Transforming India's military through Defence Economic Zones

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30th March ‘ 2014 India’s Next Generation Military Industrial Complex , Rev 01
Defence Economic Zones
Transforming India’s Military - Industrial Complex
Ashish Puntambekar
Lead Designer

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Table of Contents
1. Executive Summary … The Elevator Pitch.................................................................................................................. 5
2. Background … India’s Current Defence Equipment Marketplace ........................................................................ 22
3. Defence Production Policy 2011 … Challenges....................................................................................................... 24
4. Dream Killing Weakness in Electronics Software & Metallurgy ............................................................................ 24
5. The “ Breakthrough Thinking ” Approach to Strategic Planning........................................................................... 26
6. Defence Economic Zones … An Alexandrian Solution........................................................................................... 28
7. Solid Business & Economic Case For DEZ’s ............................................................................................................ 30
8. Changing The Game In Defence Manufacturing…Lessons from Tata / Reliance & ISRO ........................... 35
9. Need to Lower Military Equipment Capex / Opex Costs & Cost of Spare Parts ............................................... 37
10. Adopting ISRO’s Successful Model............................................................................................................................. 38
11. Leapfrogging Technology Through 49 % - 74 % Joint Ventures .......................................................................... 38
12. Obsolescence & The New Military Parity … Learning From Sun Tzu................................................................. 40
13. Strategic Structural Reset of the Indian Military........................................................................................................ 41
13.1 Strategic Naval Reset.........................................................................................................................41
13.2 Scaling Up Army / Air Force Predominance Through Smart Technology..........................................42
14. Designing A Self Sustaining Military – Industrial Ecosystem................................................................................. 44
15. Implementing “ Breakthrough ” Thinking Within Defence Production.................................................................. 46
16. DEZ’s Strategic Innovations Framework … Detailed Description ........................................................................ 48
17. Governance Structure For The Proposed New DEZ’s ............................................................................................ 57
18. Building Procurement Skills in Government & Private Industry ............................................................................ 60
19. Using Info-Tech to Minimize Fund Leakages & Cut Purchase Cycle Time........................................................ 60
20. DEZ’s Next Generation Logistics & Communication Network............................................................................... 61
21. Defence Economic Zone Set Up Costs ...................................................................................................................... 61
22. DEZ Investment Formats … Possible Options.......................................................................................................... 62
23. DEZ Layout & Area Allocations .................................................................................................................................... 63
24. DEZ Secure Systems … Next Generation Infrastructure..................................................................................... 64
25. Ordinance Factories Vs. New DEZ’s … Look and Feel.......................................................................................... 65

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26. Expected Multiplier Effects of Defence Economic Zones....................................................................................... 66
27. Annexure I … DEZ Project Justification .................................................................................................................... 69
28. Annexure II … DEZ Foundation Concepts Concepts............................................................................................. 70
29. Annexure III … Analysing India’s SEZ Policies......................................................................................................... 74
30. Annexure IV … Tax Benefits Within The Six Proposed DEZ’s.............................................................................. 77
31. Annexure V … Rationale For Strategic Increase in Naval Strength..................................................................... 82
32. Annexure VI … Need For A Defence And Aerospace Commission..................................................................... 83
33. Annexure VII … Critical Issues Pertaining To FDI in Defence .............................................................................. 90

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Defence Economic Zones ( Deliverables )
1. 75 – 80 % indigenization of Sophisticated Military Equipment and savings in excess
of US $ 200 Billion in Foreign Exchange by 2025
2. Massive Transformation of India’s Military Industrial Complex … Assisted by private
sector participation in Military – Industrial clusters
3. Unprecedented innovation in defence technologies by co-locating Six universities /
IIT research departments & full time inter-disciplinary defence engineering courses
within each DEZ
4. Creation of 3,00,000 New Hi-Technology Jobs in the defence sector
5. Strategically enhancing India’s diplomatic stature globally by providing the ability to
intervene Militarily in any theatre of conflict through precision strikes
“ Describe a future worth creating and then reap the Global Competitive Advantage by
preparing for it and making it happen. ” – Pierre Wack, French thinker

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Strategy Paper
DEFENCE ECONOMIC ZONES
Transforming India’s Military - Industrial Complex
1. Executive Summary … The Elevator Pitch
Between 6th
– 9th
February 2014, New Delhi’s Pragati maidan hosted the Defence Expo
2014. It was a high energy event which had one fundamental shortcoming. It seriously
lacked an overarching concept .
Hundreds of mostly foreign Defence OEM’s, their Indian representatives and a few Large
Indian companies and vendors participated in the event. India was represented by
manufacturers such as Tata, L & T, Bharat Forge, Mahindra and Mahindra, Rolta India and
Pipavav Defence and their presence brought a sense of hope.
These Indian companies have shown what Indian engineers are capable of, despite a most
indifferent government and extremely difficult market conditions mostly created by stifling
regulations and miles of red tape . Bharat Forge has made a good field gun, Larsen &
Toubro has manufactured sophisticated equipment for the navy & the Tata group has done
yeoman service by making sophisticated weapon systems for the army, navy and the air
force.
Lack of Overarching Concept :
In the vast majority of cases at DEFEXPO 2014, participant business plans were all
focused on imports of foreign defence equipment and while there was huge energy, among
the Indian companies, no one was asking the question “ What can we do in India, which
could potentially alter the structure of the defence industry on a global scale ? ”.
This paper seeks to answer that question. We have studied the numerous problems that
confront India’s defence manufacturing sector and we believe that the answer to the above
question lies in the concept of “ Defence Economic Zones ”.
Thinking Radically … to Solve Large Scale Problems :
The purpose of this note is to explore possibilities and simultaneously solve several difficult
problems confronting India’s defence manufacturing sector. By introducing the concept of
Defence Economic Zones ( DEZ’s ), we wish to get everyone in the Indian defence sector
to think in a radically different manner.
The Six DEZ’s proposed in this paper in two separate phases have the following
deliverables :
1. 75 – 80 % indigenization of Sophisticated Military Equipment and savings in excess
of US $ 200 Billion in Foreign Exchange by 2025
2. Massive Transformation of India’s Military Industrial Complex … Assisted by private
sector participation in Military – Industrial clusters

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3. Unprecedented innovation in defence technologies by co-locating Six universities /
IIT research departments & full time inter-disciplinary defence engineering courses
within each DEZ
4. Creation of 3,00,000 New Hi-Technology Jobs in the defence sector
5. Strategically enhancing India’s diplomatic stature globally by providing the ability to
intervene Militarily in any theatre of conflict through precision strikes
Project Need … Why Go For Defence Economic Zones ?
Today India’s defence preparedness stands severely undermined as no major defence
platform procurement has taken place over the last 10 – 15 years. According to General
VK Singh’s , March 2012 letter to the Prime Minister which was subsequently leaked to the
media, 97 % of Aircraft in the Indian Air Force are obsolete, the same can possibly be said
about our Naval and Army equipment.
The Indian Navy’s ability to defend Indian Maritime interests today stands severely
compromised. The country’s submarine fleet, the mainstay of our naval defence, is 25
years old and has outlived its specified service life. Recently, there have been two major
accidents in the Submarine fleet ( INS Sindhurakshak sank on the 14th
of August ‘ 2013,
killing 18 crew members and INS Sindhuratna had a problem with its batteries as well as a
fire on board on the 25th
of Feb ‘ 2014, killing 6 crew members ).
According to Maj Gen Mrinal Suman, the modernization programme of the Indian armed
forces is already 15 behind schedule. Nearly half the Indian Military’s ( Army, Navy,
Airforce ) equipment is nearing the end of its useful service life and needs replacement.
The table below captures the seriousness of the situation.
State of Equipment Profile Desirable
(Percentage)
Current Inventory
(Percentage)
State of the Art Equipment 30 % 15 %
Equipment of Matured technologies 40 % 35 %
Equipment becoming obsolescent 30 % 50 %
Source : Worrisome State of the Indian Armed Forces, Major General Mrinal Suman, AVSM, VSM, PhD
Head, Defence Technical Assessment and Advisory Services Group ( Confederation of Indian Industry )
Despite this serious situation, the UPA Government did nothing for the last 10 years in
terms of procuring critical military platforms and even basic things like replacing the worn
out batteries within the submarines were not done.
The government had announced an ambitious action plan in 1995 to reduce the share of
defence imports from the then prevailing 70 percent to 30 percent by 2005. This plan has
been an utter failure as can be gauged from the fact that the imports have climbed to close
to 75 percent now. In addition to this nothing was done encourage domestic manufacturers
and to make it easier for them to meet the needs of the armed forces.

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Instead the UPA government did the exact opposite by discouraging domestic production
of defence equipment. Data indicates that over the last 10 years, India has been able to
attract only US $ 5 Million as FDI in the Defence Sector. Investments by Indian private
sector companies in defence manufacturing has also been marginal with 200
manufacturing licenses ( that were issued ) yet to result in actual investments in the
defence industry. As against all this , during the same period, deals for the import of foreign
military equipment have exceeded US $ 50 Billion which is a clear indication of the
preferences of the political party in power.
Worse, indigenous production of 25 percent is limited to low-tech items and components.
and the assembly of imported sub-assemblies is being touted as indigenous production
and sold to the services at unethically exorbitant profits.
Overall the problems of obsolescence and other shortages in major strategic platforms of
the Armed forces are symptomatic of very serious problems, not just within the Defence
Procurement system currently characterized by HUGE IMPORTS & Very Little Domestic
Investment but also the way in which indigenous technology development in the defence
sector is happening.
The above problems cannot be resolved by incremental changes and amendments in the
Defence Procurement Procedures. What we need is “ Breakthrough thinking ” which goes
far beyond current Defence Procurement Procedures and in fact re-writes the DPP rule
book while also making it more transparent and clear in policy terms.
The graphs below are based on data contained in Annexure 1 of this project concept
document.
The Annexure 1 forecast clearly indicates that India will spend US $ 245 Billion on weapon
imports by 2025 ( cumulative basis ) based on a 70 % import intensity within the Defence
Capital Expenditure bill. Even more worrying is the huge jump in the Defence Imports as a
percentage of the Current Account deficit which ought to be a huge worry for the Reserve
Bank Of India.
The proposed Defence Economic Zones ( DEZ’s ) therefore bring with them a promise to
save in excess of US $ 200 Billion in Foreign Exchange by 2025. While doing so, they will
also create over 3,00,000 New jobs in the high technology defence sector.

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As currently conceived, the Defence Economic Zones ( DEZ’s ) are an Alexandrian
response to the above mentioned problems and they seek to bring about massive changes
in India’s Military-Industrial complex in the shortest possible time.
The DEZ’s will in fact transform India’s military – industrial complex by serving as platforms
that make it much easier to set up a Defence manufacturing facility in India within a
conventional SEZ format while offering a number of world class amenities , such as ultra
modern development and testing facilities, global scale infrastructure and efficient logistics,
49 % FDI blanket permits in a majority of weapon categories, attractive investment
options for DEZ developers besides the usual tax incentives for all participants.
Clearing Minefields & Avoiding Quick Sand
India’s existing Military – Industrial complex consisting of 37 Ordinance Factories, 9
Defence Production PSU’s and 50 defence R & D Labs is plagued by serious structural
problems due to which military preparedness has suffered for the last 30 – 40 years.
The DEZ plan is therefore based on the view that it is pointless to expect this existing and
highly inefficient system to deliver results. These organizations have showed disappointing
results on several projects ranging from the INSAS Rifle ( which gets jammed frequently )
to the Saras aircraft which after 20 years in development and Rs 1000 crores of taxpayer
money spent, crashed during testing in 2009 killing its entire test crew.
The DEZ scheme is intended to avoid the stifling bureaucracy within government owned
defence entities. In our view, it would be naive for Govt. of India to continue to rely on
Ordinance factories, Defence PSU’s and existing R & D labs including the National
Aeronautics Laboratory ( NAL ), as it will take 20 – 30 years for these organizations to
overcome their basic skill deficiencies, ossified mindsets, extreme bureaucracy and internal
politics. To add to this is the massive corruption within some of these organizations ( News
reports indicate that senior ordinance factory board members have been found taking
bribes from suppliers ).
Given this state of affairs, it appears that the probability of successful transformation of
this system is very low, it at all, as the rot within has made recovery difficult in a
reasonable timeframe.
The DEZ route has therefore been conceived as a means to accelerate private sector
investment in the Defence Sector by finding an alternative pathway that bypasses the
bureaucracy within the existing Military – Industrial complex. This method most importantly
shares commercial gains with government owned entities and pays them market
determined rates for use of their infrastructure and research facilities and even allows PSU
technical staff and Government scientists to get compensated for their contributions to
specific Joint venture projects with private companies.
This alternative path will accelerate the development of new defence technologies and
equip the Indian armed forces with modern and fail safe equipment that our soldiers will be
confident to go with, into the battlefield. The DEZ route achieves all this at the lowest
possible cost while also being fair to Government owned companies and their existing
stakeholders.

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DEZ’s Strategic Innovations Framework
The Defence Economic Zone as currently conceived will be an industrial cluster with a
strategic Innovation framework based on the Diamond Model developed by Prof. Michael
E. Porter of Harvard University.
Specifically, the approach is to provide the Infrastructure and policy framework that
encourages unprecedented innovation in Defence technologies with objective of bridging
the large gap that exists between India and militarily advanced economies.
Professors Michael Porter and Scott Stern found that the striking innovative output of
Israeli firms is due not just to more effective technology management, but also to Israel’s
favourable environment for innovation, including strong university-industry linkages and a
large pool of highly trained scientists and engineers.
The DEZ’s are therefore designed to apply these concepts by bringing together a number
of large Indian companies and their foreign JV partners in a vertically integrated structure
comprising of nearly 2500 vendors and small scale industries within each of the six
proposed DEZs.
This vertically integrated structure and its numerous players will then develop deep
linkages with a large number of University departments offering degree courses in Inter-
disciplinary defence engineering related disciplines. This diverse group from Industry and
academia will in turn interact with Government representatives and actual users from the
Armed Forces ( Army, Navy and Air force ) to design and develop new defence technology
and most importantly work to adapt advanced technologies from foreign sources to make
new weapons with next generation technologies.
We believe that this approach will yield substantial technical and commercial benefits in
addition to an estimated US $ 200 billion in foreign exchange savings that will accrue to
the nation by means of import substitution through 2025 by means of 49 % Joint Ventures
between Indian companies and their foreign partners.
The Innovation Framework of The
Defence Economic Zones are
based on Prof. Michael Porters
Diamond Model
Potential Savings > US $ 200
Billion in Foreign Exchange by
2025

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The challenges of a decade ago were to restructure, lower cost and raise quality. Today
that is no longer enough and the DEZ design therefore seeks to make it possible for Indian
Companies & their foreign JV partners to create new defence technologies and products
and commercialize new processes that can help India Leapfrog defence technologies and
catch up with the worlds advanced economies if not shift the global technology frontier
itself in certain critical military technologies.
A more detailed discussion regarding the DEZ’s Strategic Innovations Framework is
presented in Section 16 on this concept paper.
Growth Through 49 % - 74 % Joint Ventures … The New Normal
The DEZ as a Strategic Platform will allow for massive growth of the Indian Defence
Industry through large scale participation of the Indian Private sector and possible foreign
partners. Specifically the 26 % FDI cap for the Defence sector will be removed within the
DEZ scheme and converted to a 49 % blanket permit within a framework that can be easily
monitored.
What this means in practice is that if an Indian company with its 49 % foreign partner want
to set up a unit in the DEZ to make Carbines / Rifles for instance, they can go through a
single window system and start working immediately. However for projects involving
sensitive technology such joint manufacture of cruise missiles, a separate and more
elaborate security process will be followed. For FDI in conventional weapons manufacture
and for a vast majority of military hardware,49 % clearance will be automatic and just like
that for any other industry.
As per the reports appearing in the press, The commerce minister, Anand Sharma has
written a letter to the Prime Minister recommending raising the limit of Foreign Direct
Investment (FDI) in the defence sector to 74 per cent. He underscored the fact that the
current policy with 26 percent ceiling has been an utter failure as India received paltry
USD 5 million of FDI inflow in defence manufacturing during the last decade.
In the above quoted letter, the Commerce Minister has underscored the point that ‘the
United States and the European Union allow 100 per cent FDI in defence manufacturing
with security issues being addressed through verification and clearance procedures.
Finally, since the DEZ’s will be notified customs territories, there will be enough checks
within the system to ensure secure movement of products to authorized end users such as
our own Armed forces, Police and Paramilitary forces and in the case of exports … to
overseas government customers through government to government deals.
For a more detailed description of the issues related to FDI in Defence and specifically to
clear all misconceptions regarding the security threats to India due possible raising of the
FDI cap to 74 % and beyond, please refer to Annexure VII.
Immediate Design Feedback … Through Quick Testing
Each of the Six DEZ’s will be located close to existing Military testing ranges which will
allow the private sector to rapidly test prototypes, this will solve a big problem faced by
Indian companies such as Bharat Forge which despite having developed India’s first
private sector howitzer / field gun, was denied access to military ranges to test a weapon

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which could, if encouraged, potentially alter the strategic landscape as far India’s presence
in artillery technologies is concerned.
The DEZ’s will be configured for quick testing of developed weapons. For example if
Bharat Forge were to develop a large gun at its factory within a DEZ, the Gun will be
scheduled immediately for field testing, through an Indian army representative posted
within the DEZ. Once the test is scheduled (ordinarily) within a week, the Gun will be
airlifted by a C – 17 Globemaster Military courier aircraft to an appropriate military range
anywhere across India if the closest range is un-available or un-suitable for the test. The
DEZ’s will be equipped with landing strips and other infrastructure suitable for operating the
largest transport aircraft.
We are looking at a completely new dynamic here. We need to encourage innovation on an
unprecedented scale in the defence technology sector and it is important that companies
are allowed to test systems and make necessary design changes quickly in order to reduce
their overall costs and to stay competitive in the marketplace.
Weapon prototype testing costs in all cases will be borne by the company concerned with
the DEZ’s providing the necessary infrastructure at market determined rates.
Immediate DEZ Viability
The Defence Procurement Procedure ( DPP ) instituted first in 2002 has seen many
revisions and amendments, yet it has failed to yield substantial results in terms of both
indigenization of defence production and bringing in FDI. This has been due to not just
bureaucratic delays and policy uncertainty but also because it does not provide a scalable
platform where it would be easy to build capacity within domestic industry.
The Defence Economic Zones are primarily designed to :
1. Bring Structure and Transparency to the Defence Procurement Process
2. Build Capacity and Capability within India’s nascent defence industry
While these objectives are fully aligned with the DPP, there is also a solid business and
economic case for DEZ’s given a potential order book size of US $ 150 Billion by 2017
…according to a recent Mckinsey study. The graph below summarizes the business
opportunity for potential DEZ promoters after accounting for intergovernmental contracts
which are without offsets.
Source : Defence Services Estimates, Indian Ministry of
Defence , Economic Survey 2009 – 10, Report of the
Thirteenth Finance Commission ( 2010 – 2015 ), Union Budget
of India, Indian Ministry of Finance, Mckinsey Analysis

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If manufacturing under the other two DPP mandated quotas to domestic industry :
“ Buy ( Indian ) and make ” and “ Buy and Make ” are also re-located to the DEZ’s to take
advantage of the enormous benefits on offer ( not the least of which is ultra-efficient
logistics ), the DEZ concept turns out to be an extremely attractive business proposition.
Based on just the offsets, we believe that the Defense Economic Zones have a business
potential of US $ 10 – 20 Billion by 2017. For each of the three DEZ’s in phase I, this
represents a minimum revenue potential of US $ 3.3 Billion by 2017.
Secondly, according to the Mckinsey study, Defence Engineering services and Component
manufacturing businesses represent an additional business opportunity of anywhere
between US $ 6 Billion to US $ 10 Billion. Of this, the Engineering services market could
range from US $ 2 Billion to US $ 4 Billion and the weapon components / spares business
revenue could range between US $ 4 Billion to US $ 6 Billion.
Thirdly, setting up manufacturing facilities within the DEZ’s could potentially add billions of
US dollars to the domestic market capitalization for Indian Companies at a conservative PE
multiple of 7. That is a huge amount of increase in wealth for Indian investors which by
itself could attract a number of companies to set up facilities in the proposed Defence
Economic Zones.
The above numbers pertain just to Indian Defence demand. If to this you add demand from
the State police forces, Border security force, Coast Guard etc within India and finally
potential International demand, the Indian Defence Economic Zones are possibly the best
Investment Opportunity on offer not just in India but on a global basis.
The DEZ’’s also have attractive Tax benefits under the extant SEZ Act, 2005 (Annexure IV).
This only adds to their appeal not just for Indian companies but also for Foreign OEM’s.
According to Mckinsey, most of the big defence contracts will be awarded over the next
3 – 5 years. The Defence Economic zones are targeted at capturing this window of
opportunity and it is in the interests of Indian companies to come together and lobby with
the Government of India as the DEZ concept and structure allow for the creation of a level
playing field which will allow Indian companies to partake of the windfall business
opportunities that will accrue due to this cyclic upswing in Indian Defence demand.
Foreign suppliers will also want to participate in this unique opportunity which comes at a
time when large players in the Global Defence and Aerospace market are trying to reduce
costs within their global supply chains, to cope with global recession.
Fourthly, media reports indicate that there is immense cost escalation in India’s Defence
marketplace. This is true across equipment categories and especially true in the case of
equipment procured from blacklisted companies in certain transactions ( Bofors Guns,
HDW Submarines etc ).
The Defence Economic Zones with their transparent procurement protocols and
procedures provides a much more robust pathway for achieving large scale reductions in
defence procurement costs without scams and without subsequent blacklisting of
companies as has been happening for the last 25 years. In fact, some of the blacklisted
companies actually make excellent weapons such as the Bofors Gun.

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It needs to be noted specifically with respect to strategic defence platforms that there are
just 2 – 3 large global players in most of such categories making the same quality of
weapon system and blacklisting a company seriously hurts the defence preparedness of
the Indian Armed forces if the company is subsequently blacklisted after the weapon
system is procured.
The truth is that these companies paid bribes because some of our politicians were corrupt.
By blacklisting the companies India has had to pay a very heavy price both in terms of
defence preparedness and due to the fact that we need to buy spare parts from the same
companies by going through a circuitous route at 50 – 100 times the cost of spares.
The proposed DEZ’s procurement protocols and secure IT systems will make political and
other official decision makers highly visible. Therefore once the DEZ’s are sanctioned we
see no reason why there should not be a review of the blacklisting status of the companies
through a court monitored process. The court monitored process is critical as it will give
credibility to the re-habilitation process and we recommend it. This will allow for a huge
reduction in cost of spares with savings of thousands of crores of rupees in taxpayer
money as the spares can be bought directly from the concerned companies and their
manufacturing units set up within the DEZ’s.
As everyone competes within a fair regime on price and specifications, it will become much
easier and faster for officials to take technical and commercial calls on defence equipment
in an environment which is totally transparent and free of fear. The net result will be a
shortening of the procurement cycle of major defence platforms from a decade or more to
just 2 – 3 years. The savings achieved by all this will easily see each of the six proposed
Defence Economic Zones more than pay for themselves within 3 - 4 years of startup.
Leapfrogging Technology … Achieving a New Military Parity
The Defence Economic Zones concept is designed to allow the Indian Armed Forces to
leapfrog defence technologies. This strategic mindset will allow India to avoid buying and
operating outdated Military platforms in a defence marketplace where technology is moving
at a frenetic pace.
A prime example of an Obsolete weapon system acquired by India is the 26 year old
Aircraft carrier INS Vikramaditya. India started negotiating the purchase of this carrier in
1994 from the Russians and it reached us a whole 19 years later at a price tag of
Rs 12,641 Crores ( US $ 2.3 Billion ) which is roughly three times the 2004 approved cost
of Rs 4882 Crores.
Meanwhile, China has developed the DF – 21 D Aircraft Carrier killer missile which is
capable of destroying and sinking an aircraft carrier much larger than the INS Vikramaditya
while it is still 2500 Km from the coast. This means that India cannot use the Vikramaditya
against even Pakistan. This ship should have been acquired in the year 2000, today it is
nothing but a white elephant. The graphic below shows how advances in Military
Technology are rapidly undermining India’s defence preparedness and it will take more
than cosmetic changes in the Defence Procurement Procedure to set right the huge
military imbalance that currently exists.

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The Defence Economic Zones will help the Indian navy to leapfrog technology by designing
and developing DF – 21 D, lookalike killer missiles ( which cost approximately US $ 10
Million per piece ), thereby effectively denying access to enemy aircraft carriers which will
not be able to approach within 2500 Km of the Indian coast. The DEZ’s will also develop
other next generation technologies such as the Manta submarine drone and other futuristic
technologies such as directed energy weapons.
Fifteen Year Strategic Planning Horizon
Given India’s current population of 1.23 Billion, Nehru’s 5 year plans no longer are able to
provide adequate financial flexibility to take large strategic bets on the Indian economy
especially in critical areas such as Education, Healthcare and National Defence.
The key to successful planning is to understand that India is likely to expand from a US $
1.92 Trillion economy ( end 2014 ) to a US $ 4.0 Trillion economy by 2025 if it re-attains to
a 7.5 % + GDP growth rate by June 2015 once a new government is stabilized in New
Delhi.
If we think in terms of a US $ 4.0 Trillion economy by 2025, it becomes easy to take
decisions to pre-invest in large Education, Healthcare and Defence projects which are the
building blocks needed to sustain and protect an economy of that size. By not pre-investing
in that future we run the risk of an implosion as the building blocks are not in place to serve
as a substrate for further expansion.
In the Defence sector the shortages of equipment and the problems created due to
technological obsolescence are so large that there is no way to bridge the gap within a 5
year planning horizon. India therefore needs to move very fast to a 15 year planning
horizon where huge financial flexibility and options exist. Under this kind of approach, the
investments will be made immediately in core sectors such as Education, Healthcare and
Defence in project mode. It may interest readers that China follows such a 15 year
investment plan for science and technology investments.
Dong Feng – 21 D Carrier Killer ( US $ 10 Million )
Manta, Submarine Drone, Potential Carrier Killer
( US $ 200 Million )
Aircraft Carrier
One Time Capex : US $ 3 Billion – US $ 14 Billion
Opex : US $ 3 Million - US $ 7 Million / day
<

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India’s Foreign Policy … Strategic Geopolitical Impact of DEZ’s
The DEZ approach to rapidly build a large Military-Industrial complex in India has huge
implications for India’s foreign policy and diplomacy. This is true not just in South Asia and
the Indian ocean region but on an incremental basis, globally as well. The DEZ’s will add a
powerful strategic punch to India’s diplomatic options menu, by providing Indian special
forces with the capability to carry out precision military strikes against strategic targets
anywhere in the world. Today only the US, Israel and a handful of countries have this
capability.
Put simply, the Defence Economic Zone concept as described in this strategy paper will
provide a Military – Industrial platform for the democratic world in the Americas, Europe
and Asia to come together to contain Islamic fundamentalism on the one hand and
belligerent China on the other.
New Defence Economic Zones … Look and Feel
The New Defence Economic Zones will be state of the art Industrial and Living facilities
totally focused on the creation of a Modern and well equipped Military in India. The pictures
below compare the current Ordinance factories with proposed DEZ’s.
Ordinance Factories ( 2014 ) Proposed Defence Economic
Zones ( 2020 )

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Expected Multiplier Effects of Defence Economic Zones
Each of the six new Economic Zones will be state of the art facilities with the latest
architecture and layouts. These google lookalike campuses will have a massive
investment multiplier impacts within the Indian Economy as the picture and table below
illustrate.
The table below illustrates some of the important Investment Multiplier Effects arising from the setting
up of Defence Economic Zones in India :
Sl.
No.
DEZ Effect Mulitplier Impact
1 Direct Construction Activity Direct business / revenue boost of Rs 2,14,000 Crores
through construction activity within the Six DEZ’s by 2025.

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If DEZ’s are set up with linkages to New City development
projects as per terms of concession agreement, the net
additional investment in new urban development projects
could be upwards of Rs 6,00,000 Crores.
2 Vendor Development Creation of a New Ecosystem of 7,500 Vendors in
specialized engineering and service sectors.
3 Foreign Exchange Savings The DEZ’s will help save foreign exchange of over US $
200 Billion by 2025 as the current 75 % import regime is
reduced to a 25 % import regime by 2025.
4 Job Creation Creation of 3,00,000 New Jobs in high technology
defence engineering and related disciplines.
These 3,00,000 New Jobs will create another 9,00,000
jobs in support services leading to a total of 1.2 Million
New Jobs across sectors. If New City Development
projects are added to the concession agreements, a total
of 6 Million Jew Jobs might be created within the Indian
economy.
5 Creation of a National
Innovation Backbone
One of the biggest contributions of the DEZ’s will be the
creation of a pervasive National Common Innovation
Infrastructure.
The DEZ’s with their solid business case of US $ 3.3
Billion in revenues each year will serve as Nuclei around
which it will be possible to build a National Common
Innovations Infrastructure by linking up with all major
Indian Universities. This will make up to some extent for
the crippling dis-advantages caused by the shortage of
5,00,000 ( 5 Lakh ) secondary schools within the Indian
School System.
6 Technology Spinoffs in the
Private Sector
The DEZ’s will develop cutting edge technology. A
number of these technologies will have civilian
applications in a number of sectors with accompanying
revenue impacts to the tune of tens of billions of US
dollars.
7 Large Increase in Aerospace
and Conventional Defence
equipment exports
The DEZ’s are likely to result in a Major increase of
Defence Exports out of India with state of the art logistics
facilities and critical linkages within the DEZ’s playing a
major part.
A number of Indian Companies are likely to set up 49 %
joint ventures with overseas OEM’s besides a large
number of foreign OEM’s setting up shop in India to
reduce costs within their global supply chains, especially
in the extremely competitive aerospace and satellite
industries.

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8 Taxes and Royalties The DEZ’s are likely to be huge contributors to the
exchequer in terms of Taxes and Royalties that they will
generate due to the industrial / manufacturing activity
taking place in the DEZ’s.
Government Support Required
The Six DEZ’s proposed to be set up in this concept paper will need policy support from
the Government of India. The Government essentially has just to say “ YES ” to the
Defence Economic Zone concept.
Specifically this government support will involve the following policy measures :
1. Amending the Defence Procurement Procedure to allow for the setting of of DEZ’s
as a platform to rapidly build defence manufacturing capability in India
2. Mandating that all offset contracts related activity will take place only in the DEZ’s
and further that by 2020, 75 % of all Defence Procurement will be done only from
companies located within the DEZ’s. Foreign OEM’s not located within the DEZ’s as
49 % equity participants will therefore not be considered for Indian Military related
procurement.
3. Amending the SEZ Act of 2005 to include DEZ’s with a 30 years concession period.
4. The Government also needs to help in procuring 3000 – 5000 acres of land for the
three DEZ’s in Phase I and another three in Phase II.
There is a need for Government to give the Indian private sector the freedom to work freely
and not allow the Ordinance factory board, Defence PSU’s and DRDO to interfere with the
administration of the DEZ’s. This last point is critical to the success of the DEZ concept. It
is good to have the Public Sector as a partner, but they should not be in a position of
control, else we will have a repeat of what we have seen for the last 40 – 50 years.
Defence Economic Zones Set Up Costs
Each of the Six new DEZ’s will be state of the art facilities with the latest architecture and
layouts. The purpose of creating these google lookalike campuses is to attract the best
talent possible from India and around the world.
Please note that the unit rates quoted below are based on actual costs incurred in the
construction of a large township in 2007 and the numbers therein have been adjusted for
inflation. The actual numbers post 2014 could vary depending on local conditions and
project modifications and their utility lies in using them as guideline costs, but without being
too sticky about them.
The approximate / ballpark costs to set up a DEZ is captured in the calculation below. To
be investment worthy / meet strict financial hurdle rates, the DEZ needs to have 30 %
capital recovery in terms of free cash flow each year. Given the above Capex this means
that each DEZ , at the upper limit, will need to generate a free cash flow of Rs. 8350 Crores

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each year for the project developer while some developers could have lower thresholds.
Please note that in stating these numbers we have assumed that the entire facility is set up
in a single phase ( all at once in 3 years ) while actually, the DEZ’s will be phased
developments spread out over a decade.
To make it possible to meet the broad financial criteria and financial hurdle rates as
specified above, we now consider various possible investment formats.
DEZ Investment Formats … Possible Options
The proposed Defence Economic Zones will be put out for Open Competitive Bidding to
Company Bidding Consortia ( Indian + Foreign ) under a transparent process wherein the
winning consortium will be required to sign a 30 year Contract / Concession agreement
based preferably on the BOO format.
The Lab is looking at four possible business models for setting up the Defence Economic
Zones. Under the first scheme, the MOD makes a policy commitment to buy 80 % of
defence equipment and spares from companies located in the Economic Zones by 2020,
so that companies are encouraged to take risk and set up units in the Economic Zones.
Under this model, the consortium concessionaire setting up the DEZ ( This could even be a
group of big builders / developers ) will recover all its front end construction costs from
companies and ancillary units re-locating to the Economic Zones.
Alternatively, as a possible second option, the Concession agreements for the Defence
Economic Zones could be modeled on the lines of Production Sharing Contracts in the Oil
& Gas Sector which allow for a decreasing trapezium type of cost recovery / profit
sharing plan wherein the private party will be able to capitalize and recover its capital
costs in developing the Defence Economic Zones over a decreasing trapezium as Govt
profit share increases from Zero. This PPP revenue model will, at the end of 10 years,
stabilize at a 60 : 40 revenue share in the Governments favour.
This second alternative will essentially be a cost recovery model based on rent collections.
Under this , the DEZ developer will charge a monthly rent from companies that function
within the Economic Zones. The set up costs for defence contractors & vendors under this
model will be very low and this will encourage defence contractors and ancillary units to
move into the DEZ’s fast. Initial rental income from operations will be used to recover
Capital Costs with Government providing Viability Gap Funding to reduce promoter risk.

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Under a third possible model, the DEZ Consortia would be Defence Contractors
themselves whose revenue model will be based on cash flow streams not just from their
own sales to the Govt of India, initially from the 30 % guaranteed offset related business
( a maximum of US $ 20 Billion business over the next 5 years ) but also from overseas /
export sales of aerospace and aircraft components to foreign buyers. In addition, rentals
they receive from the thousands of small vendor companies within the Economic Zones will
also contribute to their cash flow. This amount will exceed the US $ 3.0 Billion base level
revenue guaranteed for each of the 6 Economic Zones over 5 years under the offsets
policy for order sizes in excess of Rs.300 crores.
The fourth possible model is a hybrid model. Under this, the developer of the DEZ will get
development rights over an adjacent ( or geographically separated ) 3000 acres of land at
another location within the state hosting the DEZ , for the creation of a new city / urban
centre catering to the local economy. The DEZ developer, will be allowed to re-coup the
entire cost of the DEZ from the development of the new urban center and retain any profits
accruing therefrom subject to a pre-agreed ceiling on capital recovery. This Hybrid model
will retain some of the features of the other models to make it attractive for developers.
By 2020, the revenue model in all the above schemes as they pertain to the DEZ area will
swing from the 30:70 ratio based on guaranteed 30 % offsets to a 70 :30 ratio with 70 % of
the Defence related procurement coming from the Economic Zones and with just 30 %
being imported. This will further boost the economic attractiveness of the Economic Zones
and even more companies from around the world will be tempted to move in. The Ministry
of Defence can further tweak the policy to dictate that all 80 % of all purchases by 2025 will
be made from companies located within the Economic Zones.
It needs to be noted that for change to happen fast, Government just has to lay down a
policy which stipulates that the bulk of the purchases will be made from Defence Economic
Zones and foreign partners will be permitted to repatriate all their earnings without charging
any withholding tax.
Those wishing to do business with the worlds largest buyer may find it profitable to transfer
technology as well if they wish to reduce their cost structures and export to a global market
from an Indian location. The lab is of the view that a number of US and European defence
contractors may in fact relocate to India just to reduce their cost structures.
The rest of this paper discusses strategic defence concepts, ideas and an execution
schematic that will radically transform the Indian military – industrial complex where an
opportunity exists for a beginner to become a leader by Leapfrogging Technology and
changing the Structure of global trade in the defence industry.

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2. Background … India’s Current Defence Equipment Marketplace
India today is the worlds largest importer of defence equipment. Experts vary in their
estimates regarding the size of this market, for instance a recent BCG – CII study
estimates the size of the import order book at US $ 80 billion over the next five years while
Mckinsey estimates the total defence platform spending at US $ 150 Billion by 2017.
Going back a little more than a decade we see that India’s Capital Expenditure on Defence
Equipment quadrupled from US $ 3 Billion in 2000 to US $ 12.2 Billion in 2010.
Approximately 70 % of these acquisitions have continued to be done through the inter-
governmental purchase route in the form of non-competitive, bilateral agreements
according to the 2013 Mckinsey study.
These inter-governmental purchases have mostly involved our inefficient Defence PSU’s
who have been licensed to produce the contracted equipment. For example, a large
proportion of the India Air Force’s fleet of Russian Sukhoi Su-30 MKI fighter jets has been
manufactured under license by Hindustan Aeronautics Limited ( HAL ) in Bangaluru and
elsewhere through the transfer of designs and subsystems from the Russian Original
Equipment Manufacturer ( OEM ).
Government owned organizations dominate the defence manufacturing space in India. The
Military – Industrial complex today consists of 37 Ordinance Factories, 9 Defence
Production PSU’s, 50 + defence R & D Labs and the National Aeronautical Laboratory
( NAL ). These organizations have showed disappointing results on several projects
ranging from the INSAS Rifle ( which gets jammed frequently ) to the Saras aircraft which
after 20 years in development and Rs 1000 crores of taxpayer money spent, crashed
during testing in 2009 killing its entire test crew.
Whenever the armed forces wants a new weapon system, the DRDO invariably says “ We
can make it ”. They then waste the next 20 years of the nation’s time and produce a
disappointing product. In the end, the armed forces have to import the same equipment at
10 times the original cost. Meanwhile, we risk losing thousands of soldiers lives as we do
not have proper equipment in times of crisis.
The picture overall is one of utter neglect within the ordinance factories. For instance,
ordinance factories keep their ammunition stocks in the open sun and there have been
cases where hundreds of crores of rupees worth of artillery shells have exploded within the
ordinance depots. At the Bharatpur factory in May 2000, for instance Rs. 376 crores of
ammunition caught fire and blew up as it was kept uncovered in the open sun.
The net result of this systemic rot within the defence production system is that in India
today no Indian government or private organization can make a decent Carbine, Light
machine gun or even a modern pistol.
One thing is crystal clear to everyone. The existing system of 37 Ordinance factories, 9
Defence PSU’s and 50 defence R & D Labs just cannot deliver. Everyone is painfully
aware that if we rely totally on them, we will get absolutely nowhere. They have over the
last 30 - 40 years produced disappointing results on every strategic defence project except
with the sole exception of the Missile programme which has been very successful, for
entirely different reasons.

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India urgently requires weapons that our soldiers can use with confidence. Given this
requirement, it would be foolhardy for Govt. of India to continue to rely on Ordinance
factories, Defence PSU’s , existing R & D labs and NAL , as it will take 20 – 30 years for
these organizations to overcome their basic skill deficiencies, extreme bureaucracy and
internal politics. To add to this is the massive corruption within, with senior ordinance
factory board members taking bribes from suppliers. Given this state of affairs, the
probability of successful transformation of this system is very low, it at all as the rot within
has made recovery difficult within a reasonable timeframe.
We therefore believe that the recent Ministry of Defence plan to spend Rs 15,000 crores for
Modernizing the Ordinance factories sends out very wrong signals to potential investors
and will achieve nothing within the ordinance factories themselves.
This money , and it is a lot, should instead be spent on creating an enabling framework that
allows the Private and Public sectors to work together in a market determined manner. This
will allow them to work together to exponentially increase India’s defence manufacturing
base. Spending this hard earned taxpayer money instead on modernizing dilapidated
ordinance factories is in fact equivalent to “ modernizing the bullock cart ” as opined by
Capt. Bharat Verma, Editor of the Indian Defence Review.
Spending 15,000 crores on a decaying Ordinance Factory system sends out completely
wrong signals to domestic and foreign investors. Why should any Indian company invest
huge amounts of capital in developing a field gun if the government is finally going to give
the order to an Ordinance factory which can now claim that its facilities have been re-
furbished, even though it still has the same old people who have not done anything new for
the last 30 – 40 years ?
The potential disasterous impact of this 15,000 crores becomes very clear when it is
pointed out that of the roughly 200 manufacturing licenses issued, very few, if at all have
resulted in actual investments by companies in the Indian defence industry. Given this kind
of regressive thinking, it also comes as no surprise that in the last 10 years, India has been
able to attract only US $ 5 Million as FDI in the Defence Sector. So both Indian private
sector investment and the case for future FDI could suffer in a very major way.
Our own Indian companies are scared to commit more money to Defence related industries
because of this kind of thoughtless investment in the ordinance factories. No one is
objecting to the government keeping the factories open and spending taxpayer money on
factories that are delivering substandard weapons, but at least do not stop others from
making new investments using state of the art technology and employing qualified people
and engineers who can hold out some hope by producing guns that our soldiers can use
with confidence or aircraft that our pilots can fly without fear that the planes may crash.
All this shows that the problems in India’s defence manufacturing sector are self created.
Over the last ten years we have signed import deals worth US $ 50 Billion and at the
same time we have implemented policies that have discouraged domestic investment in
defence manufacturing. There appears to be a pattern in this, but it could also be due to
impatience with the pace of indigenous technology development.
Overall, we believe that such excessive reliance on foreign suppliers in the first instance
and on in-efficient Defence PSU’s and Ordinance factories on the other hand could result
in India losing its next war if critical equipment spare parts are denied in times of crisis.

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It is therefore critical that private companies with a track record for innovation are also
given a share of contracts such as that for licensed production of the Sukhoi Su-30 MKI
fighter jets or for the manufacture of ammunition. We see no reason why only HAL should
get the aircraft contracts.
Let us give our domestic companies or a consortium of domestic companies a chance.
They can and they will come together and develop the necessary vertically integrated
infrastructure to produce advanced fighter’s or any other advanced system through joint
ventures if necessary. As it is, a recent media report has suggested that the Indian armed
forces have ammunition for just 20 days in case of a war. We need additional
manufacturing capacity, preferably in the private sector, in this sector on an immediate /
yesterday basis.
3. Defence Production Policy 2011 … Challenges
The Indian Government’s 2011 Defence Production Policy has been quite clear and direct
in its objectives :
1. To achieve substantive self-reliance in the design, development and production of
equipment, weapon system and platforms required for defence in as early a time
frame as possible.
2. To create the conditions conducive for the private industry to play an active role in
this endeavour.
3. To broaden the defence research and development ( R & D ) base of the country
And …
4. To enhance the potential of Small and Medium enterprises (SMEs) in
indigenization.
The problem is that the no one in Government or Industry seems to know how to execute
and realize the above policy objectives in the fastest possible time and at the lowest
possible cost. Everyone appears to think that this will happen somehow and there is no
road map or even a draft plan to achieve this.
The principle objective of this paper is therefore to show how 2011 policy objectives can be
achieved in the least possible timeframe and at the lowest possible cost. Before we get to
that however, we need to identify the main hurdles that could act as showstoppers in
India’s efforts to achieve 75 % – 80 % indigenization of defence production.
4. Dream Killing Weakness in Electronics Software & Metallurgy
There are basic two technology gaps that India needs to bridge to be a credible
manufacturer of Defence Equipment. We are also short of weapon designers and
personnel with system integration skills, but the critical technology gaps exist in Software
and Metallurgy / Material Science and it is on these areas that India needs to focus the
most :
Mission Critical Software :
Today, from an operations standpoint the intensity of foreign software and embedded
systems software use by India’s armed forces is very worrying as far as equipment

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reliability goes. Without constant technological and electronic / software support from
foreign nations, the Indian armed forces cannot meet their operations effectiveness targets
for a single day. Forget about fighting a war, even peacetime routine drills would be
impossible without foreign software support.
The fact is that all the software that runs imported defence equipment has been written by
programmers abroad. Not a single person in the entire Indian armed forces knows what
kind of code has been written in the software that operates critical equipment. It is
therefore possible that hidden sub-routines within this software can be activated from
a remote foreign country by satellite to make critical equipment malfunction and we will
never even know what went wrong in a potential future war. If this happens our soldiers
will be forced to fight with their bare hands or with just their rifles and bayonets.
There is therefore a need to develop Indigenous Defence Software capability in India on a
massive scale. Our software companies are sending thousands of their engineers abroad
for business. We need those engineers here in India to work on Defence platforms and
there is literally hundreds of millions of dollars worth of business each year for Indian
software companies in this critical area.
The Metallurgy / Material Science Gap :
At Defexpo 2014, one thing was painfully very clear.
No Indian manufacturer in India today can make a sophisticated high performance Carbine
or even a Pistol. Some companies such as Bharat Forge have succeeded in making Large
field guns / howitzers and have acquired the metallurgical knowhow to make the barrels for
these weapons, but they have not yet mastered a sizeable range of metallurgical
technologies needed in the Defence space.
Therefore if India has to go anywhere close to its goal of indigenization of Defence
production there is a need to indegenize whole range of sophisticated Metallurgical / Alloy
Steel technologies and most importantly welding technologies / procedures including
special electrode manufacture. To do this we also need to attain a sophisticated
understanding of Superalloys and Composite materials and all the technologies related to
their manufacture.
To get this knowledge it will be necessary for Indian Companies to set up joint ventures
and acquire companies with specialist knowledge and technical knowhow related to special
alloys and high performance Composite materials from around the world. The criticality of
this is apparent if readers note that even the South Koreans have not been able to perfect
the manufacture of 5 % nickel steel and even they buy it from the Japanese.
No Indian
organization
can make this
standard weapon

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Indian companies will therefore need to enter into joint ventures or make outright
acquisitions of, if not US, then Japanese, German, Italian, French or German companies
that have these special technologies.
Once we specifically target and acquire skills in Software and Metallurgy / Material science,
India will be in a position to make sophisticated weapons. It’s then a matter of design and
system integration. How to acquire weapon design and system integration skills is dealt
with in detail later in this paper. We have suggested a few approaches, each company
however will have its own unique approach.
5. The “ Breakthrough Thinking ” Approach to Strategic Planning
Given India’s current population of 1.23 Billion, Nehru’s 5 year plans no longer are able to
provide adequate financial flexibility to take large bets on the Indian economy especially in
critical areas such as Education, Healthcare and National Defence.
The key to successful planning is to understand that India is likely to expand from a US $
1.92 Trillion economy ( end 2014 ) to a US $ 4.0 Trillion economy by 2025 , if she re-attains
to a 7.5 % + GDP growth rate by June 2015 once a new government is stabilized in New
Delhi.
If we think in terms of a US $ 4.0 Trillion economy by 2025, it becomes easy to take
decisions to pre-invest in large Education, Healthcare and Defence projects which are the
building blocks needed to sustain and protect an economy of that size. By not pre-investing
in that future we run the risk of an implosion as the building blocks are not in place to serve
as a substrate for further expansion.
Planning commission data indicate that India is short of 5,00,000 secondary schools and
over the last decade over 150 million children have had to drop out of school as there were
no schools to go to after class IV. In addition, according to a NUEPA report, just 46 % of
teachers in India have studied beyond class XII, and in Bihar where all the six rapists in the
New Delhi rape case of Dec 2012 came from, just 21 % of teachers have studied beyond
class X. Poor teacher quality is therefore becoming India’s NO 1 security threat. In
Healthcare also, we are short of 2.5 Million hospital beds , 8,00,000 doctors and 2.5 million
nurses. The question is “ with this huge gap in the social infrastructure space, can the
Indian economy remain stable as it expands ? Will it not collapse onto itself just like a Red
Giant Star which expands even as it cools and then collapses on itself to create a highly
dense black hole ? ”. This is a very serious question !!!
The same logic applies to the Defence Industry and the Military – Industrial complex where
the shortages of equipment and the problems created due to technological obsolescence
are so large that there is no way to bridge the gap within a 5 year planning horizon. India
therefore needs to move very fast to a 15 year planning horizon where huge financial
flexibility and options exist.
Under this kind of approach, investments will be made, starting immediately, in core
sectors such as Education, Healthcare and Defence in project mode. China follows such a
15 year investment plan for science and technology investments.

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To solve the critical weapon shortages problem in the Indian Military and to upgrade them
technologically, the first step is to realize that it is pointless to expect the existing system of
9 defence PSU’s, 37 ordinance factories and 50 defence R & D labs to deliver results.
Instead, we need to move on and explore alternate breakthrough approaches that can
deliver on the goal of 75 – 80 % indigenization of defence production by 2025, completely
independent of the existing system.
In our view, 75 – 80 % indigenization is a good enough goal given the fact that the US
which is the worlds largest arms exporter has imports worth 14.8 % of its exports which
effectively makes it the worlds second largest weapons importer after India.
To make the projects financially viable form the start and fastrack indigenous production,
The DEZ’s being proposed in this paper will be backed by an innovative and forward
looking policy framework which will allow potential foreign partners to work with Indian
companies to dramatically reduce costs within their global supply chains while also
improving their global market shares. Significant policy incentives such as a blanket permit
for 49 % foreign equity participation in general areas ranging from Aerospace industries
and land based military vehicles of all types to Naval vessels and diesel submarines to the
manufacture of rifles, carbines, pistols and grenades will be allowed as the “ New Normal ”
in the Indian defence production policy framework.
The DEZ’s by their very design will do away with the present 26 % cap on foreign
ownership of Indian defence entities and allow for a blanket 49 % foreign ownership stake
in any defence related industry set up within the Defence Economic Zone barring a few
high technology strategic defence systems. This way foreign partners will be able to
adequately control the flow and ensure the appropriate use of their intellectual property by
their Indian partners.
As stated before, since defence is a strategic sector, the government would of course have
a say in the most critical cases such as nuclear submarine manufacture or the
development and manufacture and export of precision missiles for instance, but for
everything else ( carbines, military vehicles, conventional artillery, tanks etc, the 49 %
blanket permit on FDI in any unit set up within the DEZ would apply.
This will ( As suggested by Capt. Bharat Verma of the Indian Defence Review ) enable the
setting up of advanced manufacturing facilities in India catering to the worlds Aircraft and
Rocket / Satellite launch industries and allow India based companies to participate as
specialist suppliers of high value / high margin aircraft parts such as entire wing assemblies
to sophisticated avionics in a global industry where specific components are sourced from
around the world by a global supply chain and assembled in much the same way as a
modern Airbus aircraft.
As described earlier, Defence PSU’s such as HAL ( which has seldom produced any real
innovation ) have always been favoured with licensed production contracts in the military
aerospace sector. For example, a large proportion of the Indian Air Force’s fleet of Russian
Sukhoi Su-30 MKI fighter jets has been manufactured under license by Hindustan
Aeronautics Limited ( HAL ) in India through the transfer of designs and subsystems from
the Russian Original Equipment Manufacturer ( OEM ).
This has been at the cost of developing / encouraging Indian Private Sector companies
which could also build Sukhoi’s or other fighter jets and Missile systems , first under a

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license and later on, on their own through strategic joint ventures, if they are suitably
encouraged. This author is of the view that there is a need to encourage our own private
sector companies such as L & T, Mahindra and Tata by giving them a chance through
licensed production under inter – governmental contracts.
If this is done, these companies will be able to graduate to the next level in the Defence
Contractor hierarchy to become system integrators with the various other vendor
companies within the DEZ’s making up the highly integrated vertical supply chain, the
absence of which has so far prevented our own companies from emerging as alternative
suppliers to HAL which has the necessary vertical integration within its facilities.
Relocating to a DEZ will allow an aspiring defence contractor to graduate to the next level
at a much lower cost and by diversifying risk which will be taken up by other smaller
companies interested in participating as specialist vendors for the larger players within the
DEZ’s.
The Indian Defence Economic Zones have been conceptually designed to match the
immense pace of innovation in the global defence industry. Today, aircraft carrier killer
missiles, such as the Chinese Dong Feng DF – 21D and separately Submarine drone
technology ( represented by the US “ Manta ” submarine drone ) is rendering the Aircraft
carrier group platform, obsolete as a concept.
This massive strategic shift in Naval Technology is an example of “ Technology Velocity ”
in the defence sector globally and it provides a unique opportunity for a beginner to emerge
as a leader by changing the structure of the global military landscape by first leapfrogging
to next generation systems and technology development and then rapidly deploying these
low cost, low maintenance systems in the field.
ISRO’s experience with frugal innovation shows that India can now launch satellites at
nearly 1 / 10th
the cost of advanced nations. We believe that the country has and can
rapidly build the technical human resources to achieve the same feat in defence
production. This approach will also meet all the objectives of the 2011 National Defence
Production Policy while upgrading the existing system at the lowest possible cost.
6. Defence Economic Zones … An Alexandrian Solution
Self-reliance in State of The Art Defence Equipment and Technology has presented Indian
defence planners & military brass with a gordian knot lookalike problem for the last
40 – 50 years and it is only fitting that an Alexandrian / out of the box solution is attempted.
In 333 BC, Alexander while wintering in Gordium had attempted to untie the knot which
held an ox-cart to a post within the palace of the former kings of Phrygia. When he could
not find the end to the knot to unbind it, he sliced it in half with a stroke of his sword,
producing the required ends ( the so called “ Alexandrian Solution ” ).
Given the strategic objectives specified in the 2011 defence production policy and the
current state of the domestic industry ( characterized by very low productivity of
government owned assets and their disastrous technology development record as
described above ), it is critical to totally bypass the existing Military - Industrial complex in
India and build a totally new one from scratch. Only if this is done, will India be able to

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achieve self-reliance in defence production at the lowest possible cost and in the shortest
possible time.
Secondly, India has deservedly been rated as one of the most difficult countries in the
world to set up businesses. To eliminate this impression among potential defence sector
stakeholders ( both domestic and foreign ) and at the same time achieve indigenous
defence production milestones in a timely manner, it is proposed to adopt the SEZ route
and existing SEZ policies as specified in the Sez Act ‘ 2005 which effectively over-rides all
other laws, for the time being in force, grants several fiscal concessions to industry and in
effect establishes a Large Defence Production platform outside the customs territory of
India, but still subject to Indian law as enunciated in the SEZ Act of 2005.
The Lab therefore recommends the setting up of Six New Defence Economic Zones
( DEZ’s ) in two phases of Three Zones each. Each DEZ will have between 3000 - 5000
acres of land and will be located in a remote area, preferably close to a missile testing
range belonging to the Ministry of Defence so that technologies developed in the DEZ’s
can be tested easily and quickly.
In the first phase, one of the DEZ’s will be exclusively dedicated to the Navy and the other
two will cater jointly to the Army and the Air Force. These latter two bases will also cater to
the massive demand from the Paramilitary Forces, Police forces of 29 states and 7 Union
Territories, The Coast Guard and also the Global Civil Aviation and Healthcare sectors.
The Naval Economic Zone will be located at a deep draft ( minor port ) location along either
the east or west coasts with the first located along the east coast. The critical site selection
criteria for the Naval Economic Zones will be the availability of sizeable back up land
behind the jetty’s / slipways so as to allow for large scale ship and submarine building
activity.
The DEZ’s will be next generation state of the art facilities very unlike the sleepy defence
PSU’s and ordinance factories. These will be vibrant, totally self-contained facilities
complete with their townships and living facilities for 15,000 – 20,000 families and most
importantly their own landing strips to enable a massive logistics platform and
communications system that drives down global logistics costs and project development
cycle times.
To secure early commercial wins and to anchor the projects, the first DEZ’s will also cater
to the global Civilian Aircraft and Rocket / Satellite launch industries so as to allow India
based companies to participate as specialist suppliers of high value / high margin aircraft
parts ranging from entire wing assemblies to sophisticated avionics in a global industry
where specific components are sourced from around the world by a global supply chain
and assembled in much the same way as a modern Airbus aircraft.
These advanced manufacturing facilities will be backed by extensive air support.
Specifically each DEZ will be able to land large heavy lift transport aircraft such as the
Boeing C-17 Globemaster III , Lockheed Martin C-130J Super Hercules and the Antonov
An-124 Ruslan. These heavy lift aircraft will serve as couriers within the new system that
would make speedy movement of spares and entire weapon systems possible between the
Six different DEZ locations, the testing sites ( Military ranges ) and their domestic ( India )
and International customer locations.

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This New DEZ system will be run as a Public – Private partnership ( PPP ) between the
Ministry of Defence and Six private consortia with one consortium per DEZ . Each of these
Economic Zones will have living accommodation, education, healthcare and entertainment
facilities to cater to around 15,000 – 20,000 personnel and their families. In terms of
business and Industrial infrastructure, besides large scale office complexes there will be
several large defence equipment production plants owned by prime contractors, R & D
labs, common testing facilities and hundreds of small scale ancillary units to
manufacture defence equipment components.
Each DEZ will have its own governing board with the Secretary of Defence as a board
member. This will ensure that the concerns of Industry are addressed quickly. Secondly, as
is done in the advanced economies, the Ministry of Defence will openly publish its future
equipment requirements on the MOD website and companies will be able to develop
solutions that meet those requirements. All the three services of the Indian armed forces
will also have their technical people posted within the DEZ so that prototypes can be tested
quickly and necessary design changes can be made based on inputs received from the
Army, Navy & Airforce end users.
To guarantee the commercial viability of the first three DEZ’s under phase I, the Ministry of
Defence will initially guarantee business amounting to 30 % of the US $ 150 Billion, large
platform order book ( by 2017 as estimated by Mckinsey ) to the DEZ’s and foreign
suppliers will be required to work with companies located in these Economic Zones to
manufacture the components and systems in accordance with the 30 % guaranteed offsets
policy.
Offsets however finally represent increased costs to India, as foreign suppliers usually
quote higher prices when offsets are included. Therefore it is understood that the offset
requirement will be progressively removed from Indian defence contracts within 5 – 7 years
and this will only be a bootstrapping provision to get the DEZ’s off the ground.
Given India’s growing Urban phenomenon and the need for more cities, a further option
would be included within the DEZ Concession agreements to include a city development
concession wherein the Developer would get exclusive development and planning rights
over an additional 3000 Acres of land for development of a modern city and regional
business hub. This will vastly improve the economics of the DEZ’s and allow developers to
make large upfront capital commitments to the DEZ’s.
After 1st
January ‘ 2020, the DEZ policy will switch to a 70 : 30 regime, wherein foreign
suppliers looking to supply defence equipment to India will need to produce 70 % of their
equipment within any of the Six Defence Economic Zones and partner with local
companies through joint ventures. This means that after 2020, they will be able to bring in a
maximum of 30 % of the value in the equipment as an import component or technology. In
very special circumstances , some suppliers will be allowed a 50 : 50 regime for a period of
three more years. But in all cases all suppliers will need to move to a 70 : 30 regime in
favour of domestic production by 2025 to continue to be eligible to bid for Indian defence
contracts.
7. Solid Business & Economic Case For DEZ’s
The Defence Procurement Procedure ( DPP ) instituted first in 2002 has seen many
revisions and amendments, yet it has failed to yield substantial results in terms of both

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indigenization of defence production and bringing in FDI, not just due to bureaucratic
delays but also because it does not provide a scalable platform where it would be easy to
build capacity within domestic industry.
The Defence Economic Zones are primarily designed to :
1. Bring Structure and Transparency to the Defence Procurement Process
2. Build Capacity and Capability within India’s nascent defence industry
While these objectives are fully aligned with the DPP, there is also a solid business and
economic case for DEZ’s given a potential order book size of US $ 150 Billion by 2017
…according to the Mckinsey study.
The graph below summarizes the business opportunity for potential DEZ promoters after
accounting for intergovernmental contracts which are without offsets. If manufacturing
under the other two DPP mandated quotas to domestic industry : “ Buy ( Indian ) and
make ” and “ Buy and Make ” are also re-located to the DEZ’s to take advantage of the
enormous benefits on offer ( not the least of which is ultra-efficient logistics ), it turns out to
be an extremely attractive business proposition.
Based on just the offsets, we believe that the Defense Economic Zones have a business
potential of US $ 10 – 20 Billion by 2017. For each of the three DEZ’s in phase I, this
represents a minimum revenue potential of US $ 3.3 Billion by 2017.
Secondly, according to the Mckinsey study, Defence Engineering services and Component
manufacturing businesses represent an additional business opportunity of anywhere
between US $ 6 Billion to US $ 10 Billion. Of this, the Engineering services market could
range from US $ 2 Billion to US $ 4 Billion and the weapon components / spares business
revenue could range between US $ 4 Billion to US $ 6 Billion.
Thirdly, the DEZ’s could potentially add billions of US dollars to the domestic market
capitalization for Indian Companies at a conservative PE multiple of 7. That is a huge
amount of increase in wealth for Indian investors which by itself could attract a number of
companies to set up facilities in the proposed Defence Economic Zones.
The above numbers pertain just to Indian Defence demand. If to this you add demand from
the State police forces, Border security force, Coast Guard etc within India and finally
potential International demand, the Indian Defence Economic Zones are possibly the best
Investment Opportunity on offer not just in India but on a global basis.
Sources : Defence Services Estimates, Indian Ministry of
Defence, Economic Survey 2009 – 10,
Report of the Thirteenth Finance Commission ( 2010 – 2015 ),
Union Budget of India, Indian Ministry of Finance, Mckinsey
Analysis

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The DEZ’’s also have attractive Tax benefits under the extant SEZ Act, 2005 (Annexure IV).
This only adds to their appeal not just for Indian companies but also for Foreign OEM’s.
According to Mckinsey, most of the big defence contracts will be awarded over the next
3 – 5 years. The Defence Economic zones are targeted at capturing this window of
opportunity and it is in the interests of Indian companies to come together and lobby with
the Government of India as the DEZ concept and structure allow for the creation of a level
playing field which will allow Indian companies to partake of the windfall business
opportunities that will accrue due to this cyclic upswing in Indian Defence demand.
Foreign suppliers will also want to participate in this unique opportunity which comes at a
time when large players in the the Global defence and aerospace market are trying to
reduce costs within their global supply chains, to cope with global recession.
Mckinsey expects the following to be ordered over the next 3 – 5 years :
Sl.
No.
Arm Category Potential
Spending *
( US $ Billion )
Main Orders Expected
1 Air Combat / Trainer 26.3 Medium multirole combat aircraft
and other 5
th
generation aircraft.
Mirage Upgrade, Jaguar Engine
Upgrade, basic trainer.
Support 15.8 Transport aircraft, aerial tankers,
long – range maritime patrol aircraft,
midrange maritime reconnaissance
aircraft, Phalcon AWACS **, mini
AWACS
Rotary 9.1 Light –utility helicopters replacing
Chetaks for the Navy, Multirole
helicopters for the Navy, attack,
heavy lift, light utility, light combat
2 Land Fighting vehicles 15.8 Arjun main battle tank ( MBT ), T –
90 MBT, Light Tank, Futuristic
infantry combat vehicle
Artillery 4.20 155 mm towed guns, 155 mm
ultralight guns, 155 mm self –
propelled tracked guns, 155 mm
self-propelled wheeled guns
Missiles 3.4 Javelin antitank guided missiles,
CBU – 105 sensor – fused weapon,
short – to medium range surface to
air missile, Agni – V, MICA
Infantry Systems 1.1 Fururistic Infantry Soldier as a
System ( eg, weapins, helmet, visor,
clothing )
Sea Surface
Combatants
20.8 Aircraft Carrier : Project 71;
Destroyer : Project 15 B; Frigate :
Project 17 A and 17 B; Corvette :
Project 28 A
Submarines 46.7 Nuclear : Arihant follow – on;
Scorpene, Project 75 I; Special;
Midget
Support 4.1 Landing platform dock, Landing ship
tank, Landing craft utility

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C4ISR 0.3 Navy 3-D Radar, Radar Jamming
integrated electronic warfare
systems
Homeland
Security #
State Police,
Paramilitary
Forces, Coast
Guard
18.0 Guns ( Carbines, Pistols ), Electronic
Surveillance Systems, 300
Helicopters, Power launches
Healthcare # State Health
Ministries
3 300 Helicopters
* Total includes $ 1.1 Billion on infantry equipment not detailed in the chart
** Airborne Warning & Control System
*** Command, Control, Communications, Computers, Intelligence , Surveillance and Reconnaissance
Source : Defence Services Estimates, Indian Ministry of Defence , Economic Survey 2009 – 10, India
Ministry of Defence; Report of the Thirteenth Finance Commission ( 2010 – 2015 ), Union Budget of India, Indian Ministry of Finance
Mckinsey Report “ A bright future for India’s defence industry ” , 2013, Planning & Design Lab estimates #
Within the Defence Engineering Services and Defence Spares / Components space
Mckinsey sees India as providing the following opportunities for Foreign OEM’s.
Attraction For OEM’s Engineering Services Components
Discharge of Offset
Obligations
Multinational original
equipment manufacturers
with Indian Defence
contracts can discharge
their offset obligations by
sourcing Military – Grade
components from Indian
Defence Economic Zones.
Access to low cost
Engineering Talent
There is a shortage of
Engineers in Multinationals
home markets while India
has a small but growing
pool of highly qualified
engineers coming for
relatively lower salaries.
India turns out 4000
Aeronautical engineers
each year and most of
these are likely to be
absorbed in the DEZ’s.
Cost Efficiency
Talent and other factor
costs are available at 50 –
60 % of the costs in
developed markets.

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The Indian DEZ’s are likely
to have lower cost
structures compared to
developed countries. This
will provide foreign OEM’s
with a unique opportunities
to lower their supply chain
costs across a huge range
of aerospace and defence
products given DEZ duty
free tax structures and
advanced heavy lift
logistics capabilities.
Huge Homeland Security &
Healthcare Marketplace
within a US $ 4.5 Trillion
Economy by 2025 #
The DEZ’s are also being
targeted at the domestic
homeland security market
characterized by huge
demand from State police
forces and Coast Guard +
India’s huge and growing
Healthcare sector. Both
these categories could
potentially absorb 300
Helicopters each.
Re-Enforcing Impact of
Porter Diamond yields
Strategic Advantages #
The DEZ’s are specifically
designed to leverage
competitive advantage as
envisioned in the Porters
Diamond model. This will
result in shortened product
development times ,
improved logistics,
increased productivity and
enhanced development of
new technologies.
Size of the dot indicates the strength of the factor
Source : Mckinsey Report “ A bright future for India’s defence industry ” , 2013, Planning & Design Lab estimates #
Fourthly, media reports indicate that there is immense cost escalation in India’s Defence
marketplace. This is true across equipment categories and especially true in the case of

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equipment procured from blacklisted companies in certain transactions ( Bofors Guns,
HDW Submarines etc ).
The Defence Economic Zones with their transparent procurement protocols and
procedures provides a much more robust pathway for achieving large scale reductions in
defence procurement costs without scams and without subsequent blacklisting of
companies as has been happening for the last 25 years. In fact, some of the blacklisted
companies actually make excellent weapons such as the Bofors Gun.
It needs to be noted specifically with respect to strategic defence platforms that there are
just 2 – 3 large global players in most of such categories making the same quality of
weapon system and blacklisting a company seriously hurts the defence preparedness of
the Indian Armed forces if the company is subsequently blacklisted after the weapon
system is procured.
The truth is that these companies paid bribes because some of our politicians were corrupt.
By blacklisting the companies India has had to pay a very heavy price both in terms of
defence preparedness and due to the fact that we need to buy spare parts from the same
companies by going through a circuitous route at 50 – 100 times the cost of spares.
The proposed DEZ’s procurement protocols and secure IT systems will make political and
other official decision makers highly visible. Therefore once the DEZ’s are sanctioned we
see no reason why there should not be a review of the blacklisting status of the companies
through a court monitored process. The court monitored process is critical as it will give
credibility to the re-habilitation process and we recommend it. This will allow for a huge
reduction in cost of spares with savings of thousands of crores of rupees in taxpayer
money as the spares can be bought directly from the concerned companies and their
manufacturing units set up within the DEZ’s.
As everyone competes within a fair regime on price and specifications, it will become much
easier and faster for officials to take technical and commercial calls on defence equipment
in an environment which is totally transparent and free of fear. The net result will be a
shortening of the procurement cycle of major defence platforms from a decade or more to
just 2 – 3 years. The savings achieved by all this will easily see each of the six proposed
Defence Economic Zones more than pay for themselves within 3 - 4 years of startup.
8. Changing The Game In Defence Manufacturing…Lessons from Tata / Reliance
& ISRO
A great transformation of India’s military – industrial complex can be achieved by learning
from the Automobile & Telecom industries and the strategies deployed by the Tata group
( in the design of the Nano ) and Reliance Industries ( drastic reduction of costs within the
Reliance telecom project). The ISRO model of cost reduction in satellite launch is also
worth learning from.
While the Nano is an example of value engineering and innovation at the product level ( A
Car ), the cost reduction achieved in call rates within Reliance Telecom is an example of
project level innovation. In both cases however the design of product / project was dictated
by the price of the end product. The Tata’s design was dictated by the Rs. 1,00,000 price
fixed for the Nano ( basic model ) and the design of the Reliance Telecom project was
dictated by the 25 paise / minute price committed as the price per minute of talk time on
long distance calls ( Mumbai – Silchar as an example ).

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The Tata Nano Experience
Once the Tata’s had committed to the Rs 1,00,000 price for the Nano, they went back to
the drawing board to design the entire car from scratch. Design innovations were made in
the following areas to achieve the price target :
1. Compact design and small size to reduce material use and therefore cost
2. Use of a 624 cc, two cylinder aluminum engine to reduce weight
3. Engine located at rear of vehicle to reduce cost of components towards the front
steering area. The Tubular design also had lower costs then the rod design.
4. 90 % outsourcing of components. Targeted cost reduction from volumes however
did not materialize.
5. For specialist components, specialist vendors such as GKN for drive shafts and
BOSCH for Multi Point fuel systems … were approached
6. For boosting Margins, higher end versions were to bring in revenue
The Reliance Telecom Story … Crashing Costs
Innovation in the Reliance Telecom Case was at the project concept level. This was a
totally different game from the Tata Nano or ISRO’s innovation .
As conceived, the telecom project was an ambitious scheme with a price tag of US $ 10
Billion, with thousands of cell phone towers and 60,000 Km of fiber optic cable to be laid
out across the country.
When the project was first conceived, the price per minute for a telephone call, being
charged by other players in India was Rs 16 / minute. Reliance believed that the
Rs 16 / minute cost was limiting the size of the market and that demand would explode if
they could succeed in reducing the offer price / minute to the cost of a postcard
(25 paise) for a hypothetical call from Mumbai in Maharashtra to Silchar in Assam.
By targeting 25 paise / minute, Reliance was in fact looking to reduce the price for
telephone calls in India by close to 98 % . Most people who heard of this felt it was an
impossible target to achieve.
But this massive cost reduction in call rates was achieved by resorting to project level
innovation where the largest cost reductions are often possible, simply by looking at the
project differently.
The breakthrough came by looking at the elements of project cost. The numbers looked
something like this :
1. Cell Phone towers US $ 2.0 Billion
2. 60,000 Km Fiber Optic Network US $ 3.0 Billion
3. License Fees to Govt. of India US $ 1.5 Billion
4. Telecom Software US $ 3.0 Billion
5. Cell Phone Financing US $ 0.5 Billion
Reducing costs in the above cost structure would appear impossible to most people. RIL
however was looking at these costs through a commodity traders lens.

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Would it be possible to perform a cost arbitrage by commoditizing high technology
products ? They felt they could do this with Telecom software where IP products
( Networking, Switching & Billing Software ) were owned by a few big players ( AT & T,
Nortel and Lucent ) who had created an oligopoly with attendant massive price inflation.
The project designers felt that they could in fact commoditize high end telecom software
products by hiring a few hundred software engineers with high end programming skills or
by buying specialist companies with skills in strategic segments of the telecom software
value chain.
Since the price of the software was US $ 3 Billion ( Rs 12,000 Crores ) , the critical
question they asked was “ How many CD’s will we get for Rs 12,000 Crores ? ”. The
answer to this was that the entire software would come in 50 CD’s at most .
Essentially, the telecom majors wanted Rs 12,000 Crores for 50 CD’s .
The breakthrough had come by asking the right question.
RIL then took a decision. They hired the engineers, paid them extremely well and got the
job done at 1/10th
the cost .” The total cost of this software development, through strategic
hiring and outright purchase of a few companies, was US $ 300 Million or thereabouts. It
was, as they had correctly estimated, 1/10th
the cost of the same software one would have
got from Nortel or Lucent.
Taking US $ 300 Million as the cost of the software, they ran the new costs again through
the model while also making some other changes. The cost of a minute of talk-time had
indeed fallen to a level comparable to the price of a postcard.
What followed is now a part of telecom history and the entire industry in India had to
reduce its costs to match Reliance’s prices for telephone calls. Needless to say … market
demand “ EXPLODED ”.
The Tata and Reliance experiences may not apply to all aspects of the Defence
Manufacturing Sector … but they definitely do apply to large parts of it and especially to the
two critical areas of Metallurgy / Material Science and Defence Software where India is
especially weak as discussed before in this paper. India can and therefore will change this
market.
Similarly ISRO has through frugal innovation achieved the lowest global costs for launching
satellites “ The Mangalyaan mission to Mars ” for instance has been launched at 1/ 10th
the cost achieved by NASA . All these are examples of what Indian engineers can do … if
given a chance.
9. Need to Lower Military Equipment Capex / Opex Costs & Cost of Spare Parts
Lack of transparency in Defence Contracts is creating severe problems for the country.
Firstly, since there is no transparency, the entire process is slowed down. Then when
scams surface, the contracts are cancelled which severely affects India’s defence
preparedness. This has happened with the Bofors Gun deal , the HDW submarine deal, the
Augusta Westland VVIP Chopper and most recently looks set to create problems in India’s

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relationship with Rolls Royce which could create serious problems for both civil and military
aviation in India.
The net result of all this is extreme cost escalation in spare parts as these must be
procured through other channels at between 50 – 100 times the cost to keep the
equipment in working condition.
Such cost escalation further undermines the credibility of established defence procurement
systems and procedures and the obvious solution to all this is to produce most ( actually a
maximum of 75 % … for various reasons explained elsewhere in this note ) military
equipment domestically , so that SCAMS are avoided and the armed forces get their
equipment at a substantially lower cost.
The only remaining issue then is how do we do this in a manner that keeps our systems on
par with the rest of the world in technological terms within an Industry where technology is
moving at an extremely fast pace.
We now discuss various options and strategies that could be deployed to achieve this.
10.Adopting ISRO’s Successful Model
Thanks to ISRO’s acquired expertise in frugal innovation, India can now launch satellites at
the lowest cost on a global basis. For comparison, NASA's Mars mission “ MAVEN ” had by
Dec 2013, already clocked up US $ 679 million in costs over five years even though it is set
for launch in 2018. ISRO by comparison successfully launched “ Mangalyaan ” using the
same conceptual platform as MAVEN, on the 5th
of Nov ‘ 2013 after just 18 months of
effort, at a cost of just US $ 69 million.
This shows that ISRO has developed the expertise in adapting technology and deploying it
in unusual ways, in a manner that is foreign to engineers in the west. ISRO's engineering
revolves around very careful planning and just a few core principles : Adapt technology as
much as possible, Minimize the number of physical models, Optimize on testing, and work
24 X 7.
We propose to use the same kind of thinking and processes in the Defence Economic
Zones along with a few other business concepts described in this note.
11.Leapfrogging Technology Through 49 % - 74 % Joint Ventures
Technology is moving at a very fast pace in the global defence industry. This has very
serious implications for India where defence procurement is very slow with time lags
between start of negotiations and actual weapon system delivery sometimes stretching out
as far as 15 – 20 years ( as in the case of the aircraft carrier INS Vikramaditya ).
As a result, in the time the Indian Ministry of Defence initiates negotiations to the time the
contracted weapon system finally arrives in India, it is already obsolete. It is therefore
believed that a large percentage of the weapon systems operated by the Indian armed
forces ( Army, Navy and Airforce ) are already obsolete. For instance According to General
VK Singh’s , March 2012 letter to the Prime Minister which was subsequently leaked to the
media, 97 % of Aircraft in the Indian Air Force are obsolete.

Transforming India's military through Defence Economic Zones

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