Tri-service military command takes tiny step forward

Left to right: General Bikram Singh, IDS chief Lt Gen Anil Chait, Defence Secretary RK Mathur, Arun Jaitley, ACM Subir Raha and Admiral Robin Dhowan

By Ajai Shukla

New Delhi

India does not yet have a tri-service military organisation that can effectively coordinate between the army, navy and air force in equipping, manning and planning for battle. But it now has a building for one.

Defence Minister Arun Jaitley today unveiled the foundation stone for the Headquarters of the Integrated Defence Staff (HQ IDS), which has functioned since 2001 as a rump organization without real powers. This after two high-power bodies --- the Kargil Review Committee and a Group of Ministers (GoM) --- recommended the appointment of a powerful chief of defence staff (CDS), who would be the top commander over all three services.

This five-star ranked CDS was to oversee the four-star ranked chiefs of the army, navy and air force. He would be a single point of advice to the government on military matters.

With political and bureaucratic opposition to such a powerful post mounting, Prime Minister Atal Behari Vajpayee’s government quickly backtracked. Citing the need for “political consultations”, which has been echoed over the last ten years by the United Progressive Alliance, the government set up HQ IDS in Oct 2001, headed by a three-star officer who is junior to the chiefs of the army, navy and air force. With no power to implement joint service decisions, the IDS has remained a relative backwater to which vocal and inconvenient officers can be sidelined.

Meanwhile, the job of tri-service chief --- termed the Chairman Chiefs of Staff Committee, or COSC --- is carried out by the senior-most serving chief. He is expected to play this role in addition to commanding his own service.

The BJP manifesto has undertaken to address the issue of higher military command. So far, however, a permanent defence minister is still awaited.

Speaking at the inauguration, Mr Jaitley declared that in future almost all operations, be they inland or overseas, were invariably going to be tri-service operations. Developing synergy between the services to achieve optimum force application therefore attains utmost importance, he remarked. 

Govt lists defence products that require production licences

By Ajai Shukla

Business Standard, 27th June 14

As a step towards galvanising defence manufacture, the government on Thursday published a concise list of defence equipment that requires a licence to manufacture in India.

The Department of Industrial Policy & Promotion (DIPP), which functions under the Ministry of Commerce and Industry (MoCI), has issued a list that was drawn up by the Ministry of Defence. It includes four categories of defence equipment that require compulsory production licences: (a) Tanks and other armoured fighting vehicles; (b) Defence aircraft, space craft and parts thereof; (c) Warships of all kinds; and (d) Arms and ammunition and allied items of defence equipment; parts and accessories thereof.

The policy, promulgated in DIPP’s Press Note No 3 of 2014, states: “Items not included in the list would not require industrial license (sic) for defence purposes. Further, it is clarified that dual use items, having military as well as civilian applications, other than those specifically mentioned in the list, would also not require Industrial License from Defence angle.”

This seeks to provide policy clarity in a field complicated by issues like dual-use products. A spanner, for example, can be used on both tanks and private cars; there is ambiguity about whether it is a defence product.

Welcoming the announcement, the Confederation of Indian Industry (CII) says it would streamline the issuance of industrial licences for defence manufacture, and encourage new entrepreneurs in the sector.

“We are happy to see that Ministry of Defence has taken cognizance of CII’s recommendations to prune the list and keep it to the bare minimum” said Baba N Kalyani, Chairman, CII National Committee on Defence.

Some defence software engineering companies believe that defence/embedded software should also require production licences. Says Rahul Chaudhary, the co-chairman of Ficci’s defence committee: “These are highly classified and security sensitive products that cannot be treated like just any piece of software.”

The government move to designate defence products is for licensing purposes, but this is as essential for export control. New Delhi expects membership of the Wassenaar Arrangement --- a multilateral export control regime between 41 states that regulates the international transfer of conventional weapons and dual-use technologies. This would require clearly designating defence products.

In 2004, MoCI’s Directorate General of Foreign Trade (DGFT) promulgated a so-called SCOMET List (List of Special Chemicals, Organisms, Materials, Equipment and Technologies), which identified sensitive items relating to nuclear, biological and chemical (NBC) warfare; special materials; stealth technologies; aeronautics and rocket materials. Yet Category 6 --- earmarked for defence equipment --- has not yet been filled. The SCOMET List merely states that it is “Reserved”.

Even though an export control list is separate from a licensing list, there is speculation that the new list will eventually flesh out SCOMET’s Category 6. For now there is little pressure on the government to draw up Category 6, since the ministry of external affairs is holding back on joining the Wassenaar Arrangement. New Delhi is demanding simultaneous membership in all four global non-proliferation agreements: Nuclear Suppliers’ Group; Wassenaar Arrangement; Australia Group and the Missile Technology Control Regime.

Over the years, the SCOMET List has been populated more due to domestic and bilateral imperatives than the need to join non-proliferation regimes. Category 0 of the SCOMET List, which designates nuclear materials, was updated in July 2005 after parliament passed the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities Act), 2005, to address US concerns over the danger of nuclear proliferation. This was one of Washington’s pre-conditions for taking forward negotiations on the US-India nuclear deal.

Analysts point out that today’s list of defence products is clearly modelled on the Wassenaar Arrangement munitions list, but is far less detailed. For example, the list only generically mentions, “energetic materials, and related substances includes all explosives like primers, boosters, initiators, igniters, detonators, etc”, which covers a large number of commercial, non-military-grade products.

In contrast, the Wassenaar Arrangement specifies the “total impulse capacity”, the “specific impulse”, “stage mass fractions”, of a propellant. The US “Munitions List” has a detailed listing of the explosives it considers military grade; specifying that it must have “detonation velocity exceeding 8,700 metres/second at maximum density or detonation pressure exceeding 340 kilobars”. All this would require to be worked into the SCOMET List.

The Industrial Development and Regulation Act, 1951 (IDR Act) requires a licence for producing any defence product in India, a requirement that continued after defence production was opened to the private sector through Press Note No 4 of 2001. This states: “The defence industry sector is opened up to 100% for Indian private sector participation with FDI permissible up to 26%, both subject to licensing.”

Divided CII opts for defence FDI cap of 49 per cent

By Ajai Shukla

Business Standard, 25th June 14

The Confederation of Indian Industry (CII) has overruled some of its own defence committee members in recommending that foreign direct investment (FDI) in defence should be capped at 49 per cent.

At a stormy meeting in New Delhi on Tuesday, a near-plenary session of CII’s defence committee, chaired by Bharat Forge chief, Baba Kalyani, overruled co-chairman, Nikhil Gandhi of Sea King Infrastructure Ltd (SKIL), who wants foreign companies to be automatically permitted majority stakes in Indian defence firms.

The controversy has been boiling within CII since a meeting on Saturday between senior ministry of defence (MoD) officials and industry bodies, where Gandhi had recommended on behalf of CII that 51 per cent FDI should be allowed through the automatic route, with higher FDI permissible in cases where high-technology was being brought into India.

This led to defence majors like L&T and Bharat Forge expressing their ire to CII president, Ajay Shriram. Today, the CII defence committee overruled Gandhi, recommending that no more than 49 per cent FDI should be allowed through the automatic route, with higher FDI permissible “only on a case-by-case basis.”

Several CII defence committee members confirm that this is now the official CII position, which conforms to that of industry bodies, Ficci and Assocham.

CII’s defence committee noted today that defence was a strategic sector where governments control technology, not companies; and that a government could legitimately refuse to release high technology even to a fully owned subsidiary in India.

Industry sources who attended today’s meeting tell Business Standard that some defence company owners are arguing for higher FDI simply in order to divest their holdings later for a hefty profit to foreign vendors.

Nikhil Gandhi flatly rejects such motivation on the part of SKIL. He points out that his shipbuilding facility, Pipavav Shipyard, has an order book position of Rs 2,000 crore and world-class infrastructure for warship building. “What is the problem with allowing foreign majority holding if that brings in technology, creates jobs and develops infrastructure in the country?” asks Gandhi.

Even so, the CII meeting on Tuesday flatly rejected the notion that raising FDI in defence would create manufacturing jobs. Noting that defence production did not yet provide a level playing field for India’s private companies, CII demanded that defence be fully opened for the private sector before allowing in global vendors.

“In 1991-92, hundreds of SMEs were killed off when the economy was liberalised. Before such a liberalisation in defence, Indian defence companies should get at least a decade to build their capabilities and ready themselves to face global competition,” says a senior defence industry executive who was present at the meeting.

The debate over FDI in defence has been resumed after the Department of Industrial Policy & Promotion (DIPP) has floated a proposal to raise the current 26 per cent FDI cap in defence, mooting alternative caps of 49, 74 and 100 per cent.

The MoD internally holds that defence industry must be protected with a 49 per cent cap. Consensus between all the major industry bodies would make it almost certain that the DIPP proposal would be capped at 49 per cent.

Promoting “swadeshi” in defence

Don't waste money on buying the Rafale. Boost Sukhoi-30MKI availability, and fast track the Tejas Mark II instead

By Ajai Shukla

Business Standard, 24th June 14

The one positive from having Arun Jaitley run the ministry of defence (MoD) in addition to his time-consuming job as finance minister is that, like Pranab Mukherjee, he will be better equipped to evaluate defence expenditure proposals that come up to the finance ministry. On the flip side, his current preoccupation with the finance ministry would leave him little time to scrutinise the fundamentals --- whether the military is manned, equipped and run effectively, why weaponry is imported and what policies could promote indigenous defence production. It would be tragic if Mr Jaitley concludes that boosting overseas arms procurement is the way to strengthen the military. It can be safely assumed that, despite the tight fiscal situation, BJP optics will trigger a moderate rise in the capital budget. What remains to be seen is whether Mr Jaitley directs most of that money to the international arms bazaar or to shoring up India’s defence production capability.

An example of this is the defence ministry’s key procurement dilemma: that is whether to sign the controversial, Rs 1,00,000 crore contract for 126 Rafale fighters for the Indian Air Force (IAF). The new government would relish the glitzy spectacle of a Rafale signing ceremony. That would please the public and placate the IAF, but it would also require allocating Rs 15,000 crore as the signing advance; and commit the IAF to annual instalments of some Rs 10,000 crore, payable yearly till 2023-24.

Yet a searching examination by Mr Jaitley would have discovered that a fraction of that expenditure --- spent on improving the serviceability rate of the Sukhoi-30MKI --- could generate equivalent combat power. By 2019, the IAF will have 272 Sukhoi-30MKIs, yet poor maintenance and inefficient spares management ensures that just 40 per cent of these fighters are combat-ready at any given time. Effectively, the IAF has just 109 combat-ready Sukhoi-30MKIs; 272 is an illusory number. Raising serviceability to 75 per cent, which is par for any self-respecting air force, would add 95 fighters to the numbers operationally available. That is precisely the number of Rafales that would be operationally available from a 126-fighter fleet, given a 75 per cent serviceability rate.

This mind-boggling truth needs reiteration, since the IAF and the MoD gloss over it --- spending Rs 5,000 crore to boost Sukhoi-30MKI serviceability would “buy” as many additional fighters as the purchase of 126 Rafales for Rs 1,00,000 crore. The IAF lament of “dwindling squadron numbers” is a red herring; more important is the number of fighters available in each squadron.

Further, abandoning the Rafael would save money for a light fighter fleet, and also build an indigenous aerospace industry. The IAF’s obsolescent MiG-21 and MiG-27 fleets could be replaced economically with an improved (or Mark II) version of the Tejas Light Combat Aircraft (LCA), its development and manufacture accelerated through a strategic alliance with Swedish company, Saab, which is close to completing the Gripen-E, a fighter very much like what the IAF wants the Tejas Mark II to be. With the Defence R&D Organisation (DRDO) cooperating with Saab, a world-class Tejas Mark II would start joining the IAF fleet by 2019 (assuming five years for development and testing); and a second aircraft manufacturing line would be established in India, complete with an airfield, to complement the HAL facilities at Bangalore. Further, a project like this would catalyse an entire aeronautical design and manufacturing eco-system, especially the small and medium firms that wither away when the government buys overseas, rather than innovates and produces domestically. Alongside this, aerospace engineering courses could be sponsored in selected technological institutes, which would feed into the indigenous design and manufacture of an advanced medium combat aircraft (AMCA), a project already under way. Finally, with the change left over from Rs 1,00,000 crore, New Delhi could press Stockholm hard to buy out Saab’s aerospace division. The Swedish government might resist, but its decision would eventually be driven by how much it wants a strategic alliance with an emerging superpower like India.

The army faces similar dilemmas, with expensive overseas buys counter-posed against indigenous alternatives --- whether to buy more Russian T-90 tanks or expedite the DRDO’s Future Main Battle Tank (FMBT) project that has languished for years; whether to buy more Russian armoured carriers or fast track the Future Infantry Combat Vehicle (FICV) that India’s defence industry is to develop. For critically-needed artillery guns, the dilemma is whether to approach the international arms bazaar, or sponsor industry-led consortia to develop the guns in India, while confining overseas purchases to high-tech purchases like the ultralight howitzer (ULH) that require materials and engineering technologies currently out of reach for us. In each case the MoD faces temptation to seal a quick overseas deal; but also has the opportunity to build genuine, long-term defence capability through an indigenous product that slashes life-cycle costs to obtain “bang for the buck”.

The policy framework for going swadeshi already exists. Ironically it was created by the Antony MoD, which then lacked the political courage to implement its own policies. The Defence Procurement Procedure of 2013 explicitly states that indigenous development and manufacture is the default option. There is a Defence Production Policy to encourage manufacture. More policy initiatives are needed, especially in reducing duties and tariffs for domestic industry that, incredibly, pays higher taxes for building weaponry in India than foreign vendors pay for importing it fully built. The domestic industry must be protected against variation in foreign exchange rates; export of defence equipment must be not just permitted, but actively encouraged; and foreign direct investment in defence must be automatically allowed up to 49 per cent. 

Industry, MoD brass closing ranks to cap defence FDI at 49%

By Ajai Shukla

Business Standard, 21st June 14

At a meeting scheduled in New Delhi on Saturday between senior MoD brass and defence industry bodies, the Confederation of Indian Industry (CII) is set to align with the Federation of Indian Chambers of Commerce and Industry (Ficci) in restricting foreign direct investment (FDI) in defence to 49 per cent.

With the two biggest industry bodies on common ground, the ministry of defence (MoD) --- which has always held that defence industry must be protected ---would then ensure that a ministry of commerce and industry (MoCI) proposal to allow as much as 100 per cent FDI in defence would be restricted to 49 per cent.

The MoCI proposal to raise the current 26 per cent FDI cap in defence moots FDI options of 49, 74 and 100 per cent. In response Ficci supported up to 49 per cent, but its June 13^th press release cited the “strategic nature” of defence industry to place stringent conditions on FDI above that limit. In contrast, CII President Ajay Shriram declared on June 10^th that foreign investors could be allowed “majority equity” since FDI in defence would raise manufacturing growth.

Business Standard has learned that L&T, an emerging defence powerhouse that played a large role in shaping Ficci’s 49 per cent position, objected to CII’s stance as an influential founder member of that industry body. Another influential CII member, Bharat Forge, which is also making a major play in defence, joined L&T in pressuring CII to recommend a 49 per cent cap.

This disagreement echoes a similar confrontation in 2010 over a discussion paper floated by the Department of Industrial Policy & Promotion (DIPP), proposing liberalisation of defence FDI. After CII supported greater FDI, Baba Kalyani of Bharat Forge, who then headed CII’s defence committee, stepped down, protesting that CII had not discussed the matter in the defence committee. Today, the CII president has again supported FDI liberalisation without first discussing it in the defence committee.

The discussion on Saturday will take place at the Institute for Defence Studies and Analyses (IDSA) in what has become an informal, but regular, meeting forum between the MoD and representatives of private industry bodies. Instituted by the previous MoD acquisitions chief, the Saturday forum has resolved several roadblocks towards providing the private sector a larger role in developing and manufacturing defence equipment.

Tomorrow’s meeting will be attended by the MoD’s acquisitions chief, as well as by Secretary (Defence Production), Gokul Chandra Pati.

Business Standard learns that CII is likely to discuss the issue internally and then issue a revised press release on June 24, recommending a 49 per cent cap on FDI in defence. Like Ficci, CII could propose that foreign companies be allowed majority stakes, even full ownership, only if they fulfil stringent conditions such as transferring cutting-edge technology, retaining Indian control and employment, and keeping Intellectual Property Rights in India. 

Predictable patterns in calls for raising FDI in defence

By Ajai Shukla

Business Standard, 19th June 14

A day after this newspaper reported that the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (Ficci) had divergent positions on over the government’s proposal to liberalise foreign direct investment (FDI) in defence (“CII & Ficci disagree on raising FDI in defence”, June 12, 2014) a traditionally protectionist Ficci attempted to paper over its divergence with a CII that has whole-heartedly endorsed higher FDI.

On June 13, Ficci said in a press release that it “welcomes the proposal put forth by the Ministry of Commerce and Industry to enhance FDI levels in defence beyond 26% to higher levels up to 49%, 74% or even 100% in exceptional cases”. Yet Ficci threw in a demand for “safeguards” that recognised “the strategic nature of the defence sector.”

It is evident that there are divergent views on the advisability of raising FDI in defence. An assortment of players in the defence economy each seeks an FDI regime that best serves its interests.

Business Standard has mapped the following seven major interest groups, each of which lobby for their preferred FDI level depending upon where they are located on the industry canvas.

The first category of FDI lobbyists consists of professional managers and chief executives of defence companies. These are basically employees, who do not hold a significant share of the defence company they run. Many are accomplished and competent professionals who enjoy credibility within the defence industry, including industry bodies, as also with the defence ministry. They argue for raising the FDI cap to 49 per cent, with the proviso that “control of the company should remain in Indian hands.” Their motivation is self-interest: allowing more foreign capital and management practices would raise their emoluments, while the jobs would remain protected by the proviso that Indian nationals must run the defence companies.

A second category of FDI inputs comes from professional managers of companies like L&T, who are also part owners through shareholding accumulated over time. These managers want foreign investment and technological expertise to galvanise growth in their defence units, but without disrupting their control. They argue, as L&T boss AM Naik has done in a recent media interview, that, “We should agree to 49 per cent, subject to genuine transfer of technology. But nowhere in the world, even in the most advanced nations like the United States, which has a high-tech defence sector, do they allow foreign companies to own a majority stake.” Ficci directly echoes this viewpoint.

A third category includes companies with some valuable defence and engineering capabilities, who would harness international partners to expand their opportunities. For example, Bharat Forge knows that the Indian market for artillery guns --- a prime area of expertise --- would be limited to about Rs 25-30,000 crore. Expanding into related fields like opto-electronics and networking systems would expand the market manifold. Without in-house capability in these technology domains, these companies need foreign partnerships. The foreign OEM gains access through the Indian company; which, in turn, benefits from high technology. Thus the CII’s welcome of even a “foreign investor having majority equity.”

The fourth category includes established corporates like the Tatas, who see big profits in defence but remain uncomfortable with the unpredictability and murk of defence contracting. Seeking a hedge in higher foreign ownership, some of these companies have already made profits in the past through strategically divesting their share to a foreign partner --- e.g. Tatas to Lucent in telecom, and to Honeywell in process management and control solutions; and the BK Modi group to Alcatel. This kind of divestment takes place most profitably in a gradually liberalising FDI regime that permits incremental equity dilution. For the present, this group would back 49 per cent dilution with control remaining in Indian hands and would incrementally back greater FDI and looser control.

The fifth category of FDI lobbyists follows what could be called the “Ranbaxy model”. These include small-to-medium, family-owned businesses that have established themselves painstakingly in a hostile, anti-private-sector policy environment. The owners, some facing internal boardroom battles, would be relieved to encash their hard-won success by selling their entire holding to foreign buyers. Having fought the establishment for years, these entrepreneurs feel they deserve a good retirement. This group is prominent in arguing for 100 per cent FDI.

A sixth group that also wants full FDI liberalisation comprises of several relatively new defence companies that were set up after defence production was opened to the private sector in 2001. While masquerading as technology developers, these companies are actually “build-to-print” manufacturers of foreign --- especially Israeli --- defence equipment.

A seventh category, which wants no liberalisation to the current 26 per cent FDI cap, comprises genuine, home-grown entrepreneurs that have created high-technology products through in-house research & development. This includes many micro, small and medium enterprises (MSMEs), and several larger companies like Zen Technologies, Data Patterns and Astra Microwave. These companies want maximum protection from foreign competition in order to grow and increase their valuations manifold. The slogan of one such CEO: “The future is bright; the colour is saffron.”

Interest groups pitching for various FDI levels
1	Defence companies run by professional managers, CEOs, who want better emoluments, but control in Indian hands	FDI up to 49%
2	Companies like L&T with managers holding equity, want foreign funds, technology, but while retaining control (Ficci position)	FDI up to 49%
3	Companies like Bharat Forge, with strong capabilities in single field, but wanting foreign technology in order to expand capabilities and repertoire (CII position)	FDI above 51%, up to 74%
4	Companies like Tatas, uncomfortable in defence field, would like to shelter behind foreigner, have previous experience of divesting for huge profits	Incremental rise in FDI up to 100%
5	Established small-to-medium defence companies, now looking to encash position by selling out to foreign OEM	FDI to 100%
6	Defence companies set up after 2001, who are mostly “build-to-print” manufacturers of foreign defence equipment	FDI to 100%
7	Home-grown, successful, committed companies who plan to stay in business and would like to protect their own markets. entrepreneurs	FDI restricted to 26%

Rafale contract elusive, Eurofighter and Saab remain hopeful

Saab believes co-developing Tejas Mark II with DRDO would end IAF's need for Rafale

By Ajai Shukla

Business Standard, 17th June 14

More than two years after India’s defence ministry (MoD) chose to buy 126 Dassault Rafale fighters for the Indian Air Force (IAF), the world’s biggest fighter contract twists in the wind. With no deal in sight after 28 months of haggling with Dassault, two of the losing vendors --- Eurofighter and Saab --- believe they could yet come out tops.

Eurofighter GmbH, whose Typhoon fighter narrowly lost out to the Rafale, still retains a senior executive in New Delhi. This is to allow Eurofighter --- the official runner-up --- to quickly step in should negotiations with Dassault collapse.

Swedish company, Saab, whose Gripen-D light fighter was evaluated but not selected, similarly believes the contract remains open. Saab places hope in a proposal that it formulated with the Defence R&D Organisation (DRDO) to co-develop and co-manufacture the improved Tejas Mark II Light Combat Aircraft (LCA). This affordable, indigenous, single-engine fighter could be built in numbers, providing the IAF a more economical and effective option than limited numbers of enormously expensive, twin-engine Rafales.

Saab believes that a successful Tejas Mark II would erode the need for the Rafale. The Swedish company has offered co-development and co-manufacture of the Tejas Mark II, even whilst fielding the cheapest and most economical fighter of the six in the fray.

As IAF officers confirm, India had intended to buy a cheap, light fighter to replace the IAF’s MiG-21s as they were phased out of service. In late 2004, the IAF sent out a “request for information”, to four manufacturers of small, cheap fighters --- the Russian MiG-29; the American F-16; the French Mirage-2000-5, and the Saab Gripen.

Only in August 2007, when the IAF issued a formal tender --- termed “request for proposal”, or RfP --- were expensive, twin-engine fighters like the Eurofighter, Rafale and F/A-18 regarded as options. Today, with the economy stuttering, the daunting prospect of paying Rs 1,00,000 crore for 126 fighters could mean that low cost becomes decisive.

Saab sees further advantage in backing the indigenous horse, the Tejas Mark II. The Swedish company claims it is best suited for upgrading the Tejas Mark I, since it is currently upgrading the Gripen-D by fitting a new engine, the General Electric F-414 power pack. Upgrading the Tejas Mark I to Mark II specifications involves exactly the same upgrade.

The last DRDO chief, Dr VK Saraswat, was convinced that Saab’s assistance would be ideal for the Tejas programme. In 2012, the DRDO sent Saab a “Request for Information” asking for a rough estimate of costs, which Saab duly submitted.

In Jan 2013, DRDO followed up with a “Request for Proposal”, or RfP, asking for technical and financial bids for Saab to jointly audit the Tejas design with DRDO. Saab had proposed an 8-10 month long audit, after which a fresh design would be finalised and a manufacturing line established.

MoD sources tell Business Standard that Saab proposed in 2011 to co-develop the Tejas Mark II and roll it out from a new manufacturing line within five years. Saab wanted at least 51 per cent ownership of the joint venture company that built the new Tejas, to be free of government controls and procedures.

By May 2013, a joint design contract seemed imminent, says Saab. But, on June 1, a new DRDO chief, Dr Avinash Chander, took charge and Saab was unofficially told that DRDO could not co-develop the Tejas with a foreign company without an international tender to select the partner.

Contacted for comments, a DRDO spokesperson told Business Standard that design work on the Tejas Mark II is proceeding satisfactorily without a foreign partner.

In fact, MoD sources admit the Tejas Mark II programme faces significant design challenges beyond merely fitting a new engine. The Tejas Mark I was not designed with operational availability in mind, with important systems placed in inaccessible places that take time for technicians to reach. The Gripen-D, in contrast, requires just 5 man-hours of maintenance for an hour of flying. (The figure for the Tejas in not available, but the Rafale is estimated to require 15 man-hours).

Furthermore, the new F-414 engine would require the Tejas’ length to be increased by half a metre. In addition, experts say the air intakes will have to be redesigned, since they do not allow in sufficient air for even the F-404 engine, far less the more powerful F-414 that will be fitted.

Aerospace analysts acknowledge Saab’s expertise in building economical and effective fighters. The Gripen-D costs half as much as a Rafale. International expert, Jane’s, puts the operating cost of a Gripen at $4,700 per flight hour, while flying a Rafale for an hour costs $15,000. 

CII and FICCI disagree on raising FDI in defence

By Ajai Shukla

Business Standard, 12 Jun 14

Any decision to raise the foreign direct investment (FDI) cap of 26 per cent in defence production would be contentious. Sharp disagreement on the issue has surfaced between India’s biggest two industry bodies --- the Confederation of Indian Industry (CII), and the Federation of Indian Chambers of Commerce and Industry (FICCI).

CII, which includes manufacturing powerhouses like Bharat Forge, sees higher FDI as a catalyst for defence manufacture and job creation. On the other hand, FICCI, which includes innovation majors like Larsen & Toubro and Tata Power (Strategic Electronics Division), say higher FDI will not translate into greater indigenisation. Since defence technology developed by foreign original equipment manufacturers (OEMs) is controlled by their governments, FICCI says its transfer will be based on strategic considerations, not company ownership patterns.

On Tuesday, CII president, Ajay Shriram, welcomed the government’s proposal to raise the FDI limit. Lamenting that just $4.8 million of FDI had flowed into India since private firms were allowed into defence in 2001, Shriram said permitting foreign firms to own majority stakes in Indian defence companies would leverage India’s purchasing power, IT infrastructure and manufacturing potential to make the country a “key global manufacturing hub for defence systems and equipment.”

Earlier, in a 2012 report titled “Creating a Vibrant Domestic Defence Manufacturing Sector”, CII had projected that the defence and aerospace sector could create 10 lakh new jobs in the country. On Tuesday, CII said this would be accelerated by liberalising FDI.

The CII statement endorses “majority equity” for foreign OEMs without specifying an upper limit. The Department of Industrial Policy and Promotion (DIPP) has recently circulated for comments a proposal that mentions three possible levels of FDI --- 49, 74 and 100 per cent.

FICCI, in contrast, wants FDI capped at 49 per cent, subject to tight conditions. Writing to DIPP in 2012, FICCI said control must remain in Indian hands; the foreign OEM must brings in “key technologies as required in the priority list of the Ministry of Defence”; the foreign company’s home government must provide “in-principle permission to share technology with Indian partner”; Intellectual Property Rights (IPR) generated by the joint venture must reside in India, as well as other conditions.

FICCI officials reject the notion that raising FDI stimulates domestic manufacture. They point out that although 74 per cent FDI was allowed in telecom, which was raised to 100 per cent last year, India’s electronics import bill is on course to surpass the oil import bill by 2020.

In contrast, defence self-reliance is highest in the nuclear, space and ballistic missile fields, where international technology was comprehensively denied to India. In these three fields, government agencies partnered the private sector to develop indigenous technologies and systems.

Rahul Chaudhry, who was a member of the Vijay Kelkar Committee on defence indigenisation, and who heads a leading private sector defence company says, “The notion that higher FDI will increase indigenisation and create jobs ignores the fact that value lies not in build-to-print know-how, but in design, i.e. in “know-why”. The defence public sector in India has created many assembly lines for “Made in India” equipment. Yet we have never had control over the technology that goes into what these assembly lines build. What we need are “India Made” products, designed in India, with the IPR residing here.”

“If permitting 100% FDI for building products for the world largest cellular phone market has not spawned a single world-class Indian company that manufactures cellular handsets or infrastructure, how will it happen in defence?” asks Chaudhry.

Even so, the BJP seems poised to liberalise FDI in defence. Addressing parliament on June 9, President Pranab Mukherjee said, “We will introduce policies to strengthen technology transfer, including through liberalised FDI in defence production.”

In its election manifesto, released in May, the BJP promised it would “encourage private sector participation and investment, including FDI in selected defence industries.”

The current FDI cap was promulgated in 2001, when defence was opened up for the first time to the private sector. The DIPP’s Press Note No 4 of 2001 (paragraph iii) said, “The defence industry sector is opened up to 100% for Indian private sector participation with FDI permissible up to 26%, both subject to licensing.”