Merging public sector defenc cos into a single conglomerate: Prudence or Folly?

Discussion in 'Strategic Forces' started by pyromaniac, Aug 11, 2009.

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Should the govt. merge all existing defence companies together?

  1. Yes.

    2 vote(s)
    14.3%
  2. No.

    11 vote(s)
    78.6%
  3. Other (Plese explain in detail)

    1 vote(s)
    7.1%
  1. pyromaniac

    pyromaniac Founding Member

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    Should the govt. merge all existing public Defense companies into one super-company?


    The simple answer is no..I can give a few reasons why I think the Govt. shouldn't do so.
    The first one is simple, the more competition you have the better off the final product is going to be. Clumping together the existing defence firms will only bring about less competition and especially in India, where defence projects routinely run late by a order of years or even decades, this would be a very poor move. In countries like America, you will find that projects are almost never late because of the very real possibility that if you fail to reach the goal that you have promised to reach, your contract will be canceled and it will be awarded to your rival and in the process you will lose billions of dollars. The fear of losing money is something provides a very strong motivation to people and this is something that the Indian defence companies have to face.
    Another important fact is that such a consolidation would hinder Research and Development and would ultimately pose serious problems for national Security. If the company is unable to produce the promised product then our Govt. will have no choice but to turn to foreign sources and this is something that we must avoid. We have already stated repeatedly that we want to be self sufficient and so doing this will only take us in the opposite direction of where we want to head
     
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  3. Antimony

    Antimony Regular Member

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    And effectively kill competition and innovation.

    This making them "efficient vis-a-vis foreign companies" is horse puckey. Indian companies have proved time and again that they are adept in competing with large players. Essentially we stop Reliance from coming up with a better gun compared to Tata, or Mahindra in making a better APC and trumping the one from TATRA

    One look at the multitude of defence procurement companies in the US shows why innovation is essential in this game
     
  4. Sabir

    Sabir DFI TEAM Senior Member

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    Before answering it we should know what problem our defence indusrey is acctually facing. Its not the skill or knowledge or individual efficiency of our scientists...but improper project management. Now setting up a giant defence company by merging all related organization will not be the best solution.

    1) There must be competition among the players which leads to better quality and cost control. Setting a new monopoly is far from the solutions.To survive a competition the firms will be bound to manage project efficiently.

    2)If different players cater different needs they will achive specialisation in it which again lead to better quality. Indian firms should go for joint ventures with foreign companies if necessary for tech-know-how rather than messing it uo within a conglomerate.

    3) Inside a mamoth organisation budget allocation to thousands of segments will be the most difficult task.

    So in my opinion Product centric entities (govt and private) must be encouraged to grow up seperately if possible as joint venturs of Indian-foreign firms.
     
  5. Rage

    Rage DFI TEAM Stars and Ambassadors

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    I am of the view that merging all public sector defense institutes is a folly- but the "innovation" and "competitiveness" argument falls flat - simply because the institutes in question are not competing against each other. I think that the course of the behemoth would inevitably come to be dictated by the singular individual in charge- if it were an ex-Army officer for instance, the focus of research & development would tend to be land-based weapons systems; were it a missile man, nuclear weapons, and so forth. While there may exist 'competition' in some very restricted and limited sense for the pool of talent or government resources and money, even those are allocated and pre-determined by the Defence Committee of the Cabinet under the Ministry of Defence.

    The only argument perhaps for amalgamation is the converse of the argument above: the centralization of the decision process in the hands of one capable official, with the ostensible view to improve efficiency. Rather than to agglomerate however, I believe the solution is to create a system of rewards and punishments: budget hikes and cuts in purely monetary terms, and accountability at the highest of levels, as well as to improve coordination with the QSR's of the Armed forces which these institutes serve, so that projects are time-bound - in forethought and in execution, and that resources are not blightly squandered.
     
  6. pyromaniac

    pyromaniac Founding Member

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    You make a good point...competition between such institutes is non existent and that is precisely the reason we experience ungodly amount of delays in weapons manufacturing. However, going by your argument having such a large company would amount to very little as the daily management of such a giant would require a substantial amount of funds. Not to mention that managing such a company would be close to impossible. The truth of the matter is, unless the private sector gets involved or unless there is a hybrid private/public relationship on key projects, India will remain at a disadvantage. There needs to be a sense of competition amongst companies..a sense of pride that come with beating out the competition and the only real motivator would be money. However, the problem is that Indian officials are notoriously corrupt and having such a "reward" system would do more harm than good. We have a find a middle ground of sorts, where competition is welcomed yet there is a close monitoring of the funds that have been appropriated. However, that I fear is nothing more than a pipe dream..yet for India to truly take the next step, we need to foster competition amongst companies. To give our Country the ability to pick and chose the weapon system she wants and not have to compromise. The other option is direct competition with Private companies, it will force them to adhere to standards and not have ridiculous delays.
     
  7. Sabir

    Sabir DFI TEAM Senior Member

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    Do you want our defence institutes remain pygmies forever?
    These institution will compete with each other in future when they will expand and their product range will start to overlap with each other. Just let them face the market ..they will learn how to swim.
     
  8. Antimony

    Antimony Regular Member

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    I am wondering why you would think so. If the MoD calls a tender for a new 6.8 mm assault weapon platform, why shouldn't the Tatas, Birlas, REliance and other compete with the IMIs, Armalites, Colts and the DRDOs?

    In the future, why should Tata Aerospace not compete with Dassault for air based platforms?

    Why should Mahindra not face competition for its AXE? In the near future, I can even see these guys exporting to other countries, under the auspieces of the MoD
     
  9. Rage

    Rage DFI TEAM Stars and Ambassadors

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    Antimony, Sabir,

    Look carefully at the title of the thread [I made the same mistake too when I composed my original (subsequently merged) thread].

    I have absolutely no qualms about the TATA's competing for a 6.88 mm carbine, or the Mahindras competing for a high mobility, multipurpose land utility vehicle, or for that matter the Birlas participating in tenders to build captive ports for the Navy. Nor for that matter do I have reservations against them competing against foreign companies. I know, given time, they can hold their own (provided babudom does not succumb to the aggressive lobbying of some of our more zealous suppliers). But that is not the topic of this discussion- atleast in purveyance of what was parlayed from the chatbox.
     
  10. Antimony

    Antimony Regular Member

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    I was just replying to your comment about innovation and competition.

    By the way, I think this notion that domestic industries need time to become competitive is somewhat suspect. We have seen how our own industrialists have risen to the challenge post the nineties
     
  11. Rage

    Rage DFI TEAM Stars and Ambassadors

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    The comment was in context of public sector defense institutions and their inherent lack of competition- particularly in the sense of a quasi-free-market contest that is incipient to spurring innovation in developing and supplying weapons systems to various branches of the Armed Forces.

    Ofcourse, there exists 'competition' in a protracted sense for the limited pool of ingenuity, talent and resources that exist, particularly where success in endeavours is matched by a greater endowment in the successive iterations. However, in the public sector industry of defense, priorities are generally pre-determined and funds pre-allocated. The question of 'economic incentive' therefore is circumspect. Again, this is in relation to the public sector of defense, not the private.

    Everything requires time. However, in a large country like ours, domestic industries circumscribed within the national market have the chance to flourish relatively insulated from foreign competition- if policy so permits. The length of time we take to make defense decisions however, and our rapidly changing Staff QSR's in response to a rapidly changing geopolitical and security environment- mean that foreign defense companies with a significantly higher technological quotient will always have the advantage - unless we pursue a two-fold policy of scrupulously augmenting public sector defense industries via: 1) a proper funding, and more importantly, an infinitely better management of funds; and 2) a greater focus on research and development- and the removal of the attendant restrictions that hamper the further prelation of indigenous defense products once these are conceived, as in: a) circumscription by license-production agreements, b) constraints by the services which do not desire the widespread dissemination of integral IP. c) synchronization- or the lack thereof - with market demand. Until such time as we have the technological base, ours being still in its nascent stages in comparison to that of the West, the bar our Armed Forces set for their defense acquisitions will continue to be out of reach of what private or public players can contrive.
     
  12. icecoolben

    icecoolben Regular Member

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    The russian have done it and are thinking of a way out. Why should v repeat the folly? Ordnance factories are loss making ineffective inefficient units in goverment hands but merging them or selling them is not the answer. The loss makes can be sold to the private sectors who can re-structure them, the profitable ones can be offered ipo's and the funds used for improving their infrastructure. Finally when the private sector is nature enough allow them to acquire other companies, keep isro and other scientific research organisations under government for non-profit research.
     
  13. Antimony

    Antimony Regular Member

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    Which is exactly why I would like to see defense contracting move into the realm of private investments, both in small arms platforms and in large weapons system platforms.

    We have insulated our domestic industries for far too long. During that period of insulation we retarded the growth and innovation of the private sector through restrictive licensing regulations. When we opened up to an extent in the early nineties, the private sector boomed, even in the face of foreign competition. Consider the automotive market, whereas we had only a few models pre-1990, the nineties decade saw an explosion in number of models for bikes, cars and SUVs.

    Do we have a technological disadvantage? Of course we do, as we did when foreign competition came in during the nineties, and our domestic industry coped. I have confidence that we will do so again. We will not progress in all areas simultaneously, but its still worth the effort. Also, why think only of the domestic defense market. We can do business with foreign countries which may not be able to afford Western systems. Consider this, companies from Phillipines, Brazil and China do brisk business in small arms in the USA. If we set our industry free, I believe we can do that too.

    About your suggestion of greater fund allocation to domestic R&D, we can still do that through DRDO and the associated laboratories and also make that research available to our own domestic industries for licensed manufacture. Here is a possible scenario. DRDO is researching on a new multi calibre personal defence weapons platform. After the protypes are developed and a final design approved, they may license the production out not only to OFB but also to local manufactured like TATA and Mahindra
     
  14. Sabir

    Sabir DFI TEAM Senior Member

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    If we want our defence industry to go with a common goal to strengthen our national security...there is an alternative way rather than merging all entities in a conglomerate (which is an illogical idea.....someone explain why Tata should give up its identity it when Tata itself is a conglomerate)....

    Need for Defence Manufacturers Association
    By Maj Gen Mrinal Suman
    Issue: Vol 24.3 Jul-Sep 2009Although manufacture of components, assemblies and sub-assemblies was thrown open to the private sector in 1991, it was only in 1998 that the Ministry of Defence (MoD) took the first major step to involve the private sector in defence production. Six Joint Task Forces were constituted with the Confederation of Indian Industry to cover the following aspects:-

    (a) Defence-Industry Long Term Partnership.

    (b) Defence-Industry Partnership on Commercial Process.

    (c) Public Sector Undertakings/Ordnance Factories/Private Sector Complementarity.

    (d) DRDO-Industry Partnership.

    (e) Defence Export Strategy.

    (f) Defence-IT Industry Partnership.

    Consequent to their recommendations, the Government opened defence production to the private sector in January 2002. It allowed 100 percent private equity with 26 percent Foreign Direct Investment (FDI). It was a major policy change. Subsequently, the Department of Industrial Policy and Promotion issued detailed guidelines for the issuance of licence to the private sector for the production of arms and ammunition.

    The private sector was euphoric and anticipated huge business opportunities. However, their hopes were soon belied when they realised that the public sector continued to get all orders and the private sector had to remain content with the supply of some sub-assemblies and components. Moreover, as the stipulations governing foreign investments were highly skewed, there was no inflow of foreign funds. In short, there has been no change in the ground situation.

    One of the major reasons for the continued neglect of the private companies in the defence sector is their failure to organize themselves into a collective effort. There is no business association in India exclusively for the defence industry. There are three major business associations in India, as follows:

    Confederation of Indian Industry
    Federation of Indian Chambers of Commerce and Industry
    Associated Chambers of Commerce and Industry of India

    (brief description of these three organizations which is avilable in original article is deleted to comply with DFI limit of 20000 characters...)

    All the three business associations look after the complete gamut of business and industrial activities. Defence is handled by one of their numerous committees. In other words, defence does not get the attention that it deserves. Although all associations organise seminars, publish papers and participate in defence exhibitions, they are unable to influence Government policies due to lack of integrated and focused approach.

    There are two activities of CII that merit special mention. First, it provides Defence Technical Assessment and Advisory Services (DTAAS) to its member companies to facilitate their entry in defence sector. The service strives to bridge information gap existing between the aspirant companies and the defence procurement agencies. DTAAS team assesses a company’s capability to manufacture various defence projects both with their existing facilities and with incremental additions. The team also offers specialist consultancy services relating to defence procurement procedures and policies. The service has been outsourced by CII to a team of professionals.

    Secondly, CII conducts much acclaimed Defence Acquisition Management Course in India and abroad. DAMC aims to familiarise senior managers with defence procurement structures and procedures. The course provides latest information pertaining to defence acquisition policies and quality assurance procedures. India’s defence offset policy is also covered in detail.

    A Look Abroad

    National Defence Industrial Association (NDIA) is America’s leading defence industry association promoting national security. Though founded in 1997, it traces its history to the American Defence Preparedness Association (1919) and the National Security Industrial Association (1944). Its mission is to provide a legal and ethical forum for the promotion of insightful interaction between the Government and the industry on national security issues. NDIA provides individuals from academia, government, the military services, small businesses, prime contractors and the international community, opportunities to network effectively with the government. It addresses and influences issues as well as government policies critical to the health of the defence industry.

    The International Division serves as the NDIA focal point and coordinating element for the identification, study and resolution of management and business problems associated with government policy and practices in the areas of foreign military sales. The Legislative Information Division aims to provide NDIA members with access to key government and industry officials and to monitor defence industry related legislation. NDIA’s Procurement Division monitors and advances sound acquisition policies and processes.

    South African Aerospace Maritime and Defence Industries Association (AMD) represents the collective interest of all the main players and interest groups within the Defence Related Industry. The membership represents in excess of 90 percent of defence related business in South Africa and in excess of 97 percent of all defence related exports. The Department of Trade and Industry recognises AMD as the Joint Export Action Group representing the Aerospace and Defence Industries sector.

    With a view to promote Korean defence industry, Korean Defence Industry Association (KDIA) was founded in 1976 as a civilian non-profit organisation. Subsequently, it was designated as the sole approval agency for defense exports. In 1986, it took over the responsibility of being a financial guarantee agency for defense contracts. Enlarging its charter further, it was designated as an approval agency for defence imports in 1998. Interestingly, KDIA has much larger participation. Unlike defence associations in other countries, its membership is not limited to defence manufacturers only. Interestingly, concerned defence ministry officials are also on its rolls.

    Australian Industry & Defence Network Incorporated (AIDN) was established in 1995 to facilitate business in the defence sector for small-to-medium enterprises (SMEs). It has over 800 members and acts as a focal point for interaction between the Government agencies and defence companies. It represents member companies at the highest Government levels and to the prime contractors over a wide range of issues. AIDN has continued to play an integral role in the development of new defence and industry policies to maximise SME participation.

    Defence Manufacturers Association of the UK is often cited as an example of dynamically evolving industrial association. Due to synergy of activities, Association of Police and Public Security Suppliers has recently been incorporated in DMA. In further consolidation, DMA and the Society of British Aerospace Companies decided in March this year to merge the two organisations into one new trade association to create a more robust entity with much larger membership. The merged association will provide the industry with a more powerful voice, unified approach and a single point of contact with the Government. Representing a much wider network of large, medium and small companies across the complete supply chain, it will be able to influence Government policies effectively. The Government has also welcomed simplification of structure for interface with the industry.

    It was in December 2005 that Canadian Defence Industries Association decided to widen the scope of the organisation’s representation and mandate due to the increasingly integrated nature of the national defence and internal security. Canadian Association of Defence and Security Industries (CADSI) boasts of a membership of over 500 companies, providing employment to more than 70,000 Canadians and generating $7 billion in annual revenues, with half of it coming from international sales. It aims to facilitate closer relationship and dialogue between the government and the defence industry. CADSI membership provides benefits in terms of customer intelligence, company visibility, government recognition, influence and networking.

    The following facts emerge from the above discussion:

    In all countries, defence manufacturers have exclusive association to provide single point interface for effective interaction with their respective governments and other agencies to promote their interests.
    Although in most cases membership of the associations is restricted to companies associated with defence products and services, there are some notable exceptions. KDIA members are also drawn from ministries handling national defence, strategy and finance. Even the acquisition staff, defence R&D scientists and representatives of strategic think tanks join as members. Similarly, NDIA has both corporate and individual members.
    KDIA has been assigned additional functions by the Korean Government. It has been designated as the approving authority for defence exports and imports. Additionally, it performs the functions of a financial guarantee agency for defence contracts.
    In addition to promoting defence industry’s business interests, NDIA also acts as a think tank, in that it has members drawn from academia to ensure continued existence of a viable competitive national technology and industrial base.
    All associations publish regular newsletters and prepare directory of their member companies for ease of reference.
    Most importantly, all associations are granted due recognition by their governments and are regularly consulted while framing policies and procedures. Feedback obtained from the associations helps in streamlined functioning. Associations are considered as indispensable partners in national progress and given due recognition.

    India Needs an Exclusive Association for Defence Industry

    It is time Indian defence manufacturers come together to form an association with total focus on defence industry. They can continue their current membership of existing associations as well. The proposed Association of Defence Manufacturers of India (ADMI) should aspire to be the collective voice of the Indian defence industry. In addition to corporate members, ADMI should have associate members from academia and think tanks. Retired service officers should also be co-opted as they know the requirements and functioning of the services best. They can prove invaluable in establishing working level liaison.

    ADMI should undertake the following major activities:

    Interface with the Government

    ADMI should provide a platform for regular interaction between the Government and the industry. Both the Government officials and representatives of the industry should be able to discuss all issues in a spirit of partnership and to promote Indian defence industry. Commercial interests of the industry should be in tandem with the broader national interests. Prior to framing defence procurement policies, the Government can sound the industry and obtain useful feedback. Similarly, the industry can project impediments faced by it and suggest measures for streamlining the procedures and processes.

    The current policy on FDI in defence has failed to evoke interest amongst foreign investors. ADMI can propose changes to make FDI policy attractive. Similarly, a number of corrective steps can be suggested to facilitate defence exports.

    Promotion of Defence Exports

    Whereas India imports defence goods worth billions of dollars, its defence exports are a paltry 50 million dollars annually. Despite its best efforts, the Government has not been able to penetrate foreign markets. ADMI can spur growth of exports through networking with associations of other countries. It can apprise foreign buyers of Indian product range and technological competence. It can recommend policy changes to the Government to facilitate smooth and speedy clearance of export proposals.

    A close understanding can be developed with foreign defence companies through regular exchange of trade missions and participation in seminars and exhibitions. Such interaction will result in better appreciation of business opportunities available in the world arms market.

    Development of Indigenous Capability

    The Government has been trying, albeit unsuccessfully, to reduce imports from the current level of 70 percent to 30 percent by sourcing most of the defence requirements from indigenous sources. Due to the continuing predominance of the public sector, full potential of the private sector remains unutilised. At times, procurement functionaries place orders on foreign vendors in complete ignorance of similar capability existing in the Indian private sector. ADMI can effectively bridge this communication gap by projecting indigenous capability effectively. Additionally, through collaborations with foreign vendors, technology can be imported for local production.

    Offset Facilitation

    Indian offset policy is still in embryonic state. There are a large number of gaps that need to be filled. The Government remains undecided whether to accept technology against offset obligations for the development of an indigenous technology base. Similarly, a number of issues relating to offset value, offset threshold and acceptance of indirect offsets need urgent attention. In the absence of adequate experience, the Government is wary of making major policy changes. The current drift has created uncertainties in the environment.

    ADMI can make effective contribution by suggesting desirable modifications in Indian offset policy, implementation procedure and monitoring system.

    Research and Creation of Data Bank

    The current crop of Indian think tanks appear more concerned with Kosovo and Iraq Wars as it is easy to churn out papers by ‘cut and paste’ of abundant material available in public domain. Sadly, no worthwhile research is undertaken in India on issues affecting defence industry, defence exports and procurement procedures. This critical void can be effectively filled by ADMI by co-opting experts from academia and the industry. Research findings can provide factual feed back and help the Government to make policy changes to further streamline the process.

    All research papers and study reports should be made public to generate debate.

    Facilitating Entry in Defence Sector of New Aspirant Companies

    As discussed above, there is a huge information gap between the procurement functionaries and private sector companies. Whereas new entrants have little knowledge of defence procurement regime and procedures, procurement functionaries are ignorant of indigenous capability. ADMI can bridge this gap through the following steps:

    Provide assessment and advisory service to the aspiring companies to help them identify areas in which they could operate fruitfully with their current product profile and with incremental add-ons.
    Publish directory/catalogue of all companies manufacturing defence goods and service providers. It should also include system integrators, platform producers and SME. The aim should be to cover the complete supply chain and provide due visibility to all players in defence industry.
    Conduct training capsules to apprise functionaries of procurement structures, procedures and processes.
    Conduct seminars, conferences and workshops to create better understanding between officials and the industry. Both sides must appreciate strengths and limitations of each other.
    Dissemination of Information

    Dissemination of information to member companies is an important function that all associations perform. Members have to be kept informed as regards changes in Government policies, developments in equipment development, MOU signed between foreign vendors and Indian companies, impending procurement proposals and emerging business opportunities in overseas defence markets.

    ADMI should issue a fortnightly/monthly news bulletin to cover all defence industry related developments. Additionally, a monthly/quarterly magazine containing thought provoking and analytical articles should be published to generate new ideas and thereby evolve future recommendations. ADMI could also undertake publication of compendium of important Government policies as a handy reference book.

    Conclusion

    India is expected to spend close to 100 billion dollars on the modernisation of the armed forces in the next 10 years, with imports accounting for 70 percent of the expenditure. Consequently, offset inflows worth 35 million dollars would get generated. It implies that the total defence business would amount to a mind-boggling 135 billion dollars.

    CII, FICCI and ASSOCHAM are striving hard to assist their members’ entry in the defence sector. They deserve credit for forcing the Government to take the private sector seriously. They have been partnering organisation of exhibitions, seminars and conferences to improve visibility of the competence of the private sector. Such events have certainly helped bridge communication gap to some extent. However, there is little to show for tangible results on ground. By frequently resorting to ‘Buy and Make’ deals, entry of the private sector gets effectively blocked as recipient of imported technology for ‘make’ part is invariably a public sector undertaking. Thus, it is the public sector that continues to rule the roost while the private sector is still waiting in the wings for business opportunities to come its way.

    The primary reason for the neglect of the Indian defence industry is the absence of a united, forceful and influential voice to project its viewpoint to the Government. CII, FICCI and ASSOCHAM are unable to provide focused attention to the defence sector as they handle vast array of subjects. In some cases, these associations compete against each other. Additionally, the Government does not get a coordinated and concerted opinion from the industry.

    Creation of ADMI will in no way dilute the standing of the existing business associations. There is no contradiction in joining ADMI while retaining current membership of existing business organisations. ADMI should be viewed by all as an effective adjunct to facilitate closer industry-government interaction with respect to defence and security sectors rather than an unwelcome competitor.
     
  15. Rage

    Rage DFI TEAM Stars and Ambassadors

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    As do I, but to reiterate: that is not the topic of this thread.



    You are missing the crux of my argument vis-a-vis yours (both of which deviate marginally from the topic of this thread) : the argument holds that as long as our Armed Forces maintain high standards for their requisitions, private Indian industry competing for these contracts will always be at a disadvantage against more established and better 'endowed' Western defense coroprations with a significantly larger technological base. Why do we need the technological edge, in for instance the BVR-capabilities of our Su-30 MKI's? Because we are surrounded by wolves and lepers, to our North by one that is steadily building up its capabilities and has a distinct numerical advantage, to our West by a nation-state that is grovelling like a lapdog at the feet of its master for bigger and better toys to fight its 'War on Terror'. In as much as our domestic private industry remain déclassé in this interim stage, we will continue to procure significantly more advanced platforms from the West to bridge that gap. That process of attaining dynamic technological parity can be considerably expedited if it is made a matter of policy to target our nascent defense industries and develop them (a thing that has already been initiated, thankfully). Even when we first contrived to earnestly liberalize more than two decades ago, most civil domestic companies- barring a few notable exceptions- were already well-established business composites within the national market. In subsequent years, the industry that became the face of India in the global market: back-office and IT outsourcing, received unaffected support by the government via incentives, a National Task Force, liberalization of the norms on venture capital and even subsequently, a ministry....Which is why I made the recommendations above.
     
  16. Rage

    Rage DFI TEAM Stars and Ambassadors

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    Sabir basha,

    I hope to the good Lord above that this isn't the level of bedeviled comprehension on this board :D

    Again, the topic of this thread: Should Public Sector Defence Companies be merged into a single conglomerate?
     
  17. ppgj

    ppgj Senior Member Senior Member

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    DRDO is a sort of conglomerate with some 50+ defence labs.
     

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