clip hold and thereby cost escalations. This policy has addressed few issues in the capital procurance processs and with a practical attack widens the range of discharge of beginning duties with a echt purpose of beef uping the Indian private industry.

48. Benefits – Indian Industry.

( a ) Fabrication Sector. The fabrication sector can derive vastly by puting in double usage engineerings like aircraft engines and airframes. Permiting the merchandises and engineerings to be useable in the civil aerospace, the fiscal additions from the venture will go attractive and may ask for more companies to put in these strategic sectors.

( B ) Services Sector. The services sector may ease joint ventures for fix and care, inspection and repair and up step. It may make design services, winging preparation establishments and proficient publications to supply services from the guarantee phase onwards. Armed forces will acquire seasonably and assured care support and the private sector will acquire the proficient expertness.

49. Analysis. The policy provides a base for the service sector and the fabrication sector. IT sector gets the duty to supply the design services. The policy is progressive. However the concerns of DRDO has non been addressed MoD may besides affect DRDO and engineering extract while supplying the chances to the industry. Private sector may work the state of affairs when the right engineering flows in and thereby beef up the autochthonal industry.

50. Recommendations. The MoD has made progressive alterations in the DPP 2011 and need to originate stairss to turn to the concerns listed below: –

( a ) Address the concerns of DRDO by take a firm standing on engineering development.

( B ) Armed Forces must be provided with the province of the art engineering equipment in the earliest timeframe.

( degree Celsius ) Except those acquisitions that have already been signed, the policy should be applicable for all that are in assorted phases of development.

( vitamin D ) MoD should work as an enabler and institute progressive add-ons to the policy. The struggle between DOFA, acquisition wing and user be resolved and a individual window mechanism be introduced.

Defence Production Policy ( DPrP )

51. Policy and its Aims. Though long delinquent, the MoD unveiled in Jan 2011, the first of all time DPrP to supply way to industry. The vision stated is to “ accomplish autonomy in production of arm platforms, weaponries, ammo and other stuffs required for the defense mechanism of our state ”[ 25 ]. The policy has four wide aims as under: –

( a ) To “ accomplish substantial ego trust in the design, development and production of equipment / arm systems / platforms required for defense mechanism in every bit early a clip frame as possible ”[ 26 ].

( B ) To ease the private industry to take an active function in defense mechanism production.

( degree Celsius ) To enlarge the defense mechanism R & A ; D base of the state.

( vitamin D ) To heighten potency of SMEs in indigenisation.

52. Aim of DPrP 2011. The policy papers has included figure of enabling commissariats to accomplish these aims and to make a ego reliant autochthonal defense mechanism industry. The aim of accomplishing self trust in defense mechanism production helps to achieve the authorities ‘s long standing end of 70 per centum autochthonal production. It has besides expanded the range of self trust every bit good.

53. Analysis. The policy will help in doing up of short term operational nothingnesss and with the long term end of self trust. “ A modest beginning has been made in the “ Make ” class where two major programmes, the Fighting Infantry Combat Vehicle ( FICV ) and the Tactical Communication System ( TCS ) have been opened to private and public sectors to vie for development and tests ”[ 27 ]. The policy ensures that the the state will fall back to buy from foreign beginnings, stated as “ Buy Global ” and “ Buy and Make with Transfer of engineering ” , when the equipment can non be produced within the declared clip. Analysis of this policy is enumerated below: –

( a ) Self Reliance. There are 13 operational paragraphs in the policy with a separate subject for each. Defense mechanism sector has been removed from reserved class. Achieving self trust in defense mechanism is its primary focal point. Double usage systems have been shifted to restricted list, nevertheless weaponries, ammo and allied systems have been retained in modesty list.

( B ) Creation of an Ecosystem. The policy aims creative activity of an ecosystem as other nonsubjective. MoD has late stated that they would supply contributing environment for private sector engagement.

( degree Celsius ) Long Term Integrated Perspective Plans ( LTIPP ) . The aim of the 4th article provinces that the demands for equipment in the LTIPP will be provided good in progress. This will supply long lead times and ease the private sector production.

( vitamin D ) Development of Indigenous Industry. The policy focuses on development of autochthonal industry to vie with planetary companies. It has simplified the stairss in “ Make ” process. It directs that the ascents to the in service systems be done by Indian companies merely.

( vitamin E ) R & A ; D. It addresses the R & A ; D attempt required, but does non put down a policy way. The DRDO should be made responsible for the engineering enterprises, initiated by the Defence Production Board ( DPB ) Defence R & A ; D Board.

( g ) FDI. This policy has non been successful in acquiring any worthwhile fiscal or technological influx. “ Ministry of Commerce and Industry has recommended an addition of FDI to 74 per cent in the paper circulated in the parliament in July 2010 ”[ 28 ]. FDI policy has non been successful so far in pulling any meaningful influx in the defense mechanism sector as the foreign companies feel at that place is really less range for worthwhile returns due to limited control. “ Even the FDI influx into defense mechanism sector has been minimum ( USD 0.15 million ) even behind soaps and cosmetics ( see Table ) ”[ 29 ].

Table: Choice Sector-wise FDI Inflow, Apr 2000 to May 2010



Sum in FDI Inflows ( US $ million

% of Entire FDI Inflow


Servicess Sector




Computer SW and HW







Housing and Real Estate







Soaps, Cosmetics and Toilet Products




Defense mechanism Industries



Beginning: DIPP, Ministry of Commerce and Industry, Government of India, Factsheet on FDI from Aug 1991 to May 2010.

54. Recommendations.

( a ) Accountability. The policy is a progressive 1 and will present merely if answerability is thought of. DPB and the Defence R & A ; D Board need to be enabled and empowered. Regular updates must be given to the Defence Minister and observations should be on record to derive more answerability.

( B ) R & A ; D. The policy will assist to make a vibrant and strong industrial base with strong R & A ; D. Dedicated course of study in Indian Institutes of Technology and other educational establishments be included in defence/aerospace fabrication.

( degree Celsius ) Fine Tuning of the Policy. The policy soon lacks lucidity with regard to self trust, quantum of investing and R & A ; D support. A policy affecting industry during readying of QR and without any it ambiguity will supply higher drift to India ‘s defense mechanism sector.

( vitamin D ) Licensing. The conditions for licencing for obtaining eligibility for defense mechanism production may be reviewed. “ DIPP has now mooted simplified processs for grant of extension of cogency of licenses ”[ 30 ]. Enterprises have been taken to take the duplicate of process in grant of Letter of Intent or IL.

( vitamin E ) FDI. Government may increase the cap on FDI to 49 or even up to 74 per cent on a needed footing. This would ease greater investings fiscal and technological influx. FDI influx should be to the defense mechanism industry and this should be included in the Memoranda of Understanding ( MoU ) .


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