Indo-US Cooperation in Defence Production: Hagel’s visit to India

Chuck HagelThe high point of US Defence Secretary Chuck Hagel’s visit to India is the offer he made last week of joint development of seven defence technologies. Two years back US had offered as many as ten technologies under the Defence Trade and Technology Initiative (DTTI) but nothing much of that has been heard of since then.

Probably it is the fate of the previous offer that made Hagel comment that bureaucratic red-tape must not be allowed to circumscribe the limit of friendship between the two countries. Ironically, however, the key persons for energising the renewed efforts under the DTTI will be Secretary, Department of Defence Production from the Indian side and the Under Secretary for Acquisition, Technology and Licensing at the Pentagon on behalf of the US.

The main impediment in following up an initiative is not necessarily the bureaucracy but lack of clarity about the initiative itself as well as the disinclination to learn from the past. Viewed in this perspective, the reasons why what seemed to be an irresistible offer of transferring ten technologies under the earlier initiative did not yield any concrete results need to be introspected.

Some of the apparent weaknesses in the earlier initiative seem to have been taken care of this time. The fact that Hagel had a roundtable discussion with the Indian industry indicates that the initiative is not being seen by the government as a means of expanding the role of the defence public sector undertakings (DPSUs). This makes it imperative to associate the Indian private industry with the initiative in some formal manner.

There also seems to be greater recognition this time of India’s concerns on transfer of technology. That is why the talk is not just about co-production but also co-development of next generation equipment and weapon systems.

This may, however, not be enough. Several other steps would need to be taken – and taken fast – if the renewed initiative is not be allowed to go the same way as the one taken two years back.

One, a detailed policy/scheme on how the initiative is going to be implemented on ground will need to be drawn up and notified. As this will require coordination among multiple agencies within and outside the Ministry of Defence (MoD), it might help if the task is monitored by the Defence Production Board and the Defence Acquisition Council with an MoD-industry coordination group under Secretary, Department of Defence Production working on details in consultation with the private industry and not just the DPSUs. Representatives of other ministries, such as finance and commerce, could also be co-opted.

This is not going to be an easy task, not the least because of competing pressures from other countries, including the old ally Russia. Any scheme that is evolved must, therefore, be such that it would automatically be applicable as and when any other country makes a similar offer or if India were to approach another country for co-production/co-development projects.

Two, it will have to be seen whether the existing procurement procedures are good enough to be applied to procurement of equipment developed and produced by joint ventures or other special purpose vehicles set up under the initiative.

This might also necessitate rethinking on the ‘Make’ procedure, which envisages 80 per cent funding of two or more development agencies for development of high technology complex systems. It would be worth the while to consider whether such systems can be developed by facilitating cooperation between the Indian and the foreign companies without any funding by MoD as in the case of co-development and co-production of equipment under DTTI.

Three, MoD is bound to come under increasing pressure to buy what is co-developed and co-produced. Long-term planning and budget management will need to be aligned to this reality. This is a serious issue. The entities set up for co-development and co-production would, in all probability, be monopolies, dictating the price. In one way or the other this has been a problem in regard to products manufactured by the DPSUs, ordnance factories and even entities like BrahMoS. It is, therefore, important to take a long-term view of the financial commitments that this paradigm shift in defence production might entail.

Four, there is a danger of the present initiative also running aground because of an unfavourable industrial eco-system. India cannot expect to promote a robust industrial culture with its current position in the global index of ease-of-doing business. It is an inter-ministerial issue. Disjointed efforts at improving the eco-system are not likely to produce expected results.

While creating a favourable eco-system is a long haul, there are many issues that are within MoD’s purview. Hagel mentioned one such issue – offsets. He said in no uncertain terms that greater clarity was required on offset obligation required to be discharged under the new policy that permits 49 per cent FDI in defence.

While any policy/scheme that is formulated to facilitate co-operation between Indian and foreign companies for co-development and co-production must ab initio take care of all possible aspects, it is inconceivable that new issues will not arise at the implementation stage. MoD’s ability and inclination to respond to such issues has not been very encouraging. A system will need to be put in place to decide such issues as may arise in the course of implementation of the policy/scheme as soon as they arise.

Five, the public sector cannot obviously be kept out of all this. Foreign companies might gravitate towards the public sector as it is perceived to be enjoying MoD’s patronage. Any policy/scheme that is evolved must be based on clear understanding of what role will the public and private sectors play in India’s quest for what could broadly be described as indigenization of defence production. Needless to say steps will have to be taken to ensure that there is no governmental bias towards the public sector.

Six, it remains to be seen if increasing FDI cap in defence from 26 per cent to 49 per cent will stimulate the sector. Without a controlling stake in the venture, the defence majors may not be willing to transfer state-of-the-art technology. There continues to be some confusion about the modality of allowing more than 49 per cent FDI with the approval of the Cabinet Committee on Security (CCS) if the investment brings in such technologies, as also about the nature of management of the joint ventures by Indian owners. Hopefully, these issues will get addressed in the fine print of the new FDI policy.

India must reduce its dependence on import of foreign equipment and modernize its armed forces in the quickest possible time frame. It must, therefore, be prepared to do whatever it takes to achieve this objective without compromising on any other national interest in the process.

The views expressed in this article are solely those of the author.
Courtesy (IDSA)

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