Indian Defence Review

Every producer seeks economies of scale and assured continuous orders. Unfortunately, Indian procurement regime precludes both. RFPs are issued for one-time piecemeal quantities without indicating the envisaged total requirement over a period of time. Additionally, no long term commitment is made regarding regular flow of orders. This deters Indian companies from committing resources for establishing production facilities as the venture can prove both expensive and risky.

Lack of Mutual Confidence

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. It is fully aware of its weaknesses and knows that it cannot survive an open competition with the private sector. This sense of insecurity makes it wary of any move to facilitate the entry of the private sector and it tries all stratagems to block it.

On the other hand, many functionaries feel that the private sector is out to make a quick buck and lacks required perseverance. They tend to view the private sector as traders rather than committed manufacturers who can endure the travails of long drawn procurement procedure. According to them, anyone desirous of entering defence industry has to be fully aware of the fact that defence orders take inordinately long to materialise and vacillation invariably proves unproductive.

The Communication Gap

There is a total absence of an effective institutionalised interface between the MoD, the services and the private sector for regular interaction at the policy making level. There are a number of ‘groups’ or ‘partnership forums’ in place, but their utility is limited to exchange of views only.

(a). Procurement Agencies are Unaware of Industry’s Potential

Even today all major defence deals are signed with foreign producers. The public sector continues to get bulk orders under transfer of imported technology. The private sector continues to be a peripheral participant.

The procurement agencies are extremely keen to encourage indigenous production and limit imports to the minimum inescapable requirements. They, however, are unaware of the capabilities and potential of different private sector companies, as the competence of Indian companies has not been authentically catalogued as yet. They do not know whom to invite for submission of proposals. It is much easier to acquire details of numerous foreign producers.

There is no data bank of Indian industries available with the MoD. Requests for Proposals (RFPs) are issued only to a few highly visible companies, while many others lose by default. Although, the Acquisition Wing has been tasked to create the necessary data bank, the process has hardly taken off as yet.

(b). Industry Lacks Knowledge of Defence Requirements and Procedures

On the other hand, many private sector companies have the capability to manufacture the whole range of defence requirements but do not know whom to approach to ascertain details. They are ignorant of the procurement agencies, their policies and procedures. This ignorance makes them wary of dealing with the defence.

To compound the problem, there are over 150 different defence procurement agencies with different procedures. There is no system of centralised notification of requirements and vendor registration. Due to this lacuna, a new entrant finds the whole environment highly dissuasive.

The Way Forward

The present process of interaction between the Government, public sector and private enterprises should be continued, albeit with renewed vigour and purpose. All joint committees should be represented at the level of decision makers, so that follow up action can be taken in a time bound manner.

Structural Reforms

A representative of the designated industry association should be a permanent invitee to the Defence Acquisition Council, depending on the security sensitivity of agenda points. His inputs as regards the technical prowess of the private sector will prove invaluable while deciding whether to import technology or not. Similarly, selected agenda points of Defence Procurement Board, Defence Production Board and Defence Development Board should be circulated to the industry association for advice. These steps will go a long way in integrating the private sector.

Early Interaction with Industry on Acquisition Proposals

The Acquisition Wing should indicate broad parameters of equipment under procurement to the industry association six months prior to the issuance of RFP. The association could circulate this information amongst the concerned companies for their advance knowledge. This will give adequate time to the interested companies to carry out technology scan and scout for foreign collaborations, if required.

Equipment Directorates of the Services Headquarters should seek advice of the industry before finalising parameters. The industry, with its massive pool of knowledge, will be able to help the authorities in getting a better understanding of the latest technological advancements worldwide and in India with their degree of stabilisation. Comments received from the association should compulsorily be put up to the approving committee. In some non-critical cases, indigenous capability may even influence the formulation of parameters.

To help the Indian companies in taking decisions regarding investment of resources, RFP should invariably indicate the total requirement envisaged over the years. This could be without any firm commitment as such.

Support to Indigenous Industry

There is an urgent need to have a mechanism in place to facilitate the participation of Indian private sector in defence industry.

Most nations support indigenous producers by giving them purchase and price preference. Foreign producers should be given incentives for collaborations with Indian companies. It could even be made mandatory, as has been done by Great Britain under its Industrial Participation policy.

Policy on grant of waivers for deviations from parameters must make a distinction between an Indian and a foreign producer. Easier grant of waivers, albeit within acceptable limits, to Indian companies will encourage them to commit resources more willingly. Even commercial terms should be made more favourable to the local vendors as the lower life-cycle cost of indigenous equipment must also be factored in.

Presently, the payment terms are unfavourable to the Indian producers. Foreign vendors are released full payment of their dues on submission of proof of dispatch (against performance and warranty bonds – each equivalent to 5 percent of contract value). However, Indian companies get payment only after the issuance of inspection note by the designated inspectors. This may take a few months, thereby increasing the cost of the capital involved. This incongruity needs to be addressed.

Facilitation Service

There is an urgent need to have a mechanism in place to facilitate the participation of Indian private sector in defence industry. Such a mechanism can serve twin objectives. First, it could assist in the assessment of a company’s current technical/manufacturing prowess and its potential for the development of defence products. A directory of credible defence manufacturers should be compiled with details of all assessed companies. This directory should be made available to all the defence procurement agencies to assist them to identify companies for issuance of tenders. The directory could also help foreign producers to locate potential Indian partners for collaboration.

Secondly, advisory service could be extended to companies as regards the availability of opportunities for the supply of their current products to the defence. The service could also suggest defence products which a company can manufacture with marginal addition to its facilities. Related areas for development/diversification could also be indicated. Thus, this service can acquaint a company with the prevailing business opportunities and guide it as well.

Public-Private Sector Partnership

The public sector possesses excellent infrastructure, manufacturing facilities and a highly experienced task force. It will be a waste of national resources if these assets are duplicated by the private sector.

The Government has to realise that both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self reliance in defence production.

The private sector, on the other hand, can bring in latest technology, managerial practices, marketing skills and financial management. Therefore, a well-blended fusion of both will result in synergising of their strengths through economies of scale and prove mutually beneficial.

A strong and fruitful relationship can be built with mutual accommodation. The public sector should not regard private players as a persistent irritant and adopt a confrontationist attitude towards them. Similarly, the private sector must not seek to replace the public sector. Such an approach may be perceived by the public sector as a threat to their primacy and existence. It may make them close their ranks and resist all interaction with the private sector. That shall be counter-productive.

The Government has to realise that both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self reliance in defence production. It should not play favourites and treat both as equal partners in progress.

Conclusion

The then Defence Minister of India, Mr Pranab Mukherjee, in his address at New Delhi in June 2005 had stated: “The Government is committed to the development of a vibrant and proactive defence industry in India. It should be ensured that the available capability, infrastructure and resources including intellectual capital are harnessed to the fullest extent as our national assets and optimally utilised in achieving this objective.” He further advocated a strong and healthy partnership between the public and private sector for enhancing the defence capability and in sustaining a powerful domestic industrial base for the future.

During the last three years, a serious and concerted effort has been made by the Government to reform and streamline the entire acquisition process. The Government has come to appreciate the potential of the private sector and wants it to complement the efforts of the public sector. A number of praiseworthy initiatives have been taken and policies reviewed. Yet, the results on ground have very little to show. There has been no appreciable inflow of anticipated foreign funds.

Even today all major defence deals are signed with foreign producers. The public sector continues to get bulk orders under transfer of imported technology. The private sector continues to be a peripheral participant with the production of some low-tech items and indigenisation of some components.

The present process of interaction and integration should be continued, albeit with renewed vigour and purpose. All joint committees should be represented at the level of decision makers so that the follow up action can be implemented in a time bound manner. There is no point in having committees and joint task forces if their reports are going to gather dust with no follow up action.

Technological prowess of the private sector should be given due recognition and considered a national asset. The objective of achieving self-reliance will remain elusive unless the private sector is duly integrated and its potential fully harnessed to build a viable indigenous defence industrial base. The Government has to create an environment wherein the private sector feels assured of just business opportunities, level playing ground and fair play.

And finally, India plans to spend USD 100 billion on capital expenditure during the 7th Plan Period (2007-12). Imports account for close to 70 percent of capital expenditure and offsets are required equal to 30 percent of import contracts. Thus, India expects offset trade worth USD 21 billion during the next five years. Currently, Indian defence exports amount to paltry USD 50 million annually, i.e. USD 250 million in five years. From USD 250 million to USD 21 billion, it will be a quantum jump of enormous proportions. The public sector cannot handle it by itself. The private sector has to be closely integrated and its potential fully harnessed for beneficial absorption of the projected offset business.