Major Shaitan Singh
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With Remarkable Candor, Air Marshal M.Matheswaran, The IAF's Interface With HAL And Adviser (Strategy) To The HAL Chairman, Dissects The Tendency Of DPSUs To Become Barriers To The Development Of Aerospace Industry In India. The DPSUs View The Private Sector As A Threat To Their Existence, He States, With Stunning Clarity In The First Of His Two-Part Analysis Of India's Aerospace Industry.
By M.Matheswaran
The first few steps -- hike in FDI to 49 per cent in defense sector; urgency that is displayed in institutionalizing the defense acquisition mechanisms and focus on 'Buy and Make' categorization of large purchases; pressure on DRDO to dismantle its bureaucratic structures, bring in accountability and focus on young scientists; support to private sector in defense; and bringing in scrutiny and accountability in Defense Public Sector Units (DPSUs) -- have given the impression and hope that the government may display the necessary resolve to bring in radical reforms.
These expectations revolve around much needed reforms to energize defense manufacturing, defense Research and Development, and defense exports. The barometer for measuring a major power's strength is demonstrated by its technological capability in the aerospace domain.
Technology, National Security And International Order
The importance of technology in the nation's security and economy calculus can only be appreciated if the changed nuances of India's role and stature in the global system are recognized. India, in the 21st century, has clearly moved upwards into the ranks of major powers in the hierarchy of nations on the strength of the size of its economy, its potential, population, and its natural resources.
If its potential has to be realized then India will need to grasp the nuances of the role of technology and its defense industry in its national power. India has an unenviable task of overcoming its lag in its defense industrial capability while simultaneously achieve the task of leapfrogging into the knowledge sector.
These are enormous challenges particularly in an environment of intensely competitive politics among nations. Politics among great powers is very dynamic. Advances in science and technology have long influenced the course of international politics. Technology, in fact, is one of the key determinants in shaping relations among nations, alongside wars and economic shifts. In the 21st century, aerospace technologies are the currency of power for major nations.
If India has to play an effective role in the international system, it needs to strategise its industrial policies after scrutinizing its technological capabilities at three levels. The first level is an estimate of the country's capacity to produce the most important critical technologies today. It is now well established that the most important technology today appears to be aerospace, information and communication technologies in all its manifestations. The second level is the country’s capacity to produce the most important critical technologies of tomorrow.
These lie in the areas of materials, manufacturing, biotechnology, aeronautics and surface transportation, and energy and environment. The third level is the country’s capacity to produce the most important militarily critical technologies of today and which would continue to be critical into the near future. National Security strategy will have to factor the nuances of these three levels in order to develop a successful defense industrial eco-system.
Technology (here it is the dominant technology of the times) and industry are required to be coupled in a positive growth model in order to ensure growth of the national economy. An analysis of 60-year Kondratieff cycles over the past 250 years establishes the fact that world economic growth is linked to the emergence of “dominant technologies” in each cycle.
The current cycle is driven by aerospace and information technologies, which indicates the critical areas that the nation must focus on, for its investment in the defense industry. It is also indicative of the opportunities and challenges that exist for the industry and entrepreneurs hoping to enter the defense industry segment.
India's Aerospace Sector
Three important developments in the second half of the 20th century characterize the current transformations taking place in the defense-industrial base from of the post-Second World War era. These are: inter-dependency in the core sectors of aviation, space, computers, and communications led to an exponential growth and fusion into aerospace sector; resultant growth of information technologies leading to the overarching role of IT in all segments of technology; and, the rising fusion of defense and civilian sectors. These developments are now beginning to impact on India's aerospace sector.
India's aerospace industry has remained constrained for more than half a century by the government’s skewed policies. All aerospace industrial activities were restricted to the defense segment. Until the end of 20th century, Indian government followed a policy of limiting defense production to the public sector, followed a licence system and banned exports.
As a result, private industry lacked avenues and opportunities for aerospace development. The public sector, dominated by the DPSUs – HAL, BEL, and BDL has become primarily manufacturers of products under licence. They lack innovation, suffer from inefficiencies and poor quality control. The existing policies give them no motivation for export orientation. But this has begun to change in recent times.
Indian aerospace sector is almost entirely in the domain of DPSUs. Aircraft manufacture has been entirely dominated by Hindustan Aeronautics Limited (HAL). Its various divisions, located at Bangalore, Hyderabad, Lucknow, Korwa, Kanpur, Nasik, and Koraput, have accounted for all the work.
The net result is that instead of concentrating on the responsibilities of design, lead integration, and final assembly, HAL has sought to do all activities within its various divisions. As a result, its track record on development of its own designs, quality control, timely delivery etc has suffered enormously.
More importantly, it has failed to manage its supply chain and thus the ecosystem of clustered development has failed to materialize. This has hurt the nation enormously. At the heart of this malaise lies the insecurity of the DPSUs as they view the entry of private sector as a threat to their existence. The story is similar with respect to other DPSUs such as BEL, BDL etc. In short, the DPSUs, driven by flawed policies of the government, have now become barriers to overall aerospace development in the country.
Emerging Trends
India's indigenisation efforts in the aerospace sector will need to focus on combining its areas of strength (IT, automobiles, systems integration) intelligently, and addressing its areas of weaknesses (materials, advanced manufacturing, tooling, machines, design and development) effectively through joint ventures.
Indian private sector has matured to global standards in information technology and the automobile sector. Having emerged successfully as part of the global supply chain, they now have imbibed global standards of quality, efficiency, and innovation, and export orientation.
The IT sector has matured significantly wherein they are now in global league with respect to design, analyses, and advanced algorithm development capabilities. Companies like TCS, Satyam (Tech Mahindra now), Infosys, Wipro, Infotech are contributors for advanced work packages for major aerospace companies like Boeing, Airbus, Bombardier etc. On the mechanical infrastructure side, companies like Tatas, Mahindras, L & T, Reliance, and Bharat Forge are showing the resolve to move into the aerospace sector with their own investment and a global outlook to slot themselves into the global supply chain.
It is also interesting to note that major research centers have been established by world’s leading aerospace majors to capitalize India’s human resource pool. General Electrics Jack Welch Research Center employs nearly 3,000 Indian engineers to aid their research work in aeronautics and polymers. Honeywell, Boeing, Lockheed Martin, etc have established similar centers. Airbus and Rolls Royce have their own sourcing mechanisms.
Policy changes that are underway are helping the emerging trends. The acquisition policy and offset management are showing significantly positive trends. The practice of forced nomination of acquisition orders to DPSUs has been done away with almost entirely. The DPSUs are now being forced to compete with private industry. Competition is something they are ill-equipped to handle, and therefore, they continue to create barriers using all mechanisms at their disposal.
The DPSUs will need to be restructured to become more competitive, develop export orientation, and become more efficient and accelerate indigenisation. They have enormous assets and resources, which can be used very effectively in partnership with private industry to develop and market various products.
The prioritization of acquisition in favor of Buy Indian, and Buy and Make Indian has given an enormous fillip to the indigenisation process. This has energized not only the major companies like the Tatas, Mahindras and L&T, but has given a significant boost to the MSMEs in the country.
Hindustan Aeronautics Limited's BAE Systems 'Hawk' plane production line.
EXCLUSIVEIAF-HAL Insider On How To Make
'Make In India' Work – Part 2
In The Second Part Of His Analysis Of India's Aerospace Sector, Air Marshal M.Matheswaran Lists The Mantra For The Success Of Indigenisation Efforts
By M.Matheswaran
Of course, this needs to be combined with a more transparent and realistic approach to implement development programs. 'Make in India' slogan can become a reality when an active and competitive development model like the US agency, DARPA is adopted. This has been one of the core recommendations of the Kelkar committee. It needs to be revisited again.
The current environment has raised enormous hopes and optimism. However, they can be translated into success only if we recognize the challenges and barriers in order to address them effectively. Since aerospace industry deals with high ends of technology, the government needs to address three crucial areas of policy.
The following three tenets must be recognized:
-- Human capital is crucial
-- State must prevent ‘vested interests’ from blocking structural economic change
-- States that have managed to achieve the above have been characterized by political consensus and social cohesion
Analysis of Indian policies with respect to defense industry clearly indicates the failure of Indian policy makers to address the three propositions. Even advanced economies face failures if they do not guard against these observations.
The growth process gets stunted due to the following reasons:
-- Slow and steady build-up of rigidities in the economy
-- Vested interests gaining political power
-- The above two makes it harder for the states to undergo necessary structural and economic change
The above three challenges faced by a country are well analysed by economists such as Schumpeter and Olson. In recent times, sociologist Espen Moe re-frames the three main conditions for nations to rise to industrial excellence and leadership. For technological and industrial leadership a country needs to fulfill two conditions.
In the final analysis, what makes a country rise to technological and industrial excellence is the combination of a high value on the human capital variable and a low value on the vested interests variable, but that this low value is contingent on a high value on the consensus and cohesion variable.
In 2001, the government constituted a committee under the chairmanship of Dr Vijay Kelkar, to examine the process of allowing accelerated participation of the private sector in the defense industry. This writer attended virtually every meeting of the committee in 2004 and 2005. Even a decade after the report was submitted, the government is far from implementing the core recommendations.
Hence, the current enthusiasm will mean little if the current status of problems and challenges are not addressed. These need to be examined in the context of the three observations of “Human Capital, Vested Interests, and Political Consensus and Social Cohesion” as brought out earlier.
Vested interests -- External: India has produced thousands of aircraft and aerospace systems over the last five decades. But indigenisation has hardly been achieved. There were many reasons for this, the main being vested interests of the foreign OEMs and countries, which ensured that our contracts for licence production, were limited for Indian armed forces only. Thus, Indian manufactured components and spares were never used for the global market of the same product nor did India get the benefit of being a partner sharing the MRO business of the world market. This limitation had very adverse impact on the technology absorption capability of the Indian DPSUs, and this was exactly what the OEM had aimed to achieve and continue to do so.
Vested Interests -- Political: Political interests have created vested interests of their own that have gone on to play a disruptive influence on the defense industry. Public sector units (PSUs) provided major avenues through which the government could address various social objectives of employment, affirmative action, and rural development. That these objectives were met is unquestionable. Political parties competed with each other to be seen as espousing these social objectives. It provided a huge electoral guarantee to the party in power. These social objectives were achieved at a huge long-term cost as aerospace industries were located at areas where they failed to energize the development of ancillary industries. It is an open secret that many hi-tech weapons acquisitions have been influenced by political patronage. A combination of Cold War compulsions and its related strategic compulsions, and the vast variety of technicalities in the defense sector (unlike Space and Atomic Energy), have all contributed for the field to be exploited for political machinations. This has been and continues to be one of the critical factors contributing to the failure of the indigenisation process over the last five decades. This can only be resolved in bringing the defense industrial strategy to be executed and monitored by an apex body at the national level, directly accountable to the PM.
Vested Interests -- Structural and Bureaucratic: The third important ‘vested interest’ comes from the structural and bureaucratic systems of the defense industry. The bureaucracy (administrative and finance) in Department of Defense Production (DDP) has always viewed the DPSUs and Ordnance Factories as their own rather than take a nationalistic view of the defense industry (both Public and Private) as such. Thus DPSUs and OFs have used their influence on DDP to be nominated for all projects, in spite of their capacity constraints, at the cost of private sector development.
Human Capital: Aerospace industry's need for “human capital” with high level of education and skills is well established. The need for high quality “human capital” in the coming years will be hard to meet. The issue gets worse due to archaic policies that have been followed so far with respect to technical manpower. India churns out lakhs of engineers every year but industry inputs indicate that over 80% of them are of low quality unfit for high-end technological industries. If the country has to make a success of the “Make in India” objective, these serious drawbacks in the “human capital” domain will need to be addressed.
Political Consensus and Social Cohesion: India is a huge and vibrant democracy, and a country of large political diversity. While the former is a significant strength, the latter functions as a huge ‘vested interest’ group that focuses only on self-serving gains and short-term political survival. As a result, the country rarely exhibits unity of purpose, when taking decisions with respect to defense industry and defense economics. Depending on the political party in power, decisions taken are invariably at different ends of the spectrum or deeply polarized. More importantly, it should be highlighted that narrow political self-interests have led to decisions that have created a separation of the civil industry from the defense industry. The most striking example is in the separation of civil aviation from military aviation, wherein the two departments have worked at conflicting purposes to create ‘vested interests’ rather than create a synergy for the nation in research and industrial activity. Only states characterized by strong political consensus and/or social cohesion have the strength and relative autonomy to resist the power of vested interests.
Conclusion
A country’s technological capability can be measured by its strength and control over critical technologies in the aerospace sector. India’s aerospace sector now has the potential and opportunities to leapfrog into advanced capabilities. But this can only be achieved through deliberate strategy of overcoming its challenges and barriers.
An important theory in the development of defense industry for developing countries and emerging powers is the concept of the “ladder of production”. Deeper analysis shows that India has consistently violated this theoretical ladder, skipping or ignoring steps in pursuit of symbolic goals. It has regularly rejected the option of using local R & D to make incremental improvements to existing arms but instead, preferred to purchase or develop fully new systems. The separation of the Indian defense sector from the private industry has isolated it and prevented an effective contribution to the national economy.
Another major weakness in the Indian aerospace industry is the virtual absence of a significant refit and modernization capability. If the “ladder of production” concept had been followed, particularly through the involvement of the private sector, it would have built strength through incremental approach by gradually increasing ability to modify existing equipment for the local combat environment or to extend service life. By focusing almost exclusively on the production of major weapon systems and platforms, India missed the opportunity to energize innovation that would have addressed component replacement and adaptation of own technology solutions to improve or replace spares and maintenance equipment. This can now be addressed by bringing in its very capable private sector into this domain.
Skillful use of existing industrial infrastructure and more sophisticated foreign partners creates genuine opportunity for India’s military industry to make significant strides in the near future. The private sector has built significant strengths in IT (Infosys, TCS, Wipro, HCL etc are good examples), Telecommunications, Space technology, nuclear applications, heavy industry, materials, automobiles, consumer electronics etc.
Advances in ITES has enabled cross application and merger of civil and military sectors in many areas. If the defense sector were opened for flow of technology and expertise from civil sector, it would energize the defense industry through healthy competition. Skillful use of foreign expertise through intelligent FDI policies would contribute immensely to job creation in hi-tech sector and skill development. The government, while pushing for “Make in India” policy, should be careful not to create a barrier for high-end technologies from abroad.