FE Editorial : Offsetting our defence

Written by The Financial Express | Updated: Mar 31 2012, 06:50am hrs
The leaked letter from the Army chief General VK Singh to the PM tells us nothing new. The Indian armed forces have suffered because the defence ministry has hated making reforms in the procurement of arms for the armed forces. Seven years since the Vijay Kelkar committee submitted its report that recommended modernisation of procurement by the armed forces by leveraging them on offsets, on Friday the ministry was considering one of the first recommendations of the committeeto set up a new professional agency for defence acquisition and offsets. Instead of a top-heavy defence acquisition council headed by the defence minister, it will be a defence procurement board that will decide on most buys. Offsets incidentally are the compensatory work orders that a supplier of arms places with firms in the country where it sells, which means additional volume of business for domestic firms. This is a sweetener that attracts a domestic company to produce equipment for the armed forces. As an example, the $14 billion Rafale jet contract has a generous 50% offsets option, which can mean a business volume of up to R40,000 crore for Indian firms. But the ministry has come up with the defence offset policy and procedure just three years ago and then has changed those very frequently, which has given just about no space to the private sector to chip in. Most of the offsets benefit has been cornered by the public sector defence units like Hindustan Aeronautics, Bharat Electronics and Bharat Dynamics.

A key constraint for companies like the Tata Advanced Systems and Mahindra Aerospace to mine the sector deeply has also been the reluctance of the defence ministry to allow more than 26% foreign direct investment in the sector. Foreign partners have been unwilling to undertake technology transfers in the sector unless they had a larger equity in the joint ventures. But the ministry under AK Antony has been, at best, lukewarm to the idea. Even now, the Kelkar formula to prepare a 15-year long-term plan as the base for acquisition programme and sharing of that information with the industry remains to be implemented. The armed forces will have to wait some more time.