SECOND MEETING OF THE HIGH-TECH DEFENCE INNOVATION FORUM 16 th December, 2011 Building a High-Tech Defence Innovation Base in India December 16, 2011 Smita Purushottam 1

“Fortifying China” Key to understanding China’s success in building an innovation model Many of its principles underlie the recommendations of the High-Tech Defence Innovation Forum. Ideological confusions resolved. Circulated to NSAB and Task Force on Self-reliance in Defence Production. Second meeting of the Forum – key Decision Makers & Stakeholders present. High-Tech Google Group: all concerned citizens can join.

Why China’s Technology Model? Justin Yifu Lin – Chief Economist World Bank Both India and China started with similar economic models with the same distortions Struggled with the legacy of a Statist model and from low-tech base Now, transitioning from central economic planning to a market and then high-tech oriented economy Scale – no other country matches India & similarity of nation-building exercise

Additional Reasons Relentless and fast-paced Chinese technological advances especially in the military area pose a security challenge. China producing a vast array of advanced weaponry & upsetting the military balance in the Asia-Pacific region. ASBM – proof of forethought – Contrast with our situation – 70% imported defence equipment.

Another reason for looking at China’s model Current macro-economic indices Rupee currently called Asia’s worst-performing currency. Why: 1.Industrial output slowed and fell 5% in 1 year in October Indian investment fleeing – totally contradicts economic principles that state that assets are bought when currency devalues. 3.Not just cyclical and international factors.

MOC: India’s merchandise trade deficit to reach unsustainable 13% of GDP by 2014 We import fully – Over 70% of machine tools, basic building blocks – 90% modern telecommunications and IT hardware equipment: missed our chance in 1999 – 100% civil aerospace equipment and aircraft – 70% of defence requirements? But Government’s own Audit report import component of the Dhruv Light Air Helicopter at 90%. – Rail equipment – contrast this with China! – And now inevitably - consumer goods.

Sam Pitroda: Electronics import bill could surpass oil Reuters Nov 13, 2011 India must invest in an electronics manufacturing base or risk an import bill larger than for oil: Sam Pitroda. "We have lost all of the electronics manufacturing base, whatever little we had. If we're not careful, in the next years - it could be more than oil."

Services Sector Drain on Forex Reserves! Much touted services sector does not compensate for not having a robust manufacturing sector It comprises 55% of GDP but only 35% of total exports. Except for IT and healthcare, India has not reached the “controlling heights” in the services sector. Banking, tourism, higher education – net drain (does not have to be like this)

No excuses please! No embargoes are preventing us from meeting our requirements. IMTMA report.

Result This import dependence is harming Indian national welfare and national security. Senior Officer has quipped – “India is not even a ‘banana’ republic, it is a khareedna republic!” Rupee fall. And yet domestic investment flees.

Michael Porter’s Paradigm Proof that a competitive sector can weather the recessionary storm is the report that Indian automobile exports grew 30% during April-October

ORIGINAL SIN! We did not promote manufacturing Licence Raj never fully lifted

Why does China have US$ 3 trillion in forex reserves? “China ( ) created an economic juggernaut based on a solid manufacturing base. As a result of its development strategy, China has raced ahead of India. India’s first phase not only started 13 years later, but also witnessed the launching of only the “easy” reforms between The current economic slowdown and whittling down of the manufacturing sector in India can be attributed to the neglect of core sector reforms, something China tackled early on, with a host of repercussions for sustained growth in many sectors.” Smita Purushottam, Harvard paper, 2001 “Can India Overtake China?” 13

Time to go beyond the consumption driven, services sector led model of development. High growth in India’s services sector and consumption-led economy translates into gains mostly for foreign manufacturers and education providers. National Manufacturing Policy

So, Chinese model has a lot to teach us!  China got it right on Manufacturing Sector  China is getting it right on technology  Only manufacturing sector supports high-tech– tinkering, innovation of all kinds

China’s Futuristic Strategy 2050 Plan reads like a sci-fi document China will invest £1.1 trillion (10 trillion yuan) in strategic sectors over the coming five years - alternative energy, biotechnology, new- generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars and energy- saving and environmentally friendly technologies.

INDIA Imperative to have autonomous technological capabilities. Urgent need for High Tech Strategy. 17

Further neglect would be another “Blunder of Himalayan Proportions” - senior MOD official

3 OPENINGS TO BUILD INDIGENOUS HIGH TECHNOLOGY DEFENCE INNOVATION BASE 1.Offset opportunity and spate of defence equipment orders. 2.Defence Production and Defence Procurement reforms in Easing of restrictions on technology transfers by US on Indian entities, followed by other Western countries, reflecting changing geostrategic realities. 19

LESSONS FOR INDIA – BASIC PRINCIPLES Apply “India First!” to all policies – Offsets, manufacturing, TOT, FDI, tariffs… Impart greater dynamism to economic reform and grow the manufacturing sector. Go for reverse engineering on war footing: China has not suffered consequences because of the attractions of its growing market. But protect IPR. 20

Civil military integration - sophisticated defence economy cannot thrive without sophisticated economy-wide supply chain. (Implications for Offset Policy: indirect/direct – increase in scope etc.) 21 Defence Economy Dual use econom y High- tech civilian sector Low tech sector

Prof. Tai Ming Cheung Foundations of Innov. Eco-Syst. Reverse Engineering – different stages Civil Military Integration and the 16 character policy Distinction between Hard & Soft Capabilities (corporatisation of defence industry and research institutions) Restructuring and re-engineering Government Last but not least –Leadership – to ensure Departments follow single minded goal and work together 22

THE FORUM ON HIGH-TECH DEF INNOVATION PROPOSES A VISION FOR AN INTEGRATED SCIENCE & TECHNOLOGY ADVANCEMENT STRATEGY VISTAS! Make development of a high-tech innovation eco-system a national priority. 23

Provide political leadership at the highest level for VISTAS. Establish a National Technology Advisory Council (NTAC) including apex representatives of all stakeholders (incl. industry, academia and research) directly under the Prime Minister to monitor VISTAS. No new department to be created. 24

Technological Autonomy (Not autarky…) A matter of national pride! Same commitment and leadership in building Atom Bomb, Delhi Metro required. 25

DG ACQUISITIONS DIRECTORATES OF INDIGENISATIOMN IDS HQ DOFA DODP NATIONAL TECHNOLOGY ADVISORY COUNCIL PM CSIR DRDO ARMED FORCES INDUSTRY ASSOCIATIONS MOC/MEA/DST IITs/ENG. 26

Declare a Defence Industrialisation Strategy One document instead of bulky DPP covering Acquisitions, Offsets, exports, manufacturing, FDI and ToT policies – for indigenous technological development. In it, prioritise Indian industry in defence acquisitions. Designate Indian firms or consortia as lead integrators. Introduce modern management in Public Sector Units, DPSUs and research institutes. Corporatise/privatise PSUs and research institutes and make them more market oriented.

Explore all strategies for development of technology including acquisitions of foreign technology firms. Promote defence exports to expand markets. Promote reverse engineering.

China’s APE Strategy ASSIMILATE/ABSORBA PRODUCEP EXPORTE 29

Copying is Official Policy! Official Guidelines for the Medium- and Long-Term National Science and Technology [S&T] Development Programme ( ) PRC State Council: “Enhance the Absorption, Assimilation, and Re- Innovation of Imported Technologies”

Reverse Engineering No shame in it – everyone’s been there, done that. Success of India’s pharmaceutical sector, now a target of foreign acquisitions, is due to reverse engineering. Why have we allowed a liberal acquisitions regime in the pharma sector? Different stages corresponding to the level of sophistication attained by an economy. Prof. Tai Ming Cheung has lucidly categorised these stages as - duplicative imitation; creative imitation; creative adaptation and/or incremental innovation; architectural innovation (which China has reached); component innovation and radical/ disruptive innovation. Cox Committee Report/ Richard Fisher / Russian military press West up in arms!

REVERSE ENGINEERING THEFT ON A SCALE UNSEEN BEFORE: US COC

SMEs Reform regulatory environment in the brick and mortar space – make their life easier. Create industrial parks with common infrastructure. 33

INCREASE R & D SPENDING ACROSS GOVERNMENT AND INDUSTRY India’s R & D expenditure should be doubled to 1.75% of GDP by 2015 and 2.5% by China’s aim 2.5% in

INDUSTRY CONTRIBUTION Industry should contribute an increasing proportion of R & D expenditure with 5% of revenues for large scale industry and 3% for SMEs. International example: 60-65% R & D funding internationally comes from corporate sector.

HIGH TIME SERVICES SECTOR ALSO CONTRIBUTED The service sector especially in telecommunications and aerospace should invest in indigenous technology and manufacturing capabilities. Only IT sector has contributed to R & D. Telecom Policy 1999!

OFFSETS Formulate model National Offsets Policy. Declare aim of offsets policy is to promote indigenous manufacture, technology and innovation. Set up Offsets Agencies in sectors depending on huge imports such as telecommunications, aerospace, railways, IT, etc. 37

Raise defence offset obligations to 100%: While 30% should continue to be reserved for defence production, 70% can be invested in high-tech sectors such as aerospace, telecommunications, railways, composites, engines, machine tools, electronics hardware, etc. This would create a dual use manufacturing base benefiting defence sector, the philosophy behind civil and military integration (CMI).

International experience Europe: Over 100% Offsets is common Gripen SAAB just offered % offsets to Czech Republic and Croatia Turkish offset policy: maximise local involvement at 70%; 15% - SMEs No minimum threshold – was only US$10 m to begin with Chinese offsets: growth of indigenous civil aviation sector

OTHER EXAMPLES WE CAN LEARN FROM The Israeli Industrial Co-operation Authority handles offsets with long term goal of promoting indigenous technological upgradation. Israel spends 3% of GDP on R&D

SOUTH KOREAN SYNERGIES Launched agency to boost indigenous defence industry and expand exports to become top military exporter. The Defense Industry Development Council (DIDC) is co-chaired by the South Korean Ministry of National Defense (MND) and the Ministry of Knowledge Economy (MNE). Also to plan R & D activities, training and skills programmes as well as defence offset, including technology acquisition. DIDC will also co-operate with Defense Acquisition Program Administration (DAPA) (for offsets), Korea Defense Industry Association and the Korea Trade- Investment Promotion Agency.

Coincidentally our recommendation was to: Create a combined Defence Industry Development Council from MOD departments/ agencies like Defence Acquisitions, DoDP, IDS HQ, DOFA and DRDO, associating the Ministries of External Affairs, Defence, and Commerce and Industry - to implement a coordinated technology indigenisation policy by leveraging all means at a State’s disposal including leveraging market access for indigenization. Eventually, re-engineer Government organisations and processes by merging or dynamically linking departments in charge of acquisitions, production, indigenisation, R&D, ToT, FDI with TOT provisions, manufacturing and exports - to create synchronised entities focusing on promoting indigenous high technology.

FDI IN DEFENCE Take advantage of Western interest in defence collaboration. Lift FDI cap so that manufacturing facilities are set up in India. 1.A calibrated tariff policy to protect indigenous including FDI manufacture, resisting pressure for tariff reductions under multilateral trading arrangements – should be instituted. Med. Devices. 2.Host country policies should mandate transfer of technology and phased indigenous sourcing obligations, as China has done. 3.Monitoring of indigenisation/ local sourcing and production targets must be ensured if the FDI ceiling is raised. 43

Inter-ministerial coordination between the Ministries of External Affairs, Defence, and Commerce and Industry - to leverage market access for technology transfers– must be established under the NTAC. (China aerospace example) 44

R & D Best practices of MNC R & D centres should be studied Simple solutions: promotion and incentive systems in R & D Institutes and academic institutions should be based on the marketability of product and patents acquired. DRDO and CSIR to focus on fundamental research and accelerate outsourcing of technologies for production to private sector. Govt. R & D labs allowed to generate own income and be corporatised where necessary. 45

Information & Transparency Ensure transparency in awarding Government contracts. Every Government Department / private or public sector company should carry on its website a list of: (a) Projects to be awarded for indigenisation and (b) Items imported from abroad. © Names of proactive departments and officials charged with indigenisation with full contact details. Declassification of important reports like the Kelkar Committee report, greater consultation with entities outside Govt. and data access is imperative.

Copycats don’t catch mice! While it Does not Matter What Colour the Cat is, Copycats Certainly Don’t Catch Mice! Smita Purushottam, 2002

Conclusion India has to overcome the hesitant, piece-meal and turf- led approach to defence industrialization and innovation if it wishes to catch up with the world’s technological leaders. Without the above reforms and changes, India will be unable to take its place as an advanced technological nation which will affect its standing, autonomy in conducting foreign policy, but most importantly, affect the overall welfare of its citizens. NSA has stated this in a speech. It is recommended that Government consider these suggestions and take appropriate measures to launch a high-tech science and technological revolution in India.

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JAI HIND! NAMASKAAR! 50