Defence procurement in the time of Coronavirus

May 23, 2020 12:53 PM

The export of arms is one of the most profitable businesses in the world. Scores of small and big companies in India have been making high-quality equipment for FOEMs, either independently or through joint ventures.

It is for the Indian government to take advantage of this new friendship and help replace the 70% obsolete wares that the Indian Armed forces are operating with.It is for the Indian government to take advantage of this new friendship and help replace the 70% obsolete wares that the Indian Armed forces are operating with.

By Vikram Mahajan

The coronavirus pandemic has caused the world economy to spiral downwards. Countries across the world have resorted to the protectionism of various kinds to save their respective economies. Late last month, USA banned immigration visas for 60 days and is now debating the temporary ban of the H1B visa. The Indian government, on the other hand, has disallowed global tenders above INR 200 crores (around $27 million) and announced INR 20 trillion (approx. US$ 265 billion) stimulus package to relieve the Indian economy. As part of the package, FDI limit in the defence manufacturing under automatic route has been raised from 49% to 74%. While, this is a welcome step, as the Foreign OEMs (FOEMs) will have control in defence manufacturing in India, the question is, will this help build the much-awaited ‘defence eco-system’ that India aspires for? If not, then what is the real stimulus needed? Let us see this announcement in consonance with the Defence Procurement Procedure (DPP).

Amidst the pandemonium of the pandemic, the Ministry of Defence (MoD) came out with the draft DPP-2020, a proposed upgrade to DPP-2016. Unlike in the previous DPPs, there is a paragraph in Chapter 2 which says,

‘Preference will be given to indigenous design, development and manufacturing of defence equipment. Therefore, whenever the required arms, ammunition and equipment are possible to be made by Indian Industry, within the timelines required by the Services, the procurement will be made from indigenous sources. While examining procurement cases, the time required for the procurement and delivery from foreign sources vis-à-vis the time required for making it within India, along with the urgency and the criticality of the requirement will be examined before deciding to proceed on categorisation.’

This one paragraph sums up the defence procurement priority of the MoD. Let me explain. A typical procurement process starts with the defence service (Army, Navy or Air Force) laying down the Qualitative Requirement (QR) of the equipment it wants to procure. The QRs are based on the best technology available globally and especially with the adversary. Even the DPP states that the equipment being procured should be ‘state of the art’. The aim is to procure the equipment indigenously. Whenever the equipment is not available locally, the MoD endeavours to procure the equipment from a FOEM, who is willing to make the equipment in India. However, if the requirement is urgent, the equipment is bought directly from the FOEM.

The fact that globally, India was the second-largest arms importer for the period 2014-2018, is a testimonial to the fact that India’s defence manufacturing capability does not meet the requirement of the Indian Armed Forces. The late Defence Minister Shri Manohar Parrikar transformed the DPP-13 to DPP-16 and added a new ‘Strategic Partnership’ (SP) chapter to enable procurement of high technology, vital items for the Armed Forces. These include fighters, helicopters, tanks, submarines etc, to be manufactured by an Indian (preferably) private sector company partnering with a FOEM. These projects will bring in technology, generate employment, include MSMEs and boost the economy. The arms produced will not only meet the requirement of the three forces but will eventually be exported. This was the true vision to build a defence eco-system that will bring the long-desired goal of self-reliance in defence manufacturing in India. However, four years down the line, not a single SP project is close to fructification.

Defence contracts have been a matter of great scrutiny in India for a very long time. Governments in the past have fallen on the charges of wrongdoing in defence procurement. As a result, the entire procurement process has become very objective with every step subject to intense scrutiny, making the entire process painstakingly cumbersome. It is evident from the fact that the draft DPP-2020 is nearly twice the size of DPP-16 and a normal procurement process takes around two years to sign the contract. Repeated governments have thus been reluctant to take a bold decision pertaining to defence procurement. Immediate requirements have been met through piecemeal procurement like that of 36 Rafale instead of 126 fighters, 12 Chetaks instead of 114 NUH, 24 MRH instead of 123 NMRHs etc.

The export of arms is one of the most profitable businesses in the world. Scores of small and big companies in India have been making high-quality equipment for FOEMs, either independently or through joint ventures. The products have been manufactured without compromising on quality or timelines, proving that India has the capability to become ‘the’ global defence manufacturing hub. The USA has recently taken over as the largest exporter of arms to India, replacing Russia. Unlike Russia, the USA has engaged with India at many military and strategic level, like no other nation and has been progressively easing export restrictions to India. It is for the Indian government to take advantage of this new friendship and help replace the 70% obsolete wares that the Indian Armed forces are operating with.

Today the global economy is dwindling, and protectionism is forcing the Indian government to look inwards for all procurement including defence. However, the defence manufacturing capability within India is nowhere close to the global standards required to fight any contemporary war. If it were, there would be no requirement of the SP chapter. Diluting the requirements of the armed forces will force them to fight with an adversary who is superiorly equipped. The result is obvious and terrifying. Therefore, this is important ‘not’ to take a hasty decision which will be regretted later. Catering for the two-year procurement cycle, decisions of today will translate to a contract in 2022. The economy would have recovered and would probably be prospering with the influx of companies from China, shifting manufacturing to India.

If the MoD is serious about building a defence eco-system, it should be driving it through the DPP and not expect it to happen by relaxation of FDI percentage. Increase in FDI to 74% only helps the new, ambitious category ‘Buy Global (Manufacture in India)’, as most of the procurement in DPP, (including SP) is required to be contracted with an ‘Indian vendor’.MoD should consider tweaking the definition of ‘Indian Vendor’, to make the most of it. In the interim, the best decision that the government can take for the armed forces is to fast track the SP projects. Today in the era of transparency there should be no fear of decision making with conviction, and the present government is known to take them.

(The author is veteran of the Indian Army and is currently the Director for Aerospace and Defense, India at US-India Strategic Partnership Forum. Views expressed are personal.)

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