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

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  “…it is not correct to state that the progress of participation of  the private sector in defence production has been stalled.”

The process of opening the Indian defence industry to the private sector commenced in 2001. It gathered pace with the constitution of the Kelkar Committee. In the recent past, the Ministry of Defence has introduced many bold and innovative policy initiatives through periodic revision of the defence procurement procedure. Offsets have since been made mandatory for all high value imports. To obtain the Ministry’s views, Bharat Verma interviewed Minister of State for Defence Production Rao Inderjit Singh. The interview covered a wide range of issues concerning defence industry and offsets.

The Government has been repeatedly declaring that it wants to procure 70 percent of its defence requirements from indigenous sources by 2010. Are we likely to achieve this target? What are the reasons for slippages, if any?

The market for defence goods is based on requirements projected by the Services in their annual and long term acquisition plan. Indigenisation as a process is a complex exercise, involving efforts at balancing the immediate requirement of the services for preparedness with the efforts of the production agencies in indigenising defence technology. DPSUs and Ordnance Factories have substantially increased the level of indigenisation in recent years.

Although the government opened the defence industry to the private sector in 2001, the public sector continues to play the  dominant role. The private sector remains confined to supplying components and sub-assemblies. There has been little progress on ground. What has stalled the progress?

Till 2001, defence production was confined in the public sector, having 8 defence PSUs and 39 Ordinance Factories. In May 2001, the defence industry sector was opened for 100 percent Indian private sector participation, subject to licencing. FDI upto 26 percent had also been permitted. Since then, 73 Letters of Intent/Industrial Licenses have been issued to various companies in the private sector for the manufacture of a wide range of defence items. Some of these companies are already in production. Therefore, it is not correct to state that the progress of participation of the private sector in defence production has been stalled. It may be appreciated that the defence market is not an assured market for suppliers, and involves long-term investment in view of the inherent nature of defence supplies. Nevertheless, an effort has been made by the Government to encourage participation of the private industry in defence production in the last few years. DPP-2006, for example, has incorporated the following measures to facilitate increased participation of the Indian Industry in the defence sector:

• Categorisation of equipment: Acquisitons covered under the ‘buy’ category would be classified as ‘buy Indian’ and ‘buy Global’. ‘Buy Indian’ category must have minimum 30 percent indigenous content if the systems are being integrated by an Indian vendor.
• ‘Make’ Procedure: The aim of the procedure is to undertake indigenous research, design, development and production by Indian defence industries. Projects under this procedure would involve design and development of High Technology Complex Systems indigenously. These projects are to be undertaken by Raksha Udyog Ratnas (RURs)/Indian Industry/Defence Public Sector Undertakings (DPSUs)/Ordnance Factory Board (OFB)/Consortia on a level playing field. These procedures would also be adopted for all upgrades categorised as ‘Make’.
• Transfer of Technology for Maintenance Infrastructure: In all ‘buy’ category cases, where equipment is being brought from foreign vendors, the provision of transfer of technology to an Indian public/private firm, for providing maintenance infrastructure would be applicable. In such cases, the foreign vendor would have to identify an Indian firm which would be responsible for providing base repairs and the requisite spares for the entire life cycle of the equipment.
• Offset provision is applicable for all procurement proposals where the indicative cost is above Rs 300 crores involving the outright purchase from foreign/Indian vendors and purchase from foreign vendor followed by licensed production. These offset obligations shall be discharged directly by the direct purchase of, or executing export orders for, defence products and components manufactured or services provided by Indian Defence Industries. These offset obligations may also be discharged by direct foreign investment in Indian defence industries, and in Indian organisations engaged in research in defence R&D.
• A level playing field for the Indian industry has been ensured in DPP-2006 by incorporating the following guidelines to neutralise the impact of taxes and duties payable by the Indian industry while carrying out evaluation of bids to determine licensed vendors, without making any changes in the tax structure:

- In case of a foreign supplier, the basic cost (CIF) quoted should be the basis for the purpose of comparison of various tenders.

- In case of indigenous suppliers, excise duty on fully formed equipment would be offloaded.

- Sales tax and other local levies, i.e. octroi, entry tax, etc. would be ignored in case of indigenous suppliers including Defence Public Sector Undertakings (DPSUs)/Ordinance Factories (OFs).

- The payment conditions should be similar for domestic private suppliers, Defence PSUs/Ordnance Factories and the foreign suppliers.

The Government had accepted the recommendations of the Kelkar Committee as regards grant of Raksha Utpadan Ratna status to select private sector companies to enable them to participate in defence tenders on equal footing with the public sector. What has stalled the progress?

A Selection Committee had been appointed by the Government to recommend tier-1 Indian industry in the private sector for grant of Raksha Udyog Ratna status. The Committee has submitted its report, which is presently under examination.

Despite progressive reviews of the procurement procedures, there has been no discernible reduction in the time taken to finalise procurements. What are the major constraints and what steps are being contemplated to overcome them?

All the initial decisions such as Acceptance of  Necessity (AON), Categorization, Quantity, need for Transfer of Technology(TOT), Offset requirement, etc. are now taken in an integrated manner by the Defence Acquisition Council (DAC). To that extent, the process has been simplified and time-taken reduced. However, many a time, there are delays in conduct of trials. Trials are to be conducted in different environments and terrains. At times, there are problems expressed by the vendors to bring the equipment or platform to India. In cases where trials under ‘single vendor’ situation take place, there are problems at the price negotiation stage also. These factors have been identified and the Defence Procurement Procedure(DPP) would be revised to address some of these con cerns.

India is perhaps the only country which has formulated a defence offset policy without having a national offset policy. It is not known as to what India wants to achieve through defence offsets as no objectives or aims have been spelt out.

Offsets as an international practice exist the world over, practised by more than 130 countries primarily in the area of defence contracts. Offsets are a popular tool to leverage high cost procurement of defence systems towards indigenous development in various countries. Offsets are a part of the broader policy of self reliance in defence. The offset policy is integral to the Defence Procurement Procedure 2006, wherein the aim of self-reliance is explicitly mentioned as under:

        “The objective of this procedure is to ensure expeditious procurement of the approved requirements of the Armed Forces in terms of capabilities sought and time frame prescribed by optimally utilizing the allocated budgetary resources. While achieving the same, it will demonstrate the highest degree of probity and public accountability, transparency in operations, free competition and impartiality. In addition, the goal of achieving self-reliance in defence equipment will be kept in mind.”

Many feel that the Indian offset policy is designed primarily to help the public sector, with the private sector being a peripheral player. Even the definition of Indian defence industry to receive offset business remains imprecise. Do you agree with this perception?

I do not agree with the perception as outlined by you and I do not even agree that such a perception exists amongst many. MoD offset policy has provided a level playing field between the DPSUs and the private industry. The offset policy specifically provides freedom to the foreign vendor to select the Indian offset partner without any interference from the Ministry of Defence.

Transfer of Technology (ToT) is considered the best form of offsets, especially for nations that strive to develop an indigenous defence industry. Offsets are used as a leverage to obtain technology that is not available otherwise (even for a cost). India, however, does not allow it at present. What are the reasons for the same?

ToT has been an integral part of the procurement process in the MoD under ‘buy and make’ proposals. Whenever it is felt that the technology needs to be acquired, the acquisition programme is categorised as ‘buy and make’. The Request for Proposal in such cases mentions in great detail the type of technology and the depth of technology that is being sought.

There is immense euphoria and excitement in the Indian defence industry over likely business coming its way through offsets. However, there are many experts who are skeptic about India’s capability to absorb all offsets profitably?

Defence industrial capability is fairly strong and diversified. Ordinance Factories and Defence Public Sector Undertakings have huge manufacturing facilities. The Indian Industry Associations like CII, FICCI and ASSOCHAM have also expressed their confidence in the Indian defence industry being fully capable of absorbing offsets. Since the opening up of the defence sector to the private industry from 2002 onwards, the private defence industry has also invested in infrastructure to meet the requirements of defence forces. Over the years the capacity of the Indian private sector to absorb offset has increased.

All countries seek offsets to fulfill an economic or technological need. India has left it to foreign vendors to decide fields in which they wish to offer offsets. Are there any reasons for the same?

India has not left it to the foreign vendors to decide fields in which they wish to offer offsets. We accept only direct offsets which will strengthen the defence industry. There can be many ways to fulfill the obligations, which have been defined in the offset policy. Freedom has been given to the foreign vendors to decide the Indian partners.

How many contracts have been signed so far with offset obligations? Has any offset obligation been fully or partially fulfilled? Is the Government considering offset banking? What are the other proposed changes?

Only one contract has been signed so far with offset obligations. We have got the first quarterly report as envisaged in the guidelines and are examining it. We are considering some changes depending upon the requirements and feedbacks from different stakeholders. These are being examined; a decision would be taken in a few months.

Do export joint ventures like the BrahMos missile require security clearance from both participants? Is there an officially declared policy for future joint ventures in defence platforms?

Indo-Russian joint venture BrahMos has completed the development of missile systems required for the Indian Navy and Army, and is currently producing the systems using Indian and Russian industries to meet internal requirement. The Inter-Governmental agreement signed as early as in 1998 stipulates that the product will be exported to friendly countries. The joint Supervisory Council has already identified the countries to which the BrahMos missile can be exported. The two Governments will shortlist the list of friendly countries, after carefully considering the security requirements of both India and Russia, and the strategic relationship with these countries. Similar other possibilities are being explored with different countries for futuristic systems. DRDO will enter into joint venture, wherever needed and feasible.