Defence Procurement: A Major Overhaul of Policy and Procedures is Necessary
No country that is not substantially self-reliant in defence production can aspire to become a dominant military power in its region and, in due course, on the world stage. Prime Minister Narendra Modi has selected ‘Make in India’ as a key feature of his policy for economic development. While addressing investors during his visit to the United Kingdom in November 2015, he once again invited them to come and make in India. The aim of indigenisation of defence manufacture should be to make India a design, development, manufacture, export and servicing hub for weapons and defence equipment by 2025.
According to a February 2016 report by SIPRI, it is now the largest importer of weapons systems and defence equipment in the world and accounts for 14 per cent of the world’s defence imports.
During the UPA-II regime, the Defence Minister, Mr A K Antony, had repeatedly exhorted the armed forces to procure their weapons and equipment from indigenous sources. However, the Ministry of Defence (MoD) bureaucracy must understand that the government needs to drastically reorient its own procurement and production policies for indigenisation, or else the import content of defence acquisitions will continue to remain over 70 to 80 per cent.
It is axiomatic that the country’s procurement of weapons platforms and other equipment as part of its plans for defence modernisation, must simultaneously lead to a transformative enhancement in the defence technology base and manufacturing prowess. In case measures required to upgrade the defence technology base are not instituted, defence procurement will remain mired in disadvantageous buyer-seller, patron-client relationships like that with the erstwhile Soviet Union and now Russia. While India manufactured Russian fighter aircraft, tanks and other equipment under license, the Russians never actually transferred technology to India. Whatever India procures now must be procured with a transfer of technology (ToT) clause being built into the contract, even if it means having to pay a higher price.
Policy Changes Underway
Based on the recommendations of the Dhirendra Singh committee that reviewed the entire gamut of the defence acquisition process and extensive inter-ministerial consultations, the Defence Minister has approved several far-reaching changes to the current Defence Procurement Procedure (2013) in recent months. The new policy emphasises reduction in the import content of weapons system and defence equipment, encourages indigenous design and gives a boost to the small-scale sector. In keeping with the Prime Minister’s exhortation to “make in India”, the new policy lays stress on “Make” rather than “Buy and Make” for future defence acquisitions.
Though FDI in defence manufacture has been increased from 26 to 49 per cent, this is still not attractive enough for the MNCs to invest in India.
According to the new policy approved by the DAC in January 2016, the highest priority will be given to indigenous design and manufacture. A new category called “Buy Indian (Indigenously Designed, Developed and Manufactured – IDDM)” has been introduced. This category will replace “Buy Indian” as the category that is the most favoured for awarding future contracts. To qualify, vendors must ensure that not only is the product indigenously designed, but also that at least 40 per cent of it is manufactured in India. In case the design is not indigenous, 60 per cent of the product must be manufactured in India.
The implementation of this policy will gradually result in greater investment in indigenous research and development and the harnessing of Indian talent for military modernisation. India will eventually become a source of state-of-the-art military technology rather than the receiver that it is at present. While the cardinal features of IDDM are unique, it will be difficult to implement as the indigenous component of both design and manufacture will not be easy to determine. Also, given the lack of success with the “Buy Indian” category since its inception, it is extremely doubtful whether the introduction of IDDM will result in a rapid growth in indigenous manufacture.
The ‘offsets’ policy, the implementation of which has been hampering the award of contracts for defence equipment, has also been amended to make it more viable. Earlier it was mandatory for foreign manufacturers to source at least 30 per cent of the parts of the item being supplied from Indian suppliers if the contract was for Rs 300 crore or more. This has been raised to Rs 2,000 crore as most Indian companies were not in a position to absorb such offsets. Also, offsets will now be permitted in the services sector as well. Both of these are steps in the right direction as these will allow better utilisation of the concept of offsets – which is to gradually enhance the participation of Indian industry in defence manufacture – without being encumbered by them.
…give a fillip to the military modernisation process that has been stalled due to the automatic blacklisting of errant companies.
The L1 – lowest bidder – method of awarding defence contracts is also proposed to be amended. The new DPP is expected to allow for a bid from a single vendor to be accepted if there is no other manufacture who meets the qualitative requirement. The government has also decided to subsidise research and development, particularly for micro, small and medium scale enterprises (MSMEs).
Policies needing Review
The privatisation of most of the ordnance factories and some of the defence PSUs should be considered on priority. Publicly owned manufacturing facilities are always inefficient and seldom meet the laid down production targets. They also lack dynamism and normally develop a risk-averse professional culture. Today it is well accepted that it is not the business of the government to be in business. The private sector has shown its readiness and technological proficiency to take up the production of weapons and equipment designed and developed by the DRDO and must be trusted to deliver.
Though FDI in defence manufacture has been increased from 26 to 49 per cent, this is still not attractive enough for the MNCs to invest in India. Given the time and effort that goes into locating a joint venture partner, the risks involved and the fact that they are expected to bring in proprietary technology, MNCs prefer to have a controlling stake. This policy should be reviewed by the government, but adequate regulatory measures should be built in to guard against the pitfalls of permitting majority stake.
In a meeting held on 22 February 2016, the Defence Acquisition Council (DAC) headed by Manohar Parrikar, the Defence Minister, was expected to approve major changes to the policy on the blacklisting of defence manufacturers who violate their contractual obligations by way of indulging in corrupt practices. It was expected that defence suppliers suspected of corrupt practices will no longer be automatically blacklisted. After a preliminary enquiry into allegations of corruption, the company will be suspended pending a more detailed enquiry and the procurement of the concerned item will be placed on hold. If the charges are proved, the company will be penalised monetarily based on the gravity of the offence. Only in exceptional cases will a company be barred completely from bidding for Indian contracts.
The pragmatic steps being taken by Defence Minister Parrikar should gradually result in increasing the indigenous content in defence manufacture as also raising India’s technological threshold.
However, the DAC postponed the decision. The new policy will provide some relief to 15 defence companies that are blacklisted at present, including six MNCs and 23 others that are being scrutinised for non-compliance. It will also give a fillip to the military modernisation process that has been stalled due to the automatic blacklisting of errant companies.
The government’s policy for defence exports also needs to be reviewed and made more liberal. While exports of defence equipment have been permitted, the procedures for according the approvals that are necessary and the regulatory framework need to be streamlined. Companies in the private sector will be in a better position to consider investing in defence manufacture if they are free to export their products to overseas buyers. Obviously, any changes will need to take into account the fact that sales cannot be permitted to states under UN sanctions and non-state actors. One element of policy that has still not been addressed is the formulation of guidelines for the selection of ‘strategic’ partners for joint ventures in the defence sector.
Impact on Defence Preparedness
India is expected to spend up to US$ 100 billion on defence acquisitions over the next ten years. According to a February 2016 report by SIPRI, it is now the largest importer of weapons systems and defence equipment in the world and accounts for 14 per cent of the world’s defence imports. India imports thrice as much defence equipment as China and Pakistan. The pragmatic steps being taken by Defence Minister Parrikar should gradually result in increasing the indigenous content in defence manufacture as also raising India’s technological threshold. These will go a long way towards making India a design, development, manufacture and servicing hub that will one day be a far cry from the present state of importing 70 to 80 per cent of its requirements.
Due to critical deficiencies in several of these elements, the present state of defence preparedness – particularly that of the army – leaves a lot to be desired.
The procurement of defence equipment is an extremely important facet of preparedness for future conflict. Defence preparedness is a function of the training and morale of the combatants, the suitability of the force structure, the efficacy of the weapons with which the force is armed, the adequacy of the supporting equipment, the availability of the right quantities of ammunition and explosives, and the serviceability state of the war machinery. Due to critical deficiencies in several of these elements, the present state of defence preparedness – particularly that of the army – leaves a lot to be desired.
More than anything else, the former Army Chief, Gen V K Singh’s leaked letter to the Prime Minister and the CAG’s reports of 2012 and 2015, revealed that the state of defence preparedness is a cause for concern. Parliament’s Standing Committee on Defence has noted these developments with alarm. Attributing the deficiencies to ‘hollowness’ in the defence procurement system, Gen V K Singh reportedly wrote in his letter to the PM, that, “The state of the major (fighting) arms, i.e. Mechanised Forces, Artillery, Air Defence, Infantry and Special Forces, as well as the Engineers and Signals, is indeed alarming.”
The major issues raised by the former COAS include the following: the army’s entire tank fleet is ‘devoid of critical ammunition to defeat enemy tanks,’ the air defence equipment is ‘97% obsolete and it doesn’t give the deemed confidence to protect…from the air,’ the infantry is crippled with ‘deficiencies of crew served weapon’ and lacks ‘night fighting’ capabilities, the elite Special Forces are ‘woefully short of ‘essential weapons,’ and there are ‘large-scale voids’ in critical surveillance. All of these merit the urgent attention of the government.