sathya
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In order to encourage wider participation of local and foreign companies in the production of hi-tech defence products in India, a panel has highlighted the need for a revamp of the defence procurement policy.
In its report, the Committee on Public Procurement has said that "the objective of defence procurement should be to create a robust defence production industry in India which will enable procurement of hi-tech products produced competitively and efficiently on the Indian soil".
The defence procurement procedure (DPP) has been refined since 2002 through amendments in 2003, 2005, 2006, 2008, 2009 and 2011. Under the DPP, bidders are first shortlisted and bids are invited through a "single stage-two bid system". Technical and commercial offers are received together in separate sealed envelopes. The categorisation of defence procurement has expanded from `Buy' cases to `Buy and Make through Transfer of Technology (ToT)', `Buy and Make (Indian)' and `Make' procedures, which has enabled a significant expansion of procurement during the recent years.
However, the committee observed that there is a need to review the policy as "this will help create employment and income opportunities in India"¦ While procurement from foreign sources may continue as necessary, augmenting of domestic production would improve efficiency and reduce costs".
In its list of recommendations, the committee has pointed out that "restrictive practices such as those relating to exclusion of foreign bidders in certain cases, transfer of technology and offset policy also need to be reviewed and suitably modified. This would not only result in significant savings for the exchequer as well as creation of jobs, it would also strengthen India's defence capability".
An overview of some aspects of defence procurement in India suggests an anomalous conceptual framework that seems to have led to unintended outcomes.
The committee also suggested that the government must consider progressive corporatisation of selected ordnance factories (OFs) in order to bring greater transparency in their operations and market-based accountability, as well as allowing the better performing of these entities to enjoy more flexibility in their work.
On the issue of expanding private sector participation in defence production, the committee noted that in most developed countries too private sector plays a dominant role in defence production. For example, in the US, which is the largest producer of hi-tech armaments, all production is reportedly undertaken in the private sector. On the other hand, in India, as a result of the policy and other constraints, indigenous production capacity has remained relatively inadequate and underdeveloped, leaving India as one of the largest importers of defence equipment.
There is a necessity to ensure development of competitive, efficient and economic manufacturing capacity in the private sector in India in the interest of national security as well as the national economy, the report observed.
Pushing for raising the FDI limit in the defence sector, the report pointed out that the 26% equity acts as a barrier to setting up of hi-tech production units because the foreign producers possessing such technology would not normally be willing to pass on their know-how to another private company which they do not control.
"While existing Indian companies may support these restrictions in the hope that they would provide a leverage to them in dealing with their prospective foreign partners, these may actually act as barriers to many worthwhile collaborations for production of advanced equipment," it added.
It is sometimes argued that even if the FDI limits are increased, foreign governments and companies may not allow defence production to shift to India. The committee suggested that the government create an enabling environment and allow competitive forces to operate and thereby enhance indigenous defence production.
However in the MoD, the DG (Acquisition) stated that exceptions could be made on case-by-case basis to raise the FDI limit, pointing out that there were other important barriers to transfer of defence technology, which was tightly controlled through legislation in advanced defence manufacturing countries. "Even if the FDI cap is increased beyond 26%, there would be no certainty regarding ToT to India, since such decisions are governed by export control laws and political and strategic considerations of the exporting country,"the DG stated.
According to the MoD, "a higher cap on foreign equity in Indian defence manufacturing is, therefore, not a panacea for hi-tech defence production. Further, while low-end ToT and know-how may get transferred, it is unlikely that `design' and `development' capability and `know-why' would be transferred to Indian manufacturing entities with higher FDI cap. Design and development capabilities and `know-why' are closely held by foreign companies or JVs. On the other hand, allowing foreign original equipment manufacturers (OEMs) a higher FDI cap in defence manufacturing could be a setback for indigenous design and development efforts. The reliability of defence supplies during war would also become subject to greater uncertainty"
In its report, the Committee on Public Procurement has said that "the objective of defence procurement should be to create a robust defence production industry in India which will enable procurement of hi-tech products produced competitively and efficiently on the Indian soil".
The defence procurement procedure (DPP) has been refined since 2002 through amendments in 2003, 2005, 2006, 2008, 2009 and 2011. Under the DPP, bidders are first shortlisted and bids are invited through a "single stage-two bid system". Technical and commercial offers are received together in separate sealed envelopes. The categorisation of defence procurement has expanded from `Buy' cases to `Buy and Make through Transfer of Technology (ToT)', `Buy and Make (Indian)' and `Make' procedures, which has enabled a significant expansion of procurement during the recent years.
However, the committee observed that there is a need to review the policy as "this will help create employment and income opportunities in India"¦ While procurement from foreign sources may continue as necessary, augmenting of domestic production would improve efficiency and reduce costs".
In its list of recommendations, the committee has pointed out that "restrictive practices such as those relating to exclusion of foreign bidders in certain cases, transfer of technology and offset policy also need to be reviewed and suitably modified. This would not only result in significant savings for the exchequer as well as creation of jobs, it would also strengthen India's defence capability".
An overview of some aspects of defence procurement in India suggests an anomalous conceptual framework that seems to have led to unintended outcomes.
The committee also suggested that the government must consider progressive corporatisation of selected ordnance factories (OFs) in order to bring greater transparency in their operations and market-based accountability, as well as allowing the better performing of these entities to enjoy more flexibility in their work.
On the issue of expanding private sector participation in defence production, the committee noted that in most developed countries too private sector plays a dominant role in defence production. For example, in the US, which is the largest producer of hi-tech armaments, all production is reportedly undertaken in the private sector. On the other hand, in India, as a result of the policy and other constraints, indigenous production capacity has remained relatively inadequate and underdeveloped, leaving India as one of the largest importers of defence equipment.
There is a necessity to ensure development of competitive, efficient and economic manufacturing capacity in the private sector in India in the interest of national security as well as the national economy, the report observed.
Pushing for raising the FDI limit in the defence sector, the report pointed out that the 26% equity acts as a barrier to setting up of hi-tech production units because the foreign producers possessing such technology would not normally be willing to pass on their know-how to another private company which they do not control.
"While existing Indian companies may support these restrictions in the hope that they would provide a leverage to them in dealing with their prospective foreign partners, these may actually act as barriers to many worthwhile collaborations for production of advanced equipment," it added.
It is sometimes argued that even if the FDI limits are increased, foreign governments and companies may not allow defence production to shift to India. The committee suggested that the government create an enabling environment and allow competitive forces to operate and thereby enhance indigenous defence production.
However in the MoD, the DG (Acquisition) stated that exceptions could be made on case-by-case basis to raise the FDI limit, pointing out that there were other important barriers to transfer of defence technology, which was tightly controlled through legislation in advanced defence manufacturing countries. "Even if the FDI cap is increased beyond 26%, there would be no certainty regarding ToT to India, since such decisions are governed by export control laws and political and strategic considerations of the exporting country,"the DG stated.
According to the MoD, "a higher cap on foreign equity in Indian defence manufacturing is, therefore, not a panacea for hi-tech defence production. Further, while low-end ToT and know-how may get transferred, it is unlikely that `design' and `development' capability and `know-why' would be transferred to Indian manufacturing entities with higher FDI cap. Design and development capabilities and `know-why' are closely held by foreign companies or JVs. On the other hand, allowing foreign original equipment manufacturers (OEMs) a higher FDI cap in defence manufacturing could be a setback for indigenous design and development efforts. The reliability of defence supplies during war would also become subject to greater uncertainty"
