The government should fast-track the SP model to cut down on defence imports
In March 2016, the then defence minister, Manohar Parrikar, announced the new Defence Procurement Procedure (DPP). Under DPP the government introduced the Strategic Partnership (SP) model which, apart from giving a boost to Narendra Modi led Bharatiya Janata Party (BJP) government’s ‘Make in India’ policy, would ‘transform India into a manufacturing and design hub’ in the field of defence. The idea was to rope in Indian private companies to partner with established foreign defence manufacturing firms to develop technology and long-term capabilities within the country.
Three years on, the progress has been slow in the ambitious plan. None of the projects under SP model has been awarded yet. The first such project – to procure 111 Naval Utility Helicopters (NUH) – is still in the final stages of selecting a manufacturer. Defence experts say that while the SP model is an important step towards achieving strategic autonomy, the cut in defence budget puts a big question mark on its future.
The SP model, developed by a task force led by V.K. Aatre, aims to give India holistic and long-term capabilities in developing design and manufacturing defence equipment rather than importing them. Under the model, an overseas global defence company or an Original Equipment Manufacturer (OEM) is brought in to partner with an Indian firm which would be the Strategic Partner (SP) in creation and building of defence arms and platforms within India by the way of technology transfer. Four segments within which the production will take place have been identified as fighter aircraft, helicopters, submarines and armoured fighting vehicles or main battle tanks.
It’s expected that this model will give a chance to the private sector companies to compete among each other and ultimately bring quality to the table in India’s defence industry that has been for long dominated by Defence Public Sector Undertakings (DPSUs) and Ordnance Factory Board (OFB).
However, in May 2018, a parliamentary committee on defence told the government that even after a year of its implementation, there was very slow progress on the SP model. The panel also pointed out that India couldn’t afford to waste time on lack of defence preparedness, given the fact that ‘it’s surrounded by two hostile neighbours’.
Within two months of this, the ministry of defence (MoD) issued Expression of Interest (EoI) in July 2018 for shortlisting both the stakeholders for its first project under the 111 Naval Utility Helicopters (NUH) and entered its final stage of selecting the manufacturer in November last year. The first project worth Rs 21,738 crore is expected to replace the Chetak helicopters by buying a total of 111 NUHs, of which 95 will be manufactured in India.
Defence experts and former high-ranking defence officials told FORCE that the SP model is an important step in securing a ‘strategic autonomy’ for the country. Defence analyst Lt Gen. P.G. Kamath (retd) said that if a country is dependent on another for the supply of key weapons and equipment, then it does have a bearing on the relations between the two nations as well as with those the latter is friendly with.
Kamath also highlighted that dependence on export for arms and ammunition becomes a weakness in times of war. He cited the example of Kargil. “During Kargil, India did not have the ammunition for the 155 millimetres Bofors as the procurement was hit by a political scandal. So, people had to run around with a begging bowl for artillery. Hence, the ability to manufacture critical weapons and equipment within the country. As such, strategic autonomy is a very important aspect of defence strategy. It enables the establishment to take a certain decision in the national interest when there is a need,” said Kamath.
Another retired official, who requested anonymity, said that the model will help India develop ‘high-end technology’ by improving the research and development capacities of its own institutions and private companies. “We do not have high-end technology and that, frankly, no other country parts with it on its own. Which is why we have to make a difference and leverage import potential by improving the R&D capacities within the country. For example, development of Cryogenic Engines happened after we were denied the high-end technology by both Russia and the US. We had to develop the technology that they would have transferred, just like we developed the Cryogenic engines,” he said.
But Where’s the Money?
Notwithstanding all the positives of the SP model and good that it will do to India’s defence capabilities, experts point out that there’s very little monetary allocation to roll out the projects.
In the current fiscal, the finance ministry has allocated a total of Rs 3.18 lakh crore (1.06 per cent of GDP) for defence, which is the lowest in recent times. Considering that a big chunk of this (about 70 per cent) will be spent towards operational expenses and only 30 per cent will be available for capital investments.
“The funds that are allotted are clearly not sufficient even to pay the committed liabilities,” said a retired lieutenant general. “So, there is very little money for buying new weapons. As a result, no modernisation is actually going on – strategic procurement model or otherwise,” he added.
According to Kamath, unless the government has allocated money, clearance given by a certain proposal by the Defence Acquisition Council (DAC) has no meaning. “They cannot actually order it without having money to put in. For instance, in November 2019, reports surfaced that the Indian Army had reduced almost 70 per cent of its procurement of the Sniper rifles due to a tight budget. Procurement is fine but if there is no national defence strategy in order to tackle two hostile neighbours, then obviously, you do not have a procurement plan and you do not have a budget that would support the plan,” pointed out Kamath.
This has had a clear impact on defence productions, as numbers show. The draft Defence Production Policy, 2018, had set a target of USD5 billion in defence exports by 2025. However, as per reports, in 2016-17 India’s total defence export was a mere Rs 1,495.27 crore.
Will the Model Sustain Change in Regime?
Defence experts that FORCE spoke to said that the SP model had slowed down the procurement process in the short term. They were worried if the model and selected private players would find bi-partisan support.
“The process is so new and is yet to mature. Moreover, each of the items being considered under SP model entails huge budget outlays, which are not available. In addition, each of these items, besides being considered on SP model (which now ironically includes Ordinance Factory and DSPUs which weren’t envisaged earlier by the task force) is also being considered at G-to-G (government to government) level and hence, causing the delay in decision making,” said the lieutenant general who didn’t want to be quoted.
The industry today thrives and develops capacities from contract to contract and would not like the field to be narrowed down to a few SPs. The MoD is also concerned about getting stuck with unreliable or non-responsive OEM or SP. Also, pragmatically, the big-ticket SP selection may have problems lasting past one ruling dispensation to another. In the US, the defence industry consolidated internally through acquisitions and mergers, out of internal necessity. Here, in India, the government driven decision is meeting resistance from all quarters. A general bureaucratic reluctance also persists in selecting one SP over other for concerns of subsequent accusations, believe experts.
For the SP model to survive and thrive in the future, it will require an endorsement from across the political spectrum. “It’s a huge business proposition requiring big investment from private players apart from the government. For them to take the leap, it’s important to know that the policy is here to stay for a long duration,” said the retired lieutenant general.
General Kamath added, “Another aspect is that DPSUs are not directly accountable to the users – the three-armed forces –, they are accountable to the MoD. For the SP model to work hassle-free, the government of the time has to trust the private players.”
Once implemented according to the revised criteria agreed upon, the SP model will help consolidation of Indian defence industry amongst serious and credible private players. It will genuinely bring the private sector in competition with OFBs and DPSUs. Now with Industrial Security Annex (ISA) signed with the US, the private industry will get into the global supply chain of big OEMs.
When asked if the private sector will get a level-playing field against the DPSUs, the retired defence official said, “As the private industry matures and as it gets integrated with global OEMs and in global supply chains, it will gather a momentum of its own. In fact, the OFBs and DPSUs will then have to reform to compete to survive. Today, L&T, Mahindra and TATA already seem to be in that league. Also, with their own R&D and availability of dual-use technologies, they would be able to better leverage high technology weapons/systems contracts over DPSUs.”