India Has Potential To Lead Tech Innovation In Defence: Ex Defence Secretary Ajay Kumar

Each year, the defence sector in India gets a lions share of the government’s budget. This year Rs 6.2 lakh crore was allocated for the sector. Despite this, in India, innovation in the defence sector, especially private, has lagged behind because of policy constraints.

A recent study, by the Foundation for Advancing Science and Technology (FAST India) in collaboration with IIFL Securities, found that Indian defence firms seriously lagged behind its counterparts in other countries when it came to research and development (R&D) despite good spending. The only exception was the Hindustan Aeronautics Limited.

Ajay Kumar, former defence secretary of India and an expert in the defence industry believes that India has immense potential in the sector which has not been tapped into. Kumar, who has found Mount Tech Growth Fund that works in the space of innovation, deep tech, defence and space, told The Core, “Interestingly, five countries actually control more than 75% of this industry. Of course, we are nowhere close or we are a very small player in it now. But I really think that we have the capability to be among those top five countries to become a leading creator, developer, producer of new innovative technologies which are really defining the frontier, the leading edge of where technology is going.”

Kumar said that there had been a change in the nature in which war is now being conducted. “There is greater focus on autonomy. Everything is becoming autonomous, whether you are on land or on water or on any other. We see that even a simple soldier today, they are equipped with so much of technology on their body that they are much more aware and much more potent.”

In this week’s The Core Report: Weekend Edition, spoke about on the transformative role of technology in modern warfare, the role of venture capital in defence innovation and the opportunities for Indian startups to become global leaders in defence technology.

Edited Excerpts:

Tell us a little bit about how you see the landscape for defence equipment at all levels, whether it's combat equipment or electronic equipment, or whichever way you define it, today, in terms of what we need versus what we procure or import from the rest of the world, or locally.

We are actually witnessing a huge change in the nature in which war is being conducted now. And this changing nature of the battlefield is actually hugely driven by technology. We see today three kinds of activities happening on the battlefield which were not there in the past. And I must qualify this by saying that it is not that the conventional war doesn't have relevance now. It continues to have its relevance, but it is increasingly being influenced by these new trends.

So what are these new trends? One is that whenever there is contact and there is, there is new kind of equipment. These include, for example, the tanks are today become… or any equipment is becoming more net centric. It is controlled remotely. There is greater focus on autonomy. Everything is becoming autonomous, whether you are on land or on water or on any other. We see that even a simple soldier today, they are equipped with so much of technology on their body that they are much more aware and much more potent when it comes to doing this. But this is only with respect to how the conventional systems are changing. We are also seeing today, increasingly, where you do not need to go near the enemy to actually hurt him. We are now seeing increasing use of unmanned aerial vehicles. We are going, we are increasingly seeing use of space. And space actually is making situational awareness ubiquitous at all times, at all places. Nothing is really hidden. And we are also seeing new things like directed energy weapons, where you actually can remotely hurt the enemy.

Then there is a third thing, which is also very technology driven, where you are not even trying to physically hurt the enemy, but you do significant damage. We have been seeing this in all recent wars or skirmishes that are going on. Sometimes when a physical skirmish is not going on, this kind of warfare is continuing. One important facet of this is information warfare, for example. You try to distort facts, create perceptions which are very different, and influence the will of the people in an enemy state. The second thing is that of cyber attacks, which has become a very common everyday affair. We also increasingly see nano and precision drones that are going, which are not in terms of large equipment, but going and picking up the target and hurting the target. Now, in all of this, what you see is the huge influence of technology. I think that is the biggest trend that we are seeing, that technology is increasingly going to influence future warfare and I think we need to be prepared for it

Before I come to, what are the kind of areas that you think there is an investment opportunity and how does that pan out from a pure investment point of view? So what made you think of it? Usually, someone who's been in government for so long, maybe part of a private sector venture, but I'm not, at least in my experience, I've not seen too many, career bureaucrats who jumped into actually starting a fund and leading a fund. Of course, the concept of even starting a fund and leading a fund is relatively new in India. But what made you think of it?

I think for me, it's more of something which I believe in. I have seen how the defence innovation ecosystem in India has grown and I think what we have seen so far is really the tip of the iceberg. We have potential to be… the defence industry is very peculiar. It's a $1 trillion — defence and aerospace is $1 trillion plus industry. And with space getting added, it is even becoming bigger. But interestingly, five countries actually control more than 75% of this industry. Of course, we are nowhere close or we are a very small player in it now. But I really think that we have the capability to be among those top five countries to become a leading creator, developer, producer of new innovative technologies which are really defining the frontier, the leading edge of where technology is going. And that kind of change I had seen while I was in service, when I was in the Ministry of Electronics and IT, and thereafter when I was in defence.

Our startups and our industry have capabilities which are unmatched. This is not news really. If you look at the world over we are the world's largest R&D outsourcing centres, as is reflected by the global capability centers that are being set up in India. We are the world's number one. So it is the foreign companies, who have actually seen the opportunity that exists in India. I think we in India have possibly not discovered this so far. I think this is something in defence, which I had first hand experience.

Second is, I think time has changed. You see this trend a lot in other countries. In the US, you see a lot of people moving from government to industry. Maybe it isn’t so much the case in India. But I think you will see in the coming times people who have the knowledge, the expertise, and professional background, will want to do something post retirement, which is interesting. I thought this was an interesting thing to do post retirement.

How do you see the role of the capital itself. So your fund, for example, is a Rs 250 crore fund, and you've got subscriptions of Rs 280 crore. But I'm not getting into the numbers right now. I want to look more at the opportunities but the role of capital in catalysing this ecosystem, to what extent, in your understanding, is that important and against, let's say, policy, which in itself is a very key driver in terms of who you allow, what you allow, which projects are awarded, role of private sector and so on. Maybe you could contrast that between examples like the United States, which have seen a lot of effort in this after the second world war, and in India today.

I think both policy and capital risk capital are essential. Like you mentioned, if you look at the US, which is kind of the cradle of the venture capital industry, a lot of innovation in the US is attributable to venture capital, which started initially in the northeast, but later on in the Silicon Valley. In fact, the whole of Silicon Valley itself was consequent to the development of the venture capital industry in that part of the world. But more recently, if you look at Israel, the growth of Israel as a startup nation or the innovation center for a large number of new technologies has been hugely dependent on the venture capital industry.

The Yozma Fund, which has become, you know, folklore in some ways, is actually a shining example of what venture capital can do. And in Israel, of course, Yozma Fund was directed based on their own circumstances and needs, primarily on military technologies. And several of the companies, who have several of the funds that got created out of Yozma and thereafter, companies that created out of those funds are today the world's leading companies in their respective technologies. And today, of course, we know Israel is one of the most advanced countries in terms of new technologies. So I think the question of venture capital being able to drive technology is something which has been shown world over. And, I mean, we just mentioned two examples, but you see many other countries, especially liberal democracies, you will find that this venture capital industry has been very important everywhere.

But for the venture capital industry, the policy framework has to support it. And as you rightly said, we have seen those changes only in the last 10-12 years, because in the past, we did not have this kind of an ecosystem where venture capital was seen as one way of creating innovation. We had typically been working on a system of R&D grants. And there is a limitation to which we do...

If you look at, from a governmental perspective, what it enables the government to do is to actually, when they… to bring in private capital into innovation, into R&D, something which we have been lamenting in the past. And now, through this mechanism, we see a huge amount of interest, both in institutional investors, high net worth individuals, and family offices. But even today, this whole interest has seeped down to even smaller individuals. Also, everyone recognises the importance of how this can actually not only create technology for the country, but also create wealth for them. So I think we are seeing a huge change. In fact, if you see the venture capital industry in the last ten years has grown at a healthy rate of nearly 18% per annum. And this is something which is now coming up in India in a very big way.

If I were to ask you to illustrate an example of a company that makes or is going to develop a miniaturised satellite, which is an earth imaging startup company. So that's one example that, in a way illustrates where the technology, let's say thrust is, or where the technology opportunities. What are the kind of opportunities that you are seeing right now in the context of your own fund and maybe have been pitched to already.

First of all today there are a plethora of opportunities. There are several thousand startups who are working in this space, and at least intense, there are startups who have actually made significant progress, so much so that in a short period of three to four years, they are not only catering to the needs of Indian armed forces, but they have started going global. They have started opening offices in the US and other countries where they see some market for their products in defence or for the civil market. The second important part of this whole thing is that because the technology is owned by these organisations, these startups, they have capability to treat these technologies, to cater to a commercial or civil demand that comes. Therefore this actually gives them the flexibility which if you are only focused on defence, you may not get.

So what do we see? We see a huge, huge amount of opportunity in several sectors. But as far as our fund is concerned, we have decided to focus on certain themes. These themes we are in the process of identifying. We have identified a couple of themes, but other themes, we will be identifying five or six theme areas, thematic areas, which will be the main focus of our fund. Space is one of them, UAV is another one of them. But we are looking at the number of… because like I said, there are so many startups that are working in a whole range of areas, we are looking to zero down on five or six themes.

I'm going to come back to space and UAV opportunities in a moment. But a slightly larger question once again. So I look at, let's say, public markets and the one thing that we've seen in the last couple of years is how stocks in the defence space, Hindustan Aeronautics being maybe the most prominent example, have seen a lot of investment come in, valuations have shot through the roof and so on, which, in a way is good news. But my question really is, do you also feel that there is some crowding out effect that ventures can face from the public sector itself because of historical reasons and the way the whole defence and defence procurement is structured in India?

I think what's important is that here we are seeing an increasing size of the pie. I don't think that we are looking at a constrained space. Like I said, we are very, very small. We have seen only the tip of the iceberg and we have… we are not talking of potential growth of, you know, 20% per annum. We have the opportunity to, because we are on such a small base, we have the opportunity to grow multiple times of the scale. Second is the big opportunity for industry players in both the domestic market and the global market. PSUs are also changing, but their large focus has been the domestic market.

The third thing is, since the present value addition of most of the platforms which the PSUs are making is anything between 30% to 50%, there is this remaining value addition which is getting imported… provides a huge scope for the industry, local industry, local startups to actually contribute to the value addition and substitutes whatever is being imported. The real technology actually goes in the systems and the subsystems which go into making the platform. I think this is the area where a lot of our startups will find value going forward. I think we are looking at value addition in this area growing multiple times, and therefore there is plenty of opportunity for everyone, at least for the next ten years.

When you started this fund, was there something like one venture that you and felt, this is where we need more capital in India? We need more capital to focus on sort of high tech defence opportunities like this. Therefore I must think about doing something. Was it, I mean, was there an epiphany moment, so to speak?

No, no, no. It's a larger thing. I had a, you know, I had actually had the role, you know, the privilege to have thought of this whole idea of iDEX. I had the fortune to have actually got it approved and then got implemented it. In its implementation I saw several jaw dropping successes by these startups. I realised the potential which I spoke about earlier. So the potential is always there. The requirement was to connect this potential with the Ministry of Defence, which had happened as part of iDEX and subsequently in many other ways. But the second part was for many of you, in the iDEX, we had conceived that 50% of the project grant as assessed by the ministry would be given as a grant subject to a ceiling of one and a half crores. That was all that we were giving.

In the defence sector, which is used to getting hundreds and thousands of crores for research, we had put a ceiling of one and a half crores. Many startups actually put in much more than their 50%, sometimes…not ten times of the grant they received. One of the common refrains used to be, even at that time, was that we find it difficult to mobilise the resources we need to complete the project. And therefore, when, you know, I had actually tried, made an attempt to mobilise the VC industry to support these startups whom we were selecting for iDEX. And in the defence Expo 2022, for the first time, we organised a specialised event which was targeted to bring in the VC industry and connect them with the defence startups.

I must say, I must admit that the response was not what we we thought it would be. Most of the financial institutions who participated in the events, or financial institutions, banks and other long-term financial institutions, which are not what startups, are really looking for. And therefore this had been a need which was actually felt for a while generally. The problem when we spoke to the VC industry was, I think most of the VC industries focused on e-commerce, fintech, software, but strategic sector, deep tech sectors, the feeling was it requires more patient capital, better understanding. 

A lot of people do not understand these sectors as much because they are not the most open of sectors, as not everyone knows these sectors very well, the complications of procurement and stuff like that, and therefore not many people were willing to enter it. And therefore the need was very much there. There was some reluctance on part of others to get into this. The opportunity was very much there and I thought the circumstances were quite ready, you know, quite right for doing something like this. And that's how we started it.

You're connected with academia via IIT-Kanpur, which is your alumni as well. When you talk to students, what's the sense that you get? What are the kind of ventures they want to do? You talked about e-commerce, which of course no one may want to invest in today. But the attraction I can see is perhaps in a different direction from the needs of the nation, which could be to do with defence and so on. But anyway what is the sense that you have been taking away when you interact with students, when you interact with academia… do you see more linkage there including for your venture?

I mean it is too early to talk about my venture. But I can say clearly, you know, when we graduated and the youngsters of today who are graduating, they are way apart. I mean today, the best of students actually have stars in their eyes ( if one may use that phrase) because they have ideas, they have the willingness to try out their ideas. They are not bothered, they are not necessarily looking for the civil services job or a multinational jobs or a safe, you know, a secure, good career is not what they're looking for. But each one of them is talking of converting his idea into business and then, you know, possibly becoming a unicorn.

I think there is a lot of excitement about this, and, and that's something very heartening, actually, because top institutions, if top students actually start doing this and setting up a model, I think a lot of students across the country will follow that trend.

As you look at more ventures that you will potentially invest in, what would be the structure and approach of your investments? How much and what kind of a stake would you be looking to take? I mean, what would be your current thinking on how you would be in terms of board control and so on?

Yeah, so, you know, one of the key areas that we are very keen, like I said, and which is also part of the purpose for which we have created this fund, is that we want to create technologies. So we are not going to be looking at service companies, companies who are doing good business through service, you know, when I mean service, it includes manufacturing as a service. We are really looking at those companies which are creating technology. So we look out for companies who have something innovative to show and which has not been done before, hopefully.

Second is, we are open to a whole range from right from early stage to pre-IPO stage. But we feel that our real value and our expertise will be best utilised if we are able to find out the winners very early. That is where we think we have a very illustrious set of professionals who are in this team. We have Air Chief Marshal RKS Bhadauria, who's with us. We have the vice chief of air staff, former chief of air staff. We have the vice chief of the naval staff, former vice admiral (Satishkumar Namdeo) Ghormade. We have lieutenant general Anil Kapoor, who is a very illustrious DG of EME in the army. We have industry professionals and other financial professionals.

There are other people also apart from the names I mentioned. The point I'm trying to make is that we think we have the ability or understanding of the sector where we can detect good companies at an early stage. We hope to take advantage of that.

When you think of, let's say, creating a defence ecosystem. One is the ecosystem involving the intangibles, which is, let's say, the finance, the policy, and so on. Do you also think of physical spaces or cities or towns, which may be, let's say, future hubs for such activity?

No, because today we have digital technologies. One is, we must realise that we are very strong in certain areas in defence and as a country also. These are areas where we mostly relate to emerging technologies. In these areas, while there are certain advantages in certain big cities, and we see these concentration happening around Bangalore or Hyderabad, but I go to IIT Kanpur.

I don't know if you heard this or know this, IIT Kanpur incubator was rated as India's most innovative place by the National Innovation Ranking System in the country. So it's Kanpur, which is today not one of the top metro cities in the country where there's a concentration of these innovators coming. I think we are seeing a fair amount of decentralisation of innovation, especially in emerging technologies in places outside of Bangalore, Pune, Hyderabad, Madras, Chennai, et cetera. And I think we are also seeing that kind of trend surely.

So, you know, when you look back again a few years, including in your career as Defence Secretary or Secretary of Defence, what would be the frustrations, let's say that you've encountered, which you can, I mean, I don't think every, let's say, prospective venture will solve all those frustrations, but which you think could be handled, let's say, with better channelising of technology, the funding into it, the talent that will drive it, and therefore finding the bigger solutions that you're seeking?

You know, see, so when I joined the Defense Ministry, we were the world's largest importer of defence technology and defence equipments. We are today already, when I left the Defense Ministry, and we're doing better than that after my retirement, we were among the top 25 exporters of defence equipment.

So I think...

Would this be in UAVs, for example?

No, so there's a whole range of things, and you'll be happy to know that, you know, nearly 50% of our defence exports actually go into the US and Europe. The US actually is a major importer for systems and subsystems from India. And so it is quite heartening that that is happening. But having said that, the point I'm making is, see, we have to see what are the positives that are happening, which are today propelling us towards becoming a bigger defence innovation ecosystem. And, you know, I don't call it the defense manufacturing ecosystem, because if you don't create the technology, you never really become independent or self-reliant oraAatmanirbhar. Because if you keep on going for technology to someone else, that actually puts a lot of shackles when it comes to actually making any choices, whether producing more, upgrading the system, exporting, nothing you can do without the technology owner's permission.

So therefore, I think there is a huge trend towards growth. There is a huge, positive trend in the ecosystem. And I think this is what I think is something which has really enthused me, and that's what I take away from my tenure.

So you talked about UAV, that's unmanned aerial vehicles, which could also be drones as one of the focus areas. You talked about space, and you also said that there are a few other areas that you're looking at. So is there anything that you could talk about or hint at right now?

So some of the areas that we're looking at, you know, for example, we see a lot of opportunity in this fabulous chip design, which is basically the fundamental building block for all electronics. This is an industry, again, where we have tremendous capability as a country, but we have practically zero chip making in this country. The common refrain, the common saying that is prevalent in this industry is that there is no chip in the world which gets designed without passing through an Indian's hands. Unfortunately, however, we don't own those chips. Those chips are owned by someone else. So now, fortunately, the policy framework is today conducive or at least becoming more conducive to making chips in India.

And I'm not talking of manufacturing chips. That's a, you know, I'm not talking of foundry here, and which is a great initiative itself, but I'm talking of designing chips, which is fundamental to making any electronic device. And that's a huge opportunity.

I must just mention that 90% of the value of a chip is in the design, and 10% is in its manufacturing. So if we can design chips, we really capture a huge part of the value chain in electronics. Similarly, we are looking at areas like explosives, looking at… So we have, but these are not selected areas. What we have, you know, we have asked a team within the fund and with some other external experts to look at these and come up with, like I said, five or six thematic areas is what we would like to focus on.