Photo: Bloomberg
Photo: Bloomberg

Make in India: Big role for private firms in defence

Govt's focus on curbing direct imports and putting local industry at centre of defence procurement is an opportunity for private sector

The ‘Make in India’ initiative has become the new mantra for the Indian defence industry. Within the industry, however, it is the private sector which is the centre of attraction.

This is amply evident from some of the big measures taken so far. Be it the hike in the foreign direct investment cap from the earlier 26% to 49%, the streamlining of defence industrial licensing, articulation of export promotion measures, rationalization of taxes and payment terms or the ones mentioned below, it is the private sector which is the biggest beneficiary.

From the private sector’s point of view, what is perhaps of greater importance is the Narendra Modi government’s focus on curbing direct imports and putting local industry at the centre of India’s big defence procurement programme.

It is significant to note that the government in its first year itself has cleared 39 capital procurement proposals, of which 32 proposals worth 88,900 crore (or 96% of value of total proposals) were categorized as “Buy (Indian)" and “Buy and Make (Indian)"—the top two prioritized domestic industry-centric procurement categories as per the defence procurement procedure (DPP).

Significantly also, in almost all the major procurement proposals, there is a scope for the private sector, and in some cases the role is exclusive.

In the case of the 50,000 crore P-75I project for procurement of six conventional submarines, the Modi government has changed the previous government’s decision to import two submarines, followed by four to be licence-manufactured by public sector shipyards, and decided to construct all the submarines in domestic shipyards, with the further provision that the private sector would be given a fair chance to compete to get the contract.

In the case of the 25,000 crore Landing Platform Dock (LPD) project, the new government has decided to issue the tender only to private shipyards.

Besides, the Modi government has also attempted to operationalize the defunct “Make" procedure, which was first articulated in 2006 with the core objective to enable private players to grow into big defence entities.

Under the “Make" procedure, the first developmental contact was awarded to two consortiums, one of which consists of two private players, Larsen & Toubro and Tata, under the Indian Army’s 50,000 crore Battlefield Management System (BMS) project.

Further, the Modi government has also announced that it will launch as many as six to eight “Make" projects every year, raising the prospect of further deepening the role of the private sector. The Modi government has also set in motion a periodic revision of the DPP. A 10-memeber committee of experts was set up in May 2015 under the chairmanship of former Union home secretary Dhirendra Singh to suggest amendments to the DPP with a focus on facilitating Make in India.

The report of the committee, submitted on 23 July 2015, and thereafter put in the public domain, contains 43 recommendations. The major focus of the report is to further intensify the private sector’s participation by way of according it “strategic partner" status and removing procedural hurdles to its doing business in the defence sector.

In another significant development, the Defence Research and Development Organization (DRDO), the premier research and development wing of the defence ministry, signed a technology transfer agreement with L&T for commercial production of the Pilotless Target Aircraft (PTA), Lakshya.

This is the first time that the technology of a high-value product developed by the DRDO is given to the private sector for licensed production.

Earlier, government-owned entities, namely the defence public sector undertakings and ordnance factories had near-exclusive rights for undertaking such production.

All these developments mean that the private sector, which was hitherto excluded from big-ticket procurements in favour of either direct import or manufacture by public sector entities, will now play an equally major role in the country’s defence production.

Laxman Kumar Behera is a research fellow at the Institute for Defence Studies and Analyses.

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