There is a clear attempt to promote indigenous industry, a demand which is steadily being raised by the captains of both the public and private sector now.

Promoting Indigenous Defence Industry: Initiatives Since 2001

The objective of self-reliance in defence production has long been the driving force behind India’s expansion of defence industry. In terms of hi-tech though, it has largely been a dream, however. For much of the period since independence, the expansion was exclusively in the public sector, with the government establishing eight large defence public sector undertaking (DPSUs) and more than 39 ordnance factories. The expansion in the public domain has failed to live up to expectations, with the self-reliance index hovering way behind the stated limit of 70 per cent.

As a result the government has been forced to resort to direct import of critical defence items, with attendant consequences, in terms of possible strategic vulnerability in crisis situation. This led the MoD to take drastic steps, with a clear indication of promoting the private players, hitherto sidelined from direct involvement in defence industry.

In a major policy change the government in 2001 opened up the defence production to private participation along with the FDI limit up to 26 per cent. It also brought out several new procurement categories in successive DPPs to encourage them to delve into defence production and also to provide a level-playing field vis-à-vis the public sector enterprises

The reforms that were brought into procurement categories till 2008 were largely in the form of two additional provisions - ‘Buy and Make’ and ‘Make’ – to the existing ‘Buy’ provision in DPP.

The ‘Make’ procedure, which was introduced in 2005 and elaborated in great details later, was intended to give a thrust to indigenous design, development and production of high technology and complex systems. Under this provision, any company, including the private one can avail per cent during the developmental phase.

The procedure is however time consuming and cost intensive, and may not be in tune with the short term requirements of the armed forces.

The ‘Buy & Make’ procedure on the other hand is a short cut for ‘Make’ procedure. The only difference is that some numbers of any complex system required by the armed forces are imported followed by their indigenous production through transfer of technology. The provision saves time and money by way of doing away with the R&D efforts but ensures self-reliance in defence production, by involvement of indigenous industry.

The procedure also enables the domestic companies to form partnerships with foreign companies to benefit from their technology and finance among others

The best intention notwithstanding, the ‘Buy & Make’ procedure has also proved to be a very difficult proposition. It is primary because of the greater involvement of the MoD in finalising technology transfer agreements with the foreign companies, which should have ideally been left to the domestic production agencies to negotiate on the merit of their technical, financial and other bargaining strengths.

As the experience shows, the technology transfers were mostly in the form of transfer of engineering skills for production of non-critical items, with the foreign vendors not easily parting with critical components. Besides, as the foreign companies were more interested in supplying items directly from their own domestic production centres, they were not compelled to form partnerships with Indian companies.

Amendments to DPP 2008

Buy and Make (Indian)

Acknowledging the above deficiency in the procurement procedure, the 2009 Amendment to DPP 2008 has introduced a new category called ‘Buy & Make (Indian)’.

Under this new category, supply order will be placed only on the Indian companies who in turn will have to negotiate with interested foreign companies for technical and other production arrangement. This procedure will enable the Indian companies to explore a combination of alternatives, the best of which will be selected by the MoD.

At the same time the foreign companies, who would play indirect role under this provision, will be compelled to set up joint ventures with Indian companies, for a simple reason that it is only through the JV that they can supply their products. To obviate the possibility of Indian companies becoming a trading centre for foreign companies, the MoD has rightly a put bar, mandating that the indigenous content in value terms of the should be at least 50 per cent.

This would ensure that only serious Indian players with long term vision of becoming a true defence manufactures come into the business.

Information Sharing With Indigenous Industry

The second amendment with respect to enhancing domestic defence production relates to the information sharing with Indian industry. Earlier the Indian companies, especially the private players were constrained to have their advance R&D, production, financial and managerial plans, in the absence of the information contained in the long term requirement plans of the armed forces. Now the government deciding to ‘widely publicise’ a public version of the Long Term Perspective Plan covering a 15 year technology perspective and capability roadmap of the defence forces, the Indian companies can have advance planning in their requisite strength areas.

At the same time a window of interaction, opened via the amended DPP will provide the Indian companies and industry associations to interact with and convince the acquisition functionaries that their products are superior compared to imported ones.

Option Clause in Offset Policy

If the above amendments inventivise the domestic companies to delve into defence production, the government has also made it clear that it wants a competitive environment in defence industry.

This has also been partly reflected in the amended Offset Policy which has been in force since 2005.

Significantly, the inclusion of an ‘Option Clause’ in the offset policy, would henceforth allow the foreign vendors to change offset partner – though not the offset component and value – midway through the contractual period in “exceptional cases”.

The cases would however most likely to arise when an Indian partner faults in its contractual promises. The fear of being replaced by another company in the case of failure would not only put a question mark on its credibility, but will motivate it to improve its competitiveness to avoid the eventual embarrassment.

Streamlining QR Formulation

Efficiency in formulation of Qualitative Requirements (QRs) has always been emphasised by the MoD, for the simple reason that an efficient and broad-based QR can lead to multi-vendor situation and best value of money through greater competition.

To bring further improvements in this crucial aspect of defence procurement, the amendment to the DPP 2008 has added two new provisions. The first provision relates to information collection before formulation of QRs. Henceforth, RFI (request for information) would be made mandatory for all procurement cases.

This is to enable the QR formulating agency to seek advance information from the prospective manufactures, know the technological reality and arrive at ‘clearly identifiable and well researched QRs’. To ensure that QRs formulated do not violate the best intentions, another provision in the Amendment has made it mandatory for the QR agency to prepare a table, linking the capability sought from an equipment with the technical parameters and functional characteristic, and placed before the highest acquisition decision making bodies, that is Defence Acquisition Council (DAC) and Defence Procurement Board (DPB).

Strengthening Integrity Pact

The DPP 2006 for the time introduced a provision called precontract Integrity Pact (IP), in a move to eliminate ‘all forms of corruption’ in defence deals (IP is a binding agreement between the seller and the buyer, prohibiting any misconduct from either side).

Further, the DPP 2006 also made a provision of appointment of Independent Monitors (IMs), who would be responsible to examine any violations of pact, brought to notice by the buyer.

However, the DPP 2006 and also the DPP 2008, which upholds the same, did not mention the precise role and power of the IMs. To fill up the gap the Amendment-2009, has made the provision, giving precise role and powers to this oversight agency. Henceforth, IMs are authorised to scrutinize complaints with regards to violation of Integrity Pact, through the access to ‘the relevant office records in connection with the complaints sent to them by the buyer.’

Conclusion

The amendments to DPP 2008 augur well for the Indian defence acquisition, and more particularly the domestic defence industry. Considering that India’s cumulative defence procurement budget would be well over $50 billion in the next five to six years, it provides tremendous opportunity for the indigenous industry.

The Indian industry now needs to have a firm plan, in terms of collaborations with foreign partners, investment in key areas of strength and also a strong resolve to make India truly self-reliant in defence production.

(The author is an Associate Fellow at New Delhi-based Institute for Defence Studies and Analyses [IDSA]).