Column Rationalising defence procurement

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: Defence expenditure across the globe is showing an upward trend and, with developing countries assuming greater importance in the global defence industry, global dynamics are constantly evolving. India, one of the world’s largest importer of military hardware, is fast emerging as an extremely important market with high business potential. The budget allocation to the sector has increased by 10% in Union Budget 2008-09 to $26.4 billion (Rs 1,05,600 crore) from $24 billion (Rs 96,000 crore) in 2007-08. The allocation is expected to grow at 7-8% annually over the next five years.

Starting from 2001, when the defence sector was opened up to private sector participation, the GoI has introduced a series of reforms to build indigenous defence manufacturing capabilities. As a step further, the GoI has come out with the revised defence procurement procedure (DPP) 2008 which succeeds DPP 2006 and will be effective from September 1, 2008. The procedures will govern purchases worth nearly $100 billion over the next decade.

The revised policy seeks to achieve the objective of self-reliance, expeditious defence procurement by optimally utilising budgetary resources, demonstrating highest degree of public accountability and transparency in defence procurement.

One of the anticipated revisions pertains to permitting credit banking in offset provisions. An offset in defence trade are formal commitments wherein foreign original equipment manufacturers (OEMs) undertake specific defence procurement programmes from India which will have 30% as minimum threshold of the main contract. Under the revised procedures, the offset obligations are to be coterminous within the period of main contract and the surplus offset credits can be banked and would remain valid for a period of next two financial years. This will allow foreign OEMs to claim offset credits against subsequent defence request for proposals which are issued within two financial years of date of approval of banked offset credits. To facilitate foreign OEMs abide by offset obligations, DPP 2008 has also added a list of defence products.

Also, to meet imminent operational requirements, capital acquisitions made under the fast track procedure have been exempted from offset requirements. In addition, in certain exceptional cases, the defence acquisition council can waive the offset obligations.

However, some key demands of OEMs in relation to offset, like the provision to allow transfer of technology and indirect offsets i.e., investment into other sectors of the economy, as one of the ways to discharge offset obligations have not been fulfilled under the revised procurement procedures. The banked offset credits would be non-transferrable except between the main contractor and his subcontractor within the same acquisition programme.

Another important revision is the waiver of mandatory industrial licensing requirements of production for private companies for the defence sector and to be entitled to offset programmes agreed with foreign OEMs.

In the revised procedure, focus has also been towards strengthening the procurement framework by making it more transparent, speedy, impartial and accountable. The advance information on issue of request for information and request for proposals in procurement cases giving vendors a lead time to prepare is a welcome step.

However, there appears to be no policy shift in the DPP 2008 to increase the current FDI cap of 26% in the defence sector, a major deterrent for foreign players to enter into joint ventures with Indian private sector companies and in procurement of cutting-edge defence technologies. Overall, DPP 2008 is a welcome move by the GoI to come out with the revised procurement policy taking into consideration the learning and experience over the past two years. It has also laid out certain lucid measures towards increasing private sector participation and indigenisation in the Indian defence industry.