India was the world’s biggest arms importer for five years between 2010 & 2014. The country spent over Rs 1,00,000 crore ($16.72 billion) in importing military hardware during the period. The NDA government’s flagship programme, Make in India, is aimed at boosting domestic manufacturing. Encouraging indigenous production of defence hardware is an important component of this programme. The country’s largest engineering firm Larsen & Toubro is engaged in producing cutting edge defence systems for the country. Jayant Patil, head of defence and aerospace division of L&T, spoke to Rajya Sabha Television’s Krishnanand Tripathi about the increased role of private sector in defence manufacturing. Excerpts:
Q: India is the biggest importer of arms and it will continue to be so for several years. What is the role of private sector in changing the situation?
A: The market was reserved for government firms earlier. Innovations are difficult to take place in public sector due to a large number of controls irrespective of good people. Private firms developed their capabilities in defence production in partnership with DRDO in the 80s and 90s. This capability needs to be harnessed today for enhancing indigenisation of Defence.
Q: Does our private sector have the wherewithal – in terms of manpower, resources, technical knowhow and investment –to develop a healthy defence industry?
A: There was hardly any private firm in defence in the 70s or 80s. As per a PricewaterhouseCoopers’ study conducted two years ago, private sector investment in defence stood at Rs 18,000 crore. This is large investment. Companies like L&T have skilled manpower, investment and capacity to cater this sector through the capacities created over the last three decades. There are few companies that can today engineer &build a complex platform. There are others who have entered in the sector in the last 5-6 years. They will take some time to mature.
Q: Can India’s private sector companies build complex weapon platforms like an aircraft in the category of Medium Multi Role Combat Aircraft, an aircraft carrier or a submarine?
A: India can build submarines today. Submarines have been built at Mazagon Dockyard since 1980s. Larsen & Toubro’s involvement in India’s submarine programme was not known publicly due to the classified programme, L&T was involved into. This was publicly announced in 2009, when INS Arihant was launched. We set up a design officeto support Naval Design Directorate. Indian industry is capable of designing & engineering submarines based on basic sketch design, as well as certain class of warships and land-based systems on its own.
The one area where capability doesn’t exist in Industry is for MMRCA like platforms or even transport aircrafts. In this sectorall of us in the Private sector are beginners. That’s the only sector where massive investment is required, orders are few and in distant future HAL (Hindustan Aeronautics Limited) appears to be the only choice in the country today. If the government decides then certainly some private players can develop that kind of capability. But it requires the kind of support the government provided to HAL.
Q: Which are the critical areas where the industry lags behind in terms of designing weapon platforms right from scratch?
A: Larsen &Toubro is already designing a variety of surface warships except very large ones like Destroyers & Frigates. They are designed by the Naval Design Bureau. All other kind of ships can be designed by Industry, and truly there is no need to import ships into the country. The situation is different in the case of submarines; in this segment India needs technology partners for Basic design.
Q: Is the industry capable of designing a nuclear reactor that can be fitted into a nuclear powered submarine or aircraft carrier?
A: Nuclear propulsion plantsare in the domain of the government because of the variety of controls associated with them and the sensitive nature of work. Industry can engineer the rest of the ship. Designing and building nuclear propulsion planthas been, and will stay within the government domain.
Q: Which are the major programmes that the private sector will take up in the next 5-10 years?
A: There are a large number of ships and submarines that will be unveiled. Project 75 India, programme to refit some submarines, a new class of warship, landing platform dock – a platform for helicopters, and to carry battle tank & Army, and shallow water antisubmarine crafts are some of the projects that are on the anvil.
Similarly, on the land side, artillery programmes are on card. The country didn’t buy artillery guns since the 1980s after the Bofors, but this over the next one year or so, we’ll see three gun program (Tracked SP Gun, Ultralight and Towed Gun) contracts being signed. We’re going to see a number of land-based platforms,and futuristic infantry combat vehicle (FICV) programs. FICV will be developed over the next five years, and then enter production.
But in case of air segment the country is still very much dependent on HAL.
Q: Defence sector contributions are critical for the success of Make in India. Do you see some changes at the ground level after its announcement?
A: Our order book position started moving forward after this policy initiative. We signed a few contracts this year. We signed contracts worth Rs. 2,000 crore early this fiscal, followed by two contracts of smaller value. We also have a few large programs in the pipeline, including a major gun program. We’re hopeful this will be signed in this financial year or early next financial year. We’re also hopeful to get two more shipbuilding programs during 2016-17. After the announcement of Make in India, decisions are being taken in favour of Indian players, rather than imports. 90 per cent of the proposals cleared in the last 18-20 months will actually be completed by Indian companies but it will take up to 18 to 24 months to reach the order book stage.
Typically, it should not take beyond two to three years from the decision to ordering. This is what defence minister is trying to achieve and improve upon. He has announced that the issuance of Request for Proposal (RFP) would be done within six months from the date acceptance of necessity (AON) in the new policy. Last year he brought it down to one year from two years, and this year he has made it six months. He has also given a long term direction to Defence Indigenisation through the New Category “Buy Indian Design Development & Manufacturing (IDDM)” category. This is a game changer for the future; so are the new changes in the Make in India Policy.
Q: What are your expectations from this year’s budget? Do you see a significant increase in capital expenditure in defence?
A: The defence capital budget, on an average, tends to grow by 10-12% every year. We expect a significant increase in capital expenditure this year to support plans on the anvil.
Q: What policy changes would you suggest to enable Indian firms to fully exploit the opportunities in defence?
A: The government has granted the foreign exchange rate variations for all categories of procurement, but the cost of capital is still very high for Indian companies. When a competitive evaluation using is carried out by the acquisition wing, it is on the basis of Indian cost of capital for both Indian and foreign players. Foreign players actually have a cost of capital of 2 to 2.5% but get evaluated at 9.5%. Indian companies have a cost of capital in the range of 13 to 14% but are evaluated at 9.5%. This mechanism of calculation for evaluation creates a clear 10% differential in favour of foreign players, which needs to be addressed.
Secondly, if an Indian company offers a larger indigenous component then it deserves the order, preferentially. The defence minister recently announced that if there was better performance, then the orders will be preferentially placed. Same logic should apply for higher indigenous component, as long as it is clearly differentiated.
Similar changes are required in the DPP (Defence Procurement Policy) at the apex level so the platform orders start going to private sector on preferential basis if the indigenous content is higher. Some of these things can be done and it will truly take Make in India program forward.
Q: By when India will be able to meet at least half of its defence requirements indigenously?
A: I can tell you that two and a half years back the import component was 70%, now it is 60%. In just 2.5 years it has come down by 10%. Within four-five years, the import component should come down below 50% since most of the recent decisions made by the government are in favour of buying from Indian Companies with indigenous content being 50%. Of the 15 systems supplied by L&T to MoD, indigenous component is as high as 70% and in some others it is even 90%.
Q: What is your experience while dealing with foreign private players?
A: The country has been dependent on transfer of technology for the last six to seven decades, but we actually got nothing except manufacturing capability. We got tonnes of paper in documentation but the true reasoning behind a particular design never came to India. Obviously what comes to India is obsolete because by the time technology comes to India the technical life of the product is in the last phase of its life. We kept chasing obsolete (mature) designs and it was very difficult to create indigenous capability.
In recent years, L&T has been following the path of joint development that we adopted in two major programmes. In these cases neither the foreign player nor the Indian partner had an exact product, but both had the capability to create a new product within one and a half year. Our acquisition decision cycle allows this kind of time. We actually created two products – two long-range artillery guns – one was in collaboration with Nexter of France and the other in collaboration with Samsung of Korea. Both of them didn’t have an exact product for Indian requirement. But today we’ve created two guns to meet Indian requirement by pooling in resources. Incidentally, both guns have completed trials.
So, there is actually a way to do fundamental product building work through joint development route without the huge cost of transfer of technology being involved. This is the way forward and this will make more sense under Design & Make in India. In such programmes, we say let’s do it 50:50. It’s a partnership, to create a new product, go through trials and if it is approved then it will be a completely new weapon system rolling out of Indian factory, under the ‘Make in India’ program.