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Defence procurement: The mystery of missing deals

Defence sector is one of the pillars of the Centre’s ‘Make in India’ scheme and the defence minister has repeatedly spoken about bringing the Indian private sector into defence manufacturing in a big way. It is, however, not reflected in the deals being inked

Written by Sushant Singh | Agra/new Delhi/gorakhpur, New Delhi |
Updated: July 26, 2016 9:06:40 am
manohar parrikar, defence minister parrikar, narendra modi, defence procurement deal, india defence deals, modi govt, Make in India, Make in India initiative, PM Modi Make in India, ordnance factory board, defence procurement procedure, rafale deal, rafale aircraft, make in india news, india news The Consensus among the private defence players is that the government is tight-fisted when it comes to spending on defence procurement.

A week before the Union Budget for this year was to be presented in February, defence minister Manohar Parrikar chaired a meeting of the Defence Acquisition Council to review all the defence procurement projects. Since the NDA government came to power, the DAC’s review found, it had approved proposals for defence procurement worth Rs 1,50,000 crore. Proposals for another Rs 1,50,000 crore were in the final stages of approval, which would be completed in the next 4-5 months. Ministry estimates suggest that approvals of more than Rs 2,00,000 crore have been given so far.

But this is not reflected in the quantum of deals actually signed by the defence ministry in the last two years. According to the data provided by the defence ministry, it has signed five deals of more than Rs 2,500 crore since May 2014. The biggest among them, worth Rs 45,021 crore, is for the construction of seven Shivalik class frigates under Project 17-A which has been given to public sector Mazagon Docks Limited and Garden Reach Steel Industries. Public sector Bharat Electronics Limited has also bagged the deal worth Rs 7,910 crore for additional Integrated Air Command and Control System (IACCS) for the Indian Air Force.

The Rs 13,970 crore deal for Apache helicopters, and Rs 8,047 crore deal for Chinook helicopters have been signed with the American aerospace giant, Boeing while the Rs 2,625 crore deal for Smerch multi-rocket launcher system for the army has been signed with Russian firm, Rosoboronexport. Defence ministry sources also said that the next deal likely to be signed very soon, for 12 mine counter measure vessels for the navy, will also go to the public sector Goa shipyard.

All the major defence deals (of more than Rs 2,500 crore) since this government came to power, have gone either to foreign suppliers or to public sector units. The Indian private sector is still waiting for orders from the government. The lack of orders is also reflected in the lack of incoming foreign direct investment (FDI) in the sector, despite a liberalisation of the FDI regime by the government. Only a paltry sum of Rs 1.12 crore has come in as FDI in the last two years. Not a single penny of FDI has come in after the government further liberalised the FDI norms from ‘state of the art technology’ to ‘modern technology’ under the approval route in June.

def-graphDefence sector is one of the pillars of the government’s ‘Make in India’ scheme and since taking over as the defence minister in November 2014, Parrikar has repeatedly spoken about bringing the Indian private sector into defence manufacturing in a big way. It is, however, not reflected in the deals being inked with the private players. Private defence manufacturers displayed their concern when they raised the matter with the Prime Minister’s Office (PMO) last month.

“We again told the principal secretary to the Prime Minister that for all the talk, no deals have been signed with anyone of us so far. This was our complaint even in the previous meeting. He passed certain instructions to the defence ministry officials present but we are still waiting for concrete outcomes,” a top official of a private defence firm which attended the meeting told The Indian Express.

While the prevailing wisdom is that the delay is due to bureaucratic procedures, the consensus among the private defence manufacturers is that the current government is tight-fisted when it comes to spending on defence procurement. An amount of Rs 77,407 crore was allocated for capital acquisition in FY15-16, out of which Rs 6,070 crore was for new acquisitions. Rs 11,665 crore was unspent at the end of the financial year while the rest went towards committed liabilities.

Committed liabilities are for items which have already been ordered and the payments are to be made during the year. Usually an advance of 10-15 per cent of the deal is paid while signing the contract.

“Our ministry has the biggest share of the government expenditure and it is thus expected if any savings are to be done, we will be expected to pitch in too,” a senior defence ministry official explained on condition of anonymity. Other defence ministry officials say that the finance ministry also exercises a strict check on any deals signed in the last quarter of any financial year. According to the senior defence ministry official, “files can be returned with trivial observations or just kept there, if finance ministry doesn’t want to spend money”.

Private defence manufacturers contend that the current situation is also due to the delay in finalising the defence procurement procedure (DPP). While the rest of the DPP has been finalised and put online, the critical chapter on “strategic partnership” model is still being discussed in the ministry. Under the strategic partnership, an Indian private company will be selected by the government to make one type of defence platform, say submarines, aircraft or tanks, and given assured orders for next 20 years. One company will however be allowed to become a strategic partner only for one type of platform.

This model was proposed by Dhirendra Singh Committee and the criteria for selection of strategic partners finalised by VK Aatre committee earlier. Sub-groups headed by various top private defence officials gave their inputs to the defence minister last month, and an internal committee of the defence ministry has been told to come with a final proposal by the end of the month.

“Unless there is a clarity on strategic partnership, we will not see any deals for private players. But this is going to take time even after ministry finalises it, as other ministries are also involved,” explained a defence ministry official directly dealing with the matter.

The official said that the role of Defence Public Sector Units will need clarity in the new model. One of the ideas put forth by Parrikar has been to make DPSUs system integrators of defence platforms while private players supply sub-systems to them. This is not acceptable to private industry and defence ministry officials worry about CAG objections on non-utilisation of production facilities created by DPSUs on public money.

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Not only the private Indian defence firms, but the foreign firms are equally worried. Rafale deal, a direct deal between Indian and French government, has not been inked so far, 15 months after Prime Minister Narendra Modi announced it in Paris. Similar is the case for M-777 artillery guns, where a final Letter of Agreement between the Indian and US governments has been extended thrice. The reason for these delays is a mystery to most foreign defence suppliers.

“The only thing I can think of that the government has no money because there is no other comprehensible reason for the delay in so many deals,” CEO of the India-arm of a European defence supplier said.

But these foreign suppliers are not losing patience yet. “India is a big market for defence and we have to be present here. We know that this country works at its own pace, and we are reconciled to that. Let’s just hope that intentions of this government get reflected in signing of the deals soon,” the CEO said.

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