Weekly Defence News Report (WDNR) - March 22-28, 2010

• L&T to build 36 boats for Coast Guard

March 22, 2010

Reports noted that India’s leading technology, engineering, construction and manufacturing company, Larsen and Turbo (L&T) has bagged an order worth 970 crore from the Ministry of Defence for supply 36 high speed interceptor boats to the Coast Guard. The boats are to be designed by the company’s own design centre and constructed at its Hazira-based shipyard. The MoD’s contract is in view of its various initiatives to strengthen costal security.

• Government mulling 100 per cent FDI in defence; NSC wants extra filter in clearing FDI proposals

May 25, 2010

In what could be major policy development, the government is considering a proposal to allow 100 per cent FDI in defence production. The Ministry of Commerce has sent a ‘note’ to the Cabinet Secretariat for discussion on allowing foreign companies to bring in 100 per cent equity to set up their own manufacturing or integration centres in India. Allaying the concerns that India based fully foreign-owned companies may not be the county’s security interest, the note argues that the same concern remain in case of direct import and hence can not be cited for opposing higher FDI.

In a related developed the National Security Council (NSC), a body which reports to PM, has proposed a layer in addition to the existing Foreign Investment Promotion Board (FIPB), for filtering inflow of foreign equity into the country. The Council’s proposal is in view of concerns “over flow of funds from inimical forces into the nation masquerading as FDI in sensitive areas of defence, telecom, pharmaceutical and airports.”

• Dhanush, Prithvi-II missiles test-fired successfully

March 27, 2010

India successfully test fired on same day two of its indigenously developed, nuclear capable missiles, Dhanush and Prithiv-II. The test was conducted by the country’s Strategic Forces Command (SCF) as part of user-training exercise, in the presence of high-officials from the premier Defence Research and Development Organisation (DRDO). Both the missiles, tested in salvo-mode, hit the pre-identified targets with high degree of accuracy.

Dhanush, a naval version of Prithvi missile, has a flight range of 250 km, and can carry a payload of about 500 kg. The missile has been weaponised on INS Subhadra and Suwarna. Prithvi-II is a surface-to-surface missile, has the same flight range and payload capacity as Dhanush.

• Agni-I test-fired successfully

March 28, 2010

A day after successful test of Dhanush and Prithvi-II missiles, India test succsfully fired its nuclear capable Agni-I missile from the Wheeler Island off the Orissa coast. "It was a fantastic mission carried out by the Indian Army. The test-firing of the Agni-I missile met all parameters," S P Dash, the director of Integrated Test Range. The missile, which can carry one tonne warhead with a flight range of 750 km, was equipped with a new navigational technology to help it to home on to the target.

Weekly Defence News Review (WDNR) - December 28, 2009-January 03, 2010

Defence expenditure review committee submits report

December 29, 2009

Reports noted that the Defence Expenditure Review Committee (DERC), a high powered group set up by the Ministry of Defence under the Chairmanship of VK Misra, former Secretary (Defence Finance) has submitted its report. The report, although yet to be made public, has made a number of suggestions. It has recommended to increase the FDI cap in defence production to 49 per cent (from the present level of 26 per cent) across the board and to a higher level (up to 74 to 100 per cent) on a case by case basis. To expedite the acquisition process, the Committee has suggested to cut down the time taken between request for information (RFI) and the final acquisition, through a series of efficient measures. To promote greater competition it has advised that except for strategic and operational reasons, single source procurement should be avoided.

To enhance the domestic defence industrial and technological capability, the committee has suggested to further promote the private sector; reform the existing public sector enterprises; and bring “synergy among the DRDO, Ordnance Factory Boards, defence PSUs and the private sector to address design, manufacturing and maintenance concerns of India's defence.” Besides the Committee has recommended “setting up of a defence regulatory authority to deal with a range of issues concerning offsets, defence industrialization, capital acquisitions and potential reforms in defence on a permanent basis (Source: DNA).”

• India may get Nerpa nuclear sub in mid-2010

December 28, 2009

Nerpa, an Akula II class nuclear powered attack submarine joined Russian navy after months of trial, in which it met with a fatal accident in November, killing 20 sailor and technicians. The underwater boat, weighing 12,000 ton, is to be subsequently handed over to India around mid-2010 under the name INS Chakra. India has reportedly paid $650 million for a 10-year lease. The submarine, when joins Indian Navy, will not be armed with ‘strategic weapons’ like Russian 3,200-km range Granit nuclear-capable cruise missiles due to restriction under Missile Technology Control Regime(MTCR). Rather it is expected to be armed with 300-km range Klub-S land-attack cruise missiles.

• India building technology to defeat enemy satellites

January 03, 2009

Scientific Advisor to Defence Minister and chief of Defence Research and Development Organisation (DRDO), VK Saraswat told that his organising is building “technology that could be used to neutralise enemy satellites” in low-earth orbit and polar orbit. Although trial of the technology has so far not been planned, the scientists are gearing toward to building a weapon in case the country needs it, he added.

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) - 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 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.

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.