Absence of competition has been the bane of the Indian defence industry
Maj. Gen. Mrinal Suman (retd)
Competition is considered to be the bedrock of efficiency and progress. In fact, competition is the prime mover for human advancement. As only the fittest can survive in a competitive environment, all aspirants have to continuously strive to excel by exploring innovative ways to do business. Innovation means ‘doing things in a newer and better way’. Innovation implies an active and exploratory drive that seeks to better existing products, processes (including services) and procedures for more effective results. Sustained generation of newer ideas, views, concepts and solutions is a key requirement for growth. Therefore, competition is a fundamental and indispensable catalyst to progress. Any country that neglects competition and innovations is bound to become a laggard.
Conversely, lack of competition results in monopoly which, in turn, breeds complacency. Without any threat to survival, there is no incentive or compulsion to improve. Everyone lets the matters drift and the status quo continues. Thus, neglect of competition results in stagnation, languishment and decay. That is the reason that all developed countries undertake concerted measures to promote competition and have enacted strict anti-monopoly laws. Neglect of competition discourages innovations. In the case of defence systems, innovations acquire added criticality due to rapid obsolescence of defence technologies.
The Indian government has been repeatedly stating that one of the objectives of the defence procurement procedure (DPP) is ‘to demonstrate the highest degree of probity and public accountability, transparency in operations, free competition and impartiality’. Unfortunately, the position in actual practice is totally different. With a vast domain of 39 Ordnance Factories and nine Defence Public Sector Undertakings (DPSUs), the public sector straddles across the complete gamut of defence manufacturing activities with strangulating monopoly. The private sector is kept at bay through various subterfuges as it is considered to be a threat to its survival.
The public sector dreads competition. It seeks orders by nomination and not through open competition. It wants the present dispensation to continue where it treats the Indian armed forces as its captive customers, forcing it to buy what it produces; quality, cost and delivery schedule notwithstanding. That is the root cause for its well-known inefficiency and failure to upgrade its skills for better productivity. As a result, the state of Indian defence industry is miserable even after seven decades of Independence. All major procurements continue to be from the public sector units through nomination. Free competition remains consigned to small value purchases like bullet-proof jackets and binoculars.
According to Stephenson Lecturor, Assistant Attorney General in Clinton Administration, the US owes its technological supremacy to the prevailing environment of open competition. He is of the view that competition fostered innovation and efficiency and is the best means of promoting or facilitating technological innovation. Noted Polish logician Stanisław Leśniewski declared competition to be a key tool, “It stimulates the level of human aspirations, allowing you to achieve the highest results, as well as being the driving force of technological innovation and productivity growth.”
Undoubtedly, competition is a far more efficient market structure than monopoly. A competitive market is proficient because long-term equilibrium is achieved through a well-organised allocation of resources and productive efficiency. Competition forces producers to infuse newer ideas/ technologies to better their products and reduce prices, thereby offering the buyers best value for their money; and that is the essence of survival in a competitive market.
For the Indian armed forces, competition means lower cost of procurement and saving of scarce defence budget. To underline this aspect, an observation made by the Comptroller and Auditor General (CAG) in his Report No. 32 of 2010-11 is recalled here. As is the practice, the navy nominates vendors for various equipment, weapons and sensors. The constructing shipyard, in turn, procures them from the vendors. This process effectively rules out competition. In January 2005, the navy accorded approval for procuring an Auxiliary Control System from a Russian supplier. The company quoted a price of Rs 210 crore as against Rs 31 crore mentioned in the proposal. On the insistence of the shipyard, fresh tendering was carried out with an addition of four more vendors. The lowest bid was Rs 30.89 crore. Interestingly, the Russian company quoted Rs 114.8 crore in the second bid, a huge drop from its earlier quote. Apparently, open competition had forced the company to lower its bid. To sum up, an item which was costing Rs 210 crore in a non-competitive market became available at a fraction of cost at Rs 30.89 crore in a competitive environment, a saving of mindboggling 85 per cent.
The Dismal Indian Scene
As stated earlier, the Indian defence industry is fully dominated/ controlled by the public sector. It is characterised by a total absence of competition and that is the primary reason for the current dismal state of the indigenous defence industry. All stratagems are employed to perpetuate the monopoly of the public sector by denying entry to the private sector.
When the British left, India had 16 ordnance factories producing low-tech and non-critical items. No private company was allowed to manufacture arms and ammunition. The Industrial Policy Resolution of 1956 further consolidated the hold of the public sector over defence production. It divided industry into three parts:
- Schedule A: Basic industries which are the preserve of the state, including defence and heavy engineering.
- Schedule B: Industries in which private industry was allowed to operate.
- Schedule C: All other industries.
Thus, the defence industry continued to remain the exclusive preserve of the public sector till 1991 when production of components, assemblies and sub-assemblies was opened to the private sector. Though many private companies prospered as sub-vendors to public sector behemoths, they remained totally dependent on their largesse. Their role was limited to supplying ‘nuts and bolts’. Resultantly, the private sector did not progress technologically and continued to be a marginal player.
By 2002, the private sector had emerged as a vibrant and dynamic force, especially in information technology, service sector and manufacturing fields. It was realised that harnessing of the enormous potential of the private sector was an inescapable necessity to develop indigenous defence industrial base. Consequently, defence production was opened to the private sector in January 2002 with 100 per cent private equity and 26 per cent Foreign Direct Investment (FDI). Detailed guidelines for the issuance of licence for the production of arms and ammunition were subsequently issued by the Department of Industrial Policy and Promotion (DIPP). However, through cleverly introduced policy provisions, it was ensured that the private sector remained on the periphery.
The department of defence production (DDP) was set up to create a self-reliant and self-sufficient indigenous defence production base. Being the controlling authority of the public sector, it has been safeguarding its interests by thwarting emergence of the private sector as a competitor. Functioning of DDP suffers from serious internal contradictions with acute conflict of interest, resulting in subjectivity and favouritism. In the absence of any threat to its domination, the public sector became complacent and its performance suffered. With assured orders and captive customer base (the armed forces), the public sector never felt any necessity to keep pace with the newer technologies. It has been surviving on periodic infusion of transferred technology under ‘Buy and Make’ procedure, without ever building on imported technology or developing any indigenous competence.
The shipbuilding procedure, introduced in the Defence Procurement Procedure of 2011, is a good indicator of the prevailing bias against the private sector. Shipbuilding procedure has been split into two sections – one for placing orders on a nominated public sector shipyard and the other for open competitive bidding. As is apparent, nomination is the first priority. Proposals get thrown open to competitive bidding only after the public sector shipyards get fully loaded with orders and decline further orders. Thus, only the insignificant overflow of low-tech and unremunerative orders gets assigned to the competitive category. Resultantly, India remains deprived of the technological prowess of the private sector shipyards. Worse, in the absence of adequate orders, they are forced to nurse their idle capacities while piling up huge debts.
The much-trumpeted Raksha Utpadan Ratna (RUR) programme of 2006 aimed at treating select private companies at par with the public sector for producing high-tech defence equipment. The programme failed to overcome the obstacles created by the entrenched interest groups who abhor competition and had to be abandoned. A similarly delineated Strategic Partnership (SP) scheme was recommended by the Dhirendra Singh Committee in 2016. The idea of co-opting well-established private sector companies as SP to create additional capacities in the private sector in respect of platforms of strategic importance cannot be faulted on any account. SP programme would have provided much needed competition to the public sector entities. Quite expectedly, considering such a competition to be a threat to its very survival, the public sector tried all ploys to abort the initiative.
In May 2017, the government approved four segments for SP – submarines, single-engine fighter aircraft, helicopters and armoured carriers/main battle tanks. While reserving aircraft and helicopter manufacturing exclusively for the private sector, manufacture of submarines and armoured vehicles was thrown open to the public sector as well. This defies logic and negates the very rationale of the scheme. In case a public sector entity is selected as SP, the basic objective of creating addition capacity in the private sector and of providing competition to the public sector will be defeated. Over three years have passed since the idea was mooted by the expert committee but not a single SP has been nominated so far. Matters continue to drift and competition remains a chimera.
The Way Forward
The sole objective of management of defence equipment is to provide the armed forces with the latest equipment within the required time frame and with best value for money. For that, a competitive environment is an essential pre-requisite. Failure to create, stimulate and nurture competition has resulted in a disappointing performance of the Indian defence industry. A conducive eco-system needs to be created to force the manufacturers to adopt innovative ideas to improve their product and reduce costs to survive.
Competition does not flourish in a vacuum. The government has to take purposeful steps through well thought-through policy initiatives. An open architecture which allows ‘plug and play’ should be put in place to ensure seamless incorporation of evolving technologies for defence systems. Potential entrants must be convinced that they have a fair and reasonable chance of succeeding on merit, with no discrimination whatsoever. For that, transparency, impartiality and healthy competition have to be the guiding principles. Only vibrant and dynamic companies can survive in an environment of free competition. Challenge from private companies will force the public sector to shed its inertia. It will have to choose either to innovate or perish.
To start with, DDP should be abolished to free the system of its anachronistic and subjective influences. DDP is a predisposed setup and is the biggest impediment in generating competition. It should be replaced by the Department of Defence Industry to look after the interests of the defence industry as a whole. Pro-public sector bias must be replaced by fair and merit-based procedures. All provisions of DDP that accord primacy to public sector should be rescinded to facilitate a level-playing field for all companies. Competence of the private sector must be given due recognition. Long term perspective plans with major milestones and various technological routes should also be made public. It helps prospective entrepreneurs to take well-considered investment decisions.
Market favours only those who are successful in achieving competitive advantage by being ahead of the rivals as regards customer preference and profitability. In addition, they are able to foresee evolving market dynamics and emerging business openings well before the others. To exploit such opportunities, they muster enough strength and flexibility to undertake required structural changes to be able to adapt to new market conditions. Further, they are able to make optimum use of their resources, expend the capital judiciously, harness full potential of their employees and analyse market preferences diligently.
On the other hand, absence of competition results in complacence, laid-back functioning, stagnation in growth and decline in productivity. And, that has been the story of the Indian defence industry. The public sector enjoys monopoly and brooks no competition, while surviving on government’s munificence. No wonder that even after seven decades of Independence, India needs to import almost every modern defence system. The indigenous production is limited to some sub-systems based on imported technology. There cannot be a greater testimony of India’s failure to generate competition to achieve self-reliance in defence production.