Make in India for Defence – No Easy Task!

The ‘Make in India’ campaign drew enthusiastic response from not only the Indian industry but from overseas investors eyeing opportunities for manufacturing in India in the aerospace and defence sector

Issue: 3 / 2015By Air Marshal B.K. Pandey (Retd)Illustration(s): By Anoop Kamath

The ‘Make in India’ campaign launched by the NDA Government in the recent past and driven personally by Prime Minister Narendra Modi has undoubtedly elevated the level of optimism across all segments of the industry both in the public and private sector. While in the years gone by, India raced ahead of China in the regime of information technology, she lagged far behind in the manufacturing sector. The Chinese manufacturers have penetrated markets all over the world including in the US and Canada. In India even the miniature statues of Hindu gods and goddesses that flood the street markets during the festival season, are made in China. Even the caps and carry bags distributed by some of the global aerospace firms as souvenirs to visitors at Aero India International Airshow held at Yelahanka near Bengaluru in February 2015, were made in China! What can be more ironic!

The ‘Make in India’ campaign definitely has the potential to open up opportunities for Indian entrepreneurs to foray into the domain of manufacturing not only for the domestic market but for the export market as well. Indian entrepreneurs will now have the opportunity to not only compete with but even overtake China in the field of manufacturing. Coincidentally, this opportunity presents itself to the entrepreneurs in the manufacturing sector at a time when the Chinese economy is reported to be slowing down.

The ‘Make in India’ campaign drew enthusiastic response from not only the Indian industry but from overseas investors eyeing opportunities for manufacturing in India in the aerospace and defence sector. While there is reason for the Indian industry to rejoice at this unique opportunity that has come their way, the road ahead for the Indian aerospace and defence industry in the private sector in the ‘Make in India’ journey, may not offer a smooth and trouble free ride. While the Indian manufacturer of consumer or common user goods can exploit the demand of the civilian domestic market generated by a population of 1.2 billion and would not necessarily have to depend on the demand from overseas, the situation with regard to the defence and aerospace industry is somewhat different. By its very nature, the defence and aerospace industry in India is restrictive in many ways. The demand for products that would be placed on the Indian aerospace and defence industry to begin with will be inherently limited by the size of inventory of the Indian armed forces.

Establishment of a facility in India to produce military hardware will require huge investments in infrastructure as well as in training and retention of specialised manpower. Besides, the facility must deliver impeccable quality assurance failing which the product will not be acceptable rendering the heavy investment futile. Also, as the military hardware in the inventory of the Indian armed forces being limited in size, the volume of business for the Indian entrepreneur will consequently be low. This factor will militate seriously against the principle of economy of scale, a prerequisite for investment in any new venture. As the nation procures over 60 per cent of military hardware from abroad, Indian entrepreneurs will undertake manufacture of products for the original equipment manufacturers (OEM) in all probability, for only the Indian market. For the Indian entrepreneurs to access the global market, they will need explicit support of the OEM which neither the government nor the Indian entrepreneur can ensure on their own. Unless this precondition is made an integral part of the contract with foreign vendors, prospects of Indian entrepreneurs exploiting the global market will remain clouded in uncertainty.

Another factor that is bound to impede the ‘Make in India’ campaign is the cap on foreign direct investment (FDI) that is set at 49 per cent. Unless the limit of FDI is raised to beyond 49 per cent, investors from abroad are unlikely to be enthused as the existing limit will not give them the privilege to exercise control on their investments especially in high technology areas. But perhaps the most formidable impediment to the success of the ‘Make in India’ campaign is the crippling interference by the regulatory hurdles that impede decisionmaking at the level of both the political leadership and the bureaucracy. The last tenure of the UPA Government is replete with examples of mindless vacillation in decision-making that resulted in near total paralysis in the system.

Unless the government of the day carries out a comprehensive review the whole system of defence procurement, the nuances of manufacturing for the defence sector and restructures regulatory provisions to make it significantly easier for the foreign companies in the aerospace and defence sector to carry out business in India, modernisation of the Indian armed forces through indigenisation may continue to remain a distant dream, the lucrative potential of the ‘Make in India’ campaign notwithstanding.