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Private Sector Participation in Defence Procurement: A Reality Check

'Make in India' in Defence production has not taken off for myriad reasons. Given the pace at which things are moving, the ability of the government to navigate through the Indian business environment by streamlining the defense procurement procedures and facilitation of the private sector on fair competitive basis, will decide the direction.

Make in India Defence Slow Pitch

The Defence Industry was opened up for Indian Private Sector participation in May 2001 with FDI permissible upto 26%, subject to licensing. Government has announced the Defence Production Policy in January, 2011 and Joint Venture Policy for DPSUs in February, 2012.The much hyped 'Make in India' projects such as Futuristic Infantry Combat Vehicle (FICV) project, Tactical Communication System (TCS) and Battlefield Management System (BMS), have not reached even at development stage after almost 4 years.  The same is the fate of Strategic Partnership. Process involving the selection of the Production agencies, placement of orders is yet to be done. The actual production will take another decade.

The present defence production infrastructure dominated by DPSU and OFB produce about Rs. 60000 Crores and most of it toward meeting the Revenue requirements. Even for some of the platform the Foreign Component share is significant almost over 30% import by Indian industry. The amount spent on  acquisition from indigenous and foreign sources during the previous years is as follows:

From FY 2014-15 to 2017-18, 128 contracts worth Rs.119000 Crore have been signed with Indian vendors for capital procurement of defence equipment such as Helicopters, Radar, Ballistic Helmets, Artillery Guns, Simulators, Missiles, Bullet Proof Jackets, Electronic Fuzes and ammunition. There is significant increase in trend of procurement from indigenous source in case of  Capital acquisition as shown in fig below.

Categorization of Defence Programmes and Impact

The defence ministry has accorded Acceptance of Necessity (AONs) to proposals worth approximately INR 4.8 Lakh Crores from FY15 to FY19 (till date), almost 1.7 times of the Rs. 2.8 Lakhs Crores of AON accorded over FY11-14 and highlighting points to the push by the NDA government toward modernization of defense services.

While the pace of AONs has accelerated over the past four years and these are mostly focused on indigenous production as shown in figure, but AON is one of the initial steps in the defense procurement process.

We need to keep in mind that all AONs do not result in RFP being issued, as AONs are valid for 6-12 months. The record reveals  that AONs issued over  FY15-FY19  almost Rs 3 Lakh crores  of AONs, about 67%   are yet to convert into orders as shown in Figure.

In  four financial years i.e. from 2014-15 to 2017-18, Government has accorded Acceptance of Necessity (AoN) to 151 proposals, worth Rs. 2,66,700 Crore approximately under 'Buy (Indian-IDDM)', 'Buy (Indian)', 'Buy and Make (Indian)' or 'Make' categories of capital procurement as per Defence Procurement Procedure (DPP), which means Request for Proposal (RFP) shall be issued only to Indian Vendors. With the Capital procurement categorization in favour of domestic industry, the market for defence equipment new inductions in the next five years is pegged at approx. Rs 5.5 Lakh Crores (more than $90 Billion); more than 80 percent of Capital allocation. The broad categorization and quantum in procurement in pipeline is given in Figure and Table. The opportunities are both in terms of being part of a supply chain of a product or making the complete product.

Procurement Pattern

In recent past 70 capital acquisition contract worth over Rs.1.3 lakh crore inked with foreign vendors since 2014 and 120 contracts worth Rs. 1.17 lakh crore inked with Indian vendors since 2014.  90% of domestic acquisitions are from DPSUs & 41 ordnance factories and about 10% from private sector.

Most of the procurement still being sourced from DPSU/ Govt sector, despite claims of level playing field.  Fact of the matter is India has made little headway in getting its private sector to take to defence production under 'Make in India' policy with foreign collaboration.

Way Forward

With the Capital procurement categorization in favour of domestic industry, the market for defence equipment new inductions in the next five years is pegged at approx. Rs 5.5 Lakh Crores (more than $90 Billion). The broad quantum in procurement in pipeline is given in Figure and tables. The opportunities "are both in terms of being part of a supply chain of a product or making the complete product".

Taking into account the above given data, it depicts that there is likelihood of an increase in the share of domestic procurement in total procurement in comparison to the defence procurements from the foreign sources. Note worthily, about 80 percent is the value of major platform which have on the average 30 percent import content sourced by Indian production agency.

The admission in Government circles few months back as a follow up of Parliament Committee Report on Defence, 'Make in India' not taking off in Defence production for myriad reasons. The points made by the report were not new or unknown to MOD, most of these have been highlighted earlier and suitable recommendations made by various committees. The real issue is that the recommendations were never followed by vested interests. Resultantly no major 'Make in India' defence project has actually kicked off in the last three to four years. Given the pace at which things are moving, it is unlikely to sign on any of the major procurement by mid next year. With such virtual freeze, the services will have difficulties in even maintaining the present level of capability, forget modernisation.

There is a need to streamline and simplify the defense procurement procedures in national interest. Moreover, there is need to, increase the involvement of the private sector and supplement with committed funding for upcoming projects. The ability of the government to navigate through the Indian business environment, to reduce the time taken for defence procurement right from the initial clearance to placing the order on competitive basis will decide the direction, in case it really wishes to remove policy paralysis.

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