The Government of India has been reiterating its commitment to achieve the much-publicised target of procuring 70 per cent of its defence requirements from indigenous sources by 2010. Despite its best efforts over the last two decades, India is nowhere near that figure as yet. The Government is well aware of the emergence of private sector as a vibrant and dynamic force, especially in information technology, service sector and manufacturing fields. It has come to realise that self reliance would remain a pipe dream if it continued to bank on public sector alone.
One of the objectives mentioned in the new defence procurement procedure is to achieve self-reliance in defence equipment. But the whole procedure is silent about the role of the private sector and no worthwhile initiatives have been proposed to integrate its potential in India’s quest for self reliance.
In all deals where transfer of technology is negotiated, the nominated recipient is always a DPSU, even if a private sector company is better placed in terms of infrastructure and know-how to absorb the technology.
In addition to economic factors, defence industry is generally considered to be an instrument of national sovereignty and pride. Defence industry comprises of all industrial undertakings engaged in the production of hardware and services for use by the defence forces. The origin of the Indian defence industry can be traced to the establishment of Gun and Shell Factory at Cossipore in 1801. At the time of the Independence, India had 16 Ordnance Factories, established by the British to produce low tech items. Bharat Electronics Ltd was the first Defence Public Sector Undertaking (DPSU) established in 1954 to manufacture electronic equipment for the forces. Today, India has 39 Ordnance Factories and eight DPSU.
The Industrial Policy Resolution of 1956 divided industry into three parts:-
- Schedule A: Basic industries which are the preserve of the state, including defence and heavy engineering.
- Schedule B: Industries in which private industry was allowed to operate.
- Schedule C: All other industries.
|Defence Industry Abroad|
|According to the US War Department, private sector is better equipped for defence industry because:• Defence industry is highly technology driven and it is the private sector that adapts itself better to rapidly changing technology.• The private sector possesses business acumen to spot fleeting opportunities for long term survival and continued prosperity of their enterprise.
• Open and free competition compels companies to master frontier technology to beat their rivals for the limited orders available. It, in turn, helps the nation to build a reservoir of latest technology to give it an edge over its prospective adversaries.
Continued US military prowess fully justifies the confidence reposed in their private sector.
The Australian Government recognises the role of defence industry and considers it to be partner in the development of indigenous capability. It wants the industry to be aware of the long term defence plans to be able to identify and exploit emerging business opportunities.
Russia embarked on a major restructuring exercise of its defence industry in the early 1990s. One of the major steps was to create new corporate structures to undertake the complete gamut of research, design and production of defence systems. In a way, Russia wanted to follow the highly successful Western model. It privatised a large number of defence production facilities However, major research/design establishments and production facilities falling under strategic disciplines were kept under the Government’s direct control.
As per the UK Ministry of Defence Policy Paper No 5 on Defence Industrial Policy, a thriving, innovative and competitive defence industry is essential for the defence of the UK. The UK defence industry embraces all defence suppliers that create value, employment, technology or intellectual assets in the UK. The UK’s innovative science base supports the defence industry’s high levels of technology development, and this brings benefits to other industry sectors through the application of military technology to civil products. The UK Government works closely with industry and is committed to public/private partnerships. As a matter of fact, intense consultations are held with Defence Manufacturers Association before formulating Government policies.
Pakistan has also realised that private sector has to be dovetailed in the overall effort to produce defence equipment indigenously. Defence Production Division has been created in the Ministry of Defence Production to involve local industry in defence production. It has been made responsible to identify, integrate and utilise the industrial potential available both in public and private sectors for production and procurement of Defence Stores. It also tries to attain economies of scale by optimum utilisation of available production capacities in both sectors.
Manufacture of components, assemblies and sub-assemblies was thrown open to the private sector in 1991. With a view to promote defence-industry partnership, the Ministry of Defence (MoD) constituted six Joint Task Forces in collaboration with Confederation of Indian Industry in 1998. Consequent to their recommendations, the Government opened defence production to the private sector in January 2002. It allowed 100 percent private equity with 26 percent Foreign Direct Investment (FDI). It was a major policy change. Subsequently, the Department of Industrial Policy and Promotion issued detailed guidelines for the issuance of licence for the production of arms and ammunition.
The Kelkar Committee, constituted in 2004, made many radical recommendations. The Government has accepted a majority of them but their implementation has lacked earnestness and focus. The Department of Industrial Policy & Promotion (DIPP), in consultation with Ministry of Defence, has so far issued 37 letters of intent for the manufacture of various types of defence hardware which include armoured and combat vehicles, radars, electronic warfare equipment, warships, submarines, avionics, military aircraft, safety and ballistic products, armaments and ammunition.
Despite the above measures, there has been no discernible change in the ground situation. Only a handful of India’s top companies are involved in small value defence contracts. The private sector has to remain content with the supply of some low-tech items to the public sector. Its supplies to DPSU and Ordnance Factories grossed over Rs. 1200 crores and Rs. 1900 crores respectively last year. Whereas these figures signify the contribution made by the private sector, they also highlight the fact that the private sector continues to be merely an outsourcing base for the public sector.
Reasons for Continued Non-Participation of the Private Sector
A number of defence-industry seminars, conferences and exhibitions have been held in the recent years. Given decades of insulation and prejudices, this was no small achievement. But old mindsets, complexity of procurement procedures and clout wielded by the public sector have been acting as major deterrents to any meaningful participation of the private sector. New aspirants, in particular, find the whole regime to be highly forbidding.
Decisions are taken by the Defence Acquisition Council to categorise a proposal as ‘Buy’ or ‘Buy and Make’ or ‘Make’ based on the advice given by Defence Research and Development Organisation and the public sector. No inputs are sought from the private sector. Its competence and potential are given no consideration.
In all deals where transfer of technology is negotiated, the nominated recipient is always a DPSU, even if a private sector company is better placed in terms of infrastructure and know-how to absorb the technology. A DPSU may have to establish complete facilities ab initio, whereas a private sector company may need only incremental technology.
The Indian public sector has got used to a position of pre-eminence. Its hold over defence orders is total. It thrives because of its monopolistic clout and not because of any displayed excellence.
Requirements of the armed forces are not made known to the private sector sufficiently in advance, with the result that it does not get adequate time, either to scout for foreign tie-ups or to establish the necessary facilities. The time given for the submission of technical and commercial proposals is grossly inadequate for a new entrant in the field.
Parameters for the equipment to be procured are formulated with foreign equipment in mind, after reading manufacturers’ brochures. Private sector is not consulted in this process, whereas minor acceptable changes in parameters may make the Indian equipment eligible for consideration.
As Requests for Proposals (RFP) are issued to foreign original equipment manufacturers as well, they prefer direct bidding. They decline joint ventures with Indian companies as it helps them to guard their technology and perpetuate their monopoly with consequent financial gains.
All trials are carried out on ‘No Cost No Commitment’ basis. Whereas foreign vendors can incur the expenditure involved, many upcoming indigenous companies do not possess the necessary financial strength. This acts as a major disincentive.
Due to the very nature of its usage, defence equipment has to meet highly exacting standards. There can be no failure in the face of the enemy. Regrettably, many Indian vendors have not fully grasped the import of this requirement and find the quality control regime to be extremely irksome.