Last week, the Narendra Modi government unveiled some measures to boost defence manufacturing in the country as part of its economic stimulus and reform package. Among other things, the government raised Foreign Direct Investment limit in defence manufacturing under automatic route from 49 to 74 per cent and said that it will soon notify a list of weapons and defence platforms banned for imports.
Swarajya interviewed Bharat Karnad, an Emeritus Professor at the Delhi-based Centre for Policy Research and a national security expert to understand what these changes mean and whether or not they will help boost defence manufacturing and indigenisation of defence equipment.
Here are edited excerpts:
Q. Prime Minister Modi gave a call for ‘Aatmanirbhar Bharat’ on 12 May. Subsequently, FM Nirmala Sitharaman has unveiled specific measures related to Defence. Do you think they are sufficient to make India self-reliant, especially the decision to ban import of certain armaments?
No, because only a total ban on arms imports, as I have advocated in my books and other writings, will rid India of the incubus of arms dependency.
What Sitharaman announced was a partial ban on imports and that too a leaky one, and won't gain for the country the end state of ‘atmanirbharta’.
This is because the Defence Ministry has been asked to produce a negative list of weapons systems whose imports are barred and to propose deadlines for each of these items from beyond which the ban will come into effect.
Except, this is an escape hatch for the armed services to continue sourcing their high-value hardware/software requirements and keeping them out of this list.
Should the Services fail to convince the Defence Ministry on this, they will no doubt endeavour to extend the deadlines so that most of the arms import transactions already in the pipeline come in under the wire.
The point is not that reasons cannot be adduced for this or that military product to not be on this list. But rather that such a course of action will be used by the armed services habituated to “buying foreign” to persist with this habit.
As a result, even a modicum of self-sufficiency will be hard to achieve. Because it is certain the Services headquarters will fight tooth and nail to ensure that their main armaments — main battle tanks, combat aircraft, diesel submarines, helicopters and ballistic missile defence systems and the like, inclusive of their associated electronics, and systems and sub-systems, remain outside the negative list.
It could, in effect, leave the country still forking out enormous amounts of hard currency to foreign suppliers even as the process to make India self-reliant stays unachieved.
One fervently hopes Modi’s PMO will be rude and ruthless in insisting that the Defence Ministry first enlarge the list of defence items that cannot anymore be bought from foreign vendors and, simultaneously, nullify or at least drastically prune the underway deals.
Q2: If you were asked for a list of defence items that must be made-in-India right away and not be imported at all, what would those items be? And do we have the capability to locally manufacture these items?
There are proven capabilities in India, especially in the private sector, to ensure that navy’s Project 75i diesel submarine project can be almost entirely tackled indigenously, considering the entire Arihant-class of nuclear-powered ballistic missile firing submarines (SSBNs) are designed in the nuclear submarine design and production facility in Visakhapatnam and elsewhere (L&T).
Likewise, there is ample capacity in-country to produce all kinds of towed and self-propelled artillery ranging from the 105 mm to 155 mm gun systems (Bharat Forge, Tata), and tanks when there’s the Arjun MBT to refine and design-wise down-scale to obtain a 35-ton light tank for Tibetan plateau use prospectively by the offensive mountain corps, and infantry combat vehicles (Mahindra).
Moreover, it is a criminal waste of national resources to fly in foreign combat aircraft to fill the IAF’s MMRCA fleet when there are Tejas derivatives, such as the AMCA to fast forward.
This can be done when a very large order for the Tejas 1A, Tejas Mk-2 is placed by the IAF to make local manufacture economically worthwhile.
This should be followed by DRDO/ADA transferring source codes for the Tejas to private sector companies that have stepped into this field (Mahindra Aerospace, Tata) and incentivise them to initiate new production lines for this aircraft to compete with HAL's two assembly lines, which together produce only some 18 aircraft a year, and do not meet the demand.
With the total production of the LCA thus ramped up to nearly 60 aircraft annually, enough financial resources will be available to fast-track the advanced medium combat aircraft (AMCA) design and prototype production to the certification stage.
Thereafter again, the same protocol should be followed of onpassing design material and source codes to the private sector.
It will seed a massive advanced aviation industry and create, quite literally, tens of thousands of high-paying jobs (everything from aircraft designers, project managers, software writers, to line technicians).
Larger numbers of this aircraft rolling out will mean reduced unit price of each and allow derated versions of these aircraft (Tejas, AMCA), for which there's a vast market, to be exported to nations in the developing world to earn multi-billion dollar revenues.
The Tejas could run the Western and Russian arms suppliers out of the Third World.
All this activity should be based on a simple procurement principle that should be soldered by the PMO into the defence ministry's mindset that, hereafter only specific technologies and systems India is deficient in should be bought from abroad, not the whole damned weapon system package that gets us nothing under the usual ToT (transfer of technology) agreements that Defence Ministry signs and, in the bargain, drains the country of its wealth.
Thus, for example, the Indian Navy is not certain about its own 75i design for a conventional submarine and DRDO has not been able to provide mast optronics for submarines. So fine, purchase a diesel submarine design and mast optronics tech from competing submarine builders (Rubin Bureau of Russia or DCN of France or ThyssenKrupp Marine of Germany).
In a similar vein, it is a criminal waste of national resources to buy a whole combat aircraft package when what's critically needed is assistance specifically to re-work the Kaveri jet engine designed to fit into Indian-designed and made combat aircraft.
The country doesn't have to buy a new fighter aircraft when what's needed is help to get an indigenous power plant up and running.
Once foreign suppliers adjust to this new reality, they’ll compete for India’s custom — however small it is. With the above kind of measures and with the private sector leading the charge — because, leaving it to the public sector defence enterprises to lead this effort will result in the Mazgaon Shipyard Ltd sort of disasters with the Scorpene submarine coming in 12 years late and over two times the budget — the country is primed to realise inside of 5-7 years Prime Minister Modi’s goal of ‘atmanirbharta’.
If Modi is serious about this aim, it will require him, his government and the Indian military to trust in Indian talent and invest in Indian programmes to deliver the most sophisticated military goods on accountable basis.
So, if Tata or Mahindra or L&T foul up in any way they'd have to pay up very serious penalties, a standard the defence public sector units are never held to.
Q3: How do you see the decision of allowing more FDI (74 per cent up from 49 per cent) in defence? Will that be sufficient for a foreign arms manufacturer to invest in India or will the carrot have to be bigger to attract them here?
The danger has always been in the Indian government’s habit of doing things by half. This is reflected, other than in the partial arms imports ban, in Sitharaman’s announcing the raising of FDI limit to 74 per cent in the defence sphere.
The expectation, apparently, is that foreign arms manufacturers allowed to set up shop freely and with no prior authorisation, will jump at the opportunity.
There would be no problem and such ventures would be welcome if foreign defence companies set up their arms production plants here, and benefit from labour cost advantages, but use India as a manufacturing hub only for exports.
They may be induced to do that, but they will want the Modi regime to guarantee them sales in India.
This could inevitably lead to foreign vendors setting up factories to dump a whole bunch of obsolete or fast obsolescing weapons/platforms by assembling them here for the Indian armed services, thereby pushing off into the indefinite future the possibility of the Indian military becoming technologically in-date and consequential.
Thus, Lockheed, for instance, which has already tied up with Tata to produce in India the F-21 (the vintage F-16 by another numeric) will come in fast and try and seal a deal with the IAF.
From the Washington end, Trump can be relied on to do the pushing, which our main man, Modi, is unlikely to resist, he being only too eager to please Trump at every turn. (Refer the PM’s expressing his gratitude yesterday to Trump for his promise to send, unbidden, some excess ventilators the US has no use for possibly because these Chinese-produced items have been found to be defective.)
It makes no sense whatsoever for India to buy this aircraft which is so long in the tooth as to be already a museum piece.
Q4: One of the biggest problems with setting up manufacturing units in India is our onerous land and labour laws. Some BJP state governments have made drastic changes to labour laws and have exempted companies from their ambit for the next three years. State governments are also looking to provide single-window clearances and land to firms willing to invest in their states. That should help, right?
Affording foreign arms companies controlling shares is all very well, but before foreign Original Equipment Manufacturers take up the offer, they'll insist that labour laws be changed to permit hire and fire practices, which's the norm elsewhere in the world so they don’t ever get stuck with a low productivity workforce they can’t be rid off.
These foreign firms will also insist on ‘one window’ clearance for all permits, local level up, so they aren’t mired in red tape nor compelled to function at the sufferance of babus in the defence production department of the Defence Ministry or, as even more likely, petty bureaucrats in state governments.
And further, the potential investors will demand that the land acquisition be simplified and facilitated by the central, state and local authorities which will require all of them to be on the same page.
So, how will it work? Consider the decision by several BJP-ruled states to loosen labour and land laws for three years.
Why three years and not a permanent change and overhaul of these laws? These state governments obviously believe that this is the minimum necessary change to attract FDI. Shouldn't the central government start by disabusing the UP and MP governments on these issues and what's needed to formalise a business friendly milieu?
The Finance Minister said nothing about any of these things. Result: There’ll be some uptick in foreign interest but no rush into India from foreign quarters, unless they too get the sort of consideration that Lockheed is banking on.
Q5: Where do we stand in self-reliance as far as other key sectors are concerned such as telecommunications, electronics and aerospace?
It is stuck in the same mess. After almost surrendering the telecommunications future to the PLA outfit, Huawei, and China, the government, prompted by organisations such as SITARA (Science, Indigenous Technology & Advanced Research Accelerator), is finally permitting Indian private sector high-tech achievers to enter the field of 5G and potentially even 6G systems.
SITARA is headed by an unusual former Indian diplomat, Smita Purushottam; unusual because the Indian Foreign Service usually breeds foreign arms lovers.
A similar telecom sector-type thrust will have to be given by the Modi regime in defence, aerospace, and electronics sectors generally, lest national security continue to be willfully compromised.
There is more than a critical mass of Indian companies with skills and competences in these fields to free the country from the “commissions and considerations in kind”- racket within the portals of government that lubricates the present procurement system.
In the event, now may be the time, if he is really serious about self-reliance, for Modi to announce, alongside the partial ban on arms imports, to also bar all purchase of aerospace systems and sub-systems, and high-value electronics components and for his government to stop dilly-dallying [detailed in my 2015 book Why India is Not a Great Power (Yet)] and put up the money for establishing a high-value microchip fabrication facility to drive the technology sector.
It will mean the beginning of the the long overdue dismantling of the extant procurement processes and systems in the Defence Ministry and the departments of Space and of Electronics.
Here, it may be best to recall as a cautionary tale about the country’s sorry condition in the electronics field.
It was the result of the historic blunder committed by the late MGK Menon-led electronics commission in the 1970s, which advised the Indian government to concentrate on developing software capability while ignoring development in-country of computer hardware capability.
It allowed companies like TCS, Infosys, et al to grow and prosper, of course, and all to the good, but did not help India become comprehensively independent in high-technology — whence the awful state the country is in with Huawei and China lording over us in the telecom sphere, as does every other half-way industrialised state supplying India with this or that component for the aerospace sector.
Q6: Recently, Dr RK Tyagi, former Chairman of HAL, wrote a letter to the government exhorting it to bid for control of the Embraer Company of Brazil for as little as $5 billion. Given India has no capability in aircraft production, shouldn’t we grab this opportunity with both hands?
A: Absolutely. Embraer, the Brazilian firm specialises, among other things, in producing various bestselling passenger aircraft (such as 30-110 passenger carrying E2 and ERJ-145 series of single engine, single aisle, transporters) which can also be converted for maritime reconnaissance, aerial early warning, cargo, and VVIP flight missions.
In fact, there are already a number of these aircraft flying in India. Just to provide perspective: India has failed to manufacture any such plane despite a number of underway projects over the past 30 years to design and produce them.
Acquiring Embraer will thus vault India into the front ranks of aircraft producers.
In his letter dated 27 April 2020 to Puri, Tyagi mentions that the projected demand by 2035 in India for these types of aircraft is between 350 to 500.
So, it makes ample economic sense to grab Embraer at this time, and act fast to do so before “other other players, potentially China, enter the scene and pitch for the Embraer stake”.
He adds that, “Apart from the possibility for phased manufacturing in India, there is also the potential to attract OEMs (Original Equipment Manufacturers) of aircraft engines, wheels and braking and landing gears, avionics, etc to set up MRO (Maintenance and Repair Organizations)/manufacturing in India since the scale and size of the business are potentially sustainable. It will also add to indigenous design and engineering skills.”
Tyagi recommends that
(1) “the extant opportunity be [expeditiously] seized”,
(2) “An interim Expression of Interest” be communicated to the Government of Brazil to bid time, and
(3) “India actively considers acquiring a 51 per cent stake into Embraer either through an SPV (Special Purpose Vehicle) created by equity participation by Hindustan Aeronautics Limited acting alone or in partnership with the private sector.”
Private sector participation by such Indian firms as L&T and/or Mahindra, or Godrej Aerospace makes ample sense in terms of spreading the risk and distributing the benefits, such as transfer of technology and skills, of this acquisition.
Indeed, Indian Twitterati have been besides themselves enumerating the immense possibilities of such a deal — such as producing the Tejas LCA in Embraer production facilities to sell in the promising Latin American market.
In case his acquisition idea finds favour with the Modi government, Tyagi suggests constituting “a small team of policy/industry experts”, and ends his letter with a warning: “This may be once in a lifetime opportunity for us” and hence, by implication, not to be missed.
It is copied to Defence Minister Rajnath Singh, PK Mishra, principal private secretary to the PM, and Amitabh Kant, CEO, Niti Ayog.
What are the chances this proposal for securing controlling shares in Embraer will be entertained by the Modi government, and these four notables — Messrs Puri, Singh, Mishra and Kant will succeed in speedily getting the Prime Minister’s and, more important, Finance Ministry’s approval and release of the necessary funds, and that in the meantime, MEA will be tasked to discuss the topic to the Jair Bolsonaro government in Brazil and prepare the politico-economic ground for such Indian investment.
Specific help should be asked for from President Bolsonaro to block other potential, especially Chinese, bidders.
The Brazilian leader, after all, was wined, dined and feted as the chief guest at the Republic Day parade this year and will have warm memories of his Delhi sojourn and, if properly approached, would be more than receptive to having India upkeep an economically faltering company — one of the great tech success stories in Brazil.
One wishes though that the Modi regime had by now articulated a strategic vision such as the one proposed in my book ‘Staggering Forward: Narendra Modi and India's Global Ambition’ of a more meaningful geo-strategic grouping of BRIS (Brazil, Russia, India and South Africa) derived from the purely trade and economically oriented BRICS but minus China.
An Indian majority stake in Embraer would fit nicely in a BRIS schemata and would have positively motivated Brasilia.
Any which way this deal is justified by the Indian government, Modi could propel this deal for Emvraer by broaching this topic directly and personally to Bolsonaro in a phone call, leaving their respective government functionaries to speedily work out the details.
So what’s the proverbial fly in the ointment? Well, Puri, a former diplomat, Mishra and Kant are all civil servants used to working in a certain leisurely bureaucratic style and pondering procedural hurdles at length, rather than getting on with it and showing some urgency in cutting through the red tape.
The mind boggles at the potential of this transaction and how Embraer in the Indian fold would turbocharge Modi’s so far idling ‘Make in India’ policy and programme, generate huge employment, and keep the immense Indian wealth that has to-date been frittered away in arms imports, within the country.
Is all this not enough for these durbans (gatekeepers) to Modi to get their political master to act without losing time? And if adequately briefed, will Modi have the foresight to pilot, with Bolsonaro's help, the Embraer company acquisition through the bureaucratic thicket that is the Government of India?
Time will soon tell or, as is more likely, newspapers report that China has already grabbed Embraer, even as Delhi is still at the starting gate mulling over the matter.
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