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At the time of
independence, India had a very small ‘Defence Industrial Base’. Over
the years, it has come a long way to acquire
an enviable size and India now has one of the largest and most
significant defence production capabilities in the developing world.
Despite its
growth, Indian Defence Industry has not been significantly successful
in development of ‘State-of-the-art” technology. Though a large number
of projects have been undertaken to bridge the technological gap, most
of them have either ended in failures or were delayed so much that
import had to be restored to for meeting operational requirement of
services.
Analysis of the state
of defence industry in some of the developed states like US, UK and
Sweden suggests that the necessary push to influx dynamism in defence
production in these countries has been accomplished by participation
of private industry in production of high tech arms and ammunition. In
India, however the participation of civil industry in defence
production is negligible.
In mid-1990, DRDO
set a target of 70% self dependence in respect of country’s defence
needs by the year 2005. However, even today
India is nowhere near that
objective of 70 percent self reliance. It continues to depend on
imports for all its major equipment requirements
for which technology for production is not
available in the country. In the Defence Budget for the current year
2006-07, there is a provision of Rs. 89,000 crores, out of which the
provision under Capital Head is pegged at Rs.37, 458 crores. Out of
this, a major portion will be spent on imports. Major reason for this
state of Indian defence industry is the poor participation of private
industry in defence production
MAJOR POLICY REFORMS
There are many
reasons for the poor participation of the civil industry in defence
production However in order to address the major problems in achieving
a larger participation of private industry in defence production and
in its quest to achieve the target of 70 percent self reliance for
country’s defence needs by 2005, the Government since mid-1990, has
implemented a number of policy changes.
The new Industrial
policy of 1991 implemented by Government of India ushered in an era of
economic liberalization, offering Indian industry an opportunity to
grow and expand.
In 1998, on
initiative of CII, six joint task forces were constituted. One of
major recommendations of the task forces was private sector should be
given a proactive role in defence production. After Kargil war, a
committee was formed under Mr. K Subramanyam to look into aspects of
national security. The report “Kargil committee report” submitted by
the committee on 26 Feb 2001, highlighted a requirement of the reforms
in higher defence management. The government also founded a Group of
Ministers committee which submitted its report “Reforming National
Security System”. Report recommended many steps for institutional
changes and highlighted the importance of self reliance. Following
this, the government brought about a major policy change in May2001
and opened the defence production by allowing 100% participation by
private sector industry with 26% FDI cap. This is a landmark policy
shift implemented by the government in the history of defence
production in India. Government also implemented a few institutional
changes. Integrated Defence Staff (IDS) was established for direct
interaction between MoD and defence forces. A new acquisition set up
was established in the Ministry of Defence in Oct 2001 to make the
acquisition more efficient, transparent and fair. A new Defence
Procurement Procedures(DPP- 2002) was implemented with effect from 30
December 2002 for procurements flowing out of ‘Buy’ decision of
Defence Acquisition Council (DAC) cases and subsequently extended
to include “Buy and Make through Imported Transfer of Technology
(TOT)’ decision. ” cases as well The Defence Procurement Procedure
–2002 (version June 2003), was reviewed and modified based on
experience gained in implementation. This new procedure, Defence
Procurement Procedure–2005 for all capital acquisitions has been
implemented on 01 Jul 2005 to
ensure expeditious procurement, transparency in operations, free
competition and impartiality.
A new high level council named Defence Acquisition Council (DAC)
with Finance Minister as its chairman, three service chiefs , Defence
Secretary, Secretary(DP&S), Secretary(DR&D) and Secretary (Defence
finance) ) as members was constituted.
The planning process for
defence acquisitions would be under the overall guidance of the
Defence Acquisition Council. Headquarters Integrated Defence Staff (HQ
IDS), in consultation with the Service Headquarters, would formulate
the 15 years Long Term Integrated Perspective Plan (LTIPP) for the
Defence Forces and five years Services Capital Acquisition Plan (SCAP)
which should
indicate the list of equipment to be acquired, keeping in view
operational exigencies and the overall requirement of funds.
The DAC will categorise
all capital acquisitions as ‘BUY’ ((outright purchase). ‘BUY and
MAKE’ (purchase followed by
licensed
production / indigenous development) and ‘MAKE’ (indigenous production
and
research &
development) on a five year basis and accord overall Acceptance of
Necessity (AON). DAC’s decisions on acquisition as approved by the
Raksha Mantri will flow down for implementation to the Defence
Procurement Board (DPB), Defence Production Board and Defence R&D
Board.
Defence Procurement Board (DPB) has been made responsible for
monitoring all activities related to capital acquisitions of
Department of Defence of “Buy” and “Buy& Make” cases and would also
chalk out annual acquisition plans of the three services which would
be based on the five years acquisition plans approved by DAC.
Defence Production
Board would be responsible for indigenous production of all cases of
acquisition categorized as “Buy & Make” and “Make”. Defence Research
and Development Board would monitor the progress on all R&D
indigenous proposals categorized as “Buy & make” by DAC.
Acquisition
Wing will be headed by Special Secretary and would be responsible for
all matters concerning capital acquisition. It will consist of four
divisions namely Land, Maritime, Air Force and a Systems Division.
Each division would have Acquisition manager, a joint Secretary level
officer and Technical manager, a service officer of two star ranks.
Finance Advisor (acquisition)
would advise Special Secretary (acquisition)
on finance matters
Highlights of the DPP-2005.
Defence Procurement Procedure–2005 for all capital acquisitions,
implemented on 01 Jul 2005 for
expeditious, transparent, impartial and competitive procurement, has
the following main features:
·
Joint Services
Qualitative Requirements will be formulated for equipment common to
the three services.
·
Up to 30% direct
offsets for procurement values of more than Rs 300 crores. It is
mandatory for overseas defence companies making a sale of more than
$70 million to India to buy goods worth 30 percent of the sale amount
from Indian defence companies.
·
An integrity pact
will have to be signed by Buyers and purchaser to ensure that no
unfair and unethical means were employed for winning the deals. The
sellers would have to give a declaration that they have neither
engaged any agent or broker for the defence deal nor have they paid
any commission for the purpose.
·
Qualitative
requirements for each acquisition will be broad based to avoid single
vendor's situations.
·
A new clause will
allow strategic and political consideration to override lowest-bid
criteria in awarding major defence Contracts.
Decisions on all such acquisitions would be taken by the Cabinet
Committee on Security (CCS) on the recommendations of the DPB.
·
Open tendering for
items bought commercially-off-the-shelf (COTS).
DPP-2005 which
is basically an amended version of DPP- 2002 is an attempt to make the
procurement procedures more
transparent to ensure greater public
accountability, healthier and wider competition. There are three
important clauses which have been included in the procedures for the
first time. Firstly, direct offset clause of 30% of the contract value
would be extremely beneficial to Indian defence industry. Mr. Banerjee, Special Secretary (Acquisition),
Ministry of Defence in his address at “India Defence Industry Summit
2006 ” held during Defexpo 2006, clarified that the as per the Offset
Policy clause of the Defence Procurement Policy (DPP-2005) , vendors
would be at liberty to select their Indian partners from a list that
would include both public and selected private sector companies.
Secondly,
integrity pact clause for capital acquisitions costing more than 100
crores has been introduced. Aim of this clause is to eradicate
corruption and make the entire process of acquisition absolutely fair
and transparent. Mr. Pramod K. Anand, Joint Secretary and
Acquisition Manager, Ministry of Defence explained the details of the
clause. He stated
“Integrity pact binds both bidder and the buyer in the form of
commitments made in black and white by them. Strict rules and
punishments are being formulated in the rule book to deal with reports
of using undue influence or bribery in the form of money or by
personal contacts”. However
results of this innovative clause in cleaning the corruption from
the system would be known after some experience in defence capital
acquisition under this clause.
Thirdly, clause of
formulating Joint Services
Qualitative Requirements for equipment common to three services is
very important as this would eradicate duplication and standardize the
inventory of the three services.
Another clause of deviation from DPP- 2002 is the waiver/amendment
to parameters of SQR. In DPP-2002,
waiver/amendment to SQR had to be referred to Defence Minister
for approval which invariably delayed the acquisition process.
However, as per DPP-2005,
waiver/amendment to parameters of SQR may be accorded by the SHQ
concerned before issue of Request for Proposal (RFP). Thereafter no
waiver of parameters would be granted.
Kelkar committee on self reliance in defence preparedness
In order to address the critical issues raised by the
private industrial institutions and to obviate the difficulties for
private industry to enter defence production, the government had set
up Kelkar Committee in 2004 to
examine and recommend
changes needed
in the acquisition procedures and enabling a greater participation of
private sector in defence production for strengthening
self-reliance in Defence preparedness. The Kelkar Committee has
submitted the report in two parts. First part of the report, submitted
in April 2005 which focused on the review of defence procurement
procedure, to integrate users, ministry of defence and the industry
made several important recommendations, which are linked with the
issue of enhancing indigenous production.
The
Committee’s proposals focus on encouraging involvement of country’s
best firms in Defence Capability Building, pursuing Offsets policy to
bring in Technology and investment, exploring synergies amongst
private sector Defence Public Sector Undertakings (DPSUs), Ordnance
Factories (OFs) and Defence Research and Development Organisation (DRDO)
to promote high technology capabilities and creating an environment
for quantum jump in export of defence equipment and services.
The main recommendations of the
Committee are:-
-
Preparation of a 15-year long-term plan forming the basis for
acquisition programme.
-
Information sharing of requirement of Armed Forces with the
Industry.
-
Identification of entry points for the private sector in the
acquisition process.
-
Accreditation and fostering of Raksha Udyog Ratna /Champion.
-
Evolve policy framework to promote participation of Small and
Medium Enterprises in defence production.
-
Setting up a new professional agency for defence acquisition.
-
Provide Defence Research and Development opportunities both with
DRDO and industry.
-
To promote transparency in decision making.
-
To encourage optimum utilization of existing capacity.
-
To work out Request for Proposals (RFP) to include an Offset
Clause for contracts valued at Rs. 300 crores and above.
-
To re-examine the concept of Negative List for Defence exports and
setting up of an Export Marketing Organisation.
The committee has recommended adoption of South Korean model to
identify Raksha Udyog Ratna (RUR)/champions on the basis of their
performance. Only those firms
of proven excellence and which are capable of contributing, depending
on their technical, managerial and financial strength should be
declared RURs.
These firms are
essentially platform producers and system integrators and to be
treated at par with the Defence Public Sector Undertakings.
As per the MoD
press release, the measures outlined in the report when implemented
would lead to a high degree of indigenous production, resulting in
increased growth in the GDP, greater employment opportunities and
substantial savings. There would be greater self-reliance in Defence
Production, benefits in terms of R&D, technology spin offs, higher
industrial growth, higher exports, increased competition and more
employment opportunities, besides cost savings.
Majority of the
recommendations have been accepted by MOD for implementation. A few
others are being analysed for acceptance. Defence Minister, Mr. Pranab
Mukherjee while addressing Seminar on 'Defence Production and
Outsourcing :Opportunities for the Private Sector' organized by FICCI
on 30September 2005 in New Delhi said “We have already included,
in the Defence procurement procedures 2005 which has been recently
promulgated, an important provision for obtaining 'offsets'. The
present dispensation stipulates that for all the Capital purchases
estimated to be above Rs.300 crores, there will be a requirement of an
'offset' obligation”. Mr.
S Banerjee, Director General (Acquisitions), Ministry of Defence in a
seminar during Defexpo2006 announced that only “direct offsets” would
be allowed in defence acquisitions for all cases valued over 300
crores and these have to relate to co-production, joint ventures and
transfer of technology for maintenance and upgrades of weapon systems
purchased. He also allayed apprehensions that offsets would be only
confined to defence PSUs or ordnance factories, but it would be up to
the defence suppliers to select their Indian partners from an approved
list including private and public sector companies.
This clause of “direct offset” has been included in the RFP for all
cases of capital acquisition valued above Rs. 300 crores in the
Defence Procurement Procedures 2005. Implementation of this clause in
letter and spirit will go a long way in strengthening the defence
sector capabilities in India.
Second part of the
committee’s report was submitted to MoD in Nov 2005.In the part two of
its recommendations, committee has recommended that the Government
should give greater freedom to the PSUs to form joint ventures,
consortiums.
After all the
recommendations of the committee are implemented, there would be a
much larger and proactive participation by the private industry in
production of defence systems since they would be associated with
project right from the designing stage. There would be a
greater participation between public and private sectors industry
which will go a long way in evolution of a vibrant defence production
industry in India.
Conclusion
This is a
matter on concern that, despite policy changes implementation by the
government towards defence production in 2001, private sector
participation in this field has not increased in the last five years
at the pace as was expected by the Government. Except for some
developments in the recent past, there are very few examples of a
complete weapon system having been taken up for development by
private industry independently or in collaboration with DPSUs/DRDO.
This was acknowledged by Defence Minister, Mr. Pranab Mukherjee while
addressing a seminar on 'Doing business with
Defence' in Kolkata on 31 Dec 2005. He said “the
private sector had failed to come up to the desired level of
participation in production of defence capacities”.
However, the policy
changes implemented by the government are the steps in right direction
and are likely to integrate private industry with defence industry to
a larger extent and sooner or later usher in the desired results.
These are a few reasons to be optimistic about future of Indian
Defence Industry.
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