In defence of private participation
The achievements in nuclear and space sectors can be replicated in defence production, if the Defence Ministry is willing
Feb 08, 2014
Source : The Hindu


MUMBAI: After India’s independence, defence production was restricted to the public sector. Poor industrial infrastructure prompted the government to create defence public sector units as system integrators along with ordnance factories, which were meant to produce defence hardware.

Over time, these units produced equipment, systems and consumables based on transfer of technology (ToT) acquired mainly from the Soviets, without developing any ‘know why’. It was only in the early 1970s that the Defence Research and Development Organisation (DRDO) was created with a mandate to develop indigenous products and systems.

But since then, a lot has changed.

Private participation

The public sector was unable to cope with the increasing operational requirements of our armed forces. Spares and upgrades were not made available in critical situations, leading to rising imports.

Hence, the government in 2001 decided to open up the sector to private entities subject to licensing, and allowed foreign direct investment up to 26 per cent.

The policy intent has not been matched by implementation, affecting our technology upgradation and indigenisation plans.

Private sector participation in India’s defence sector has led to fruitful results. The involvement of Tata Power SED in building the Samyukta — India’s first major electronic warfare system — and L&T’s contribution to the nuclear submarine programme are noteworthy examples. The government issued a notification, referring to the Tata Power SED as a “gazetted work centre” for the Samyukta.

Similarly, L&T’s in-house development of hull construction technologies for submarines gave the company an opportunity to participate in building INS Arihant — India’s first nuclear submarine — despite severe sanctions.

Since 2001, the private sector has displayed capability in the complete product life cycle for advanced systems such as missile launchers, rocket launchers, land-based as well as naval engineering systems, sensors such as radars and sonars, avionics, secure communication, and aircraft sub-systems.

With world-class skills in IT, ITeS and manufacturing, the private sector has augmented India’s indigenous defence production capability. The private sector has also built up extensive infrastructure without waiting for any orders from the Ministry of Defence (MoD). Despite this track record, the Indian private sector does not enjoy a a level playing field vis-à-vis foreign equipment makers and defence PSUs.

A battery of challenges

Some of the disadvantages include nomination preference to PSUs, disadvantages in taxation through differential exemption regimes, no compensation for exchange rate variations, lack of support for export orders, and procedural delays.

It was in 2005 that the Vijay Kelkar committee emphasised self-reliance, active private sector participation, a long-term product strategy and identification of system integrators in the form of Raksha Udyog Ratnas (RURs) or Champions of Industry from private sector, which would be on par with DPSUs.

However, the MoD has jettisoned the concept of RURs. The nomination of defence PSUs remains the preferred route.

Almost every policy of defence production and acquisition refers to the need for self-reliance. While Defence Procurement Procedure-2013 has enumerated the different procurement categories, giving highest priority to indigenous products and relegating imports to last preference, it is for the MoD to implement these policies in right earnest.

However, the MoD’s apathy towards self-reliance and state-of-the-art defence technology clearly demonstrates the government’s lack of faith in the private sector. The much talked about FICV project, which had shortlisted four developmental agencies, has been retracted with no news of its revival.

The TCS (Tactical Communication System) programme is moving at a snail’s pace. This sends negative signals not only to the industry but also to their foreign technology partners.

Another recent example, which has dented private sector confidence, is the IAF Avro replacement programme. This was the first ‘Buy & Make’ programme, where the MoD decided to have the ToT for the ‘Make’ part to be transferred only to Indian private players and establish a second line of aircraft production in India. Recently, this programme has run into rough weather.

Hitting confidence

The government is yet to walk the talk on allowing private player to play a strategic and leading role. The Indian private industry is willing to invest and play a major role in defence indigenisation. But the government has to create the right conditions on the ground. Corporates are answerable to their boards and cannot invest indefinitely in an unpredictable environment.

FICCI urges the government to repose trust in Indian private companies, stop nomination of major projects to PSUs and introduce competitiveness in the defence sector.

This will open more avenues for public-private partnership, promote indigenisation, create the much needed defence industrial base and generate economic spin-offs.

The defence sector should learn from the phenomenal success that India achieved in the strategic nuclear and space sectors.

The Nuclear Power Corporation of India (NPCIL) and the Indian Space Research Organisation (ISRO) recognised the strengths of private industry and involved them during the initial stage, not as vendors but as risk-sharing partners.

As a result, India sustained its capabilities even under the sanctions. Industry’s partnership with ISRO and NPCIL is a shining example of PPP, which also needs to be emulated by the defence and aerospace sectors.

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