Saturday, November 5, 2011

Shoring Up Defense
Nov , 2011
Neelam Mathews

Printed headline: Taking Care Of Business

India’s defense establishment has ambitious plans for modernization of the armed forces, procurement of advanced weapons and systems, and establishment of a world-class defense manufacturing base. It must, however, cope with rules that can stymie procurement, deal with complaints over offsets and issues of technology transfer that occasionally impede foreign investment, and walk the fine line between guarding its own intellectual property and developing a viable export business. Involved in many decisions related to these issues is Minister of State for Defense M. Mangapati Pallam Raju, who brings a keen understanding of what India has to do to achieve its ambitions as an importer, manufacturer and exporter of defense technology. Having worked in the private sector, Raju understands that India must procure technology and modernize its aging manufacturing infrastructure. Recognizing the country’s need for self-reliance, he says the day is not far away when Indian defense companies will be part of global supply chains, operating in some programs as system integrators and primes. Raju brings a global perspective to his job, and travels to outposts where Indian forces are deployed—notably the Middle East, where a regiment serves with the United Nations Interim Force in Lebanon. Raju speaks passionately about the threats that India and other countries face from terrorism, and has urged greater creativity in dealing with the threat and restricting the flow of technology that makes terrorism potent and global. Contributing Editor Neelam Mathews interviewed Raju in his New Delhi office to discuss his views on the future of Indian defense.

Defense Technology International: India’s procurement process is riddled with delays. How does this affect equipment supply?

Raju: There have been delays, but we utilized the entire defense budget last year. In fact, in the last fiscal year, we spent more than the budget allocated, which shows that we have been able to use the budget for necessary procurement and that our modernization program is on track.

Why are there projects that India keeps repeating tenders for?

There are procedures for procurement of capital goods and revenue goods. The rules for both state that procurement cannot be by a single vendor and cannot be a nominated case unless it’s a repeat purchase. This has been happening with army orders where some vendors get disqualified, leaving a single vendor and forcing us into a re-tender. This is apart from cancellations due to irregularities of procedure.

There have been many stalled projects including the re-tender of tanker aircraft and the army’s request for 197 helicopters. What others are affected?

The M777 ultra-light howitzer cancellation occurred because of blacklisting. [One company allegedly ran afoul of bidding procedure, leaving only BAE Systems in the race.] This resulted in a single-vendor situation. We are looking at how to work around it.

Will there be more foreign military sales requests?

We try to avoid them unless they meet an urgent operational requirement, or the equipment is unique.

India has refused to sign Cismoa (Communication Interoperability and Security Memorandum of Agreement), a U.S. requirement that guarantees the secrecy of C4ISR equipment on its aircraft, ships and other platforms. Considering that India wants to buy U.S. aircraft and other assets, when do you expect the matter to be resolved?

I am not able to say because it’s a policy decision by the government. It is something the government must determine.

How does the revised offsets policy differ from before?

We have taken into consideration the suggestions of industry, vendors and international players and have been trying to refine it as we go along. The idea is to accelerate it to widen the defense industrial base and adopt best practices. The director general of defense acquisition has interacted with the business community and vendors. The revised offsets policy will soon come before the Defense Acquisition Committee for clearance.

When will this happen?

As soon as it is ready—hopefully, in a month or two.

Transfer of technology and intellectual property (IP) rights are offsets issues. How will they be resolved?

They will be taken into consideration in the new policy.

Do you anticipate changes in the foreign direct investment (FDI) ratio from the current 74% for Indian companies and 26% for foreign investors?

FDI is being examined and discussed. We will not change it considerably but have taken suggestions into consideration. We have relaxed the policy to accommodate civilian aerospace products such as simulators. However, there have been some questions raised and we’ll clarify those to plug loopholes.

Will the $10 billion Medium Multi-Role Combat Aircraft (MMRCA) program fall under new procurement policies?

No. The MMRCA will be guided by the 2006 procurement policy. The new policy is not retroactive.
Is India losing out in the growth of its defense manufacturing industry as a result of offsets, foreign direct investment rules and other policies?

The vendors have done sufficient homework to see how best to implement their offset obligations. But if there is some issue of concern they want to address, we will look into it. The whole idea is to not let offset policy defeat the process of acquisition, and at the same time have local manufacturing get off the ground.

How much investment has come in as a result of offset policy?

As many as 12 projects have been concluded. The investment made from offsets is around $2 billion. Projects are across the board—ammunition, platforms and missiles.

With India looking to export the BrahMos cruise missile, how does it plan to protect its IP rights?

The External Affairs Ministry is clear about what levels of technology we export and where. BrahMos is a premium product. The ministry would be restrictive when it comes to exports. I believe that as far as small arms and other low-tech products are concerned, we should have a generous export policy. If we export to countries around our immediate neighborhood, we will be able to optimize our capacities and leverage our economies of scale.

Do you believe that India should focus on developing its domestic industry or look at exports?

Historically, we have neglected our manufacturing facilities for multiple reasons, including lack of resources. As we modernize, we are changing this. The army is now giving five-year procurement projections as opposed to a year, which did not help in production planning. Now, if we can couple that with additional volume, we’ll get economies of scale.

Do you think that India is geared up for defense manufacturing?

In manufacturing, we have reached a level of competency. There has been historical neglect of certain areas. Some of this might be because technology was obsolete. With a focus on modernization, in a few years there will be good manufacturing facilities turning out quality products. Our manpower capability is very good. Being consistent in production planning will assure we emerge at the top of our game.

What will be the role of the private sector in this?

Companies are moving up the value chain, which is a good sign. Apart from components and subsystems, we hope they will be integrators and complement the government-owned companies.

It has been said that India needs to invest $200 billion in defense to modernize its forces. What is your take on this?

We are trying to make the armed forces state-of-the-art. Our acquisition of weapons and platforms will be in line with this. The idea of acquisition is to strengthen defense capability and fill in gaps. We are trying to breach the gaps in the shortest time possible.

What role will technology play in this?

Technology is a vital and integral aspect, especially in such areas as electronic warfare. We are trying to acquire the most advanced equipment we can.

What makes for an ideal force?

The ability to respond in the shortest time, provide deterrence and endure.

What is the outlook for research and development?

The Defense Research Development Organization has a big budget. Recently, government-owned companies were told by the defense minister to increase R&D spending. R&D accounted for 3-4% of the defense budget and will be more.

India has been doing exercises with many countries including Mongolia. Why Mongolia?

All the exercises are in tune with agreements. It’s a routine process—whenever we have a request, it is evaluated. Mongolians have certain skills, especially in land warfare. They run a military exercise called Khaan Quest. Whenever they ask, we participate. We have a good diplomatic relationship with them and it strengthens our bilateral relationship. They look to us for IT skills and have been looking at our radars.

India wants to procure 1,500 unmanned aerial vehicles. Is the government looking at an integrated procurement plan?

The procurement is being coordinated by the Integrated Defense Staff, which looks at who needs what and how best to optimize purchases.

M. Mangapati Pallam Raju
Indian Minister of State for Defense
Age: 49
Birthplace: Hoshangabad, India
Education: B.E., electronics and communications engineering, Andhra University, Visakhapatnam, Andhra Pradesh, 1983; MBA, Temple University, Philadelphia, 1985.
Background: Raju was a research assistant at Temple University in 1985-86; a management consultant in South Natick, Mass., in 1986-87; and sales coordinator for a computer company in Oslo. His business experience includes positions as managing director of an information technology company and board member of publicly listed firms, among them Air India and Indian Airlines. In 1989, he was elected to the Indian senate at age 27, the youngest member in that session of parliament. He was reelected in 2004 and 2009. Raju was named defense minister in 2009. He is married and has two children.

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