BIT­ING THE BUL­LET

The pol­icy break­through lever­ages pri­vate sec­tor ca­pac­ity into strate­gic part­ner­ships for arms man­u­fac­ture, but it will be years be­fore or­ders come through

India Today - - POLITICS | BJP -

n a steamy Satur­day evening in New Delhi, the Union min­istry for de­fence (MoD) ap­proved the broad con­tours of a pol­icy that will spell the end of a 70-year pub­lic sec­tor mo­nop­oly. The Strate­gic Part­ner (SP) pol­icy, in the works for nearly two years, per­mits pri­vate sec­tor firms to make bat­tle tanks, com­bat air­craft and sub­marines. This pol­icy is among the sin­gle big­gest moves by any govern­ment since the doors were opened to pri­vate sec­tor in­volve­ment in de­fence in 2001. It is also a timely move by the Modi govern­ment to shore up its tot­ter­ing flag­ship

Make in In­dia pro­gramme. Just how se­ri­ously the govern­ment views this pol­icy be­came clear four days later when the cab­i­net com­mit­tee on se­cu­rity cleared it, mak­ing it among the quick­est such ap­provals.

The fo­cus now shifts to the de­fence min­istry which will now have to se­lect pri­vate sec­tor firms to tie up with for­eign orig­i­nal equip­ment man­u­fac­tur­ers (OEMs) to pro­duce hard­ware in a few se­lected seg­ments—fighter air­craft, sub­marines, tanks and he­li­copters. Ne­go­ti­a­tions will be con­trolled by the MoD. In the past, all such ‘buy and make’ cases, as they were called, were handed over by the MoD to its nine de­fence pub­lic sec­tor un­der­tak­ings, ship­yards and 39 ord­nance

fac­to­ries. Now the field has opened up. The ori­gins of the SP pol­icy lie in the re­al­i­sa­tion that the mono­lithic pub­lic sec­tor failed to pre­vent the coun­try’s head­long de­scent into the abyss of arms de­pen­dence. In­dia re­mains the world’s largest con­ven­tional arms im­porter, buy­ing nearly 13 per cent of all arms pro­duced in the world be­tween 2012 and 2016, ac­cord­ing to the Stockholm In­ter­na­tional Peace Re­search In­sti­tute.

Given the ur­gent re­quire­ments— the air force is short of fighter jets, the navy is short of modern con­ven­tional sub­marines and all three ser­vices have a short­fall of he­li­copters—the SP pol­icy comes in as a half-way house. It en­vis­ages the man­u­fac­ture of such mil­i­tary hard­ware within the coun­try with for­eign col­lab­o­ra­tion, rather than sim­ply im­port­ing it. “Un­der this pol­icy, im­port con­tent will be at the sub-sys­tem level rather than at the sys­tems level,” says a pri­vate sec­tor CEO who wel­comes the pol­icy as a break­through. The pol­icy, cleared by the De­fence Ac­qui­si­tion Coun­cil (DAC), headed by Union de­fence min­is­ter Arun Jait­ley, is ‘aimed at de­vel­op­ing the de­fence in­dus­trial eco-sys­tem in the coun­try through the in­volve­ment of ma­jor In­dian cor­po­rates as well as the MSME (mi­cro, small and medium en­ter­prises) sec­tor’, a PIB re­lease pro­claimed.

Bring­ing the pri­vate sec­tor into ‘strate­gic part­ner­ships’, as sug­gested by the Dhiren­dra Singh Com­mit­tee in 2015, might have seemed like a low-cost pol­icy so­lu­tion, but it has not been that easy. Few govern­ment poli­cies caused as much dis­agree­ment within the de­fence min­istry as the SP pol­icy did. The bu­reau­cracy wor­ried it could lead to the creation of mo­nop­o­lies within the pri­vate sec­tor and at­tract ac­cu­sa­tions of crony cap­i­tal­ism. Strate­gic part­ner­ships, they ar­gued, were the ex­act op­po­site of the MoD pol­icy of en­cour­ag­ing com­pe­ti­tion and sourc­ing arms from the low­est bid­der. For­mer de­fence min­is­ter Manohar Par­rikar wanted sin­gle part­ners for each strate­gic sec­tor, with checks and bal­ances in­sti­tuted to en­sure pri­vate sec­tor firms did not make car­tels. Jait­ley pushed the pol­icy through the last lap, in­sist­ing that the strate­gic part­ners and OEMs would win con­tracts only for com­pet­i­tively priced bids and that there would be more than one strate­gic part­ner in each seg­ment to pre­vent carteli­sa­tion. At least six pri­vate sec­tor de­fence firms may be se­lected from the pool of con­tenders, which in­cludes Larsen & Toubro, Re­liance De­fence, Bharat Forge, Mahin­dra&Mahin­dra, Ashok Ley­land, Sun Group, TCS, Punj Lloyd, Tata Mo­tors and Tata Power SED.

The SP pol­icy aims to cre­ate arms pro­duc­tion ca­pac­ity in the pri­vate sec­tor over and above the ex­ist­ing ca­pac­ity in the pub­lic sec­tor. It also en­vis­ages the de­vel­op­ment of world class com­pa­nies for the de­sign, de­vel­op­ment and man­u­fac­ture of strate­gic plat­forms for the fu­ture. These ob­jec­tives are still a long way from re­al­i­sa­tion. So far, only the ‘broad con­tours’ of the SP pol­icy have been ap­proved by the Arun Jait­ley-led DAC. Which means that much of the heavy lift­ing—such as se­lect­ing the In­dian firms that will even­tu­ally be made strate­gic part­ners—is a long, drawn-out process that could take be­tween two and three years. The Dhiren­dra Singh Com­mit­tee, which first rec­om­mended the SP pol­icy in a July 2015 re­port to the de­fence min­istry, calls the se­lec­tion process for strate­gic part­ners the most cru­cial el­e­ment in op­er­a­tional­is­ing the idea, say­ing that “the en­tire scheme rests on it.”

And this is where, ex­perts say, the pol­icy could cause de­lays in­stead of speed­ing things up. Given where we are in the process, it could be years be­fore the first or­der for a tank, a fighter jet or a heli­copter is even placed. If one were to de­scribe the SP pol­icy’s progress in terms of In­dia’s

In the past month, the pol­icy raced to com­ple­tion un­der de­fence min­is­ter Arun Jait­ley. The DAC green­light was given on May 21

tor­tu­ously slow arms ac­qui­si­tion process, the SP pol­icy is at the ‘ac­cep­tance of ne­ces­sity’ stage—the very first step in the pur­chase of de­fence equip­ment. One pri­vate sec­tor CEO de­scribes the se­lec­tion of part­ners as “three beauty con­tests fol­lowed by a caste-based mar­riage ar­ranged by the de­fence min­istry.” “A swifter way to have done it would have been to get the for­eign OEM to set up a whol­ly­owned In­dian sub­sidiary to pro­duce the de­fence hard­ware here and then con­trac­tu­ally bind them to share tech­nol­ogy and cre­ate an MSME eco-sys­tem,” the CEO says.

“The process of se­lect­ing the plat­form would have to fol­low the same process as laid down in the de­fence pro­cure­ment pro­ce­dure, which, among other things, en­tails lengthy field tri­als. It is doubt­ful if the adop­tion of strate­gic part­ners will lead to a has­ten­ing of this process,” says Amit Cow­shish, for­mer fi­nan­cial ad­vi­sor (ac­qui­si­tion) at the MoD. Ad­di­tion­ally, the past ex­pe­ri­ence of tie-ups be­tween the pri­vate sec­tor and for­eign OEMs has been dis­ap­point­ing. For in­stance, a Tata-Air­bus con­sor­tium bid to pro­duce 56 medium trans­port air­craft within the coun­try for the In­dian mil­i­tary has been held up for over a year. One of the rea­sons for this de­lay is be­lieved to be the fact that the MoD is keen on or­der­ing only 56 air­craft—but the con­sor­tium wanted a min­i­mum or­der of 100.

Still, the MoD hopes this new pol­icy will prove to be a sil­ver bul­let. When one of its orig­i­nal votaries—ex-de­fence min­is­ter Par­rikar—moved to Goa as chief min­is­ter, the SP pol­icy was al­ready close to be­ing fi­nalised. In the past month, the pol­icy raced ahead un­der Jait­ley. Two meet­ings—on May 11 and May 15—with all the stake­hold­ers in the pri­vate and pub­lic sec­tors were held be­fore the DAC green­light was given on May 21.

With the rare ex­cep­tion of the Pi­naka multi-bar­reled rocket launch­ers—made by L&T and Tata Power SED— In­dia’s pri­vate sec­tor de­fence in­dus­try has al­ways played sec­ond fid­dle to the mono­lithic pub­lic sec­tor. Pri­vate sec­tor firms have func­tioned as sec­ondary-level com­po­nent sup­pli­ers to pub­lic sec­tor sys­tems in­te­gra­tors who were ‘nom­i­nated’ for or­ders by the de­fence min­istry. The first signs of this be­ing changed came in the mid-2000s when the UPA briefly flirted with the idea of lever­ag­ing the In­dian pri­vate sec­tor’s demon­strated abil­i­ties into de­fence pro­duc­tion. The Rak­sha Udyog Rat­nas (RURs) pol­icy, a sug­ges­tion by the Vi­jay Kelkar com­mit­tee on de­fen­cein­dus­try link­ages, en­vis­aged iden­ti­fy­ing pri­vate sec­tor ‘rat­nas’ who would be treated on a par with the pub­lic sec­tor for con­tracts. The pol­icy was shelved by the UPA in 2006 af­ter op­po­si­tion from de­fence PSU trade unions.

The NDA made the creation of an in­dige­nous arms in­dus­try a cor­ner­stone of its de­fence pro­duc­tion pol­icy. This found men­tion in its elec­tion man­i­festo in 2014. Soon af­ter tak­ing over as de­fence min­is­ter in Novem­ber 2014, Par­rikar set up the Dhiren­dra Singh com­mit­tee to study how the pri­vate sec­tor could be roped into de­fence hard­ware man­u­fac­ture. The com­mit­tee, which rec­om­mended strate­gic part­ners, sub­mit­ted its re­port in July 2015, and was fol­lowed by the V.K. Aa­tre com­mit­tee re­port in De­cem­ber 2016. Aa­tre, a for­mer sci­en­tific ad­vi­sor to the de­fence min­is­ter, rec­om­mended the pol­icy frame­work for SPs. There was clearly go­ing to be no re­peat of the RURs, be­cause, as one pri­vate sec­tor CEO says, RURs were con­ceived at a time when In­dia was the third largest arms im­porter and could be­gin weapons sys­tems which typ­i­cally have de­vel­op­ment cy­cles of be­tween seven and ten years. Strate­gic part­ner­ships, how­ever, are a short term pol­icy fix—an ad­mis­sion that the coun­try would have no op­tion but to im­port the hard­ware—but to do it in a way that it would de­liver ben­e­fits to in­dige­nous in­dus­try.

The long term pol­icy fixes are clearly ‘Make in In­dia’ projects—a clutch of de­fence pro­grammes in­dige­nously de­vel­oped by In­dian pri­vate sec­tor firms. These in­clude projects such as a Rs 70,000 crore bat­tle­field man­age­ment sys­tem, a Rs 18,000 crore tac­ti­cal com­mu­ni­ca­tion sys­tem and a Rs 26,000 crore project for fu­ture in­fantry com­bat ve­hi­cles. Wholly in­dige­nous projects that have none of the com­plex­i­ties of the SP projects. SPs will not get pref­er­en­tial treat­ment to ex­e­cute cru­cial ‘Buy and Make (In­dia)’ and ‘Make’ con­tracts. Given that ca­pa­bil­ity creation and its nur­ture un­der the lat­ter two cat­e­gories are more crit­i­cal from the self-re­liance point of view, “it would have been pru­dent for strate­gic part­ner­ships to be ex­tended to those as well,” says Lax­man K. Be­hera of the New Delhi-based In­sti­tute for De­fence Stud­ies and Analy­ses. Clearly, the de­fence min­istry’s list of to-dos was al­ways a long one.

AR­MOURED FIGHT­ING VE­HI­CLES $10 BIL­LION* How many: 2,000 What the In­dian army wants un­der its Fu­ture Ready Com­bat Ve­hi­cle pro­gramme to be­gin re­plac­ing its T-72 main bat­tle tanks

16-20 $ BIL­LION* How many: 1,000 The num­ber and cost of light- and medium-sized he­li­copters needed by the air force, navy and army over the next decade HE­LI­COPTERS

SIN­GLE-ENGINED LIGHT MULTI-ROLE FIGHTERS $10 BIL­LION* How many: 100 The cost for the IAF to re­place all its 230 MiG-se­ries air­craft, set to be re­tired by 2024

CON­VEN­TIONAL SUB­MARINES 8 $ BIL­LION* How many: 6 What the In­dian navy will spend on buy­ing six sub­marines equipped with air-in­de­pen­dent propul­sion and cruise mis­siles *prices are in­dica­tive.

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