Streamlining India’s Defence Procurement System

    Despite a large industrial base and a growing economy, India is one of the world's largest importers of defence equipment. Our inventory shows an indigenous purchase ratio that is barely 30% of the total procurement. This is a report of the oroceedings of a seminar organised by Observer Research Foundation in New Delhi on May 2, 2012 which explores the issue of streamlining India's defence procurement system.

    Despite a large industrial base and a growing economy, India is one of the world's largest importers of defence equipment. Our inventory shows an indigenous purchase ratio that is barely 30% of the total procurement. The nation is expected to import defence equipment to the tune of $100 billion in the next ten years. The security challenges and the reported “hollowness”, coupled with obsolescence, varied inventory and huge import cost of defence equipment demand streamlining of our procurement system. This Workshop, organised by the ORF in association with SP's Guide Publications, aims to delineate the existing Defence Procurement Procedure (DPP) and address its core
    concerns. The platform comprises eminent individuals from academia, Services, private and public sectors, along with policy makers, both from the government and the political arena.
    Given the complexities and sensibilities of defence procurement, the objective is to seek a balance in its process–transparency, probity and fair competition with quality control, cost effectiveness and timely delivery. These factors are subservient to national security considerations and enable a shift from procurements to acquisitions with the ultimate goal of self-reliance and indigenisation. Accordingly, the DPP has been steadily refined since 2002 through amendments in 2003, 2005, 2006, 2008, 2009 and 2011. The categorisation of defence procurement has been gradually expanded from “Buy” cases to “Buy and Make” through Transfer of Technology (TOT), Buy and Make (Indian) and Make (Indian). Yet another revision in the form of DPP-2012 is expected shortly.
    The DPP is an “11 step” acquisition process, starting with the Services Quality Requirement (SQR) laid down by the Services and goes on to the award of the contract and its management. It includes aspects of offsets, TOT, Integrity Pact, Single Viewer Situation, Inter-governmental Agreements and oversight at various levels. The chain starts from the Planning Directorates of each Service at the lowest level and goes up to the Defence Acquisition Council (DAC), at the highest level. Although the DPP should cover all the capital acquisitions of defence, the Defence Research & Development Organisation (DRDO), Defence Public Sector Units (DPSU) and Ordnance Factories (OFs) follow their own procurement procedures. Even the procurement of medical equipment is excluded from it. This certainly calls for re-examination, as all defence procurements should ideally operate within a common conceptual framework.
    There is a view that domestic defence procurement is essentially sourced through DPSUs and OFs, with a monopoly status that leads to common ills in economic activity like inefficiency, lack of corporate accountability, competition, high costs and outdated technologies. With notable exceptions, these establishments primarily operate as aggregators or assembly units sourcing components from private producers. They either outsource hi-tech components or acquire TOT, leaving behind a
    static technological base. DPSUs and OFs have their successes and so one may not necessarily go along with the above criticism completely, but one has to point out that progressive corporatization and Joint Ventures (JVs) with the private sector will bring in market-based accountability and competition in quality, price and sales. It will also provide a window and a level playing field to the private sector, as it cannot be made to 'sit-out' in our march towards self-reliance. The situation in the field is somewhat similar to the phenomena that prevailed in the manufacturing sector prior to the liberalisation of the licensing regime in 1991. With this background, ORF will be addressing the specifics of capturing private sector participation in defence production through events planned in the coming months.
    Apart from indigenous R&D efforts including DRDO, for India to emerge as a military industrial base, Foreign Direct Investment (FDI) both in finance and technology is a must. Within the laid down international provisions
    (Wassenaar Arrangment), the cap of 26% on FDI needs an upward review, or else participation will be restricted to low technology. Similarly, restriction on TOT to private companies denies them the opportunity to acquire technology or commercially competitive terms, vis-à-vis the public sector. Alongside, the offset policy laid down for foreign vendors to either invest 30% of the value of their procurement orders of Rs. 300 crore or more in defence production units set up in India, or to purchase goods worth this value from the Indian defence production industry is not attractive enough. It must be appreciated that being a large importer, physical and financial implications of the offset clause are substantial.
    The technology-related offsets are the products of a country's advanced technology infrastructure, export competitiveness with advanced countries and advanced technology standing in terms of output of human resources and skills. Therefore, the argument that the Indian industry is not developed enough to absorb the volume of offset obligation needs to be examined further. Excessive barriers on foreign bidders also preclude judging the competitiveness of Indian bids, enable cartelisation and increase the costs. Instead, a price preference of 5-10% to domestic suppliers whose import content does not exclude a certain threshold should be examined. Also, technological and volume growth is only possible in global competition. Our defence industry and technology development model needs to be restructured accordingly and must include the DRDO and the PSUs These aspects need to be calibrated within an enabling environment to evolve a comprehensive policy, aimed at leveraging our buying power to enhance the flow of technology, as also the sourcing of the products and services from Indian defence enterprises.
    The strategic implications of defence procurements and transfer of critical technologies need to be a factor as well. It requires fostering of long term relationship to see the armaments and equipment inventory through its life cycle and upgrades. So, DPP in many ways goes well beyond a buyer-seller equation––to sovereign decisions. With large start-ups, capital and long gestation period to recover, the defence sector is a high risk area for the corporate sector. While the government has to make it viable and attractive for the large Indian commercial base, the corporate on its part needs to bring in more to the table and go global. Investments in R & D and advanced technology must be made as these have long–term spinoffs. The time has come for them to seize the opportunity presenting itself in the global arms market by exhibiting self-confidence and vision. Only then will we be able to realise the dream of indigenisation and self-reliance.
    The DPP has come a long way since 2002. The document has made significant improvements over a period of time. The changes incorporated are both exemplary in some cases and cosmetic in others. The approach has generally been mutual. Translated otherwise, it still seems to be a work in progress. The answer perhaps lies in the effective enforcement of the existing and proposed regulatory framework and to keep improving it. The
    aim being to do whatever it takes to reverse the import-indigenous 70:30 procurement cycle to 30:70; both the public and the private sectors will have to pull themselves up and the government has to create the enabling environment for them to succeed.

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