Where’s the defence industry?

By Shailesh Dobhal , 05/09/2010
The Indian automobile industry is the seventh largest, and the second fastest growing in the world after China. Its auto components manufacturers are globally competitive, and every manner of automaker is already here or is in the process of setting up a base here.

Even till early 1980s, the country was an auto backwater, with just about a handful of manufacturers. The industry maturing followed, in a manner of speaking, the market. With domestic demand for anything from two-wheelers and cars to light and heavy commercial vehicles exploding in the last two decades, India has emerged as the global small car hub, and a big exporter of both finished cars and components.

In the last six years, while production doubled, from 7 million to 14 million, exports more than tripled, 0.5 million to 1.8 million last fiscal.

A big consumer market for cellphones made the world's biggest cellphone maker Nokia set up its largest manufacturing plant here, to meet the domestic requirements as well as to build an export base. The story of a big and growing domestic market spawning a vibrant domestic industry repeats itself with consistency across sectors -- apparels, consumer expendables, packaged food, pharmaceuticals, etc.

In fact, it is difficult to think of any industry sector where a huge domestic market is not a prelude to a vibrant domestic industry. Perhaps, only in God-gifted natural resources like oil, gas and minerals can a country be a big consumer and a big importer at the same time. Can there be any other such exceptions?

Well yes, if you consider the country's experience with defence equipment like submarines, ships, fighter planes and artillery guns. India is one the world's biggest consumer of defence equipment, having spent $50 billion in the last 10 years and estimates of over $100 billion in the next decade or so.

And historically we have relied on imports to fulfil over two-thirds of this requirement, as the public sector monopoly of DRDO, 8 PSUs and 39 ordnance factories have failed us squarely. Our defence exports are pathetic, even compared to other big arms importers like South Korea and Singapore. For every dollar worth of export of defence equipment, India imports $200 worth, compared to $20 for Singapore and under $9 for Korea.

Even after almost a decade of opening up of private participation and 26% foreign investment, just about 130 companies have entered the fray, and very little foreign funds have flowed in. Now the defence industry is a sensitive, highly technological one, with governments and graft never far from the scene. And you can't exactly extend the arguments of the plebeian cars and cellphones industry to as highly geo-strategic sector as defence, goes one argument.

Well, maybe not, but the logic of the market is finally inexplicable -- one who pays the piper calls the tune. True, existing big boys of the global arms club will hold back the change, and foreign governments will withhold cutting-edge technologies and newer versions for itself. But purchasing power has to be leveraged to change the old order, and a beginning has to be made somewhere.

Consider what China is doing. The authors of a paper, Leveraging Defence Offset Policy for Technology Acquisition, in the Journal of Defence Studies, January 2009, argue that China is launching its large civilian aircraft industry on an aggressive leverage of transfer of production technology from other countries in the form of outsourcing and offsets, primarily from the US and other aerospace companies.

So why can't India? The reasons are not hard to find. Our much touted defence procurement policy, which inter alia provides for an offset policy, is somewhat unclear in its objectives. The 4-year-old 'Offset Policy' requires a foreign arms vendor winning a contract of more than Rs 300 crore to offset a minimum 30% of this value in the domestic market through purchase of products/services from Indian companies or investments in setting up a joint venture with an Indian partner.

Already, in the absence of a robust monitoring mechanism, some experts have started flagging offsets as the country's next big scam in the making, with unscrupulous foreign vendors using it as a means for kickbacks.

Best practices in offset management can be gleaned from countries like Israel and South Korea that have used it to kickstart their domestic industries. Israel's offset policy explicitly emphasises acquisition of technology and not the product, for that alone can have a technology spillover effect that can spawn related ancillary industries, the backbone for all big manufacturing successes.

Ditto South Korea, where the approval of the offset contract is subject to the foreign arms vendor assuring 'approval' of technology transfer to the importing country.

Or take the example of Saudi Arabia. It realises that some cutting-edge technologies won't be shared or transferred and therefore its offset programme has evolved to harness commercially exploitable (transferred) technology, which has helped its offset-related domestic industry to already clock in billions in export sales.

Gunnar Eliasson, a professor of industrial economics at the Royal Institute of Technology, Stockholm, in his recently released book, Advanced Public Procurement as Industrial Policy, argues that there are four waves of spillovers of any technology, such as fighter aircraft manufacturing -- core, related, engineering and industrial technologies.

The value for country procuring high technology-led armaments is how its organises its industrial systems' absorptive capacity to leverages on such spillovers that can have long-term economic benefits in terms of spawning related industries, dual-usage commercial technologies.

Our offsets system, which has become virtually a government dictait-led windfall for big and small domestic players alike, should instead strive to create a defence industrial ecosystem of technology absorption, assimilation and innovation.
Source:Financial Express
Where’s the defence industry?