Opportunity, obscurity, obstacles and Indian Defence Sector

Before the introduction of “Defence Procurement Procedures-DPP” in 2002, the defence procurement used to follow the old tendering system, which was applicable to all sectors across the board.

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A file photo shows Indian Army jawans standing in a formation after disembarking from a military transport plane at a forward airbase in in the Ladakh region. (Reuters)

By Ajay Bedi

Indian Defence Sector holds overwhelming opportunities for the world leading defence manufacturing companies. It promises such a humongous market which is still evolving and talking baby steps toward autonomy. Some achievements are commendable e.g. manufacturing and successful testing of Light Combat Aircraft `TEJAS’. But even after achieving this feat, this sector is considered to be at a nascent stage, which is evident from export-import data and defence industry statistics globally.

We have some of the PSUs which came into existence in late 50s or earlier 60s. The details are as follows:

Though we are manufacturing defence items through “Public Sector Units-PSU’s” like

  • · HAL (1940 inception but full functioning started in 1964, amalgamation),
  • BEL (!954- Production started in 1956),
  • NAL (1959 in Delhi Under CSIR moved to Bangalore in 1960),
  • DRDO was established in 1958 by amalgamating the Defence Science Organisation and some of the technical development establishments
  • The first Indian ordnance factory can trace its origins back to the year 1712 when the Dutch Ostend Company established a GunPowder Factory in Ichhapur.
  • Started as Founded as the Scandia Shipyard in 1941, after Nationalisation in 1961, it is known as Hindustan Shipyard limited
  • Mazagon Dock Shipbuilders Limited.

Even after five decades of existence (After Independence) these agencies have not provided us a product which could compete at international level. We did have some exciting moments in the past, when Hindustan Aeronautics Limited (HAL) exported six Helicopters to Ecuador. But the glory did not last for long as these helicopters did not perform well and the whole issue was embroiled in litigation. We are proposing to export the “BrahMos Missiles” to our neighbours in South East Asia, Gulf Region and Latin American countries.

We have all these agencies which are brought into existence with a motto of self-reliance, but that motto or goal still seems to be a farfetched dream, despite having the backing of respective governments / regimes. It is really intriguing to understand why we failed to achieve the self-reliant stature.

Let us try and explore the issues or constraints.

Before the introduction of “Defence Procurement Procedures-DPP” in 2002, the defence procurement used to follow the old tendering system, which was applicable to all sectors across the board. However, the induction of DPP has envisioned as an initiative which would be addressing and catering to the defence specific issues, and would help in expediting the procurement process, with utmost transparency, eradication of red-tapism etc.., but that has not taken off, more bureaucracy creeped in, introduction of offsets was viewed to provide the required stimulus to local defence and ancillary industry, but initiative is also not yielding the desired results, on the contrary, has made it more cumbersome and confusing for the participating vendors, especially the foreign ones.

The DPP is evolving since its inception,but the tweaking of “Offset” policy is more rampant, the amendments and its interpretation has left the users and audience more confused and perplexed than ever before, the application of percentage is left on whims of the Defence Offset Management Wing (DOMW) not on the financial quantum of the project.

It has been the case with all committees or recommendations of the various boards constituted to address a particular issue or for the overall improvement of the system, still we are not self-reliant and heavily dependent on imports in the Defence, Aviation or Aeronautical sector.

Let us explore the reasons:

After Independence, it was viewed that the State would obtain the monopolistic approach towards some core sectors, Defence being the one related to the security and integrity of the country, the private sector was not involved in totality, Central Public Sector Enterprises (CPSEs) – through its nine Defence Public Sector Units (DPSUs)– and some Ordinance factory’s (OFs) working as extended arms of DPSU., constituted as first-ever Industrial Policy Resolution of 1948 and its revised version of 1956, both of which were articulated under the aegis of India’s first Prime Minister Jawaharlal Nehru. The Private sector was kept out of it, because of the sensitivity and high technology activities in Defence sector, the private sector was not that evolved technically and monetarily to take active participation in this sector.

But gradually the private sector has done exceedingly well in the other sectors, where the involvement of state was not that active, with the time the DPSU’s and related OFs have become the kind of liability and its considered that these are more of a burden than assets in the given scenario. The next major revamp of industrial policy could be attributed to Narasimha Rao government in 1991, when they abolished the “License-Permit Raj System”. Which provided the required impetus to the slow economy, that is considered as the industrial renaissance. Though many sectors grew at a rapid pace, the Defence sector could not keep up the pace with other sectors, due to the inheritance issue pertaining to this sector.

The other major policy amendment or alteration is done with the introduction of “Defence Procurement Procedures-DPP” introduced in 2002, undergone changes many times, still it is evolving, provides impetus to the growing domestic industry and achieves enhanced self-reliance in defence manufacturing. Major role for participation defined for the MSMEs in Defence Industrial Corridors. Another major amendment brought in the Draft DPP-2020 , which has been incorporated in the DAP-2020 is the “Leasing” it will help the maintenance manifolds and would expedite the lead time.

But going back to 2002, when these rules were introduced, we were not able to achieve the desired results and could not provide the required pace which was needed for domestic players participation in the defence sector. The reason one could see is the constant tweaking of the policy, which created an uncertainty in the mind of the investors, particularly the foreign investor. The stable environment and well-defined investment policy attract the business community to participate in development of a sector. Despite opening 74 per cent FDI through the automatic route, we didn’t see any significant investment coming.

The other classic example of flip flop policy was witnessed with the introduction of the “Offsets” clause in the Defence Procurement Procedure (DPP) 2005. The policy introduced a 30 per cent offset in contracts valued above Rs 3 billion under “buy” and ‘buy and make” categories. But in MMRCA they brought in a 50 per cent offset clause which was vehemently contested by participating vendors. With the newly incorporated DAP-2020 the “Offset value Parameter” are again tweaked and now offset will be applicable in all Buy (Global) cases with Acceptance of Necessity (AoN) cost of ₹ 2000 crores or more, other than all ab-initio Single Vendor Cases, including procurements based on IGA/FMS. In the Buy (Global) category, the Indian vendor, if involved, needs to fulfil the 30 per cent criteria of “Offset regulation” but it also stated that DAC is authorized to allow partial or full waiver to the Foreign and Indian vendor, this discretion would apply on case-to-case basis. No offsets will be applicable in all ab-initio Single Vendor Cases, including procurements based on IGA/FMS (Intergovernmental Agreement/Foreign Military Sales). Though the government has put this discretion to avoid any future ambiguity but it could also raise some confusion about the applicability of offset clauses or some influence could affect the interpretation of law.

We all understand that the defence is an intriguing and sensitive sector, which is required to be handled in a more sensitive manner. Any change, alteration or amendment needs to be looked into thoroughly, envisaging the pros n cons of it immediately or for the years to follow. The gestation period in the defence sector is really long, hence a long-term perspective is expected.

The holistic approach must incapsulate the operational issues, hazards and the steps to resolve those issues and concerns. We have a huge gap in the maintenance and repair approach. Though we get our personnel trained for repair of any newly procured inventory, that initial training depletes with the time, even though the strict process and procedures are in place but somewhere the quality aspect of training gets compromised while passing on the knowledge to our fellow colleagues etc…

The gap between the existing inventory and the one India aspires to get is huge. We need to make a policy which helps us in moving in the direction to acquire the latest technology. The Make in India initiative is one step in that direction. The newly released DAP-2020 has many clauses which help us in moving in direction of indigenization. It’s important to strike the balance in our existing approach where we need to maintain our readiness for another 5-7 year, and also to procure the inventory which caters to our futuristic requirements and gradually bridge-up the gap between obsolete and current inventory.

The ICDP (Integrated Capability Development Plan) motive is to keep an eye on the technology evolvement and to compare it with respective SHQs (Service Headquarters) future requirements, thereafter workout two five year plans, one concurrent and the other will again define the future requirement. ICDP plans required the approval of the Defence Acquisition Council (DAC) before they were promulgated. The ICDP needs to take into account all the aspects from conception, R&D, resources etc., till the time its commissioned. This approach is highly inclined towards the indigenous production, but in the current scenario or as we stand we are heavily dependent on imports in the defence and aviation sector. We need a long drawn concerted approach to develop our private MSMEs in these sectors along with our related PSUs.

(The author is an Independent Defence Industry Consultant. His email ID: ajaybed@gmail.com Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)

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