IDR Interview: Rao Inderjit Singh, Minister of State for Defence Production

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In the recent past, the Ministry of Defence has taken many innovative and creditable measures to harness the potential of India’s private sector in defence industry by providing level playing field. However, progress on ground has been rather sluggish. Editor, Indian Defence Review requested Minister of State for Defence Production Rao Inderjit Singh, to elucidate the Ministry’s views with respect to some issues of common concern.

Despite Government’s declared policy of opening Defence Industry to the private sector, the full potential of the Indian private sector continues to remain unexploited. Does the Government plan fresh policy initiatives including liberalisation of licensing regime?

The Government had announced a policy change in May, 2001 whereby it allowed Private Sector to take up production of any Defence items under licence. The main contribution from the Industry is expected in the development and production of equipment required in the future by the Armed Forces. It is too early to make an assessment on the extent of exploitation of the Indian Private Sector in regard to such cases. The Government has promulgated the new ‘Make’ procedure and it is only when few projects are taken up under the new procedure will the Government be able to use the potential in the Private Sector for development and production of Defence goods required by the Armed Forces in the future. The process of indigenisation and import substitution of components and similar items is an on-going process and the Private Sector is the mainstay in this effort. The Government does not have any plans of having a fresh policy for taking up new policy initiatives including liberalisation of licensing regime. In the case of Defence, it should be understood that licence for production is essentially given to ensure that the Government can have a close watch on the security aspect. Licensing per se is not intended to limit production by the licensee. There will probably be no occasion for liberalising the regime as products produced for defence would need to be carefully monitored from the security angle. This is the practice the world over and India is no exception.

There is a common perception that India’s defence offset policy has been framed exclusively to promote export of goods produced by the public sector and the private sector is unlikely to benefit from it. May we have your views please?

The perception that the Defence Offset Policy is framed exclusively to promote export of goods produced by the Public Sector is incorrect. The guidelines brought out under the Defence Procurement Procedures 2006 are very clear on this. There is no distinction between public sector and private sector or preferential treatment for PSUs.

India announced its policy on FDI in defence’ industry in 2001. The Government has accepted that the policy has failed to attract foreign investors. Is there any rethink on the issue?

The policy on FDI in Defence provides for a cap of 26%. It is incorrect to say that the policy has failed. In fact, the Indian Industry has not been able to exploit this opportunity adequately. At present, there is no rethinking on the change in this policy. Only when we have been able to implement the Defence Offset Policy for a couple of years will this assessment on the FDI policy become relevant.

MoD does not have a centralised vendor registration arrangement. Vendors have to get themselves registered with all procurement agencies separately. Similarly, there is no centralised source from where a vendor can ascertain requirements of all procurement agencies. He has to liaise with each separately. There procedural inadequacies dissuade new companies. What is MoD planning in this regard?

MOD has no scheme for centralised vendor registration. The Acquisition Wing of the Ministry is building up a data bank of vendors. Vendor registration narrows the choices and has been discouraged. In fact for the input material to Ordnance Factories, the Government has categorically said that DGQA shall not register any vendors. Procurement in Defence is done at various levels and at various locations. It will be a very difficult task to think in terms of providing centralised information with regard to all requirements. This is not an issue of procedural inadequacies. The MoD is looking at procurement of Defence equipment for which the Acquisition Wing is trying to build a data base of vendors. The Integrated Defence Headquarters is also preparing a long term capability plan, which will indicate the future long term requirements. The IDS Hqrs is also preparing a public version of this capability plan to be shared with the Industry. As far as procurement of minor items are concerned which have been left to the Service Hqrs or the Ordnance Factories or the PSUs to build their own vendor bases and it would be more appropriate of they separately have vendor familiarisation meetings, etc., for sharing of information. Formal registration in centralised manner tend to restrict entry and have not been encouraged.

Foreign vendors are unlikely to have joint ventures with Indian companies if they can bid directly. They do not want to part with their technology and share profits. Many nations have made joint ventures mandatory. What is Ministry’s thinking on the issue?

The joint venture can come up if the Indian company and the foreign partner do find advantages in making the joint venture. If the cost of the equipment is going to reduce giving an advantage to the joint venture in the competitive environment then joint ventures will occur. If joint ventures are made only to provide upfronts for supply of fully formed foreign material then they will not be formed for the reason that the foreign vendor will be able to quote a better price without having an intermediary. As far as the issue of sharing a technology and profits is concerned, this is to be seen only from the point of view of business advantage which is a matter to be resolved by the industry partners. We are not aware of any country where formation of joint ventures is mandatory. The policy of offsets is likely to encourage formation of joint ventures as that would enable investment by foreign companies for production of items which they may need not only for their own use but for export to 3rd countries also.

The Ministry is yet to announce Raksha Utpadan Ratnas (RUR). What are the reasons for the delay? In what way will RUR companies get preference over recipients of defence production licences?

There has been a delay in the announcement of Raksha Udyog Ratnas (RURs) because the Committee, which was tasked to do the scrutiny has taken a little extra time. The report is with us and soon the Government announcement shall be made. RURs are tier-I companies of the industry which have been selected on the basis of their potential both technical and financial to see whether they can perform the role of integrators of large systems and platforms. As far as Defence licences are concerned, this can be obtained for production of any items which is a defence product and is not confined to complicated systems and platforms only. The RURs when selected for taking up a development project under the ‘Make’ procedure would be required to obtain a production licence.