What a ‘Make in India’ driven Defence Procurement Procedure 2016 means for the Indian Defence Industry

In early January 2016, speaking after he inaugurated a new Hindustan Aeronautics Limited (HAL) helicopter unit in Tumakuru, Prime Minister Narendra Modi clearly stated that ‘If India has to be self-reliant in the area of security according to our armed forces needs’, it has to ‘make its own weapons’. This was quite in keeping with the emerging centrality of indigenous weapons’ manufacture to Modi’s ‘Make in India’ vision as evidenced by Defence Minister Manohar Parrikar’s view that ’the requirement for domestic production of defence equipment is more than for any other sector’ and that ‘achieving self-reliance and reducing dependence on foreign countries in defence is a necessity today rather than a choice, both for strategic and economic reasons’.

Naturally, such a doctrine must reflect itself in a concrete reorientation of the Ministry of Defence’s (MoD’s) Defence Procurement Procedure (DPP) towards a decided emphasis on sourcing indigenously designed, developed and manufactured systems for it to be credible. Long in the making, the contours of this re-orientation have now been unveiled and reveal an attempt to foster indigenization while balancing competing pressures and interests. For Indian industry, defence is now seen as a ‘recession proof’ business and the privileging of local manufacture with no discrimination between public and private entities has been a long standing demand by it.

Given India’s muted private investment cycle, it was only a matter time before the government would have had to focus on public spending in order to engender employ generating growth. Now one of the major ‘non-plan’ heads under the Union budget is of course the allocation for defence (excluding pensions and civil expenses by MoD), accounting for about 13-14 percent of overall   government spending annually. Forty percent of the total allocation for defence is typically reserved for capital expenditure. And of that 40 percent, a significant portion leaks to foreign lands each year, something that is now an unsustainable proposition. After all, a country also imports influence along with weapons’ purchases from abroad. Instead, the priority now is to keep much of the capital component of the defence budget ‘in country’ and use it to widen the defence industrial base (DIB) in a bid to spark a new wave of industrialization. India’s broad industrialization target is to increase the share of manufacturing output in Gross Domestic Product (GDP) from the current 15 percent to about 25 percent by 2025. Military industries, with their various techno-economic second order effects and high value nature are being seen as an important means to attain that goal. In fact, India’s ever growing domestic requirements will be used as an anchor to expand the DIB with the concurrent aim of becoming a major military systems exporter in the years ahead. Though projections vary, a 3-5 percent global market share by 2030 is certainly not outside the realm of possibility for India’s DIB.  Incidentally, MoD intends to raise Indian defence exports to the level of a billion dollars annually by 2020.

It is in the late 2020s, 2027 to be precise, that the Dhirendra Singh(DS) Committee tasked with reworking DPP- 2013 (the last version of the DPP before DPP-2016 which will be released shortly) by the Modi administration, sees India attain the long cherished goal of reaching 70 percent indigenization levels. In recent years, the ‘foreign exchange component’ has accounted for around 50 percent of MoD’s capital expenditure and this represents an outflow of $ 6-8 billion annually.

To be sure, in the period 2013-15, the Defence Acquisition Council (DAC) has accorded ‘acceptance of necessity’ (AON) primarily to proposals in the ‘Buy’ (Indian) and ‘Buy and Make’ (Indian) categories under DPP-2013, something whose impact will be felt in terms of reducing foreign outflows in the years ahead. For instance, in 2014-15, of the 56 AoNs accorded by the DAC for a total value of Rs 117829 Crores, 40 AoNs, amounting to Rs 111070 Crores were from the ‘Make’, ‘Buy’ (Indian) and ‘Buy & Make’ (Indian) categories. And in 2013-14 only 6 out of 34 AONs went to the ‘Buy’ (Global) category for a potential order value of only 371 Crores which represents just 2 percent of the total value of all AONs approved in that period.

Nevertheless, there is a fair bit of concern about the level of ‘indigenous content’ (IC) in systems that are being procured even under the ‘Make’, ‘Buy’ (Indian) and ‘Buy and Make’ (Indian) categories. In many cases, domestic value capture is less than 25 percent even under the ‘Buy’ (Indian) format. Naturally higher IC is desirable not just for operational security reasons (OPSEC) but also to generate greater employment through military procurements by increasing the number of component suppliers who’ll chiefly be micro, small and medium enterprises (MSMEs). Indeed, one of the key reasons for the ‘Make in India’ push in the defence sector is the fact that military related manufacturing is still relatively labour intensive and has the potential to generate several higher wage middle class jobs. According to some projections, an Indian DIB that can cater to 70 percent of annual needs by 2027 will lead to the creation of almost a million new domestic jobs despite an expected doubling of productivity in that period.

As such the DS committee has made a strong case for increasing IC in Indian military procurements and this recommendation seems to have been accepted by the government. The DS committee has also pointed out the role played by ‘preferred categorization’ of procurement modes in DPP-2013 which privileges ‘Buy’ (Indian), ‘Buy and Make’ (Indian) and ‘Make’ over ‘Buy and Make’ and ‘Buy’ (Global), in shifting prospective procurements towards more domestic heavy categories as encapsulated in the nature of AON’s accorded. In fact, the imposition of procedural discipline in DPP-2013 at the ‘Statement of Case’ (SoC) stage, wherein a proposal to select a given category, say ‘Buy’ (Global), needs to incorporate a justification for excluding more preferred categories such as ‘Buy’ (Indian) etc. has played a major role in reducing import heavy plans from the military’s side.

In keeping with the DS committee’s view, that this process be consolidated in favour of indigenous developments and higher IC, MoD has announced the introduction of a new category in the soon to be released DPP-2016 called ‘Indian Designed, Developed and Manufactured’ (IDDM) which will be accorded precedence over all existing categories in the DPP, i.e. even over the ‘Buy’ (Indian) category. Any system that has been designed and developed in India with IC levels of at least 40 percent will be considered eligible for IDDM categorization. Interestingly, IDDM will have another mode of categorization wherein any system with over 60 percent IC levels will also be earmarked for potential preference in procurements through this category.

The introduction of IDDM underlines the importance being accorded to buying homegrown systems wherein the systems level Intellectual Property (IP) resides in India, since that is a key determinant of value capture in high end systems and the basis for a truly capable defence industry that will remain competitive in the years ahead. An Indian product built using Indian design standards and procedures will also be far easier to modify and maintain, crucial considerations when inducting major weapon systems that need to serve for decades. Now the minimum IC criteria for IDDM does indicate that while IP is very important, the product must indeed be something that relies on the Indian industrial eco-system without which the advantages of design ownership will get eroded to an extent, with OPSEC and cost concerns emerging for major sub-systems. Moreover, only higher IC serves the other aims of deepening the DIB and generating employment.

What constitutes ‘Designed and Developed’ in India will however need to be clearly specified in DPP-2016, because this is bound to lead to a lot of acrimony between various players in the Indian defence landscape. While smaller players who have mostly homegrown systems in segments such as simulators will welcome it, some of the larger players may consider themselves shortchanged, since the origin of some of their key ‘indigenous offerings’ lies elsewhere and they may still not have access to the full systems level IP. On the other hand, if ‘designed and developed’ is kept vague, yet others who have actually invested in ‘in-house’ R&D and own IP will be worried if only ‘partly Indian’ systems easily qualify for IDDM categorization. Either way, there are going to be vociferous demands for delineating what in design terms will qualify to be an IDDM category proposal.

In the case of IC however, DPP-2013 itself outlines how it is to be measured and the thrust for greater IC as we have mentioned above will continue apace. And even as higher IC requirements for most procurement categories will be mandated in DPP-2016, other steps to encourage domestic manufacturers to increase IC in their offerings are already being taken. An example of this would be the extension of exchange rate variation (ERV) protection to all Indian companies irrespective of whether they are publicly or privately owned. This is expected to nudge Indian companies towards compliance with DPP-2013 norms which explicitly rule out showing sub-vendor imports at the tier III or IV level as IC, since any incorporation of a sub-vendor’s import as IC would hurt the main vendor itself if the rupee depreciates.

Another move that is expected to support higher IC levels is the recent removal of excise and customs duty exemptions given to PSUs that’ll make sourcing components and sub-assemblies that much more expensive for them. Now given that PSUs continue to account for 90 percent of all defence manufacturing in India, this measure would be particularly effective in boosting IC levels if PSUs were simultaneously not allowed to ‘pass thru’ the resultant higher costs in the short run to their customers. Instead, key PSUs such as HAL need to be pushed to expand their domestic vendor base through greater outsourcing and India’s DIB needs to come together to create an updated database of existing vendors. These measures, which have also been recommended by the DS committee will go a long way in expanding India’s MSME defence base beyond the 6000 or so companies that currently operate in the sector and are primarily supported by the Ordnance Factory Board (OFB) and Bharat Electronics Limited (BEL). For HAL however, the share of imports in total expenditure actually rose from 80 percent in 2001 to 96 percent in 2012.

The outsourcing push to domestic MSMEs is also reflected in the removal of licensing requirements in June 2014 for most parts, components, sub-systems, testing and production equipment. Worldwide, 80 percent of any major weapon system is typically outsourced to sub-vendors who are chiefly MSMEs and it is time that the Indian defence industrial eco-system began to exhibit such features as well. According to MoD, the idea is to make MSMEs beneficiaries of about 30 percent of the total capital expenditure on defence.

Beyond acting as sub-vendors, it is primarily in the realm of some of the relatively smaller value Indian Army (IA) procurements both in low and high technology areas where MSMEs can hope to become even suppliers of whole systems. IA’s ever growing equipment pool requires a vast range of systems, some of which though low volume in nature will entail rapid innovation, an area where agile MSMEs can actually succeed. In any case, Indian private sector players whether big or small do seem to have their eye on prospective IA related requirements to grow their defence practice, as it were. A large fraction of the 307 Letters of Intents (LOIs)/Industrial Licenses (ILs) issued by the Department of Industrial Policy and Promotion (DIPP) to some 182 companies till October 2015 have been for land warfare systems or for electronics items that can easily have land warfare applications among other uses. Till date, 50 licensed companies covering 79 ILs have reported commencement of production and even partial commencement is now enough to stave of withdrawal of license. Importantly, the initial validity of ILs granted under the IDR Act have been increased from 7 years to 15 years with a provision to further extend an IL by another 3 years on a case-to-case basis. These relaxed regulations are naturally intended to attract greater private interest in a number of ‘Make’ programs that are now at the planning stage.

Indeed, as the DS committee report emphasizes, the focus of military procurement must see a shift towards ‘Make’ programs with high IC in tune with the requirements outlined in Long Term Integrated Perspective Plans (LTIPPs) as well as a more detailed Technology Perspective Capability Roadmap (TPCR). In order to defray the risk associated with these technology intensive programs under the ‘Make’ category, MoD has also announced modifications that will change the way in which ‘Make’ programs will be executed. DPP-2016 will modify the existing ‘Make’ rules to include three types of programs.

In the first type, termed ‘Make I’, the government will fund 90 per cent of the prototype development cost, i.e. 10 percent more than the current outlay of 80 percent as specified by DPP-2013. Moreover, if a successful prototype fails to get an order within 24 months of completion of development, the concerned vendor will be refunded its share of expenditure (i.e. 10 percent) incurred in developing the prototype. This rule is expected to make it easier for vendors to incur expenses in a risky, high cost of capital environment, reassured that a significant portion of their cost is likely to be recovered even if orders are not placed. The second type deemed ‘Make II’ will involve industry funding for prototype development and if a tender is not issued within two years of successful prototype development, MoD would refund the entire development cost to the duly selected vendor. The third mode called ‘Make III’, is reserved for MSMEs and involves industry funded projects with a development cost of less than Rs 3 crore, with the development cost once again being refunded to the chosen vendor if a tender is not issued within 24 months of successful prototype development.

Now while the two big ‘Make’ projects currently seeing deployment, the Integrated Materiel Management Online System (IMMOLS) and the Integrated Air Defence Command and Control system (IACCS) have been Indian Air Force programmes, in the near future it is IA which is going to drive some of the bigger ‘Make’ schemes such as the Tactical Communication System (TCS), Battlefield Management Systems (BMS) and Futuristic Infantry Combat Vehicle (FICV) programmes. These programs will of course be governed by DPP versions older than DPP-2016, but some of their specific features point to the shape of things to come. While all ‘Make’ programs till DPP-2013 pertain to ‘high technology complex systems or critical components/equipment for any weapon system to be designed, developed and produced indigenously’, the TCS program was considered particularly dependent on being able to leverage cutting edge technology, which is why a 45 percent weightage had been given to the ‘access to critical technologies’ criteria. Even in the case of the FICV project, this head has 31.37 percent weightage. But in the case of both TCS and BMS, commercial assessment of a vendor’s turnover, profit, net worth and physical assets have weightages of only zero and 10 percent respectively. In the case of the FICV project the weightage given to commercial assessment is 26.08 percent however.

What this reveals is that in times to come, ‘Make’ projects in the C4ISR category requiring a ‘network of networks’ approach will give the utmost weightage to a vendor’s in-house R&D capabilities and/or ability to secure access to IP from elsewhere. For more traditional systems, such as armoured vehicles and other platforms, more traditional parameters that take into account commercial assessments will matter considerably in addition to considerations of technology and IC levels, the latter being specified at a minimum of 30 percent for ‘Make’ projects under DPP-2013.

The DS committee in turn has recommended that for platforms of ‘strategic importance’, the L-1 competitive bidding route can be junked altogether in favour of inviting a ‘strategic partner’ (SP) from the private sector for the creation of long term capacity in a particular segment. Since the primary focus of SPs would be to support sustainability and bring forth incremental improvements in platform capability through technology insertions over their lifetimes, they would need to have competence in system engineering, supply chain management to manage life cycle support, and should be companies that are looking for assured revenue streams based on long term partnerships, rather than those who would prefer one-off contracts from time to time.

The DS committee’s SP model recommendation is based on the view that markets for major weapons platforms typically do not lend themselves to competitive models owing to a variety of factors including their inability to support more than a handful of players. The SP model recommendation has been accepted by the government and the V.K Atre Committee set up to give it detailed shape has decided that it will be pursued for large projects worth over Rs 10,000 crore in two categories. The first category would include partnerships in the fixed wing aircraft, helicopter, submarine, armoured fighting vehicles, aero-engines, guns and warship segments. Each of these segments will see the selection of only one SP based on a minimum qualifying criteria which will include at least 51 percent Indian ownership, a minimum annual turnover of Rs 4000 crores for the past 3 years, a CRISIL ‘A’ rating, revenue growth of at least 5 percent in the past 5 years and a Debt/EBITDA ratio of 3:1. A second category under the SP model that will look at metallic materials and alloys, non-metallic materials and ammunition will however see the selection of up to two partners from private industry.  Final evaluation will give 50 per cent weightage to technical parameters, 30 per cent to financial parameters and 20 per cent to platform specific criteria.

Clearly, the emerging details of the SP concept indicate that the government undeniably intends to distribute very large programs amongst groups with established industrial capability. The limiting of the number of SPs to only one in key platform segments is an indication that it wishes to avoid the bidding related acrimony that has been seen in the past, for say the FICV program, where a company like Tata Motors could narrowly miss out being selected based on slightly ad hoc financial criteria. Instead, in the SP model, the government will undertake a rigorous audit of interested firms who will have to allow inspection of their books for this end.

It is worth noting that each SP in the designated segments will be chosen over and above the capacities that exist in the public sector. So it must be kept in mind that while the government may be leveling the playing field by issuing longer term licenses, extending ERV protection to all Indian companies and subjecting public firms to the same tax structure, it will not let existing public capacity wither away. With over 120,000 employees and 41 factories spread out across India, OFB will continue to be a recipient of massive orders. Even in the case of the FICV program, MoD has duly nominated OFB to be one of the contending ‘Development Agencies’ for this ‘Make’ program. OFB has also been of course receiving ammunition orders under the revenue head of the defence budget.

Among the eligible private players for any program, technical competency and IC levels in their wares will obviously be key considerations for successful selection in the years ahead. Given the emphasis being placed on indigenous IP, as epitomized by IDDM, companies that have had long associations with DRDO, whatever their size, and have a R&D practice, will find themselves in an advantageous position. Long term involvement in DRDO projects has also given private sector primes such as L&T and Tata Power SED access to a potentially larger domestic vendor base that will be important to meet IC requirements.

The SP concept is a clear indication that the government wants private sector primes to focus on one or two areas of core competency and legacy capability. This means that new companies incorporated in various segments, irrespective of whether they are backed by very large conglomerates are unlikely to make much headway in securing key orders from the Indian military. Moreover, given that the new offset guidelines indicated by MoD say that only tenders worth over Rs 2000 crore will require offset packages instead of the current Rs 300 crore, the scope to build a defence practice through creating new capacity by leveraging foreign tie-ups is also not precisely the same as before. This is on account of the fact that future offsets though of a higher value on the average will mostly be of a ‘direct or directed’ nature wherein they’ll be used to source key technology in lieu of large orders placed with foreign majors. In any case, the number of offset opportunities themselves will reduce greatly on account of far fewer ‘Buy’ (Global) tender. In the years ahead, success in the Indian defence market will come to those companies that invest in R&D, are able to work closely with the public sector and are in the game for the long haul.

Send your feedback to [email protected]. For updates follow Saurav Jha on twitter @SJha1618

How To Neck The Necklace

China’s “string of pearls” strategy to encircle Asia calls for much greater Indian Navy-Army cooperation through the creation of a serious amphibious force capable of over-the-horizon assaults President Xi Jinping’s April visit to Pakistan saw China securing de jure management rights over Gwadar port for a period of 40 years, a facility it has helped finance and build. The move has brought China closer to fulfilling its ambition of having a dual-use base sitting astride the mouth of the Persian Gulf. While this ambition is not terribly new, as evidenced by the oft-quoted “string of pearls” theory, the need to secure it was propelled by the Chinese Navy’s (CN’s) continuing experience with its “out-of-area deployment” on anti-piracy patrols in the Gulf of Aden that commenced in 2008. However, for the Indian Navy (IN), this development marks the culmination of a long held position that the CN was using anti-piracy patrols as a mere stepping stone to a more permanent presence in the region. The situation in any case warrants a quicker expansion of the IN’s Maritime Domain Awareness (MDA) network in the Indian Ocean Region (IOR), greater investment in specific kinetic and non-kinetic capabilities, and an upgradation of Indian military diplomacy to include a much bigger equipment transfer component.  Since submarines are likely to be the centrepiece of China’s emerging offensive posture in the IOR, the IN will have to up its anti-submarine warfare (ASW) game by more than a notch or two. While the Gulf of Aden operations may have crystallized the Chinese leadership’s thinking in favour of obtaining permanent basing rights to sustain a maritime presence near vital sea lines of communication, China is as yet not capable of positioning a fourth fleet (the CN has three fleets at the moment) for operations in the IOR. Nor can it currently claim access to enough sizeable bases in the IOR, Gwadar notwithstanding, to support any such hypothetical element. So whatever “pearls” China can string along in the IOR, besides serving to replenish rotating surface ships, will, for the foreseeable future, be used to support submarine deployments as a key offensive element. In the event of conflict, Chinese submarines may be used to interfere with Indian sea lines of communication, and threaten land-based targets with cruise missiles. They will also complicate deterrent patrols for Indian nuclear ballistic missile submarines (SSBN), even in peacetime. The IN’s annual Tropex exercise that involves coordinated anti-ship missile launches by several platforms leveraging a modern sensor and targeting network would have convinced the Chinese of the futility of projecting power in the IOR with a surface ship force. Especially when they are still many years away from deploying an aircraft carrier or fleet air defence or naval strikes. The IN has two aircraft carriers operational at the moment. The IN’s maritime patrol aircraft while on long range patrols are known to find and buzz Chinese ships even when they are sailing south of the equator. Despite the CN now possessing much bigger multi-role ships with decent anti-air warfare capability, it is unlikely that China has the confidence to take on the IN in the IOR with a surface ship-heavy force. Moreover, India also has the capability to bottle up a CN surface fleet entering the northern IOR via a strategic channel such as the Strait of Malacca. China will instead focus on the underwater domain, where the IN is sorely lacking in platform numbers at the moment vis-a-vis the Chinese. The IN today has only 15 submarines, 13 of them conventional diesel-electric types (SSKs), one nuclear attack submarine (SSN) and one SSBN, the INS Arihant, that is right now undergoing final sea trials before induction. As opposed to this, the Chinese possess over 50 SSKs, 5 SSNs and 4 SSBNs and are building more of all types. Granted not all its submarines are modern or of the same quality, the fact remains that China has boats to spare for patrols in the IOR.  And since 2013, “contact” with both Chinese nuclear and conventional submarines have been made by the IN near Indian waters. Not to mention the recent port calls by Chinese submarines to Sri Lanka (which hosts what was till recently a potential Chinese “pearl” in the form of Hambantota port) that caused so much consternation in New Delhi,  and contributed to pushing Indian discontentment with the former Rajapakse regime over the edge. It is noteworthy that Chinese submarine operations in the IOR seem to coincide with the INS Arihant’s progress towards final induction and deployment on nuclear deterrent patrol.  Chinese SSNs operating in the Bay of Bengal will definitely make matters difficult for the Arihant and its follow-on boats to find sanctuaries wherefrom they can launch their nuke-tipped ballistic missiles at targets in the Chinese mainland if it ever came to that. SSBNs such as the Arihant after all need to lurk undetected in deep waters waiting for orders to launch their missiles in a retaliatory nuclear second strike  while on deterrent patrol. The continuous presence of Chinese SSNs however means that the IN will have to adopt a “bastion” approach to protecting the Arihant and its successors. This would involve the use of both existing surface based ASW forces as well as future SSNs inducted by the IN. India’s only operational SSN, INS Chakra, would very likely be part of the shield protecting the Arihant to keep it safe from enemy SSNs. The IN currently plans to lease another SSN or two from Russia and build six more indigenously. However, even with these numbers, it could find itself somewhat constrained in terms of being able to spare enough SSNs for  diverse long-range missions other than providing a screen for India’s underwater second strike capability, if Chinese nuclear submarines were able to significantly increase the frequency of their patrols in the Bay of Bengal. This would of course depend both on China consolidating its presence in the IOR, and the number of SSNs it has at its disposal. China’s current woes with maintaining the readiness of its nuclear submarine fleet and their emanated noise levels (which leads to increased detectability) may not last forever either. The CN’s approach seems somewhat reminiscent of the US strategy during the late Cold War which sought to keep Soviet SSNs engaged in defending their SSBNs, even as the larger US SSN fleet dominated sea lines of communication across the Atlantic and Pacific Oceans. In the Indian context, an Indian SSN force tied down to protecting SSBNs will find it much less easy to deploy to the South China Sea. Indeed, even as it tries to acquire pearls in the IOR, the CN’s primary missions centre around preventing Taiwanese secession and dominating the hydrocarbon-rich South China Sea littorals. The IOR foray should also be seen as a way to keep the IN from joining a potential anti-Chinese maritime coalition in the South China Sea. The Chinese, like the Indians, have equipped their submarines with both anti-ship as well as land attack cruise missiles. And while Chinese SSNs are noisy, their speed and unlimited endurance means that they can launch “missiles of opportunity” at select targets from standoff ranges. The Chinese recently introduced the Type 093G nuclear submarine which carries a substantial number of cruise missiles and is stealthier than the Type 093 Shang Class SSNs currently making parleys into the IOR. What this means is that the timetable for inducting new SSNs has to be brought forward by the IN.  Merely building more conventional submarines under the recently cleared Project 75I will not do, because even though SSNs are noisier than conventional submarines, the latter is more of an ambush predator suited to quietly lurking in shallow waters and not really a match for an SSN in deep waters. The Chinese submarine threat of course manifests itself in the form of SSKs as well. While SSKs bearing the Chinese flag could operate regularly out of future Chinese bases in the IOR, the bigger de facto Chinese SSK threat will come via Pakistan’s forthcoming acquisition of eight air-independent propulsion-equipped submarines to be license-produced at the Submarine Rebuild Complex in Ormara, near Karachi. Gwadar, however, is the fulcrum around which a joint Pakistani-Chinese reconnaissance-strike complex in the northern Arabian Sea is being orchestrated.  China has helped Pakistan set up a very low frequency (VLF) facility for communicating with submarines in Turbat, north of Gwadar. While this VLF facility will allow Pakistan to transmit orders to its new submarines that will incidentally carry nuclear-tipped cruise missiles, it will also be used to talk to Chinese nuclear boats in the IOR. The IN has in recent years invested in powerful airborne platforms such as the Boeing P-8I Neptune that allows it to carry out wide-area anti-submarine warfare operations and is likely to induct more of those. However, submarine detection and tracking at the moment is still a time-consuming task and requires the availability of numerous helicopters with low frequency dunking sonar (LFDS). The Navy has to move quicker to replace and augment its current fleet of naval multi-role helicopters. Additionally, the production of a new generation LFDS developed by DRDO needs to be expedited as well. But to take on a larger number of enemy submarines in the IOR, the IN will have to move quicker on underwater force accretion in terms of SSKs too. Producing more Scorpene class submarines at the established line in Mazgaon Dockyard should seriously be considered even as Project 75I is furthered. Technology naturally has to play a very big role in the Indian riposte to Sino-Pakistani plans. Chinese submarines are known to be optimized for anti-surface warfare and are not that capable in ASW, given the limitations of Chinese sonar and other sensor technology. Sonars are however an arena where India has traditionally had great domestic competence despite the recent issues with developing cutting edge low-frequency active-towed array sonars. Those issues have now been overcome and India must look to deploy contemporary thin-line towed-array sonars on all its submarines, something Chinese submarines currently lack. India will also have to invest in an indigenously developed prototype sea-bed array system whose efficacy has already been demonstrated. Though expensive and power-consuming, this sea-bed array system can be a game changer in terms of locating and identifying submarines in strategic locations around the Indian Ocean. In fact, this sea-bed array system has to become an integral part of Indian maritime domain awareness in the IOR which  already consists of a satellite-enabled multi-sensor, multi-location network. Just as India is setting up radar stations and listening posts in friendly countries across the IOR, it will also have to add this sea-bed array system in the near future to meet the challenges of increased submarine deployment by India’s enemies. At the moment, a new coastal sensor network concept that includes underwater, surface and aerial surveillance elements, is being refined at a location in South India. Cooperation with countries like Singapore with competence in underwater communication technology as well as strategic location for new generation multi-static sensor networks is also underway. India’s outreach to the IOR littoral will however have to include a significant arms package component. Just as China is extending deterrence via Pakistan, India must create a naval coalition in the IOR of which it will naturally be the dominant entity. While  transfers of offshore patrol vessels,  both new and old, to IOR countries is commendable, what India needs is the ability to produce submarines for export and these need not be uber submarines. For instance, Bangladesh had actually requested India first for a couple of submarines and turned to China only after India was unable to meet the request. Now China is transferring to Bangladesh two old Ming Class submarines and is trying to use that to negotiate a “pearl” in Cox Bazaar which is only a thousand kilometres away from  strategic naval bases on India’s  East coast. However, it is likely that Bangladesh has had to settle for the rusty old Mings because it is not in a position to give China what it wants. So while at the moment, the Indian Navy is well placed to counter an enemy surface fleet in the Indian Ocean region, it will have to increase the pace of anti-submarine-warfare-oriented acquisitions and tie in other regional navies into a security alliance to meet the emerging Chinese posture in the IOR. Every Indian-supplied sonar on a  friendly naval ship adds to India’s maritime domain awareness in the IOR. Interestingly,  China’s “string of pearls” also calls for much greater Navy-Army cooperation in India through the creation of a serious amphibious force capable of over-the-horizon assaults. After all, what better way to destroy a submarine threat, than by capturing the submarines while they are still in port via a joint manoeuvre from the sea?

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India’s Combat Aircraft Programmes: Learnings From Past

India’s indigenous combat aircraft programmes have another chance to fulfill their potential. However, that is only possible once lessons from the past are heeded to. 

Deliveries of combat standard units of the Hindustan Aeronautics Limited (HAL) Tejas MK-I  light combat aircraft (LCA)  began recently when the first ‘series production’ aircraft, SP-I, was formally  handed over to the Indian Air force (IAF) on January 17, 2015 by HAL. Delays and all, SP-I marks the arrival of India’s first indigenous combat-capable fourth generation fighter that boasts the extensive use of carbon composites in the airframe, an indigenous quadruplex digital flight control system, indigenous mission computers and a modern glass cockpit enabling all weather day/night operations and the carriage of a range of precision guided weapons. Indeed while citing reasons for delays in the program, Defence Minister Manohar Parikkar acknowledged in Parliament that ab-initio development of high technology, initial non-availability of trained manpower in the country and a lack of infrastructure, including test facilities had played a role. Nevertheless, India’s umbrella Aeronautical Development Agency (ADA) is now focusing on an improved Tejas MK-II  with greater capability based on the IAF’s expanded requirements for its future ‘light fighter’ fleet.

However to make a success out of the MK-II program it is imperative that a modularized approach to building the Tejas MK-II be adopted with HAL assuming the role of a lead integrator while sourcing the modules from the private sector in India.   This would be the glide path pursued for the Advanced Combat Aircraft Aircraft (AMCA) project as well which is a must to sustain all that has been achieved in terms of a combat jet development eco-system via the LCA program and avoid a redux of the situation India encountered after failing to support a follow on to the HAL HF-24 Marut, India’s first indigenously designed and produced fighter whose development began in the 1950s.

The second series production HAL Tejas MK-I is meanwhile getting ready and at least four units in all will be delivered to the IAF  before the end of 2015 in order for it to form a’ mini-squadron’ in Bangalore itself. These aircraft are of course part of the initial 20 unit order for Tejas MK-Is and sport a configuration that received Initial Operational Clearance-2 (IOC-2) in December 2013. Once the full 20 unit order is executed, the IAF will operationalize a squadron at Sulur. At least a further 20 units will also be purchased by the IAF from HAL’s production line, though these will be of a configuration that has been accorded final operational clearance (FOC).

However FOC for the Tejas MK-I is expected to be achieved by late 2015. This, according to Dr K. Tamilmani, Director General (Aero),DRDO, is chiefly on account of delays in receiving two significant parts from an overseas vendor that will need to be certified for FOC acceptance. These are of course a bolt on inflight refuelling (IFR) probe and a new quartz nose cone radome, both of which are being procured from different divisions of UK’s Cobham. While the Tejas program was earlier expecting to receive the IFR probe by September 2014 and the quartz nose cone by November 2014, it seems that the probe and the first of a total three units of the new nose cone will arrive by March end. It is understood that IAF teams have made several visits to Cobham to lean on it  to deliver these items faster and sources believe that the pressure has yielded results.

Even as the Tejas MK-I edges towards FOC, the focus of the Tejas program is shifting to the Tejas Mk-II which will have a new and more powerful engine in the form of General Electric’s (GE’s) 98 kilo newton generating F414-GE-INS6, 99 units of which have already been ordered. The F414-GE-INS6 replaces the current MK-I engine which is the F404-GE-IN20. The MK-II design, whose ‘inboard’ has already been frozen in terms of what sub-systems will feature where and how in its airframe, is being designed to achieve a 5 percent improvement in drag characteristics over  the MK-I airframe.  The MK-II will also feature an indigenously developed active electronically scanned array (AESA) fire control radar, currently under development by DRDO’s Electronics and Radar Development Establishment (LRDE) under Project Uttam. ‘Rooftop’ testing  of  this radar which has a range of 100 km is underway at the moment.

The MK-II is currently set to enter the detailed design and development phase for which a private vendor will  be selected as a consultant via the standard L-I tendering route by a vendor selection committee. The selected vendor is expected to send around 100 personnel to join the ADA-HAL team working on creating the blueprints for the Tejas MK-II which will have some 25-30 percent commonality in parts with the MK-I.  Now though the IAF wants the first flight of the prototype to happen by 2017, it is probably going to take place in 2018.  A total of four test vehicles will be built and all of these will be of production standard. At least three of these at a minimum will have to be in airborne testing before the end of 2019 and FOC is likely to be achieved in another 3 years from then.

But to even prototype and then produce the MK-II within suitable timelines, a very different procedural and production approach will have to be adopted than what has been done for the MK-I or indeed for any other Indian military program before. For instance, HAL’s current practice of producing a significant fraction of the 8000 odd components that go into making the Tejas MK-I in house simply won’t do. Indeed with greater outsourcing to the domestic private sector, HAL itself forsees increasing the indigenous content of the MK-I in value terms  from the current 65 to 80 percent in the next few years.

In the case of the MK-II, its design is being modularized with appropriate interfaces being defined in a way that the aircraft will be made up of some ten final macro modular parts that will be integrated to form its whole. The building of these modules will be outsourced to Indian private players who will of course have their own stream of  vendors supplying components that will go into making any such module. HAL will thereby assume the role of a lead integrator for a clutch of private suppliers who will build  these modular parts to specification. It would of course retain its role in instrumentation and flight testing before delivering the aircraft to the IAF.

However as Dr Tamilmani says, ‘flexibility in nominating domestic private vendors with the appropriate capability in a specific area  rather than going through a cumbersome L-I tendering route will go a long way in expediting this program’. Indeed, even for the design and development phase a vendor assessment committee made up of experts both from within and without DRDO were used to narrow down private players who had the capability to actually add value to the same. In the aerospace sector, capability content is crucial even from a cost point of view, since it could well turn out that the ‘lowest bidder’ for a certain program having met minimum qualification criteria isn’t actually able to deliver the goods as it were. Targeted selection of vendors with proven capability for building these modularized parts is critical to the success of the program itself.

And realistically speaking there are only a few players in the private sector in India who can actually succeed in building these modules. Players such as Tata Advanced Systems Limited which builds a Sikorsky S-92 helicopter cabin every 4.5 days, fabricates C-130J empennages and is now graduating to build the ‘green aircraft’ for the Dornier 228 NG and PC-12 come to mind. As does Mahindra, with its efforts towards developing a 200 HP piston engine for the Rustom-2 UAV program. Larsen and Toubro, with its long involvement in domestic programs and an ability to fabricate wings for the Tejas is in the fray as well. Perhaps even smaller players such as Taneja Aerospace and Aviation Limited given their involvement in domestic programs will have a role to play. Attention may also turn to Reliance Aerospace with its aggressive inorganic and organic growth plans.

In addition to nominating vendors during the prototyping phase, it will also be important to stick with them when actual production begins. At that point, HAL should not be forced to again start a L-I tendering process for selecting module supplying vendors for series production.  This feature of making a development partner re-bid for the production order once a system has fructified has been a ridiculous way to undermine the involvement of private players who often entail sunk costs to participate in various domestic R&D programs.  Naturally waiving away the L-I process for the Mk-II program will require political approval at the highest level from the government.

Speeding up the production process for the Mk-II with better quality control will certainly be important because it is going to be ordered in much greater numbers than the Mk-I as is evidenced by the existing purchase of 99 GE F414 engines. Then there is also a minimum 56 unit order from the Indian Navy for the LCA Navy MK-II whose development is processing concurrently with the IAF’s HAL Tejas program. The IN incidentally has already put up money for a total of five LCA Navy prototypes NP-1 to NP-5, with two already flying. EADS has been roped in as a consultant for the design and development of the LCA Navy MK-II which is a different evolution of the baseline LCA design from the Tejas MK-II and is intended for carrier operations. Be that as it may, HAL is currently plugging for more orders for the Tejas MK-I  itself before it invests the around Rs 1300 crores required to bump up Tejas Mk-I production rates to 16 per year from the current 4-8 by 2016-17. For as HAL points out, if it does start cranking out 16 Mk-Is a year, its Tejas line will fall idle for a period of 4 years before  Mk-II production commences without new orders beyond the 40 currently specified. Preliminary discussions in the Ministry of Defence (MoD) are therefore underway on the feasibility of an improved MK-I with features such as a dual colour missile approach warning system (MAWS) that can increase its survivability, satisfy the IAF and keep the HAL line humming at a  rate of 16 aircraft per year.

Meanwhile, the Chinese today are flying two fifth generation fighter prototypes, at least one of which will enter series production sometime in the next decade and India at the moment is merely entering the project definition phase for the Advanced Medium Combat Aircraft (AMCA) which is a fifth generation effort crucial for India to continue building its aerospace sector on the foundation created through the LCA program.  The AMCA is larger than the LCA and is a twin engine design in the ‘medium’ category with a max take off weight (MTOW) of 25 tons featuring stealth, an active electronically scanned array (AESA) fire control radar, networked data fusion and a large internal weapons bay.

But to not make a mess of this program which as per current MoD discussions has to begin flight testing in 2020 and enter production by 2025,  it is important that the IAF accepts that the technology for what goes into making a fifth generation fighter is unevenly developed in India at the moment. For instance, India has very little capability in the domain of thrust vectoring at the moment and the IAF would do well to relax this requirement for the AMCA given that it isn’t really an absolute must for air combat in tomorrow’s environment. Then there is supercruise i.e the ability for a plane to fly at supersonic speed without the use of afterburner. For the AMCA, ADA is proposing a sustained speed of Mach 1.2 while using minimum after burner and expects that this would lead to a detection penalty of 5-7 km as compared to true supercruise.

Moreover, it is important that serious money be committed up front for this program with the IAF assuming ownership. At the moment some 7 test vehicles are envisaged to be built and tested at a cost of Rs 20000 crores. The engine for the AMCA prototypes will be the GE F414 INS6 to begin with i.e the same as the Tejas MK-II. For the production standard AMCA a 110 KN engine will be required for which talks are on with GE and the US Government to launch a joint program for ‘co-developing’ a 110 KN variant of the baseline F-414. These talks are proceeding under the aegis of the Defence Trade and Technology Initiative and if successful will see the manufacture of F414 variants in India. In the event of these talks not yielding results a global tender will be used to select the final engine for the AMCA.

As things stand today, it is clear to anybody who cares about an industrially powerful India that the aerospace sector is where the country must focus its energies. Indeed ‘Make in India’ has to have the aerospace sector at its core. It is imperative that India not repeat the mistake it made with HF-24 Marut program, when no follow-on design to the Marut (although there were a few) was sanctioned for full scale development leading to situation where things had to be built from scratch for the LCA program on account of severe attrition in India’s fighter development eco-system. For India to take wings, it must invest in making wings as it were.

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Indigenize, Engineer, Expand

The future of the Indian military will depend on the successful development of a new triad—special forces, cyber-electronic warfare and space operations

Any major power has competing visions within its military-strategic community over the nature of future warfare. India is no exception. While the Indian Navy typically emphasizes the importance of strategic manoeuvre in the sea commons over an interconnected geo-economic space, the Indian Army essentially remains focused on border and insurgent threats. The Indian Air force justifies its much larger capital budget than the other two by promoting a “capabilities” approach that would apparently give it the flexibility to support the other two across the spectrum of warfare, though its main priority is air superiority in a regional context.

However, since a 2009 directive by the Ministry of Defence (MoD) to the military to prepare for a two-front war with China and Pakistan, “conventional deterrence” is the buzzword that has ended up making India the largest importer of non-nuclear platforms in the world.

Naturally, this is an unsustainable state of affairs and the Indian military of 2020 must accept an affordable level of “conventional deterrence” that is supported through indigenous means. The focus should be on creating usable levers for projecting Indian power through the adoption of a new triad of special forces, cyber-electronic warfare and space operations. This new triad will also force the services to actually work with each other rather than give lip service to jointness. In a world characterized by nuclear deterrence, intelligence-deniability operations are the key to settling matters between states and transnational interests. Conventional strength, after all, can only provide a strong defence. But the best defence is always offence.

At the moment, six billion dollars from the Indian budget leaks to foreign arms manufacturers every year, reflecting an unacceptable drain of resources that should ideally be providing a domestic multiplier for jobs and growth. However, the focus of domestic military R&D over the years had been on strategic deterrence where no imports were possible. There was no emphasis or focus on developing platforms such as heavy combat jets like the Su-30 MKI or heavy transport aircraft like the C-17. It is imports in these categories, required for conventional war over appreciable distances, that have made India the importer it is today.

Nevertheless, today more than Rs 170,000 crore worth of DRDO-developed non-strategic (i.e, not including ballistic missiles and nuclear submarines) equipment has either been produced or approved for production, reflecting that a much larger defence industrial sector—warts and all—exists in India. Indeed, this is what the Modi government will have to multiply through “Make in India”, by promoting more private competition to public sector units given the obvious scope for efficiency improvements in the sector.

Moreover, it must support the almost entirely private small and medium enterprise (SME) pool in the defence sector by changing military procurement practices that are heavily skewed in favour of imports. For instance, today, a private player who may be offering completely indigenous technology is at a disadvantage to a foreign player who offers the same at a cheaper price through a mere joint venture with another domestic company. The importance of nurturing domestic intellectual property even if at a slightly higher cost cannot be understated from the perspective of operational security as well as future technological strength.

To understand this, however, a major mentality overhaul is required in India’s military, especially in the Indian Army, which, owing to its size, does not have that great a penetration of technically qualified personnel. The Indian Navy, with its insistence on an engineer-heavy officer cadre has done much better and it is no wonder that this service, despite its limited budget, is getting even aircraft carriers and submarines built in India today. In fact, the numbers required for a two-front war can simply not be had through dollar-denominated imports and this is something the Indian Army has to understand if it doesn’t want to run out of ammunition. The IAF of course knows this but is at the moment content with just 10 C-17 class aircraft, knowing that any more would completely derail its fighter aircraft import plans.

By 2020, the Army should therefore look to completely indigenize its supply chain for the entire spectrum of munitions it needs by leveraging domestic R&D and the private sector. The Ordinance Factory Boards (OFBs) cannot be relied upon to meet Indian Army’s massive needs and competition would do a world of good to union activity there. The IAF meanwhile must commit its own funds in addition to that of DRDO to create working jet engines in India, currently a critical deficiency of our aerospace sector. Here, the Modi government could also strategically leverage FDI by getting GE to build the F-414 engine powering the HAL Tejas by enticing them through large orders.

Even as India indigenizes its conventional weapons pool, the focus must now be on creating the three new joint commands for space, cyber and special operations that have been on the anvil for some time now. Even the most orthodox military strategist would accept that large scale conventional war is just as rare as nuclear war today. Indeed, modern conventional weapons, given their efficacy, are mostly being used in conflict against terrorist actors in the relatively free-fire zones of Middle Eastern deserts. No major states such as India and China are actually engaging in even limited conflict.

The new triad however gives options for countering covert pressure points, besides creating pressure points of one’s own when nuclear deterrence exists. After all, is it ever easy to decide as to precisely where a cyber attack originated from? Of course, intel may eventually surface and at that point, a symmetric cyber attack of one’s own may be considered. That intelligence itself can ultimately only be gathered through networks that are best seeded by special forces that can “work” with irregular or ad hoc groups.

Maintaining command and control across cyberspace or in regionally unstable areas requires leveraging space, besides retaining the option of applying force selectively but rapidly. It is a brave new world. Hopefully, the Indian military would have embraced it by 2020.

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Budget 2015: Financing India’s Defence

Defence budgets are the best way to judge whether a government is putting its money where its mouth is, as also precisely which mouths it is putting money into. In that context defence allocations for 2015-16 show a clear trend towards a quickening naval buildup in the Indian Ocean Region (IOR) and push for faster border infrastructure, both of which dovetail with the strategic goal of pushing back China from India’s sphere of influence. However capital expenditure allocations for the Indian Air force (IAF), India’s most capital using service do not show any appreciable increase indicating that the government remains lukewarm to the Dassault Rafale proposal.  The allocation for DRDO has remained more or less the same from last year, showing an increase in the revenue component and a decrease in the capital head, indicating that the government isn’t yet voting decisively in favour of ‘designed and developed in India’ as the main constituent of ‘Make in India’.

Nevertheless, the fact that money is also being made available for handholding industry R&D efforts is encouraging. Overall, despite the near 8 percent jump from the last budget, defence spend continues to languish at less than 2 percent of GDP and 13 percent of the total budgetary outlay for the year ahead i.e 2015-16.

The Indian Navy’s (IN’s) warship build plans are certainly being boosted with the budgeted capital outlay for ‘naval fleet’  in 2015-16 marking a 33 percent jump over the budget estimate for 2014-15 and a near 80 percent jump over the revised estimate for the same period.  Clearly money is being forwarded for more naval platforms including India’s first indigenous aircraft carrier (IAC), INS Vikrant II under construction at Cochin Shipyard.  In 2014, the Cabinet Committee on Security (CCS) gave the go ahead for Phase-2 of the IAC project that includes fitment of equipment on board the ship. The increased allocation for ‘naval fleet’ reflects that. It probably also reflects the commencement of a new seven ship stealth frigate build program.  The thrust now is clearly towards establishing a pre-eminent naval posture in the IOR precluding the possibility of China someday leveraging its emerging commercial web in the region to threaten India from its south i.e from the seas.

Now even as India’s southern maritime domain is being strengthened, the push back against China’s salami slicing tactics along the Northern borders is also on display in this year’s budget. The capital outlay for Indian Army (IA) construction programmes, though marginally lower than the revised estimate for 2014-15, is higher than the budgetary allocation from the same period. Thus indicating a consistent desire to complete China centric projects such as new bases, ammunition stores and other staging infrastructure.  Moreover the IA’s salary budget (easily more than the total equipment spend by the IN and IAF combined) has shown an increase of around Rs 5000 crores reflecting manpower accretions for new offensive formations meant for deployment on the China front.

However worries about the China front have not led to the government expediting the IAF proposal to purchase 126 Dassault Rafale fighters under the MMRCA program. The capital outlay for ‘Aircraft & Aero-engines’ for the IAF is only around Rs 18000 crores for 2014-16 and it is believed that a payment of Rs 15,000 crores would have to be made if any deal with Dassault is signed. Given the IAF’s on-going capital expenses, this means that there is as yet no deal with Dassault for the Rafale. Of course, if a deal were indeed to be made in the coming months it would probably get reflected in the revised estimates for 2015-16. Nevertheless it is interesting to note that the budgetary allocation made this year for aircraft and engines for the IAF is some 40 percent lower than the IAF’s actual spend under this head in 2013-14. Overall the IAF continues to be the heaviest spender on equipment but the IN is now slowly catching up. The IA of course continues to hog the overall budget on account of revenue expenditure but is number three on the capital side of things. In the years ahead the IA will have to completely indigenize its pool of equipment if it wants greater bang for buck.

For DRDO, this year’s budget is essentially neutral in that it more or less preserves the jump in allocation it received in the Modi government’s interim budget last year after years of stagnancy. However while its capital outlay has increased from the revised estimate for 2014-15, it is actually less than the budgetary allocation made in the same period. DRDO per se won’t be unhappy with this year’s budget, but for it to make faster progress in crucial areas such as seeker development,  aero-engines and directed energy weapons, it would need more manpower and test facilities than it has now.

Be that as it may, this year’s budget does allocate Rs 144 crore  for ‘Prototype Development Under Make Procedure’ which indicates that programs such as the Tactical Communication System  which is being competed for by private and public consortia and involves the govt bearing 80 percent of the cost of prototyping, are moving forward.  Indian industry has been particularly lobbying for the quicker rollout of these programs which hold great promise for it to climb the value chain in defence manufacturing with lower than usual risk.

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