Defence Production Policy aims to bring in pvt sector

Defence Minister, AK Antony, releases the new Defence Production Policy, flanked by his deputy, MM Pallam Raju and the Secretary for Defence Production, RK Singh.

by Ajai Shukla

Business Standard, 14th Jan 11

Defence Minister A K Antony unveiled a Defence Production Policy that, in an implicit admission of public sector inadequacy, seeks “to build up a robust indigenous defence industrial base by proactively encouraging larger involvement of the Indian private sector”.

The policy aims at achieving “substantive self-reliance in the design, development and production of (equipment) required for defence in as early a time frame as possible” by creating “an ecosystem conducive for the private industry to take an active role, particularly for small and medium enterprises (SMEs).”

The Ministry of Defence (MoD) — which traditionally shelters its public sector units from private sector competition — has long feared labour union protests against any level playing field to the private sector. The tightrope that Antony is now walking was evident from his remarks today: “We will give more space to the private sector (since) the nine PSUs and 50-odd Ordnance Factories cannot meet the needs of the services. We will protect the PSUs, strengthen them, and at the same time bring in the private sector by reducing the space for foreign suppliers.”

But when asked by Business Standard about whether protection for the PSUs meant the private sector would not get a level playing field, Antony avoided a direct answer: “More and more, we are offering a level playing field to the private sector. It is a process. Without creating much imbalance or shakes (sic) in the system, we are trying to go ahead. You know what I am saying.”

The MoD is also challenged in having to balance the Defence Production Policy between its key objectives of indigenisation on the one hand; and on the other, having to keep the forces supplied with high-tech weaponry, little of which is produced in India.

“Preference will be given to indigenous design, development and manufacture of defence equipment,” states the policy. But, “wherever the Indian industry is not in a position to make and deliver the equipment as per the required specifications, within the required timelines, procurement from foreign sources would be resorted to.”

“Self-reliance is still a distant dream,” admitted Antony at the release function. “But this large-scale dependence on foreign sources is unacceptable for a country like India.”

The Defence Production Policy implicitly admits that successive Defence Procurement Policies (DPPs) — there have been seven versions since 2002 — have failed to galvanise domestic defence industry.

The new policy pledges to simplify the “Make” category of the DPP, which makes Indian companies/consortiums compete against each other to develop complex defence systems. So far the ‘Make’ category has seen just one project launched: to indigenously build a Future Infantry Combat Vehicle (FICV) for the army. A second ‘Make’ project, to build a Tactical Communications System, is now on the anvil.

Private industry is cautious about the new policy. Says Khutab Hai, who heads Mahindra Defence Systems, “As a statement of intent, the new policy is a welcome step. But the government must create an effective framework that will clearly facilitate the private sector in developing and manufacturing defence equipment. The first test case that will define the new policy will be the FICV project.”

Industry body, Ficci, while welcoming the new policy, said it was “concerned about the implementation of the policy on the ground, because even the existing policies have not been implemented. Ficci further hopes that MoD will take this initiative forward by also providing a level playing field to the private sector by eliminating any price preference for Defence PSUs and doing away with the practice of nomination.”

Next, the new policy institutes a long-awaited “Defence Technology Fund”, for financing defence R&D by private companies, particularly in the SME sector. So far, however, the details of the Defence Technology Fund are still to be finalised. Said Antony, at the release function, “These are only policy guidelines. We will discuss with the finance ministry… the idea is to have a reasonable corpus.”

The Defence Production Policy mandates an “annual review of self-reliance”, that will be held by the defence minister. There are, however, no empirical targets for self-reliance in the policy.

“Unless an annual target is laid down, what will the defence minister review at this so-called annual review?” asks the CEO of a private defence company. “The MoD has been talking for years about reducing our import dependency for defence equipment from 70 per cent to 30 per cent. Now some firm targets must be set.”

THE PRIVATE SECTOR REACTS

“The new DProP augurs well for private defence companies, encouraging them to identify global partners who can provide cutting-edge technology. The policy strengthens the Indian private defence industry and will boost indigenisation of technology.”

(Puneet Kaura, Executive Director, Samtel Display Systems)

“Given the technological maturity of Indian private companies, we must target indigenous development of defence equipment that is required 5-6 years from now, not 10 years. Defence equipment becomes obsolescent in 5-8 years, even quicker in the case of electronics/ICT sub-systems.”

(Rajiv Kumar, Director General, FICCI)

“As a statement of intent, the new policy is a welcome step. But the government must create an effective framework that will clearly facilitate the private sector in developing and manufacturing defence equipment. The first test case that will define the new policy will be the FICV project.”

(Khutab Hai, Mahindra Defence Systems)

“We appreciate MOD’s initiative to formulate the first ever Defence Production Policy, which acknowledges that private sector would have to play a larger role in defence production. We anticipate that an implementation road map with benchmarks would be announced soon.”

(Gurpal Singh, DDG, CII)

“We need to wait and see how effectively the government works with the private sector to develop indigenous platforms and systems, given the limitations of time and technology that may be available in the country.”

(Nidhi Goyal, Director, Deloitte)