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
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.