Military platforms, whether tanks, artillery guns, aircraft, ships, submarines or helicopters are enormously complex mechanisms comprising numerous different systems, such as propulsion, transmission, power generation and distribution, each individual weapon, each sensor, communications, electronic warfare, fire-fighting, cooling, hydraulics etc. Each system is designed with redundancies and comprises numerous different subsystems, assemblies, subassemblies and component parts. No manufacturer makes all the component units that go into the platform; he invariably sources them from ancillary industry that fulfils requisite specifications at the most economical price. The source, particularly for dual use units, could be located anywhere on the planet. India’s Hindustan Aeronautics Limited (HAL), for example, produces about half of the forward passenger doors used by Airbus A 320 aircraft globally.
It is now common knowledge that the public sector has failed abysmally in building a vibrant indigenous defence industry, forcing the country to import the overwhelming majority of its requirements of defence hardware. To correct this, the process of involving the private sector in defence production began in 2002, with publication of the Defence Procurement Procedure (DPP), setting out the rules for Capital Procurement. These rules have seen six evolutionary changes thereafter, with the most recent version issued in 2013. An elaborate process has been put in place to ensure that foreign manufacturers source a specified percentage of the value of their platform from India. The Prime Minister’s clarion call of September 2014 to foreign manufacturer’s to ‘Make in India’ and the inclusion of defence manufacturing in the sectors covered by this call, aroused much media interest and has been the focus of numerous analyses, both by well informed professionals and ill informed pretenders. The focus of all these analyses remains on the DPP and capital procurement.
But is capital procurement the only area that merits concern? The objective, after all, is to create and nurture an indigenous defence industry. Two factors are often lost sight of. First, India’s requirements, particularly for high value platforms, are too small to justify setting up of manufacturing infrastructure unless it can export to global markets. Clearly, there is urgent need to review Government of India rules governing exports by defence industry. More important, except for the initial purchase, procurement from indigenous industry is classified as ‘Revenue Procurement’ and governed not by DPP, but by the Defence Procurement Manual (DPM). Unlike the DPP, DPM receives little attention from both the government and media, as is evident from the fact that the 2009 version, with some amendment, continues to this date (a new version is expected to come out shortly).
Does the current DPM provide a nurturing or a poison environment for indigenous industry? It certainly talks of expeditious procurement, development of an indigenous defence industry, an impetus to indigenisation, creating a level playing field between the private and public sectors, conformity to the highest standards of transparency, probity and public accountability as policy objectives, but falls far short of creating a framework that fulfils them. Its rules give foreign manufacturers and the public sector huge advantages over domestic private industry, forcing the private sector to compete on terms heavily weighted against it.
Consider the environment the private or joint sector manufacturer operates in, keeping in mind that he cannot export and the Government of India is his only market. Any businessman who enters into a contract or agreement with the ministry of defence (MoD) can reasonably expect that the terms of this agreement will be honoured. In actual fact, numerous examples are available to prove that it is not. The Indian manufacturer is forced to deal with multiple independent authorities, lack of accountability, arbitrariness and flip flops in government decisions that impact adversely on him, imposing additional financial costs on him alone. Foreign suppliers, with their different delivery and payment terms, usually don’t suffer. The Indian company’s challenge is to find a way to hold anyone in government accountable for alterations in contract terms, sometimes after delivery has been made. No business concern can take its only customer to court to resolve disputes without jeopardising its very existence, especially given India’s time-consuming legal process and the MoD’s demonstrated proclivity to appeal even against its own disabled veterans. Can forcing indigenous private and joint sector industry to function in this environment encourage its development?
Take differential payment terms cited above. Foreign suppliers are paid by irrevocable letter of credit in dollars (or the currency of their choice) on production of proof of dispatch of the consignment from their country, thus insulating them from rupee volatility and payment delays. The Indian manufacturer, however, may be paid only in rupees after delivery of the goods, that too after going through a tortuous and time-consuming process involving the inspection agency, the storekeeper, the indenting authority and the Controller of Defence Accounts, each of whom can impose indefinite delays in the release of payments without being held accountable. These delays impact only the indigenous manufacturer, imposing often unbearable financial penalties by way of interest as well as higher costs for foreign components due to depreciation of the rupee, particularly during the period between delivery and payment. There is, therefore, a built-in opportunity for the corrupt to exploit this mechanism at various levels and even the most incorrigible optimist would find it hard to believe that such corruption is not widespread. Apart from the odd exception, only those companies who are willing to engage in it and build in requisite margins for such intangibles can survive. Apart from adding to costs, this effectively prevents the growth of a globally competitive indigenous component industry.
The fact is that acquisition costs constitute less than 10 per cent of the life cycle cost of equipment. There is little doubt that there is need to make the DPP more industry friendly. Of much greater import is the need to make DPM industry friendly. An industry friendly DPP benefits only the big industrialists or joint ventures set up by foreign industry in India. An industry friendly DPM, however, spurs indigenous industry across the board, including the multitude of small and medium enterprises who desperately need government support to create an environment in which they can compete with foreign players, big industry and the public sector on a level playing field.
To sum up, there is a crying need to revise the DPM and put in place the following:-
• Unambiguous rules regarding defence exports that cannot be held hostage to bureaucratic interpretation, permitting the industry to compete globally on equal terms.
• A nurturing DPM that provides a level playing field particularly to small and medium defence industry (which actually receives incentives in most other sectors), coupled with a nurturing DPM that compensates indigenous industry for all payment delays as well as rupee depreciation for the cost of imported components.
• A speedy and unbiased dispute resolution mechanism comprising representatives of both the government and industry bodies, whose verdicts are binding unless challenged in court, in which case indigenous industry is indemnified for delays and does not bear the burden of costs alone.