Mostly dogmas

More of the same gives you more of the same

One of the positive outcomes of the controversies sparked by General V K Singh is that it has, even if it is ephemerally, triggered a public debate on defence policy. Carrying it forward is important. In today’s Business Standard, Ajai Shukla responds to my arguments for reform in defence procurement.

Mr Shukla raises two broad points. First, that we ought not to throw away indigenisation while reforming the defence public sector; and second, that economic liberalisation that gave us a modern, competitive automotive industry cannot give us a modern, competitive defence industry. Let’s consider them in turn.

The argument, as I explicitly state in my article, “is not say indigenisation is an unworthy goal. Rather, it is to suggest that the longstanding approach to indigenisation has not only met with limited success but also that the same goal can be achieved using different means.” Mr Shukla shows how reliance on foreign technology causes problems of denial, interoperability and sabotage. The answer, however, is not a “sharper focus on indigenisation” which can easily become wrapping paper for the reform-resistant status quo. No amount of tinkering with the structure and management of India’s defence PSUs can make them competitive enough to provide for our defence requirements.

In fact, the Mr Shukla’s own points support my argument that PSUs have captured our defence procurement policy. “DPSUs,” he writes “notably BEL and BEML, have undermined indigenisation by serving as fronts for the back-door induction of foreign technology through partnerships with foreign vendors.” The political economy of the Indian public sector enterprises will not make them do any better if they are given a sharper focus or placed under a different ministry.

Next, the argument that the defence industry as a whole is different from the automotive (or any other industry) is untenable. Beyond the point that the defence industry has fewer customers than other industries, they are all made of the same people, have the same economic incentives, draw capital from the same economy, react to competition in similar ways and so on. It is unfathomable why Mr Shukla should consider this naïve. Of course, you can’t expect a private sector defence industry to emerge if the government creates disincentives for it, or if it refuses to purchase from it, as happens today. I recall similar charges of naiveté being thrown about when telecommunications, banking and insurance sectors were liberalised. People deeply involved in an industry feel that their industry is different. Well, it’s not. The laws of economics apply to defence as much as they do to the vada pav industry.

Similarly, it is not at all strange to see arguments that free trade or entry of foreign players will weaken the domestic private sector. That is an argument that has been made since Nehruvian times, much to the detriment of the nation. Sadly, it continues to be made despite being proven wrong. Did allowing foreign automobile manufacturers, telecom companies or insurance providers hurt our car makers, telcos or insurance companies? The reality is quite to the contrary. You can have a debate on whether or not Indian consumers should be allowed to purchase from multi-brand retail chains owned by foreigners. But how can you have a debate on whether the Indian armed forces should be prevented from having the best possible equipment to protect us?

The danger with the kind of attempted middle-ground approaches suggested by Mr Shukla is that they end up as a cover for inaction. The onus is on those who prefer mild variations of the status quo to explain why persisting with policies that have failed us for decades will suddenly begin delivering promised results now.

The dogmas that undermine our defence

Reforming defence procurement, mindset first

This the unedited version of my op-ed in today’s Business Standard.

Why is it that on the one hand India is the world’s biggest arms buyer, and on the other, the outgoing army chief has complained that we are short of basic war-fighting equipment like tank ammunition and field guns? Why is it that our defence procurement takes years to complete and can be halted or reversed by allegations of corruption? Is corruption so rampant within the top echelons of our armed forces that the both the army chief and defence minister could shrug off a brazen attempt to bribe the general in his office? How come the defence ministry has spurned and blacklisted vendors from countries whose geopolitical interests are aligned to ours?

It is easy to treat these issues as merely the failings of individuals and the shortcomings of the latest procurement rules. It is easy to park the unholy affair under the general head of how corruption is undermining our nation. To do so would be to ignore the underlying causes of why things have some to such a pass.

The first is the dogmatic pursuit of indigenisation, a mindset that pervades the defence establishment. It has resulted both in policy capture by public sector unit (PSU) network and introduced layers of complexity in procurement rules. Ordinarily, as end users, the armed forces would want the best possible equipment for the rupee, but they too are prisoners of a narrative that involves the pursuit of a chimerical indigenisation. For in New Delhi, it is still nearly heretical to suggest that an enemy killed by a foreign-made bullet is as dead as an enemy killed by a partly-indigenous bullet.

This is not say indigenisation is an unworthy goal. Rather, it is to suggest that the longstanding approach to indigenisation has not only met with limited success but also that the same goal can be achieved using different means. Back in the 1970s and 1980s the government couldn’t produce an indigenous passenger car no matter how many it purchased from Hindustan Motors and Premier Automobiles. It was only after the liberalisation of the economy and the entry of foreign competitors that Tata Motors, Mahindra and others could produce automobiles that are not only indigenous but also in the same league as their foreign competitors. The route to effective indigenisation, therefore, is counter-intuitive. We must open our defence sector to foreign investors so that Indian industry can acquire the capabilities to produce the equipment our armed forces need.

This cannot be achieved by offsets that require foreign suppliers to spend part of the contract price in India. Offsets might re-inject part of the defence expenditure into the domestic economy but will not result in the transfer of knowledge, skills and human capital that are essential for India to build a modern defence industry. The most effective way to get there is to open doors for foreign direct investment in defence manufacturing. Capping the foreign equity at 26% has attracted few investors. Instead of arguing over another arbitrary level at which to set the cap, we should do away with it altogether.

The second is the equally dogmatic anti-middleman mindset. Going by the statements of the defence minister, it would appear that middlemen—like their lobbyist cousins—are uniformly evil and therefore ought to be banned outright. Yet middlemen are not the cause of corruption. Rather, both middlemen and corruption are the twin offspring of the same parent—complex procurement rules.

The more complex a set of rules, the more the need for ‘specialists’ to help navigate through them. The reason lawyers and chartered accountants exist is because the law and the tax code are complex. Middlemen exist because they perform a useful economic role. There’s nothing intrinsically wrong or immoral about them. It is our rules that make them so, driving underground a genuine economic activity.

Why do we have complex procurement rules? Because we have overcrowded them with multiple, sometimes conflicting objectives. Changing our approach to indigenisation as argued earlier can simplify them to some extent. Even so, it is unlikely that they can be simplified enough to eliminate the need for agents. That is why instead of prohibiting middlemen in defence procurement, a far better policy would be to create a regulatory framework under which they can operate legitimately.

Agents could be required to declare their past and current affiliations, and disclose relevant family connections. Former defence officers and their civilian counterparts could be required to serve out a cooling off period before getting into the business. The policy objective ought to be to align—to the extent possible—the economic incentives of the middlemen to the organisational interests of the armed forces. We don’t have to like lawyers and chartered accountants in order for us to let them discharge their economic roles. Why should it be any different with middlemen?

The final cause of the mess in our defence procurement is that we often ignore the geopolitical consequences of our purchases. Awarding the tender to the lowest bidder might be the best method to resurface parade grounds but not for billion dollar purchases of equipment. To treat both purchases the same way would be to lose strategic leverage that comes from being able favour a country which can give us something else that we need. Blacklisting companies from friendly powers exposes us to purchases from less friendly ones.

The biggest argument for indigenisation is that reliance on foreign suppliers is risky because supplies can be withheld in order to coerce us. That risk can be mitigated if we procure military equipment from countries with which we have extensive economic ties, and vice versa. Reducing the incongruence between our top trading partners and our top arms suppliers ought to be an important policy goal.

The ghost of Bofors continues to haunt our defence procurement. Avoiding stepping on the dung on the road is now more important than getting to the destination. As the defence minister admitted in parliament, the pace of modernisation is slow because every allegation of corruption is investigated. This leaves us with the unfortunate implication that that anyone, from an inimical foreign power to a disgruntled equipment vendor, can apply brakes on the modernisation process. The ghost must be exorcised by liberalising the defence manufacturing sector and getting rid of the superstition that passes off as strategy.

Copyright © 2012. Business Standard. All rights reserved.

Takshashila’s first discussion document

Allow greater foreign direct investment in the defence industry

Takshashila’s policy research programme has its first output—Sushant K Singh, Fellow for Defence Policy at Takshashila and an editor of Pragati has written a discussion document calling for raising or removing the caps on foreign equity in India’s defence industry.

Get the paper here.

You are welcome to discuss it in the comments section.

Poseidons for the Indian navy

Buying arms from big trading partners is a good idea

From the geopolitical perspective, the Boeing P8I “Poseidons” that India has contracted to purchase are very good deal. India should ideally purchase military equipment from countries with whom it has broad and deep trading relationships. The current situation is quite the opposite: India has next to no non-military trade with Russia, and a little with Israel—the two largest military equipment suppliers. This gives them undue strategic and commercial leverage, which Russia has been exploiting to its advantage.

So India must deepen trade and investment with Russia and Israel. And buy arms from the United States, with whom it has wide-ranging economic ties.

Another reason for increasing the American share in India’s equipment mix is operational interoperability. India must develop the capability to interoperate with US and its allies as it will become necessary in a variety of future conflicts. This does not mean buying whatever is on offer—for instance, while augmenting amphibious capacity with landing ship tanks is a good idea, purchasing a huge aircraft carrier is not.

My essay in The Friday Times: The little revolutions in India’s military affairs

Making India’s defence policy consistent with its emergence as a significant global player.

Here’s a version of my essay that appeared in Pakistan’s The Friday Times July 11-17, 2008 | (Vol. XX, No. 21):

India’s armed forces, according to K Subrahmanyam, have “not modernised their decision-making process ever since Lord Ismay prescribed it in 1947. Command and control have not changed since the Second World War. We are now thinking about buying modern equipment when the force structure and philosophy of it go back to the desert campaign of Rommel and Southeast Asia Command of Mountbatten.”

Mr Subrahmanyam’s words highlight a much broader point—that India’s external and domestic contexts have radically changed, especially since 1991, and a wide-ranging rethink of its defence policy has become an urgent necessity. A comprehensive policy review, however, is yet to take place.

That’s because the country’s leaders—even those with an interest and expertise in defence matters—have been constrained by the diktats of coalition politics, repulsed by the vested interests of the civilian and military bureaucracies, and not least, deterred by the popular media’s enthusiasm for blowing up corruption scandals.

The central challenge is to make India’s defence policy—encompassing doctrine, equipment and manpower—consistent with its emergence as a significant global player. The process of economic liberalisation first initiated by the P V Narasimha Rao government in the early 1990s not only turned India into a trillion dollar economy by early 2008, but also made it an important stakeholder in global economic and strategic affairs. Even as this is placing new demands on the armed forces, the mix of resources available for defence has changed. Budget constraints, for instance, have eased. Manpower constraints, on the other hand, have become tighter. Mindsets and policies, though, hark back to the days when the reverse was true.
Continue reading My essay in The Friday Times: The little revolutions in India’s military affairs

Defence industry woes: beyond the blame game

The real issue is competition (and the lack thereof)

It is unfortunate that those making arguments for positive change feel compelled to blame participants of the status quo for all that is wrong with it. The most famous example of this—and its unfortunate consequences—is the India-US nuclear deal. The prime minister’s office under Manmohan Singh sought to justify the need for this deal by casting doubts on the record and the capabilities of India’s nuclear scientific establishment. Not only did it create resentment in a constituency whose co-operation is vital for the success of the deal. It didn’t play too well with the public either, as people were more likely to trust India’s scientists on the topic than its politicians and spin doctors.

Now Bharat Varma, a respected analyst and editor of the Indian Defence Review, disses DRDO in an article in which he makes a very important point: the need for greater competition in the defence industry. Blaming DRDO for ‘failing the Indian military’, though, was unnecessary and will draw undue attention to the less relevant part of his article. There is little doubt that DRDO’s performance could have been better. But holding DRDO responsible for failing the armed forces is like holding Hindustan Motors responsible for India’s lacklustre car industry during the license permit raj. The real fault lies elsewhere. Given the right incentives, sleepy state-owned behemoths can reveal surprising agility. [Related Post: A player who is also a referee]

Capt Varma’s offers good suggestions as to how these incentives might be changed. One word: competition. It is fair to say that India has the industrial capacity to support the most exacting needs of the armed forces. What has really failed the Indian armed forces is the government’s failure to harness the vitality of the private sector and combine it with the achievements of DRDO and the wider public-sector scientific establishment. [Related Posts: Liberalise the defence industry; On government husbandry]

Public awareness of military and security issues is relatively shallow. The interest of reformers would be better served if the public debate generates more light than heat. Given the gravity of the issues involved, a slugfest that places the armed forces and DRDO in opposing camps is wholly unnecessary. You are now bound to see DRDO’s supporters respond to Capt Varma’s article by pointing out how the armed forces prefer foreign hardware. And the debate can get passionate.

It is more important to target the Indian government, the political class, and the scandal-happy media for a concert of ineptitude, political point-scoring and sensationalism that is responsible for the armed forces not getting the most bang for the taxpayer’s buck.