Indian Defence Review

Additionally, Requests for Proposals (RFP) are issued for one-time piecemeal quantities without indicating the envisaged total requirement over a period of time, whereas every producer seeks economies of scale and assured continuous orders. Unfortunately, Indian procurement regime precludes both.

Absence of Centralised Registration of Vendors

India has over 150 defence procurement agencies. In addition to the Acquisition Wing of MoD, some of the other entities that carry out procurement functions independently are as follows:-

Although Director General Quality Assurance is the designated authority for certifying the potential of a company, almost all defence procurement agencies have independent systems for registration of vendors. Any vendor desirous of doing business with the defence has to approach all procurement agencies separately for product-specific registration to become eligible to receive tender enquiries. It is a herculean task and tests the perseverance of even die-hard optimists.

No Centralised Notification of Defence Procurement Tenders

All defence procurement agencies function independently. Many tenders are not made public on security considerations; whereas others are published in papers with limited reach. Additionally, many deals are negotiated on the basis of single or limited tender enquiries on grounds of urgency. Thus, most tender enquiries tend to get restricted publicity.

India has no designated agency to help aspiring vendors who want to do business with defence. It is for the vendors to fend for themselves. For new entrants, it is a highly intimidating task.

As there is no system in place for centralised notification of all defence procurement tenders, prospective vendors have to learn about impending tender enquiries by direct liaison with all procurement agencies. It implies that vendors have to keep in contact with all of them to remain informed. Even worse, as per the procurement procedure, once RFP is issued, no new vendors can be added to the list. As a result, many vendors lose business by default and the country loses benefits accruing from enhanced competition. The problem gets compounded for foreign vendors as they are not allowed to employ agents in India to maintain liaison.

Ambiguities of Offset Policy

India has made offsets mandatory for all contracts over 300 crore rupees. Though the policy has been promulgated in 2005, a number of major issues remain imprecise. As per the policy, offset obligation can be discharged through any of the following routes:-

DPP-2006 defines the Indian defence industry as consisting of Defence Public Sector Undertakings, the Ordinance Factory Board, and any private defence industry manufacturing these products or components under an industrial licence granted for such manufacture. Further, for the purpose of defence offsets, ‘services’ mean maintenance, overhaul, upgradation, life extension, engineering, design, testing, defence related software or quality assurance services.

By the above definition, mostly public sector companies qualify as Indian defence industries as very few licences have been issued to the private sector. In any case licences are required to be issued only for the manufacture of arms and ammunition, whereas defence production covers a vast canvas. For example, IT companies require no licence to produce defence related software. It is not clear if they get counted as a part of the Indian defence industry for offsets. Will export of defence related software by Infosys, Wipro or Satyam be acceptable against offset obligations?

The Confederation of Indian Industry has been taking a number of creditable steps to acquaint companies with Indian defence procurement regimes.

Similarly, provisions are not clear as regards FDI in defence R&D. Though there is an upper cap of 26 percent on FDI in defence production, it is not clear if it applies to defence R&D as well. The policy is silent about it. Most major foreign defence manufacturers are wary of these ambiguities and want a clear-cut long term policy.

Purchase Preference to the Public Sector

According to the directive issued by the Government of India (Department of Public Enterprises) on 26 October 2004, all Central Public Sector Enterprises will be given purchase preference if the price quoted by any of them is within 10 per cent of the lowest bid. This provision is applicable to all tenders where the value is Rs 5 crores or more. Additionally, Defence Procurement Manual 2005 stipulates that small scale industries can be given price preference of up to 15 per cent in comparison to large industries.

The Government claims to be creating a level playing field for all vendors with equal opportunities for the private sector. Yet, it continues with such archaic and highly inequitable stipulations, which militate against the basic canons of free and fair market play.

Dissuasive Provisions of FDI in Indian Defence Industry

The Government permitted 100 per cent equity with a maximum of 26 per cent FDI component, both subject to licencing in May 2001. The applicant company has to be either an Indian company or a partnership firm and the management control must remain in Indian hands with majority representation in the board. Moreover, the Chief Executive has to be a resident Indian.