A new paradigm on defence deals

The recently announced Defence Procurement Policy (DPP), followed closely by the Defence Procurement Manual, is an indicator of a new direction being set in defence preparedness. There are several fresh features in the policy that signify a new thinking on defence strategy.

First, the requirement of an ?integrity pact? for suppliers of materials worth more than Rs 100 crore, would mandate that successful suppliers should assure availability and supply of all spare parts for the lifetime of the product, is a welcome addition. The principle of offset, announced earlier, is to be implemented from September 1, 2006 and will require external vendors supplying in excess of Rs 300 crore worth to offset 30% of the value by purchases, investment and transfer of technology to India.

The list of vendors is to be put up on the web site of the ministry of defence. There would be a more open discussion of development of technical standards and GSQR would be modified in consultation with all stakeholders. Private industry in India will be encouraged to take part in the process and there is to be a level playing field between private and public sector units in India, with no price or purchase preference. Private industry is also being encouraged to participate in supply of strategic items.

The eleventh five-year plan document indicates defence purchases between 2007 and 2011 of the order of over $10 billion, an increase of over 40% from the previous plan period. The new thinking seems to have three major foci: self-reliance, expanding sourcing, and a new strategy for defence preparedness.

The emphasis on self-reliance is welcome, given Indian firms? competitiveness capability to absorb technology. There is a clear signal to them to participate in production and supply, of even the most sophisticated equipment.

There is a simultaneous attempt, on the basis of the Kelkar committee report of 2005, to improve competitiveness, management and efficiency of state-run ordnance factories, though the recommendations on mergers and amalgamations are yet to be addressed. There have been tie-ups with several global producers and the concept of a 26% stake in some of the units is likely to take off soon.

In the 90s, Israel emerged as a major defence equipment supplier, replacing Russia. Naval eq-uipment sourcing is mainly from Europe, including Italy, France and Germany. There is also interest in buying from South Africa and Brazil, though these are early days.

Most important, there is considerable renewal of interest in sourcing from the US and most major suppliers have set up offices in Delhi over the last two years. There has been a considerable scaling up of cooperation between India and the US, after the Defence Framework Agreement was signed in June 2005. This pact envisages cooperation in a larger regional context. In the absence of any policy papers from the Indian side, one must conclude that the agreement would subserve the larger US strategy of ?creating a strategically stable Asia? and to share an interest in ?fighting terrorism.?

The US industry is uncomfortable with India?s new offset conditions, arguing that it provides neither multipliers of technology transfer, nor incentives for dealing with the private sector, while placing the public sector in a conflict of interest position. On the Indian side, there is reluctance to de-pend on the US, given the sense of unreliability in supplies and spare parts received from many developing countries.

In a policy paper, Ashley Tellis suggested that ?Bush should en-shrine his intention to advance the growth of Indian power in a formal National Security Decision Directive that provides authoritative guidance for the entire government.? This has yet to be done, and India?s defence establishment is naturally still wary of the policy stance and implementation processes involving different agencies in the US.

Even though the pact attempts to present a composite picture of the expected areas of defence cooperation between the two countries, elements that are in the US interest, like joint military exercises, are going on at full speed, while areas of India?s interest, mainly defence co-production, has been moving in fits and starts. The DPP attempts to place offsets and co-production on the front burner, but there has been little movement forward from the US side to consider it as an opportunity, rather than an obstacle to be got around.

There also continues to be debate in the US on whether it should support India?s progress by enlarging its military capability, and whether this would become a double edged sword. From the Indian viewpoint, given the need to reorient defence systems towards higher technology and mobility and the importance of special forces for peacetime as well as wartime operations, access to US equipment, including high mobility maritime systems and next generation aerospace systems, is important.

The co-operation is still a kabaddi game. If India ends up getting the short end of the stick on co-production, the current defence co-operation treaty would not have yielded any gains for India.

The worry is that India is placing too many eggs into this basket. Given the long history of procurement from Russia, sourcing from that country will continue for another decade and a half, but there are clear signs of a new approach. It is only to be hoped the new partnership will prove to be reliable. At the end, of course, there is no better alternative than self-reliance, and that is the approach that needs to be vigourously pursued.

?The writer is a former finance secretary and economic advisor to the Prime Minister