Forum for

Integrated National Security

(FINS)

RecommendationsFor

Achieving

Self-Reliance in Defence

Manufacturing

Contents :

1. Planning for Self-Reliance in Defence Sector

2. Formulation of QRs

3. Defence Techno-Industrial Consortium (DTIC)

4. Improving the efficiency of DPSUs

5. Other Recommendations

6. Summary: Recommendations grouped as

a. Short Term

b. Medium Term

c. Long Term

1. Planning for Self-Reliance in Defence Sector

Presently, 6̴0% to 7̴0% of our defence requirements are met by imports. According to the rough estimates, import dependency of Indian defence PSUs is about 35%based on the foreign exchange outflow in FY 2010-11.

If we exclude the overheads and profit of DPSUs and OFs but include the indirect imports (imports procured in rupees), the import dependency may go beyond 60% which is alarmingly a high percentage. Actually, a lack of planning, monitoring, performance audit and direction has adversely affected the efforts for self-reliance in defence manufacturing. Therefore, Ministry of Defence must prepare a concrete planning to set short-term, medium-term and long-term goals to achieve self-reliance without compromising the operational preparedness and modernisation of services.The Categorisation as envisaged in Para 4 of DPP 2013 is to be considered at the time of according Acceptance of Necessity (AoN). The Categorisation Committee presents its recommendations to DAC or DPB for accord of AoN. Categorisation is the key step in involving the Indian industry in defence supply chain. In this effort, the capability of the indigenous defence industry is to be ascertained from industry as per para 18 of the DPP 2013. There is no formal mechanism to recommend such vital step that will determine the scope of indigenous involvement. Hence the Categorisation Committees need to be given relevant recommendations from appropriate specialist groups. This group may be called as “Department of Defence Manufacturing and Industrial BasePolicy (Department of DMIBP)” which must regularly survey the industrial capability of the country from the defence preparedness focus taking into account the MoD efforts to vitalise this sector. The considered inputs from “Department of DMIBP” be factored by the Categorisation Committee while recommending the Acquisition Category (as listed below)to Defence Acquisition Council (DAC) as per para 4 of Chapter I of DPP 2013.

a) Buy (Indian)b) Buy & Make (Indian)c) Make (Indian)d) Buy & Makee) Buy (Global)

HAL BWL BEML SHIPYARDS BDL MIDHANI Ofs Avg.

63.74 38.61 22.53 31.50 43.12 29.40 15.21 34.87

2. Formulation of Qrs

Services must note that the military power of a nation has to be rooted in the indigenous industrial capability. A nation dependent on imported defence equipment can never aspire to be a formidable force regionally or globally. Therefore, the services must take care of the long term indigenization objectives while formulating the Qrs.

Recommendations:Ÿ The QRs for items that may be categorized as Buy (Global) or Buy& Make (Global) must

be formulated with an objective of long term progressive indigenization of sub systems and services.

Ÿ The existing QRs must be systematically reviewed with an objective to identify technology linkages leading to its import. Based on the recommendatory input of the “Department of Defense Manufacturing and Industrial Base (Department of DMIB)”, the QRs must be revised periodically by the Services to create a scope for qualified import substitutes without compromising the optimum operational requirements.

Ÿ There is a need to review our quality assurance policy with an objective to promote progressive indigenization.

Ÿ Technical specifications for import substitutes should be based on native standards. The Directorate of Standardization under Department of Defence Production must be closely linked to Bureau of Indian Standards (BIS) and enabled to bring about Indian Military standards. We have to effectively counter certain commercially motivated technical standards injected by the sourcesinterested in continued imports.

3. Department of Defence Manufacturing and Industrial Base Policy (Department of DMIBP)

Ÿ India is the only major power that does not have a National body on Defence and Aerospace systems focusing on integrated defence R&D, production, deployment, acquisition and integrated growth perspectives and consequent GDP growth, wealth creation and employment generation. There are a limited number of Indian defence manufacturing industries because Indian industry did not get the necessary Govt support in right direction in defence manufacturing. Govt must review and strengthen all its policies including its Defence Offsets policy to promote defence industrialisation in India

Recommendations:Ÿ Create an architecturally new Department of Defence Manufacturing and Industrial Base

Policy (Department of DMIBP) under Secretary, Defence Production to plan and oversee the functioning of the Defence Manufacturing and Industrial Base as an enabling system.

Ÿ The private sector driven defence R&D must be incubated, monitored and harmonised with the national efforts. The Department of DMIBP needs to be tasked to play this role. In this effort, DRDO and Defence Manufacture must come closer.

Ÿ Department of DMIBP would present a yearly compendium of Defence Industrial Base of the country for various organs of the government.

Ÿ Department of DMIBP would identify the potential industries as production partners to meet certain critical product requirements.

Ÿ Department of DMIBPwill taskDPSUs and Ordnance Factories are for creating a database of MSME relevant to defence technology and include them in the Defence Industrial Base Compendium.

Ÿ The system is such that MSME industries register separately with every DPSU under the MOD for supply of various items, systems etc. However, there is a strong need to streamline this procedure and a process needs to be created wherein a single code is issued to such licensed and registered MSME, which will be accepted by all DPSU's.

Ÿ Department of DMIBP will work closely with Ministry of MSME to create and sustain a vibrant Defence Cluster appropriate to the major integrators of military systems. Department of DMIBP in consultation with DRDO will put policies in place to identify and sustain critical technologies.

Ÿ Department of DMIBP would have close links with DRDO. SA to RM will co-chair meetings with Secretary, Defence Production to identify and core areas for focused indigenisation, with participation of all Services. Such identified initiatives will be driven through academia, R&D establishments and Indian industry through DPSUs, and OFs.

Ÿ Effective systems for technology transfer to take the laboratory process to manufacturing floor will be put in place. For this, a new DPSU may be instituted.

Ÿ Each industry would be evaluated for its Technology Readiness Levels (TRLs) and manufacturing partners would be selected from the consortium depending on TRLs.

Ÿ Department of DMIBP would not only strengthen the technical capabilities but also lead the harmonisation of efforts of the four resonant organs i.e. DRDO, DPSUs, Private industry and vibrant MSME.

Ÿ Department of DMIBP would evolve a Public-Private-Partnership (PPP) model in Defence R&D and Defence production.

Ÿ Department of DMIBP would facilitate in setting up of manufacturing units to cover the whole spectrum of raw materials, various components and sub-systems required for Defence and Aerospace applications and also in setting up of foundries for production of semiconductors.

Ÿ Department of DMIBP would also evolve a policy to address the issues related with Intellectual Property (IP).

4. Improving the efficiency of DPSUs

Defence PSUs were set up to achieve the self-reliance in defence manufacturing but their import dependency is still on higher side. There is also a need to restructure the management of DPSUs to achieve greater efficiency in the defence production.

Recommendations:Ÿ Selection of CMDs of DPSUs must be from Officers of defence forces, civil services

officers based on merit not restricted on seniority to organic personnel.Ÿ The overhead expenditure in DPSUs is very high in comparison with Private Industry. Govt

must set the targets for DPSUs to achieve the reduction in overhead expenditure.Ÿ Govt orders on Proprietary or single tender basis must be gradually minimised and

competition with Private industry must be promoted.Ÿ The performance of DPSUs must be assessed based on the indigenisation achieved and

reduction in foreign exchange expenditure. Ÿ Review of the quality of earnings of PSUs.

5. Other Recommendations

1. More R&D projects for indigenisation of imported systems, sub-systems or components to be undertaken by DRDO, Academia or Indian industry.

2. Involve academic institutions in defence R&D with clearly defined responsibilities identified by Department of DMIBP.

3. High value contracts must be negotiated preferablywith clearly defined work share for manufacturing of Sub systems of imported products by Indian industry. Also, life cycle issues must be brought up in the initial contract negotiation, including the need for foreign supplier to train and enable the Indian industry to extend the service support within 3 or 5 years.

4. Joint development or Joint production contracts must clearly define the work share of Indian industry. MOD through Department of DMIBP should select the Indian industry as partners for the contract and place the orders directly on Indian industry. Foreign vendors should not be generally allowed for the unilateral screening of Indian industry and placement of orders. Generally, foreign vendors insist on imported sub-systems or components to protect their commercial interests though indigenous substitutes are available.

5. Post contract monitoring provisions included in Para 62 of DPP 2013 must be operationalized. This responsibility may be shifted to Department of DMIBP from DG Acquisition.

6. TOT (Transfer of Technology) contracts must clearly define the stage of manufacturing of a limited quantity in India. Payment terms may be linked to the stage of manufacturing in India. TOT contracts should not be concluded based on the technical documentation provided by the supplier. These contracts should be evaluated based on the overall reduction in expenditure in FE.

7. Study the efficacy of Transfer of Technology so far to improve the process for future.8. We have to review the Defence Offset policy to boost defence industrialisation in India.

9. Based on the firm commitments for production and supply MSME industries associated with foreign suppliers for components and systems be given incentives similar to those given to foreign suppliers.

10. MSME Industries must be encouraged to upgrade the designs. For further up gradation depending on the complexities of design some financial incentives can be considered provided quality and timely delivery are adhered to.

11. There is a need to permit the MSME industries to export components, parts, system to those foreign vendors and suppliers who are supplying armaments, system to India.

12. Permit representatives of foreign suppliers and producers to work in India with MSME industries to ensure quality control and transfer of technology to facilitate export components, parts, systems by MSME industries.

13. Harmonise DPP, DPM, DprP and also the procurement manuals of DPSUs and Ordnance Factories.

14. Redefine and align the rules of Business of departments and Wings of MoD to drive indigenization and tie it with acquisition and sustainment.

15. Strategize what technologies are to be developed and preserved within the country.16. Need to create a new test range to be used by public & private industries. In the interim

period existing ranges under the MoD be permitted to be used by Private sector and MSME industries.

17. There is need to establish a research and training institute on the lines of Canfield University (UK) for training of students & technical officers from the Armed Forces. For this purpose the Institute of Strategic Studies being established in Goa can be designed, structured and organised to meet the requirement.

18. Design and administer creative Tax incentives to Indian industry for defence indigenisation.

19. Creating Collaborative framework for defence manufacturing in which User - Government – DPSU's -DRDO– Private Industry – Academia will hold role specific responsibility & Accountability.

20. There is an immediate need for time bound flexible policy approach towards MSME's and newly evolving industries in this sector to provide growth opportunity and become capable to serve nation in longer run.

21. Create an Additional Secretary level post to incubate a coherent defense industrial base, deploy venture capital to foster and preserve key technologies through Department of DMIBP. He will drive the 'Make in India' initiatives for defense sector.

22. Develop methods to produce and supply sustainment centric items through rapid indigenization.

23. Develop adequate procedures to deter false declarations of level of indigenization, and seek rapid indigenization in all categorizations.

24. Strategize what technologies are to be created and preserved within the country.25. Details of the equipment including broad technical specifications to be made available at

an early stage to industry to enable faster development.26. Simplify the licensing procedures for Defence manufacturing.27. Exports of Defense equipment should be encouraged and export policy to be simplified

since Defense industry at present operates in a single demand market as the Govt is the only buyer leading to high unpredictability of business.

28. A well laid out policy for formulation of Joint venture between Defense PSUs and private sector.

29. Make provisions for users to accept pilot induction of 'not so fully developed' indigenous systems and mature them in-service in a time bound manner for bulk induction.

30. Participative mechanism of forecasting long term technology requirements.31. Provision to be made for OFB to associate private sector on long term basis for

developmental process.32. Preference to be given for industry developing and establishing manufacturing and

assurance of continuation of orders for which investments have been made.33. MOD should adopt “Buy Indian Act” for governing defence acquisitions.

Summary: RecommendationsThe recommendations are summarised as Short, Medium and Long Term initiatives to facilitate implementation.

Short Term1. Create Department of DMIBP under Secretary, Defence Production to evolve policy, plan

and oversee the functioning of the Defence Industrial Base with defence private industry also included. This department be headed by Additional Secretary level officer.

2. The considered inputs from “Department of DMIBP” be factored by the Categorisation Committee for recommending the Acquisition Category to Defence Acquisition Council (DAC) as per para 4 of Chapter I of DPP 2013.

3. Post contract monitoring provisions included in Para 62 of DPP 2013 must be operationalized. This responsibility be shifted from DG Acquisition to Department of DMIBP after its due promulgation.

4. Selection of CMDs of DPSUs must be from Officers of defence forces, civil services officers based on merit not restricted on seniority to organic personnel.

5. The performance of DPSUs must be assessed based on the indigenisation achieved and reduction in foreign exchange expenditure.

6. Department of DMIBP will work closely with Ministry of MSME to create and sustain a vibrant Defence Cluster appropriate to the major integrators of military systems.

7. Department of DMIBP in consultation with DRDO will put policies in place to identify and sustain critical technologies.

8. The system is such that MSME industries register separately with every DPSU and OFs under the MOD for supply of various items, systems etc. However, there is a strong need to streamline this procedure and a process needs to be created wherein a single code is issued to such licensed and registered MSME, which will be accepted by all DPSUs and OFs.

9. Department of DMIBP would present a yearly compendium of Defence Industrial Base of the country.

10. Department of DMIBP would identify the potential industries as production partners to meet certain critical product requirements.

11. Department of DMIBP would also evolve a policy to address the issues related with Intellectual Property (IP).

12. Need to create new test ranges to be used by public & private industries. In the interim period existing ranges under the MoD be permitted to be used by private sector and MSME industries.

13. Harmonise DPP, DPM, DprP and also the procurement manuals of DPSUs and Ordnance Factories.

14. There is need to establish a research and training institute on the lines of Canfield University (UK) for training of students & technical officers from the Armed Forces. The Institute of Strategic Studies being established in Goa can be designed, structured and organised to meet the requirement

Medium Term1. The existing QRs must be systematically reviewed with an objective to identify

technology linkages leading to its import. Based on the recommendatory input of the “Department of DMIBP”, the QRs must be revised by the Services to create a scope for qualified import substitutes without compromising the optimum operational requirements.

2. Review our quality assurance policy with an objective to promote progressive indigenization.

3. Make provisions for users to accept pilot induction of 'not so fully developed' indigenous systems and mature them in-service in a time bound manner for bulk induction.

4. A well laid out policy for formulation of Joint venture between Defence PSUs and private sector.

5. The performance of DPSUs must be assessed based on the indigenisation achieved and reduction in foreign exchange expenditure.

6. Develop adequate procedures to deter false declarations of level of indigenization, and seek rapid indigenization in all categorizations.

7. Design and administer creative Tax incentives to Indian industry for defence indigenisation.

8. Develop adequate procedures to deter false declarations of level of indigenization, and seek rapid indigenization in all categorizations.

Long Term1. High value contracts must be negotiated preferably with the clearly defined work share

for manufacturing of Sub systems of imported products by Indian industry. Also, life cycle issues must be brought up in the initial contract negotiation, including the need for foreign supplier to train and enable the Indian industry to render the service support within 3 or 5 years.

2. MOD should adopt “Buy Indian Act” for governing defence acquisitions.