Defence on ground, not castles in air

The National Flight Test Centre (NFTC) team with the DRDO chief, on 10th Jan 2011, after the accordance of Initial Operational Clearance to the Tejas Light Combat Aircraft

by Ajai Shukla

Business Standard, 11th Jan 11

On the 13th of January, the Ministry of Defence (MoD) intends to promulgate its first-ever Defence Production Policy that, officials say, will ease the way for private Indian companies to compete for an impending flood of lucrative contracts for arms for India’s defence forces. But India’s private sector is not holding its breath; over the last decade, starry-eyed CEOs, who had believed that their technological skills and entrepreneurial dynamism would translate quickly into weaponry for the military and profits for them, have moulted into jaded cynics who perk up only while complaining (justifiably) about South Block’s unwillingness to walk the talk.

They point, most recently, to the just-announced Defence Procurement Policy of 2011 (DPP-2011), which has India’s private defence industry reeling. With foreign arms vendors now allowed to canalise offsets into the easy byways of civil aviation instead of the tightly regulated defence industry, the Indian defence industry correctly points out that the aim of the defence offset policy — never clearly enunciated, but generally believed to be the catalysing of domestic defence production — has been effectively undermined.

In these circumstances, snort these disillusioned CEOs, it is foolish to hope that the Defence Production Policy (let’s shorten this to DProP, since DPP is already the acronym for Defence Procurement Policy) might display flashes of enlightenment.

That may be overly pessimistic. From the grapevine chatter that has accompanied the DProP’s formulation, it seems likely to include several welcome initiatives. The first of these is unambiguously mandating that in-country defence contracts be awarded by competitive tendering, rather than by nominating one of the defence public sector undertakings (DPSUs) or an ordnance factory (OF), which the MoD has tended to do since it owns the entire lot of 9 DPSUs and 49 OFs.

Next, the DProP is likely to detail procedures for compiling, organising and maintaining data banks of the Indian defence industry so that, when a particular technology, industrial capability or equipment is needed, the MoD knows where to go. Furthermore, outlining procedures for self-registry would be a welcome relief for companies that aspire to enter defence production. Currently, they are at the mercy of touts who claim to have connections with key bureaucrats and procurement managers.

The DProP will also lay down procedures for short-listing companies that will be eligible to bid for specific contracts. With the MoD having turned down the Kelkar Committee’s recommendation to nominate a group of Raksha Udyog Ratnas (RuRs), or champions of industry — private companies with demonstrated capability, capacity and financial depth to participate in the capital and technology-intensive business of developing complex defence platforms — a transparent process for short-listing candidates is badly needed.

Cynical private sector CEOs will undoubtedly argue that they’ve heard all this before. The DPP-2011 already mandates that, for each “Make” procurement (i.e. in which the product is developed indigenously), a sectoral multi-disciplinary indigenisation committee (SMDIC) must short-list companies/consortia that possess the structure and know-how to develop that product. But the DProP can reinforce that message and detail a set of procedures that will help MoD procurement managers to internalise it.

The DProP is also likely to elaborate guidelines and procedures for allocating MoD funding for development projects that are undertaken by private companies or consortia under the “Make” procedure of DPP-2011. The DProP could also formalise the operation of a Rs 100-crore “defence technology fund”, which will fund specific cutting-edge R&D projects by small- and medium-scale private sector companies. While cutting-edge defence technology has historically emerged from small and medium companies (defence biggies tend to be systems integrators rather than developers of technology), the small companies lack financial muscle and require R&D funding from the government.

These laudable initiatives notwithstanding, it is the DProP’s fine print and the attitude with which the MoD implements its provisions that will determine whether the policy succeeds or fails. In the 20th century, the ministry has regarded private companies as useful ancillary suppliers to the public sector; this last decade, as private companies began to confidently challenge the DPSUs and OFs, the MoD establishment switched to an astonishing new argument: since the DPSUs and OFs produce only about 30 per cent of India’s defence requirements — much of that relatively low-tech — India’s private sector should focus on biting into the high-end 70 per cent that was being supplied by foreign vendors.

Consider the logic of this argument: if, even after half a century on the learning curve, the DPSUs and OFs seemed incapable of developing high-tech defence equipment, leave them in peace to paddle around ineffectually in the shallow end of the pool. Instead, throw the private sector into the deep end, asking them to build high-tech defence systems right off the bat… without funding them in any way!

Just a year ago, Minister of State for Defence M M Pallam Raju told me in an interview that this newspaper published in February 2010: “(The private sector) should play a complementary role, not try to compete in those areas where the public sector is already present… . But they should look at what the country needs. We don’t need low-tech, we need high-tech. And that is where I feel that the private sector should focus.”

That Mr Raju would probably be embarrassed to repeat that statement today says much about how the minister has grown in his job. It is to be hoped that his ministry, too, evolves in its thinking.