Defense

1. State of Technology in
India & Needed Reforms
16th December 2011
By
Rahul Chaudhry
CEO – Tata Power SED
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2. Preface
• The Comments herein are entirely based on my
personal observations
• Some of the observations are anecdotal in
nature, but mostly backed with examples
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3. Issues with Technology in Indian Defence
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4. Technology is not the “real” issue
• Indian Defence Industry has proved its ability to deliver state-of-the-art
technology against the odd of Global Sanctions
– India‟s Strategic Missile Program is completely indigenous
• Dr APJ Abdul Kalam and DRDL indigenously developed a series of missiles Programs
– Agni, Prithvi, Akash, Trishul and Nag from the scratch, after succeeding in SLV 3
and other Programs at ISRO
– Arihant Submarine Program, launched in 1997, under the peak of sanction
regime, successfully delivered under a PPP (Public-Private Partnership) model
– Samyukta EW System is another successful example of a completely
indigenously developed System under the PPP model
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5. Technology is not the “real” issue – EW
Samyukta EW System
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6. Change in Industry Dynamics – “Security” Bogy
• Instead of encouraging PPP, today MoD is avoiding it in the name of
“Security”
• BEL / DRDO did not clear IEWS – MT NC NC trials, however is being nominated for
all EW Programs citing “security” reasons
• L&T which gave the hull for Arihant, is denied the same for conversional Submarine
– Under MAKE Programs such as TCS and Global (Buy) Programs such as
MAFI, 155mm Tracked Gun, Electronic Warfare etc, Indian Companies are
Prime with “Know why” -
• Availability of Source Code, co-development and production is acceptable to major
Defence Contractors such as Raytheon, Ultra, Rockwell Collins, Cassidian (EADS),
Harris, Thales etc.
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7. Access to Technology is not the “real” issue
• Today, Indian Companies are Global Companies
– In Defence also, these companies are quite capable of buying niche
technology players abroad or create a Global Supply Chain if Indian
Market is opened for Competition
• However, the problem is Market Access, i.e., getting RFPs
– If an Indian Company buys critical IPR abroad and want to field a
Product for use of Indian Defence – its not possible under a “Single
vendor Situation”
– Indian Company creates cannot field a System jointly Developed
abroad for NC NC trial under Buy & Make
– More than 50% of Buy (Indian) Programs of ~ Rs 200,000 Cr in last
three year has been nominated to DPSUs
• Nomination equals channelised Imports
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8. Impact of Indigenous Defence Production on
Indian GDP
• Defence is a Strategic Industry – more than mere commerce
– Issues of obsolescence, technology denial and restricted trade operate here
• Defence is Monopsony – Government is the Market and the Market Maker
– In a democracy all Strategic Industries like Nuclear, Space and Defence are subject to
probity, public accountability and transparency in Procurement
– Most Executive branches use “Employment Generation” as part of the legislative
approval process. (India no exception – Factory in Nalanda & Kerala)
• Economic impact of reducing Defence imports:
% Reduction Incremental increase Acceleration in Manufacturing GDP Additional Jobs
p.a. Growth rate
25% 8,500 crores 8% 120,000
50% 11,100 crores 11% 150,000
75% 14,200 crores 14% 200,000
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9. Importance of Defence Production to GDP Growth
• Effect of US cuts on Defence Spending and their Job Growth*
*Source: http://aerospacediary.blogspot.com/2011/10/analysis-projects-one-million-jobs-at.html
• In BRIC countries, India is the only country who‟s Defence Market
will be perused by the Western Democracies
− We have the macro-economic advantage, so why not exploit it?
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10. Where are we on our aim of Indigenisation?
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11. Self Reliance / Indigenization of Indian Defence
• Ample emotional responses towards the cause of “Indigenisation, very few practical
measures
• Our Procurement Procedures, intentionally or unintentionally, conspires to buy
foreign equipment, examples
– Inverted structure in Taxes & Duties: Finished Goods attract Zero Taxes & Duty while
Value addition in India attracts Excise Duty, Service Tax, CST & VAT
– ERV extended to Foreigners and in most cases to DPSUs, but not to Indian Private
Industry
– Foreigners get LC Payments, while Indian Industry is denied the same
• Let‟s examine each of these examples in detail
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12. Inverted structure in Taxes & Duties
• Finished Goods attract Zero Customes Duty while Value addition in India attracts Excise Duty,
Service Tax, CST & VAT
– If basic cost of an item is 100, when we purchase it from Foreigner, cost is 125.64 if Private sector
does 30% value add. In case of DUSU (ED Exempt) it is 116 with 70% import but does up to 120
with 30% import.
– Taxes & Duties are kept out of L1 calculations for Global (Buy) RFPs, but for all other Procurements in
Buy (Indian), DPM, DRDO etc. Taxes & Duties are included in L1 calculations
Summary of Cost Increase in various Scenarios in Current Tax Structure
Basic Cost Central Total Cost with State Total Cost
Scenario Input Cost Type (Net of Taxes) Taxes Central Taxes Taxes with all Taxes
Scenario 1
Foreigner Input 100 0.00 100.00 0.00 100.00
Scenario 1: Domestic Import 70
Manufacturer without ED In-house 10
Domestic 10.70 110.70 14.94 125.64
exemption & lesser indigenous Outsourced 20
content Total Cost 100
Scenario 2: Domestic Import 30
Manufacturer without ED In-house 20
Domestic 11.30 111.30 15.03 126.33
exemption & higher indigenous Outsourced 50
content Total Cost 100
Import 70
Scenario 3: Domestic In-house 10
Manufacturer with ED exemption Domestic 2.46 102.46 13.83 116.29
Outsourced 20
& lesser indigenous content
Total Cost 100
Import 30
Scenario 4: Domestic Self 20
Manufacturer with ED exemption Domestic 6.15 106.15 14.33 120.48
Outsourced 50
& higher indigenous content
Total Cost 100
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13. Forex Risk Implications to the Indian Industry
• Foreigners and in most cases, DPSUs get ERV, but Indian Private Industry
was always denied
– It‟s a crippling risk being imposed on Private Industry ? Eg
• Foreign Exchange Content at the Sub-System level for the stated goal for Indigenous
content of Rs. 50,000 Cr is Rs. 27,000 Cr
• Typically, cost of FE Variation for three year forward Cover is 17%
• This translates to an additional Risk Cover burden of Rs 4,500 Cr
– This renders Indian Industry unviable
– In the last 100 day, US$ has risen by ~17%
• SMEs will not be able to survive such Forex Risk and will certainly close down if
is ERV is not extended
• Large Players may still be able to manage the Forex Risk, hedging internally against
their software export income. However, Large Companies absorbing the Forex risk,
will have no bandwidth left to invest in technology
If Private Sector absorbs the ERV risk, were is the
head room to take the much-needed technology risk?
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14. Discrimination in LC Payments
• Foreigners get LC Payments, while Indian Industry is denied the same
• Inherent MoD delays lead to additional burden on Industry,
– Ex. Pinaka 1st Regiment Contract Value ~Rs 170Cr, Tata Power SED suffered
an additional burden of ~Rs 33Cr, i.e. ~19%, on account of
• Delay in receipt of payment of Pinaka Launchers and Command Post and delays in
receipt of Buyer Furnished Items
• Delay in signing of Amendment to Pinaka Contract, consequent delay in delivery of
ESP and delay in receipt of payment
• Financial Burden due to increased FE rates due to delay in issue of EUC by MoD
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15. Some Other Examples of – I L U Foreign OEM
• There is no procedure that enables a non-DPSU Indian Vendor
to become a Single Vendor Supplier to MoD
– Even if this Vendor gets the technology, creates the entire value chain
and infrastructure, it is not possible to sell Systems to MoD
– If DPP allows an Indian Co. to Prime in Buy (Global), why can‟t an Indian
Co. Prime in a Buy & Make Program? Fault lies in the Procedure
• In Global (Buy) Procurements, if NC NC Trials are not possible, MoD accepts
Simulation Trials
– Ex. MRSAM, a G-to-G Development Program, purchased for Rs 10,000 Cr based
on Simulation trial, while the missile is still being developed
• Foreign FAT certificate of OEM is enough.
– Foreigners need to give only 30% indigenous content (under Offsets),
while an Indian Co. is mandated to give 50%
• Clause 1.2 (Pg 44) and Clause 6.5 (Pg 47) of Appendix D of DPP 2011
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16. Reality Check
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17. Reality Check - Exports
• Can India keep on importing Defence Equipment?
• Can India sustain just with a Policy of Indigenising Defence Equipment i.e. reverse
the 70:30 Import to 30:70?
• a
• Both India & Israel got independence in 1947 – where are our Defence Exports?
• Given our world-recognised capability in ICT, it is time for India claims its rightful
place in Defence Exports – this will also assist in Global benchmarking
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18. Need for Indian Defence Products
• IT & ITES has been a successful story in India, contributing
4% of GDP
• However, it has plateaud because, IT & ITES Industry exploited
only the Labour Arbitrage
Where are Indian IPRs & Products ?
For Indian Defence Industry
“Make” Projects are
steps in the Right Direction
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19. STRATEGIC ELECTRONICS DIVISION
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20. Modern Warfare & New Defence Industry Model
• New Defence Industry Model
• Lead Systems Integrator
Or
• System of Systems Manager
• Public-Private Partnership with
mission-based procurement
– Joint development of systems
architecture
• Capability-based Services &
component suppliers
Adopt a new approach towards the Global Supply Base
procurement of weapons and systems
– One that is war fighting capability • Source: Centre of Technology & National Security
driven rather that the existing GSQR Policy, National Defense University, DoD, USA
based approach.
Source: JWFC Document, IDS
STRATEGIC ELECTRONICS DIVISION
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21. Defence Product Strategy & Technology Denial
• Technology Denial is a National and Political issue
– In today‟s world, not everything can be done by everybody
• We cannot emulate the Charles de Gaulle‟s France
– Need to select long-term Partners
• Need to ensure part of the system made in one country and part being
made in another country
– F-22 Raptor denied to Japan even though the Factory is closing in the US
– Eurofighter – four countries coming together, all having clear Sub-systems
Distribution. What is made in France is not made in Italy or Spain or else where. This
ensures each country has equal power – MAD
There is no substitute to Capabilities Building &
Control over Product
Where do we put our 5th generation Fighter Partnership?
STRATEGIC ELECTRONICS DIVISION
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22. Recommendations
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23. Recommendations
• “MAKE” to be the 1st choice of Categorisation
• Buy (Indian) should be the 2nd option but with clearly defined Trial Directive
– Trial Directive to be clearly defined in the RFP and development time period of atleast 12-
18 months depending on the complexity of the system to be given to Indian Industry
• Justification: If TEC takes an average of 18-24 months, Development time of 12-18 months is the
minimum required
– Example: TEC for Upgrade Grad BM21 Launcher took 18 months, TEC for 155mm Bofors Gun Upgrade
took 36 months and finally RFP was retracted, TEC for Low Power Jammers took 6 months
• Buy & Make (Indian) 3rd option. But no nomination
• Extend ERV to all participating Vendors
• No exemptions to any Vendor on Taxes & Duties and Basic Customs Duty to be
increased to a minimum of 20%
– For transition, all Taxes & Duties to be kept outside and be paid at actuals without any
exemptions => this makes no difference to the „Consolidated Fund of India”, only in
accounting parlance, a small increase in Defence Budget is perceived. Further if the
import – export ratio is reversed, this budget does not go up at all
• Actively leverage on ITES capabilties for Exports
– If Platforms can not be made in India, atleast all upgrades to happen in India
• No Nominations and Full Internal Competition and Facilitation of a PPP model
• Export an equal Priority – This is not about 70% Import to be reduced to 30%
import
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24. PS – The Presentation did not bring up word the “Offset” or “ToT”
All ToT agreements are injurious to the cause of Indigenous Defence Products
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