The inauguration of Defexpo India 2012, which saw significant statements about impending changes to the MoD's defence procurement policies
By Ajai Shukla
Business Standard, 3rd Apr 12
The CII, in partnership with Boston Consulting Group (BCG) today released a study, entitled “Creating a Vibrant Domestic Defence Manufacturing Sector”, aimed at creating ten lakh jobs in India’s defence manufacturing sector.
Highlighting the failure of India’s public sector defence manufacturing establishment, the study notes that 1.8 lakh workers in the MoD’s 39 ordnance factories (OFs) and 8 defence PSUs accounted for sales worth a mere Rs 38,622 crore in 2010-11, a mere 30% of India’s requirement of defence equipment. The size of this workforce matches that of the UK and France, both major exporters of defence equipment.
To leverage Indian defence spending, which the report estimates at $80-100 over the next five years (the current capital spend is $15 billion), CII-BCG have offered six recommendations. These are:
Firstly, setting up a National Defence Manufacturing Commission (NDMC) under the PMO, for effective inter-agency coordination. According to the report, the NDMC must enhance domestic procurement from 30% to 75% over the next decade; mandate an indigenisation percentage for 8-10 “largest weapons programmes”; and build local IP in critical defence technology areas. The body would also monitor the trickle-down of technologies from defence to civilian sectors; support export capability building; and “enable creation of one million new direct and indirect jobs in the defence manufacturing space.”
Controversially, the report recommends that the NDMC (i.e. the PMO) should “monitor implementation of Government’s offset policy in letter and spirit for large contracts.” Currently, defence offsets are the preserve of the defence ministry (MoD), which consciously separates it from offsets arising in other sectors like civil aviation.
Secondly, the CII-BCG report mandates that flagship defence contracts be taken up through the "Make" or "Buy and Make (Indian)" procurement models (of the Defence Procurement Policy), with the prime contractor being an Indian entity. This, it would seem, is already being implemented by the MoD. At the recently concluded Defexpo India 2012 exhibition, MoD officials stated that some 150 “Make” contracts would be pushed over the coming decade.
Thirdly, the report recommends that the “Domestic Champion (RuR)” programme be revived. Initially recommended by the Kelkar Committee, this envisaged nominating select private companies as Raksha Udyog Ratnas (RuR), which would then treated on part with DPSUs, serving as prime contractors for defence contracts. The MoD, however, walked away from the RuR proposal, apparently under pressure from DPSU trade unions.
Fourthly, the report recommends streamlining the defence procurement infrastructure, with the current multiple systems “centralized into a single agency which will manage different aspects of the procurement process. A Group of Ministers had recommended this in 2000-01, as also the Comptroller and Auditor General (CAG), after an audit into defence procurement (Report No 4 of 2007).
Fifthly, the report recommends increasing the FDI cap in defence from the current 26% to 49% “to ensure adequate participation of interested parties but on case to case basis.” While the commerce ministry has recommended raising FDI cap in defence, the MoD has resisted and loosening beyond 26%.
Sixthly and finally, the CII-BCG report recommends, “enabling infrastructure for capability building.” Mechanisms should provide access to critical technologies; a programme to upgrade skills of the defence manufacturing work force; and to support the upgrade of defence manufacturing facilities, especially SMEs.
At the national level manufacturing currently constitutes just 16% of the Indian GDP. The National Manufacturing Policy envisages increasing it to 25% over the coming decade.