Weekly Defence News Review (WDNR) - December 21-27, 2009

Home Ministry unveils draft policy on Arms and Ammunitions

December 21, 2009

The Ministry of Home Affairs (MHA) has unveiled a draft policy for regulating production and supply of arms and ammunition in the private sector. The policy, which supports the existing norm for production in private sector, stipulates certain conditions with a view to ‘prevent diversion to unauthorised hands.’ Under the draft guidelines, only big private companies willing to invest more than Rs. 50 crores (subject to maximum 26 per cent FDI) are to be issued industrial licenses by the Department of Industrial Policy and Promotion (DIPP) in consultation with the MHA to produce various arms and ammunitions. However the supply of such items, except for sports weapons and the like, are strictly restricted to the defence forces, paramilitary forces and state governments. To enable the government to monitor the activities of producers, it authorises the District Magistrate of the concerning area to inspect and file report to the secretaries at state and central levels.

India, Israel to step up defence cooperation

December 23, 2009

Reports noted that India and Israel have decided to enhance bilateral defence cooperation in the areas such as trade in military goods, counter terrorism, intelligence sharing and joint R&D projects. The decision came after the meeting in New Delhi of Joint Working Group on Defence, co-chaired by director-general of Israeli Defence Ministry, Brigadier-General Pinchas Buchris (Retd) and Indian Defence Secretary Pradeep Kumar. Israel is one of the biggest defence suppliers to India, supplying nearly $9 billion worth of military products since 1999. Last week the Defence Minister, AK Antony informed the lower house of the Parliament that India’s Defence Research and Development Organisation (DRDO) and Israel Aerospace Industries (IAI) are presently working on two projects worth over Rs. 12,680 crores to develop long and short-range surface to air missiles for the Air Force and Navy.

Navy’s Submarine strength hit by delays

December 23, 2009

Reports indicated that Indian Navy’s submarine strength – presently comprising of 10 Russian Kilo-class, four German HDW and two Foxtrot – is likely to depleted to just five in 2014-15. The depletion is mainly due to the delays in induction schedule of new class submarines and obsolescence of some of the present ones. The Rs. 18,798 P-75 project under six Scorepene-class submarines are planed for induction by 2017 is facing delays of at least two years. It successor, the P75-I project, under which another six submarines are planned for induction at a total cost of nearly Rs. 30,000 crores, has not moved beyond the planning stage. It is believed that the MoD has not been able to decide which shipyard could execute the project.

Hindustan Shipyard is now under Defence Ministry

December 24, 2009

The central government has approved the transfer of the Hindustan Shipyard Ltd (HSL), a fully government-owned enterprise located in the port city of Visakhapatnam on the East coast of India from Ministry of shipping to the Ministry of Defence. A press Release issued by the Government said the transfer of shipyard would enable the defence ministry to meet “national security requirements of building strategic vessels for Indian Navy.” The decision, which came after the concerns expressed by the Navy about delays in constructing tactical submarines, is expected to boost the submarine and other shipbuilding activities. With the recent transfer, the MoD will have four dedicated shipyards under its direct control – Goa Shipyard Ltd (GSL), Garden Reach Shipbuilding and Engineers (GRSE) and Mazagon Dock Ltd (MDL) and HSL.

Mahindra’s Giant Leap into Defence Production: The Need for Further Policy Initiatives to Promote Private Sector*

On December 15, India’s Mahindra Group, a US $6.6 billion dollar industrial conglomerate, simultaneously acquired majority stakes in two Australian defence companies, Aerostaff Australia and Gippsland Aeronautics, signalling its entry into the defence and aerospace business. The acquisition, valued at nearly Rs. 1.75 billion, follows Mahindra Defence Systems’ (a Speciality Business entity of the Group), November 2009 announcement about setting up a joint venture (JV) in India with the UK’s largest defence company, BAE Systems. The intention of the JV, in which Mahindra holds a 74 per cent equity stake, is to produce a range of high-mobility, armoured and bullet-proof vehicles as well as artillery items. This commentary assesses the importance of Mahindra’s forays into the defence business and suggests further policy measures to promote the Indian private sector at large.

The acquisition of the Australian companies is no doubt a major step for the Mahindra group. This is the first time an Indian private sector company has successfully acquired majority equity share of not one but two foreign defence companies at the same time. However, unlike its previous interests shown mostly in land-based systems, the recent acquisition is directed towards aerospace components and the aviation market in general and India’s defence offsets market in particular. Aerostaff Australia is a certified company with expertise in manufacturing “close tolerance high precision sheetmetal components and assemblies.” Gippsland Aeronautics on the other hand is a designer and manufacturer of a range of 20-seater turboprop aircraft. Acquiring a majority stake in these companies will provide Mahindra a direct yet controlling access to their services, products and technologies. Besides, their customer base will also be of great utility for Mahindra. Aerostaff’s customer base, for instance, includes global majors such as Boeing, Lockheed Martin, BAE Systems, General Dynamics, and Thales, among others. These customers will be valuable for Mahindra when they win orders from India’s Ministry of Defence (MoD) and discharge their offset obligations. Under the MoD’s offset policy provisions, foreign vendors are free to choose their Indian offset partner. Mahindra will be a natural partner for them because of the working relationship they have established. To gain benefits from the offset business, estimated to be at least $10 billion by the end of 10th Plan period, Mahindra plans to set up a plant in Bangalore.

Mahindra’s venture into defence production and acquisition of foreign companies in particular is a clear indication of how much the Indian private sector is interested in participating in the defence industry. It also shows that given the right impetus from the MoD, the private sector can venture into hitherto unassailable areas.

There is no doubt that the MoD of late has taken a keen interest in promoting the private sector to increase self-reliance in defence production. The intent - which started in 2001 in the form of opening up of defence industry to private sector, with an added stimulant by way of foreign direct investment (FDI) up to 26 per cent (both of course subject to licensing) - has taken the shape of many other reform measures in recent years. The ‘Make’ procedure and offset policy of 2006 and the recent ‘Buy and Make (Indian)’ provision along with the provision of sharing a public version of the long-term plan of the Armed forces with the industry - are the indications of such measures. These efforts notwithstanding, the MoD needs to examine how to further promote the private sector in defence industry.

As of now, the private sector is still at a disadvantage vis-à-vis the established defence public sector enterprises comprising eight Defence Public Sector Undertakings (DPSUs) and 40-odd Ordnance Factories (OFs). Unlike the government-owned enterprises for which dedicated high-level MoD officials are appointed and hold responsibility for their growth, the private sector is struggling to push its interests through non-governmental channels such as the Confederation of Indian Industry (CII), Federation of the Indian Chambers of Commerce and Industry (FICCI) and Assocham. Given the fact that many a time public sector enterprises get a non-competitive advantage because of their close proximity with the MoD, the government needs to ensure that the private sector is not discouraged. In this regard, the MoD needs to redefine the role of its Department of Defence Production (DDP), so as to enable it to play a larger role beyond its current confinement to the public sector. Among others, it needs dedicated officials appointed and made responsible for the growth of the industry in the private sector.

The private sector is also at a disadvantage vis-à-vis state-owned enterprises in terms of technical limitations, even though the former does not suffer from financial and managerial shortcomings. This is primarily because of their late entry into the industry and the government’s years of investment in its own companies. To raise its technical capability in the shortest possible time, the private sector needs to form a partnership with domestic as well as established foreign companies. As far as forging partnership with foreign companies is concerned, the existing FDI cap of 26 per cent seems to be the biggest hurdle. It is noteworthy that prior to Mahindra’s November announcement of a JV, it was denied permission to bring in 49 per cent FDI into it. Although BAE Systems finally accepted 26 per cent equity share in the JV, not many foreign companies have the same inclination. Big international companies are not interested to part with technology to an Indian JV in which they have so little control. That is why despite eight years after the opening up of the industry, the FDI in defence industry is at an abysmal level. The latest data published by the government puts the figure at a mere $0.15 million - a fraction of inflows compared with even a sector like Timber Products.

The private sector’s role in the Indian defence industry is still at a nascent stage, though it is growing. What India needs to do is nurture at least a part of the industry that has the potential to assume the role of a system integrator for platform producers. Keeping this in view, the Kelkar Committee in its Report-I has suggested that government designate a select number of private companies as Raksha Udyog Ratnas (RURs), whose prime responsibility would be system integration and the manufacture of big-ticket items for the armed forces. Even though an Expert Committee was appointed to go into the identification process and submitted its report, the implementation of its recommendations has been somewhat delayed for unknown reasons. It is high time the MoD re-examines the concept of RUR and makes an immediate announcement.

Mahindra’s foray into defence production and the recent acquisition of foreign companies is demonstrative of Indian corporate initiative in the private sector. The government needs to seize the opportunity and introduce further reforms to promote private companies. It needs to enhance the role of its DDP in taking direct responsibility for promoting the private sector, increase the FDI cap to at least 49 per cent, and make an immediate announcement with regard to RURs.

*: The article was originally published by Institute for Defence Studies and Analyses (www.idsa.in) at http://www.idsa.in/idsacomments/MahindrasGiantLeapintoDefenceProduction_lkbehera_221209l

Weekly Defence News Review (WDNR) - December 14-20, 2009

NATIONAL

Offsets rise past Rs. 8900 Cr

December 14, 2009

In a written reply in the Lok Sabha, Defence Minister Shri AK Antony informed that about 10 offset contracts have been signed so far under the provision of Defence Procurement Procedure (DPP). The companies with whom the offset contracts have been signed include Rosoboronexport Russia, RAC MiG Russia, Fincantieri Italy, Lockheed Martin USA, Boeing USA, Elta Israel, Israel Aerospace Industries Israel and Rafael Israel. The estimated value of the offsets involved in these contracts is over Rs. 8909 crores. Implementation of the offsets is expected to result in expanding and enhancing the manufacturing infrastructure and technical knowledge necessary for indigenous manufacture of weapon systems required by the Armed Forces. The benefits of offsets accrue to both Defence Public Sector Undertakings as well as to private Indian Industry engaged in the manufacture of defence systems and equipments. (Source: PIB; Dec 14)

India-Israel to joint develop LRSAM and MRSAM at the cost of Rs. 12,681 croes


December 14, 2009
Defence Research Development Organization (DRDO) and Israel Aerospace Industries (IAI) have undertaken two projects to jointly develop Long Range Surface-to-Air Missile (LRSAM) and Medium Range Surface to Air Missile (MRSAM) for India’s Navy and Air Force, respectively. Total cost of these projects is around Rs. 12, 681.02 crores, of which MRSAM accounts for Rs. 10,075 crores. The missiles being developed “are comparable in performance and cost to missiles available in their class in the world market” told Defence Minister, AK Antony.

Finance Ministry expresses concern over competitiveness of mid-air Refueller bid

December 14, 2009
The ministry of Finance (MoF) “has expressed certain reservations relating to the competitiveness of the bids and the reasonableness of the price” relating to six Flight Refueller Aircrafts that the MoD intends to procure for the Air Force and Navy. Four years ago the Defence Ministry had floated a tender to four global companies – Lockheed Martin, Boeing, EADS and Ilyushin – of which the later two had expressed interest. The procurement process was then initiated as per the provisions under the Defence Procurement Procedures 2006 (DPP 2006). The Finance Ministry’s reservation may now quash the process and a fresh bid is expected to be issued next year.

Mahindra buys majority stakes in two Australian aerospace companies

December 15, 2009
India’s Mahindra Group, a $6.6 billion industrial conglomerate, simultaneously acquired majority stakes in two Australian defence and aerospace companies, Aerostaff Australia and Gippsland Aeronautics. Aerostaff Australia is a component manufacture of high-precision close-tolerance aircraft components and assemblies for large aerospace companies. Gippsland Aeronautics is a manufactures of small segment turbo-prop aircrafts. The acquisition of the companies, valued Rs. 175 crores, will propel Mahindra to expand its interests in defence beyond the land based systems. Last month it has announced to set up a joint venture with UK’s largest defence company BAE Systems to manufacture land-based system

Weekly Defence News Review (WDNR) - December 07-13, 2009

NATIONAL

Boeing places P-8I offset orders over $600 million on Indian companies

December 07, 2009

Vivek Lall, India country head of Boeing Integrated Defense System told that his company has “started to place contracts worth over $600 million with Indian companies,” as part of offset obligations accruing from the P-8I contract. The said contract valued about $2.1 billion, was signed in January 2009, under which the US major will supply eight long range maritime reconnaissance and anti-submarine warfare aircrafts to the Indian Navy by 2015. The first plane is expected to be delivered within 48 months from the date of contract signing. The contact involves 30 per cent offsets. Indian companies who have been awarded contracts include Electronics Corporation of India (ECL), Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL).

France faces stiff competition from Israel for IAF Mirage upgradation

December 10, 2009

Reports noted that Israel has shown keen interest in upgradation of Indian Air Force’s (IAF’s) Mirage fighters and offered a price which is 40 per cent less than that of France, the original supplier. A delegation led by General Gabi Ashkenazi, Israel’s defence services chief, has made presentations in this regard to the high officials, including IAF Chief, Air Marshal PV Naik during his recent visit to India. It is reported that Israel Aerospace Industries-led upgrade could cost Rs. 96 crore per plane compared to Rs. 152 core demanded by France’s Dassault Aviation and Thales. It is expected that France could consider its offer prices in the face of competition from Israel.

Eurojet and General Electric submit Tejas Offset proposals

December 12, 2009

Reports noted that European military engine consortium Eurojet and America’s General Electric (GE) have submitted their offset proposals concerning the engine of the Light Combat Aircraft, Tejas. India’s Ministry of Defence (MoD) had issued in July 2009 a Request for Proposal (RFP) to these vendors for supply of 99 engines for the indigenous Tejas. The contact is valued at $750 million. Under the offset policy, global vendors are mandated to provide offsets amounti ng to at least 30 per cent of contract’s value. The offsets can be discharged either though direct purchase of Indian defence goods/services or by investing in Indian defence industrial and/or R&D enterprises. For Tejas, Eurojet’s EJ200 engine is competing with GE’s F-414 engine. Both the companies have reportedly got the approval from their respective authorities to meet the key requirements of India’s MoD.

Nuclear-capable Dhanush test fired Successfully

December 13, 2009

Reports noted that India successfully test fired a nuclear-capable, ballistic missile 'Dhanush'. The missile, with a range of 350 km, and a payload of 500 kg, was fired from a naval ship, INS Subhadra off the Orissa coast at around 11.30 am on November 13. It can hit both sea and shore-based targets. Developed by the Defence Research and Development Organisation (DRDO), Dhanush is a naval version of Prithvi missile. The successful test of the missile comes after a failed first ever night trial of Agni-II missile, conducted on November 23.

INTERNATIONAL

Pakistan gets first AWACS aircraft

December 08, 2009

Pakistan on December 8 inducted the first of the four Saab-2000 Airborne Early Warning & Control (AWACS) aircrafts. The aircraft, procured form Sweden, landed at one of the Pakistan Air Force’s (PAF’s) Main Operating Bases. “ Besides detection of High and Medium altitude flying aircraft, this state-of-the-art system is also capable of detecting low level flying objects over land and sea at extended ranges; the system is capable of picking even the surface targets over the sea” noted an official statement issued by PAF.

Weekly Defence News Review (WDNR) - November 30-December 06, 2009

• Mahindra and BAE Systems to set up joint venture in India

November 30, 2009

Post approval by the Department of Foreign Investment Promotion Board earlier this year, India’s Mahindra and Mahindra (M&M) and UK’s BAE systems have signed an agreement to set up a joint venture (JV) in India with an initial investment of $21.25 million spread over a three year period. The JV, owned 74 per cent by M&M and rest by its British partner, will focus on land-based systems, at a facility south of Faridabad, outside of Delhi. It will initially employ about 100 employees and execute projects including the Axe high mobility vehicle and up-armoured and bulletproof Scorpios, Boleros, Rakshak, Rapid Intervention Vehicles and Marksman light armoured vehicle, Besides, the JV will also manufacture a brand new vehicle named Mine Protected Vehicle India (MPVI), the developmental process of which has been completed based on both companies’ respective strengths. In future, the JV intends to execute a number of artillery programmes, including the M777 light weight howitzer and the FH77B howitzer. The JV’s official name is presently going through official certification process.

• Admiral Gorshkov scheduled for induction in late 2012

November 30, 2009

In a written reply to the Lok Sabha, the Union Defence Minister, AK Antony told that aircraft carrier, Admiral Gorshkov was scheduled for induction in December 2012. It is noteworthy that following an Intergovernmental Agreement in 2000, India and Russia had signed a contract worth $974 million in 2004 for induction of the carrier into Indian Navy in August 2008. However, later on the Russian side submitted a revised plan, indicating delay in delivery and increase in prices to $1202 million. India has agreed to negotiate a revised contract, following which the details of final prices would be known.

• Second SU-30MKI Crash

November 30, 2009

In a second mishap involving the most advanced fighter with the Indian Air Force, a SU-30 MKI crashed near south-west of Pokhran on November 30. The aircraft was airborne on a routine training sortie and following the crash, the IAF has grounded the entire fleet. The IAF has about 90 SU-30MKI, and is in the process to take the total to 230, of which 140 would be manufactured/assembles by the state-owned Hindustan Aeronautics Ltd (HAL). The fighter which crashed in Pokhran was reportedly supplied by the HAL.

• FIPB Rejects EADS-L&T joint venture

December 01, 2009

The Foreign Investment Promotion Board has rejected a proposal from the Franco-German aerospace and defence group, EADS and India’s Larsen and Toubro’s (L&T) to set up a joint venture in India. The JV’s proposal was to supply electronic warfare system, avionics and radars. Although FIPB has not elaborated the reasons for rejection, it was reported that the proposed JV could exceed the maximum FDI limit allowed in defence production sector. India at present allows 26 per cent FDI in defence industry, subject to prior approval and licensing.

• Import-Indigenous technology for Arjun and Tejas

December 02, 2009

In a written reply in the Rajya Sabha, the Defence Minister, AK Antony informed that MBT Arjun’s power-pack comprising of engine and transmission is imported from Germany, while the armament system is indigenously developed. In Tejas aircraft, the engine is fully imported from the US, which also contributes along with Israel, France, Italy and UK, 30 per cent of the aircraft’s avionics. To indigenise the technology currently imported for these two items, India is taking further actions. It is currently contemplating a plan to work with an international manufacture to give additional boost to the indigenous Kaveri engine developed by DRDO for Tejas. To develop the indigenous power-pack for Arjun, a Project involving the DRDO and potential players has also been proposed on a joint venture basis.

• Delay in Scorpene delivery

December 02, 2009

Giving a reply in the Rajya Sabha, Defence Minister, AK Antony told that there could be delay in delivery of Scorpene submarine to the Navy, due to “some teething problems, time taken in absorption of technology and delays in augmentation of industrial infrastructure and procurement of Mazagon Dock Ltd (MDL) purchased materials.” As per the initial schedule, a total of 6 submarines were to inducted by December 2017, starting from one in December 2012, followed by one each year thereafter. The Scorpene project was sanctioned in October 2005 with an estimated budget of Rs. 18,798 crore, under a technology transfer agreement with French company Armaris.

• Navy gets first batch of Mig 29 K fighters

December 04, 2009

The first batch comprising four Mig 29 K fighters reached India in knocked down form onboard AN 132 cargo aircraft. The fighters, two of which are single seater aircrafts and two twin-seater trainers, are to be based on Goa and operate from shore until the Gorshkov carrier is inducted in December 2012. India has already ordered 16 Mig 29 Ks and is believed to be interested to procure 29 additional fighter of the same class.

Weekly Defence News Review (WDNR) - November 23-29, 2009

NATIONAL

• Agni-II missile fails in night trial

Reports noted that first ever night trial of the 2000 km plus, nuclear capable Agni-II missile failed to achieve desired results. The missile, fired at around 7.50 PM on November 23, from the Wheeler Island, off the Orissa coast, tumbled into the sea after a snag was developed just before the second stage separation. The lift off and the first stage separation was reportedly smooth. The test was a part of user’s trial and conducted by the Army officials with the DRDO scientists present to provide necessary logistical help. This is the fist time in the history of DRDO’s missile programme that trial was conducted in the night.

• Mahindra Defence Systems to bid for $3.5 bn defence projects

Reports noted that Mahindra Defence System (MDS), a unit of Mahindra and Mahindra (M&M) would bid for defence projects about $3.5 billion over the next seven years. These projects would come mostly from artillery systems and armoured vehicles, said Kutab A Hai, CEO, MDS. He also said that his company, which has formed a joint venture company with UK’s BAE System, will try to generate up to $430 million by 2016. In January 2009 the two companies announced that they have got a clearance from Department of Industrial Policy and Promotion (DIPP) to set up a JV in India, in which the British company would hold 26 per cent equity shares and rest by its Indian partner.

• DRDO to develop unmanned combat aerial vehicle

Reports noted that India’s premier Defence Research and Development Organisation (DRDO) would design and develop an indigenous unmanned combat vehicle (UCAV). Quoting the head of the organisation, Dr V K Saraswat, the report said, the UCAV “will not only do surveillance, but will also help detect the target and destroy the identified object”. The project will be led by its Bengaluru-based Aeronautical Development Establishment (ADE), with private sector participation. In the mean time, ADE is also developing a medium altitude long endurance unmanned aerial vehicle (MALE), codenamed Rustom. Its prototype, developed by Taneja Aerospace and Aviation Ltd, was however crashed in its first ever trial in November 16, 2009.

• Tejas trainer makes successful maiden flight

Reports noted that the first flight of the two-seater trainer version of Light Combat Aircraft, Tejas was successful. The flight test, conducted on November 26th, “covered an altitude of 9 km and a speed of 0.85 Mach,” according to a Defence Research and Development Organisation (DRDO) official. The trainer is likely to replace Indian Air Force’s (IAF’s) HPT-32.

• UK offers India to upgrade Jaguar; discusses HAWK AJT problems

A three-member British delegation led by the Minister for Defence Equipment and Support (DE&S), Mr. Quentin Davies met India’s Minister of State for Defence Shri MM Pallam Raju in New Delhi on November 27th. Mr. Davies told his country was eager to help India in the upgradation of the Jaguar fighter jets and overcome problems related to licensed production of Hawk Advanced Jet Trainer at the Hindustan Aeronautics Ltd (HAL). Both the leaders expressed satisfaction over the ongoing Defence Cooperation between the two countries. Shri Pallam Raju said that all the three Services have been holding Joint Exercises every year alternately on each other’s soil and territorial waters. Mr. Davies said that the UK Forces have participated in Joint Exercises with India despite being overstretched due to commitments in Afghanistan and Iraq while a number of such exercises with other countries were not held. Shri Pallam Raju informed the visiting dignitary that India was ready to sign a General Security Arrangement (GSA) with the UK while an MoU on Host Nation Support (HNS) was under examination of an inter-ministerial committee.

INTERNATIONAL

• Japan considers F-35 Purchase

Reports noted that Japan is considering to buy about 40 F-35 fighter jets as the future mainstay of its air force (see image of F-35; source: Lockheed Martin). Earlier it had proposed to buy F-22 Raptor, considered to be the most advanced with radar-evading capability, to replace its aging F-4EJ fighter fleet, but failed to acquire as America announced a plan to halt its production. Each of the F-35 is likely to cost Japan an estimated $101 million.

Weekly Defence News Review (WDNR) - November 16-22, 2009

NATIONAL

• Indian may buy an advanced aircraft carrier from Britain

Reports noted that India has “lodged a firm expression of interest” to buy an advanced 65,000 tonne aircraft carrier worth £2 billion from the UK (see right for an artistic impression of the carrier under construction; source: Guardian). The BAE Systems of the UK, the second largest defence contractor in the world, is presently building two carriers– HMS Queen Elizabeth and HMS Prince of Wales – for the Royal Navy. The £4 billion carrier programme, which has been delayed by two years, is facing threat of government’s cost cutting plans. According to officials, "selling a carrier is one very serious option," although, a formal decision in this regard has so far been not taken by the UK MoD. If India succeeds in buying the aircraft, it is unlikely to handover to its Navy before 2018, when the second carrier is due for launch. The first carrier, as per the current schedule, would join Royal Navy in 2016.

At present India has only one carrier, INS Viraat, against the Navy’s desire of having three carriers so as to enable it to have two operational carriers at any given time. To fill the void India has signed in 2004 a contract with Russia to buy a 44,500 tonne carrier, Gorshkov. Besides, India is constructing a 37,500 tonne carrier, Air Defence Ship (ADS) at Cochin Shipyard Ltd.

• ASSOCHAM reiterates its demand for 49% FDI in defence, finds support in US and IAF Vice Chief

The Associated Chambers of Commerce and Industry of India (ASSOCHAM), has reiterated its demand for enhancing FDI limit in defence production from present 26 per cent to 49 per cent. In a statement the industry representative observed that higher FDI limit would help India’s self-reliance in defence production to grow with “faster adoption of latest technology transfer.” Presently India imports most of its defence equipments (valued over $6 billion in 2008), although the government had a long time ago set a target to produce indigenously 70 per cent of its requirements. To shed the import dependence, it said the government could accelerate the FDI limit which, along with the offset policy, would help Indian industry to develop its technological and manufacturing capabilities. It also said the private companies will be the main catalyst for increasing country’s self-reliance in future.

In the meantime, a top official from the Obama Administration asked India to raise FDI in defence to 49 per cent. Talking to reporters the Assistant Secretary of State for South and Central Asia, Robert Blak said “the Indian government could do would be to lift the cap on foreign equity in Indian defence firms, from 26 per cent to 49 per cent."

In a similar demand, the Indian Air Force’s (IAF’s) Vice Chief Air Marshal P K Barbora also stressed the need for higher FDI in defence industry. Talking in a conference organised by Confederation of Indian Industry (CII), he said "we need to be bold enough to invite Foreign Direct Investment (FDI), more so into defence use."

• Indian Defence Offsets touches Rs. 8,000 crore; Private sector gets upper hand

Reports noted that Indian MoD has so far signed nearly Rs. 8,000 crore worth of offsets, of which 94 per cent are in aerospace sector, and the rest 6 per cent in the naval domain. Between the state-owned defence enterprises – Defence Public Sector Undertakings (DPSUs) and Ordnance Factories (OFs) – and the private sector, the latter has got more offsets, with a total share of 60 per cent. In the private sector, big companies account for 33 per cent of total offsets and the small and medium enterprises 27 per cent.

• Thales wins IAF Radar Contract

Reports noted that French multinational Thales has won a contract from the Indian Air Force to supply 19 low-level transportable radar systems. The radar system is based on Ground Smarter (GS) 100 sensor, which can detect and track targets in the range of 180 km. The contract involves technology transfer, under which Thales will build six radars and the rest 13 by India’s Bharat Electronics Ltd (BEL), a defence public sector undertaking under the MoD.

INTERNATIONAL

• Russia pumps $33.8 billion into its Defence Industry in 2009

To counter the negative fallout on its defence industry, Russia has provided an “unprecedented” $33.8 billion worth of aid to its defence industry in 2009, said the PM Vladimir Putin. The aid, which is in the form of low interest loans, guarantees, and direct subsidies, has helped the industry to grow at 3.8 per cent since the beginning of the year. Russia has ambitious modernisation plan, which is based on equipping its armed forces with nearly 70-80 per cent of ‘modern and promising’ equipments by 2020.

Weekly Defence News Review (WDNR) - November 09-15, 2009

NATIONAL

• India to Purchase Upgraded Barak for $1.1 billion

Reports noted that India has signed a $1.1 billion contract with Israel for an upgraded tactical air defence system, Barak-8 (see image right; Source: Press TV). The system, to be delivered by Israel Aerospace Industries Ltd (IAI) by 2017, is designed to shoot down incoming missiles, drones and planes. Although the system is configured to be used abroad ships, its advanced system can also be deployed on land.

• Antony Reviews Costal Security

Defence Minister A K Antony reviewed the costal security mechanism put in place post-Mumbai terror attacks. Presiding over a high-level meeting, the Minister urged top officials from the Navy and the Coast Guard to meet the acquisition deadlines of Patrol Vessels, Interceptor Boats, Surveillance Aircraft and Radars, for which the government is providing vast amount of money. In the meantime, the Sagar Prahari Bal of the Indian Navy is in process of acquisition 80 Fast Interceptor Crafts at the cost of Rs. 320 crores. In a major capability build up, the Coat Guard is acquiring a number of platforms at the cost of Rs. 6,000 crores, including 70 ships/high speed boats/hovercrafts, seven Advanced Offshore Patrol Vessel (AOPV) and four Dornier aircraft. To boost the costal surveillance, the Bharat Electronics Limited (BEL) is installing 46 radars at the cost of Rs. 300 crores, along the Indian coast.

• Rigid Offset Policy Curbs Samtel-Thales Joint Venture

Reports noted New Delhi’s rigid offset policy could curb the growth of Samtel Thales Avionics, a joint venture (JV) between India’s Samtel Display Systems and French multinational Thlaes. The JV in question has intended to manufacture TopSight-I, a Helmet Mounted Display System (HMD) that enables the pilot “to aim a weapon merely by looking towards the target” for a range of fighter aircrafts. Thales is interested to transfer the necessary technology to the JV, in which it holds 26 per cent stake, provided all the production from the unit is eligible for offset banking. However the MoD’s offset policy mandates that foreign vendors can bank offset credits to the tune of their actual investment.

INTERNATIONAL

• US Starts Construction of Ford Class Aircraft Carrier

In a first design change since 1960s, the US officially started the construction of nuclear powered, Ford Class aircraft carrier. Named after Gerald R. Ford, the 38th president of US, the first ship, numbered CVN 78, is expected to be delivered in 2015, at the cost of $8.7 billion. The new carrier will have a “smaller crew than previous flattops and incorporate new technologies, including an Electro-Magnetic Aircraft Launching System, advanced arresting gear and dual-band radar.” Northrop Grumman is the prime contractor of the ship.

Weekly Defence News Review (WDNR)

Starting from the second week of November2009, Defence Economics will carry a weekly report titled Weekly Defence News Review (WDNR). The report, which would be publisded at the end of every week, is intended to provide the followers of the blog a brief anlaysis of major news happeining around them. Comments from followers regarding the new initiative are most welcome.

Indian Defence Industry Poised to Grow

The major highlight of recent amendments to the Defence Procurement Procedure 2008 (DPP 2008) is that of encouraging the domestic industry to actively participate in defence production. The encouragement assumes greater importance considering the “shameful and dangerous” aspect of India’s self-reliance in defence production. As a matter of fact, despite the 50 year-stated goal of achieving 70 per cent self sufficiency in defence equipment production, less than half of it has so far been achieved, resulting in annual outflow of a significant amount of foreign currency and potential vulnerability in terms of critical dependence on others in crisis situations. It is this undesirable state of affairs that the current modifications in the rules of engagement, as brought out in amended DPP 2008, have tried to reverse and, in turn, make India “truly a world class” defence manufacturing nation. These amendments, which came into effect on November 01, 2009, need careful analysis to see how they would impact on India’s defence industrial base.

The first and foremost amendment with respect to development of an advanced indigenous defence industry relates to the way the Ministry of Defence (MoD) procures defence capital equipments/platforms, worth billons of dollars each year (approximately $8.5 billion in 2008-09). Until now, all the procurements were categorised under three broad headings: ‘Buy’, ‘Buy and Make’ and ‘Make’. The first one has little to contribute towards indigenous industrial efforts, as most of the advanced items under this category are in the form of direct import without any involvement of the domestic industry. The latter two have however direct bearings, with the last being the harbinger of India’s progress towards the manufacture of high technology complex weapons systems, albeit through a rigorous and expensive research and development (R&D) efforts. Under the ‘Buy & Make’ category, the government imports some numbers and the remainder is manufactured within India, with the MoD negotiating with foreign vendors for transfer of technology to an approved Indian agency for production. The middle path not only saves time in terms of doing away with time-consuming and costly R&D efforts but also ensures self-reliance through indigenous production of foreign technology. It also provides opportunities for Indian companies to form partnerships with foreign companies.

Good intentions notwithstanding, the ‘Buy & Make’ has procedure proved to be a very difficult proposition. It is primarily because of greater involvement of the MoD in finalising technology transfer agreements with foreign companies, which should have ideally been left to the domestic production agencies to negotiate based on the merit of their technical, financial and other bargaining strengths. As experience shows, technology transfers were mostly in the form of transfer of engineering skills for production of non-critical items, with foreign vendors not parting with critical components. Besides, as foreign companies were more interested in supplying items directly from their own domestic production centres, they were not compelled to form partnerships with Indian companies.

Acknowledging the above deficiency in the procurement procedure, the amendment has rightly introduced a new category called ‘Buy & Make (Indian)’. Under this new category, a supply order will be placed only on capable Indian companies who in turn will have to negotiate with interested foreign companies for technical and other production arrangement. This will give Indian companies an opportunity to explore a combination of alternatives, the best of which will be selected by the MoD. At the same time, foreign companies, which would play an indirect role under the new provision, would be compelled to set up joint venture with Indian companies, for a simple reason that it is only through the JV that they can sell their products. To obviate the possibility of Indian companies becoming a trading centre for foreign companies, the MoD has rightly mandated that the indigenous content, in value terms, of the product supplied under the new category should be at least 50 per cent. This would ensure that only serious Indian players with a long term vision of becoming true defence manufactures come into the business.

The second amendment vis-à-vis enhancing domestic defence production relates to information sharing with Indian industry. Earlier, Indian companies, especially private players, were constrained in terms of not having their advance R&D, production, financial and managerial plans, given the absence of information contained in the long term requirement plans of the armed forces. Now with the Indian government deciding to ‘widely publicise’ a public version of the Long Term Perspective Plan covering a 15 year technology perspective and capability roadmap of the defence forces, the Indian companies can have advance planning in their requisite strength areas. At the same time a window of interaction, opened via the amended DPP, will provide Indian companies and industry associations an opportunity to interact with and convince the acquisition functionaries that their products are superior compared to imported ones.

If the above amendments incentivise domestic companies to enter defence production, the government has also made it clear that it wants a competitive environment in defence industry. This has also been partly reflected in the amended Offset Policy which has been in force since 2005. The inclusion of an ‘Option Clause’ in the offset policy would henceforth allow foreign vendors to change offset partners – though not the offset component and value – midway through the contractual period in “exceptional cases”. The cases would however most likely arise when an Indian partner faults in its contractual promises. The clause would ensure that the company cannot take it for granted once it is selected as an offset partner. The fear of being replaced by another company in case of failure would not only put a question mark on its credibility, but will motivate it to improve its competitiveness to avoid eventual embarrassment.

The amendments to DPP 2008 augur well for the Indian defence industry. Considering that India’s cumulative defence procurement budget would be over $50 billion in the next five to six years, it provides tremendous opportunity for the industry. The industry now needs to have a firm plan, in terms of collaboration with foreign partners, investment in key areas of strength and also a strong resolve to make India truly self-reliant in defence production.

Amendments to DPP-2008

The Indian Ministry of Defence (MoD) has recently announced certain amendments to the Defence Procurement Procedures 2008 (DPP 2008). The amendments which come into force from 1st November 2009, are intended to further promote the domestic industry to participate in defence production; streamline formulation of qualitative requirements; ensure greater transparency and accountability in defence procurement; and facilitate offset transactions.

There is a clear attempt to promote indigenous industry, a demand which is steadily being raised by the captains of both the public and private sector now.

For complete article see India Strategic, November 2009, http://www.indiastrategic.in/topstories411.htm

Economic Downturn: Options for MoD

The present global economic crisis has slowed down the growth of the Indian economy, affecting among others, the fiscal situation and the revenue mobilisation potential of the central government. Defence being one of the largest recipients of central government expenditure, the present crisis casts a doubt on the adequacy of future resources. This commentary discusses some major options that India’s Ministry of Defence needs to consider in order to withstand the likely resource constraints in the coming years.

For complete article click http://www.idsa.in/idsastrategiccomments/economicdownturnoptionsforMoD_lkbehera_260509

India’s Defence Budget 2009-10: An Assessment

In its interim budget for 2009-10 the Union Government has allocated Rs. 1,41,703 crores for the country’ Defence Services that include three Armed Forces (i.e., the Army, the Navy and the Air Force), and other Departments, primarily Defence Research and Development Organisation (DRDO) and Defence Ordnance Factories. This is apart from Rs. 24,960 crores which have been earmarked to defray civil expenditures of Ministry of Defence (MoD) and its affiliated organisations, including, the Coast Guard, and for defence pension (Rs. 21,790 crores). In other words, the total resource available for the MoD and its various establishments is Rs. 1,66,663 crores. By convention, only budgetary provisions for the Defence Services constitute India’s defence budget.Though the allocations made in the interim budget are not binding for the next government to follow, it is unlikely that the new government will make any major changes in the allocation, given the mandatory increases in certain components of the defence budget, the worsening security situation in the country’s neighbourhood and the gap in the country’s defence preparedness. This commentary examines the various components of the defence budget, analyses the impact of the budget on the modernisation requirements of the Armed Forces, and the problem of under-utilisation of resources under the capital head.

For complete article click http://www.idsa.in/idsastrategiccomments/IndiasDefenceBudget2009-10_LKBehera_180209

India Needs a Liberal FDI Policy for its Defence Industry

Laxman Kumar Behera, India Strategic, January 2009

In early October 2008, the Foreign Investment Promotion Board (FIPB) of the Ministry of Finance (MoF) rejected a proposal of the Mahindra Defence Systems (MDS) – a special division of Mahindra and Mahindra (M&M) – to form a Joint Venture (JV) company in India with the UK’s largest and world’s fourth largest defence company, BAE Systems. The JV proposal, based on equity ownership of 51 per cent for MDS and 49 per cent for its British partner, was to “develop, manufacture and provide through life services support for Land Systems defence equipment” and reportedly envisaged a capital in.ow of over Rs. 55 crore.

The decision of the MoF can be termed unfortunate for several reasons.

Gorshkov Deal: India’s Helplessness with Russia*

By Laxman Kumar Behera

The Gorshkov deal between India and Russia has run into controversy over the price and cost overruns of the planned induction of the 44,500 tonne aircraft carrier into the Indian Navy. The Russian failure to adhere by contractual agreements also reveals India’s helplessness in regard to Russian military hardware. This article discusses key developments in the Gorshkov deal and the reasons for its being against India’s interests.

The deal goes back to 20 January 2004, when India signed the Contract and Supplementary Agreements worth US$974 million for inducting the Admiral Gorshkov into the Indian Navy. The agreements related to repair and re-equipment, logistics support, shore infrastructure, training of ship’s crew, repair and technical documents. The delivery of the carrier was scheduled for August 2008. However, as time elapsed, questions were raised over its timely delivery. But, the Indian establishment was assured that the ship would be delivered on the contractual terms.