Defense Procurement Boosts Private Sector Spirits

As we get closer to the All India Defence Employees Federation  call for strike on March 15th for their 17 point charter of demands, it becomes evident that the so called ‘Make in India’ policy for the military sector is not getting anywhere other than adversely affecting the Ordinance Factories (OF) and Defence Public Sector Units (DPSU). And, India remains dependent on imports even as the government moves away from public sector driven military production where private industry played a supportive role, to a foreign original equipment manufacturer (OEM) led privatization of the military sector for India.Therefore, the government has kept relaxing rules for FDI to meet the foreign manufacturers’ demand for a ‘level playing field’ as well as to make Indian private sector investment into military sector lucrative.

Dismal failure of the Indian government is evident from the fact that whereas India has received Rs 1.17 crore (Rs 11.7 million)so far,in Foreign Direct Investment, 70procurement contracts toimport military equipment approximately valued at Rs 1.25 lakh crore  (Rs 1.25 trillion)have been signed.

Among other reasons, it is the conflicting decision-making process, where the Prime Minister’s Office seems to call the shotsand decisions are changedmid-way through anegotiation  process. For instance, up until ManoharParrikarwas the Union Minister for Defense his ministry advocated ‘single engine’ fighter jet to replace Mig 21 and Mig 27s. Indeed the two decade old initiative to procure the fighter jet called Medium Multirole Range Combat Aircraft or MMRCA had, after a laborious process undertaken by the Indian Air Force, settled the issue in favour of single engine jet. When first the MMRCA,which was also meant to create indigenous capability through licensed production of Rafale by the public sector Hindutan Aeronautics Ltd , gave way to procurement of 36 off-the-shelf fighter jets from Dassault, it left the field free for just two contenders  Lockheed Martin with its F-16  which tied up with Tatas and SAAB with its Gripen jet tied up with the Adani group in the race for the manufacturing under “Make in India’ atleast 100 single engine fighter jet. Now, in yet, another change of mind the Indian government has decided to start all over again,with Request for Information from OEMs,to select a new fighter jet to replace Migs and to be manufactured in India by a foreign OEM,  offeringeither single engine or double engine jet, in strategic partnership with a Indian company. Since the IAF as well as the Ministry after technical evaluationsettled for single engine fighter jet for manufacturing in India, opening it to double engine means that those ruled out earlier on this ground re-enter the competition. This means that the entire technical evaluation process will have to be gone over again, although it may take relatively less time now since IAF had evaluated all the potential contenders in the past. Defense ministry officials told the Hindu that this phase“could take two years”( “IAF to embark on a long shopping sortie for a jet”, DinakarPeri, The Hindu March 12, 2018). However, it was pointed out that it is the ‘contract negotiation’ which may drag for few years.

While the search for fighter jets continues it is worth recalling that this problem of changing criterion as well as requirement appears to be the signature tune of the BJP government and has percolated down to the Services. For instance IAF has been insisting on acquiring at least 80-100 Rafale jets, in contrast to 126 jets as part of MMRCA. However, IAF contented itself to getting 36 fighter jets by 2022 without anassurance to consider buying two or more squadrons (each comprises 18 jets) as delivery begins from 2019.If their demand for more Rafale has to be met this deal would have to be negotiated afresh. Ofcourse, IAF claims that because Euro 2 billion out of Euro 7.8 billion IGA deal for 36 Rafale jets is on account of India specific customization it would make economic, operational and logistic sense  to acquire 36 additional jets. However, that is in the realm of possibility. Point is that such shifting criterion and requirement are not specific to procurement of fighter jets.

Consider the case for private sector replacing Ordinance Factories as supplier of ammunition for the three Services. Speaking at a seminar organized by the Federation of Indian Chamber of Commerce of India (FICCI), the Union Defense Minister ,NirmalaSitharaman announced that the tender issued last year for procuring Rs 1.7 lakh cr (Rs 170 bn) worth of ammunition for small arms, Pinaka rockets, tank and artillery shells, would be open to private sector. And went on to announce that the “entire quantity (of ammunition for 8,60,000 7.62 mm assault rifles/carbines) has been earmarked for Indian industry excluding the OFB”.

There are 37 private companies with defence production license waiting to bid for this tender. Defending this the Sitharamansaid that  OFs and DPSUs have “immense opportunities and immense assets” which can meet most of the Indian military’s requirements. However, she claimed that they need “revitalizing, they need reemerging, they need to be dynamic”. What exactly did she mean?  In January she had told the Parliament in a written reply that Army provides “roll on indents” to the OFs for five year period for its ammunition requirement. In 2014-19 orders worth Rs 2,64,000cr (Rs264 bn) were placed whereas they delivered ammunition worth Rs 1,29,190 cr (Rs 129 bn) up to March 2017.  In other words, she blamed the OFs for not meeting the demand.

If the OFs and DPSUs can meet almost the entire requirement of Indian military then rather than creating additional capacity in private sector with foreign collaboration attention ought to be on bringing in reforms which improve the working of OFs and DPSUs rather than leaving them to tend to idle capacity. Not to do so is senseless.

It is interesting that mid-way through the trials of a new rifle last April 2017 the Army made it known that it wanted the rifle bore to be of 7.62 mm rather than 5.56 mm. Why this last minute change? Major General Ajay Ohri of Army’s Infantry Directorate explained at the FICCI seminar on 12th March that 5.56 mm bullets were found ineffective against militants in Kashmir because the small bullets could not stop militants even after they were shot twice or thrice. Therefore Army needs 7.62 mm bullets.

For three decades, INSAS rifles with 5.56 mm bore were used. For the Army to discover that their bullets after all threedecades of fighting insurgencies using 5.56 mm INSAS is ineffective is something of a tall tale. But this excuse opened the way for placing order for import.

Now by claiming that OFB cannot meet the demand the government has decided to go in for import of rifles as well as manufacturing ammunition by private industry in collaboration with a foreign OEM.Thus Indian army announced it would be importing three lakh 7.62 mm assault and closer quarter carbines at an approximate cost of Rs 10,000 cr. Rest would be ‘Make in India’, sometime in indeterminate future. Add to this the lucrative ammunition deal reserved for the private sector and you can see how the charade of creating indigenous capacities while simultaneously undermining public sector carries on.

It is worth noting that one of the complaints of the Indian private sector has been that there is no level playing field with the public sector units in the military sector. They contend that the while ammunition for small arms are reserved for them, in the other categories of ammunition the public sector has assured order of 25%. This will allow them to underbid private sector companies. The implied message was to restrict them to participate in tenders for fewer and fewer categories of ammunition. This may yet happen. But as the Minister herself opined the OFs and DPSUs have the capacity to meet nearly all of military’s requirements. If this is correct then why create and encourage creation of large capacities?Prudence and thrift would demand that resources be put to better use by reforming the public sector rather than leave them with idle capacities. Besides, 275 items have been now categorized as “non-core areas”.  Furthermore, while the government is bound by procurement regulation to buy OF’s entire production of “core items”, only then going for private sector production or imports, the decision to “reserve” 25% for OFs and DPSUs appears as a way around the regulation to meet private sector demand. The last has not been heard on this front, as we know from how policies and rules are getting tweaked to attract FDI.

In other words, no matter how hoarse the BJP gets over its claims to be “nationalist”, its record shows that they have made not an iota of contribution to building up indigenous capability in the military sector. Dependence on imported equipment and promotion of private sector tied to foreign OEMs will continue to bleed  the public exchequer and weaken publicly owned military sector.With India accounting for the 12% of the global arms trade the chest beating BJP finds imports lucrative and piece-by-piece dismantling of the defense public sector to be in its self-interest.