On May 16, Finance Minister Nirmala Sitharaman made three specific announcements for ‘Self-Reliance in Defence’, and some additional measures to make faster procurement decisions.
First, a list of weapons/platforms for ‘ban on import’, with year-wise timelines will be notified. There would be initiatives to promote indigenisation of imported spares, and there will be a separate budget provision for domestic capital procurement, every year, in the defence budget. Second, is the corporatisation of Ordnance Factory Board (OFB). Third, FDI limits in defence manufacturing under the automatic route will be raised from 49 per cent to 74 per cent. The measures for the time bound defence procurement and faster decision-making include:
• Setting up of a Project Management Unit (PMU) to support contract management.
• Realistic setting of General Staff Qualitative Requirements (GSQRs) of weapons/platforms.
• Overhauling Trial and Testing procedures.
The announcements are indeed an extension of the policy reforms that have been in the pipeline since 2014. Although the defence sector was opened to direct private sector participation way back in 2001, it had not generated enough enthusiasm due to multiple reasons, the key ones being an indifferent policy and the lack of access to users. The plethora of policy reforms over the last five to six years, aimed to bridge the gap between defence modernisation and indigenisation by getting wider private sector participation, had just begun to show results. For example, in the number of industries applying for defence license, number of private industries supporting DRDO projects and the increasing outsourced work of DPSU is being managed by the private industry, particularly MSME.
The first announcement, ‘negative list for import’ is, therefore, critical to ensure that the pre-coronavirus enthusiasm, generated with so much effort, does not die down. Ban on import together with assured budgetary support for domestic capital procurement should be reassuring for the domestic industry. As of now, indigenisation is the responsibility of Department of Military Affairs headed by CDS, procurement is with DG Acquisition, determining indigenous feasibility is with DRDO, and budget oversight is with MOD Finance. Multiplicity of agencies added with short tenures of some cadres is hurting the process.
Going into the future, for self-reliance, accountability needs to be clearly defined. Draft defence Production Policy, 2018 had identified self-reliance in 13 weapon platforms/systems. These could be reviewed and a clear roadmap be outlined. To make it happen, procurement must be managed by a single agency manned by specialists.
The responsibility for developing indigenous weapon systems/platforms is primarily with the DRDO. It is imperative that alongside the time bound ‘negative list for import ban’, there should be a time bound R&D plan, with accountability of DRDO and agencies involved.
An associated challenge is going to be determining the ‘negative list’ for ban on import. Currently, there are multiple parallel procurements at various stages. For instance, Indian Army is in the process of importing rifles, carbines and light machine guns through ‘fast track procedure’ for operational urgencies in counter terrorism and line of control. At the same time, ordnance factories are manufacturing rifles for supply to Central Armed Police Forces. Even as the induction of 155 mm Dhanush Artillery guns, manufactured by Ordnance factories are in progress, there is an import procurement of 155mm towed guns, albeit with different specifications (GSQR) in the pipeline. There are similar stories with many other items, cutting across the armed forces and the central and state police forces. Consolidating the requirements in a time-bound manner is essential so that we do not lose advantage of scale.
Like weapon systems/platforms, it is equally important to lay down self-reliance objectives for critical components and material. For example, engine of an aircraft accounts for a substantial portion of the overall cost, besides there are recurring requirements of MRO. With the combined military and civil aviation requirements, this should make attractive business propositions for joint ventures, technology transfer and R&D. India’s software industry needs to be incentivised to participate in defence systems. Algorithms integrate various sub-systems/systems of defence equipment, where self-reliance could be the battle-winning factor. India lags in chip technology. In defence systems, the requirement gets more challenging due to specifications of ruggedness, extreme temperatures and minimising size. The trend is shifting towards systems on chips. Defence could well lead the way by focusing our IT industry’s interest towards this field.
Separate budget provision for ‘domestic capital procurement’ was a long overdue reform. India’s defence budget increased from Rs 3,40,921.78 crore in 2016-17, to Rs 4,31,010.79 crore in 2019-2020. There are competing demands on the budget because of the complex threats that India faces. There is an ongoing sub-conventional conflict being fought, with concomitant preparations for conventional war and other international security responsibilities. Therefore, first the prioritisation of defence modernisation requirements is critical. Second, since defence procurements tend to spread over several years to sustain the self-reliance process, it would be advisable to adopt ‘roll on budget’ for domestic defence procurements for the duration visualized, instead of year on year budgeting.
Since the opening of defence sector to private industry in 2001, 452 industrial licenses have been issued. Of these 452 licenses, 109 were issued in the last three financial years. That said, the proposed investments indicated by the companies in their license application in the five years from 2015 to 2019 amounts to only Rs 13,743.53 crore. In the same period, the government has accorded Acceptance of Necessity (AoN) to 204 proposals worth Rs. 4,04,880 crore, under categories enabling indigenous capital procurement, in which Request for Proposal (RFP) is issued only to Indian industries. The vast difference, however, between the AoN worth (Rs 4,04,880 crore) and the proposed investment (Rs 13,743.53 crore), clearly indicates scope for much more private participation.
In June 2014, FDI in defence was increased from 26 per cent to 49 per cent through the automatic route, with prospect for increasing up to 100 per cent, on a case by case basis, provided modern technology is brought into the country. The announcement made for raising FDI limits in defence manufacturing under the automatic route from 49 per cent to 74 per cent, is a positive step. This was part of the Draft Defence Production Policy 2018 as well. In the last five years, FDI amounting to Rs.1812 crore has been reported in the defence sector. The amount pales in comparison to the annual average of Rs 31,000 crores worth of capital procurement being done directly ex-import. India’s advantage is its scale, which makes it attractive for investment. Besides simplifying process, the procurement strategy must help to drive more FDI in defence.
In his inaugural speech at the Defexpo-2020, Prime Minister Narendra Modi had announced the formulation of long-term integrated perspective plan (LTIPP) for 15 years. It is essential to inform the industry well in advance about armed forces requirements, including numbers, specifications, and timeline. This is currently done through an unclassified version of the LTIPP called Technology Perspective and Capability Roadmap (TPCR). The latest TPCR 2018, is an improvement over earlier ones, as it quantifies some requirements of the armed forces. For the industry to be able to invest securely, the TPCR must be replaced by a “Defence Industrial Planning’ document which comes with a degree of assurance, that items required will be procured within the given timeframe. In addition, the clear business visibility will help attract FDI also.
Some of our defence industries prefer to deliver better technologies abroad as they find it difficult to be price-competitive and sustain the long procurement process in India. The provisions of Enhanced Performance Parameters in DPP 2016, that tried to achieve intersection of best technology (T1) with lowest bid (L1), has not been utilised much. ‘Price Indexing of Technology’ must be undertaken by the services, with help of technology and costing experts, to get best value from our indigenous manufacturers.
The decision to corporatise the Ordnance Factory Board (OFB) is a very positive, long overdue decision. OFB is a strategic asset with 41 factories, 13 Ordnance R&D centres and nine Ordnance Institutes of Learning. There have been several issues with quality, timeliness, and cost of OF products. Some incremental progress was made in the last couple of years like reducing items from the ‘core items’ to the non-core items. The OFB is presently a subordinate office of the MoD, corporatisation will enable more professional oversight, functional and financial autonomy. Corporatisation should introduce staffing structure modelled like manufacturing entities, rather than government departments.
Despite the modernisation of ordnance factories with Computerised Numerical Control (CNC) and other modern machines, the manpower and output issues remained. These should get addressed more conveniently after corporatisation. The diffused responsibility for Quality Assurance and Quality Control between OFB and DGQA, too, needs resolution. Managing the change while meeting aspirations of existing employees will be critical to avoid disruption. To enhance productivity and efficiency of the organisation while ensuring that the stability of the key national strategic asset is protected, combination of approaches involving management structural change, listing in markets, technology infusion through JV, transition to core items only, will have to be adopted.
An overhaul of the trial and testing process has been announced. A great relief to the private industry has been the opening of public sector trial and testing facilities. Further facilitation is planned through government support for trial and testing facilities in the defence industrial corridors. There is scope for further simplification of the trial process for procurements, and substitution of trial with warranty. Currently, import substitution and infusion of latest components/technology are inhibited by the present policy of going through user and DGQA trials afresh. Repeat orders and revenue procurement of already introduced equipment are similarly affected.
Armed forces are generally faulted for stipulating aspirational GSQR. This happens because those formulating the specifications try to factor in anticipated delay in procurement and wish for the best technologies that are emerging. Distinction needs to be made between procurement and development. Procurement should be out of what is available, and in case the desired QR is not available, then development is necessary. Wherever development is required, the scheme should be progressed either as Make 1, Make 2 or through the DRDO.
To enhance output from the private sector and secure independence from imports, implementation of the transformational policies is crucial. Let us target Defexpo 2022 to see these announcements implemented in letter and spirit.