On July 17, 2024, the MoD notified the fifth Positive Indigenization List with 346 items worth `1,048 crore. Despite these initiatives, substantial

self-reliance in India’s defence sector remains elusive. The paper calls for radical procurement reforms and greater private sector involvement to achieve Atmanirbharta in defence.

As the BJP led NDA Government resumes a third consecutive term, it is heartening to note the intent/claim of Raksha Mantri, Shri. Rajnath Singh, to boost Defence procurement to INR 3L Cr and defence exports to INR 50K Cr in the next 5 years. Whether this is a realistic aim or an optimistic hope, only time will tell. If the defence budget allocations, especially for capital procurements and defence R&D and the complicated Defence Acquisition procedures/policies over the last 20 years are anything to go by, then we might as well consider it to be a hope. Twenty-two years after introduction of DPP 2002, which aimed to reverse the Import to Export ratio, India continues to be the world’s leading Arms importer.

On 17 Jul 20224, the MoD notified the fifth Positive Indigenization list (PIL) which contains 346 items which include Line Replacement Units/Systems/ Sub-systems/Assemblies/Sub-assemblies/Spares & Components and raw materials, with a claimed import substitution value worth Rs 1,048 crore. Earlier, four PILs comprising 4,666 items were notified by the DDP for DPSUs, of which MoD claims to have indigenized 2,972 items having import substitution value worth Rs 3,400 crore. Not taking anything away from this PIL initiative, the numbers clearly indicate that these are baby steps and unless these PILs include Hi Tech complex systems (Not products) such as Aircraft/ Ship engines, Electronic Warfare suites, II tubes, Net Centric systems like BMS (Battlefield Management Systems) etc., achieving substantive self-reliance the in Defence sector will remain an unrealised dream and our defence procurements will never be able to keep pace with rapidly evolving technologies.

Defence sector was open to private companies with the first edition of DPP (Defence Procurement Procedure) in 2002 with the professed aim of reversing the Import to export ratio which at that time was 70:30. Despite its defence exports going up 10 fold  in the last six years, sadly, even after 7 to 8 revisions / updates of the DPP till date, with around 11 % share of total global arms imports, India continues to be the  world’s biggest importer of major arms, a dubious position it has held since 1993. Clearly the Defence Procurement/Acquisition procedures/policies aren’t working despite innumerable updates and amendments.

However, accelerated Atmanirbharta in defence is possible if the MoD brings in radical reforms in mindsets and policies that regulate defence procurement. This paper makes certain recommendations that will help the Indian MoD achieve its targets of defence procurement and defence exports.

Private Sector Holds the Key to Atmanirbharta and Tier 1 private sector vendors like L&T, TASL, Mahindra Defence, Bharat Forge, Adani Defence etc. who hold the requisite DPL (Defence Production licenses) must be given a level playing field to compete with DRDO in defence R&D and DPSUs in defence production. All discriminatory clauses in the DPP/DAP which permit arbitrary nominated single vendor orders to DRDO/DPSU should be deleted. In fact, all clauses in the DAP/DPP which even give favourable commercial/technical terms to DRDO/DPSU in all stages of the procurement cycle should be removed. To quote an instance – a DPSU was given a nominated order for a MAKE 2 program for certain radio sets. An RFP with identical radio set specifications was issued under competitive bidding under MAKE 2 categorisation to private vendors as well and the said DPSU was allowed to participate in the competitive tender also under MAKE2. This defies logic and prudence since it allows the DPSU the unfair advantage of predatory pricing in the commercial bid for the competitive tender by not loading its development costs, which would have been realized in the nominated single vendor tender.

For far too long have the DPSU/DRDOs been pushing the bogey of ‘Sensitive Programs’ and ‘National Security’ to exclude Private sector from projects of strategic importance. This betrays a lack of trust in the nationalistic and patriotic credentials of DPL holding private sector vendors, the employees of which are signatories to the Official Secrets Act 1923 and the companies themselves are subject to stringent bi annual audit by the IB based on guidelines issued by the MoD. As a case in point, most private sector tier 1 vendors have shut their Electronic Warfare (EW) shops after three major EW programs were awarded on nomination to DRDO/DPSU, despite private sector having delivered identical systems to the Indian Army.

Defence R&D projects should also be allocated on a competitive basis between DRDO and private sector to the L1 bidder. This will make the Defence R&D organizations more efficient, time bound and competitive in all their R&D initiatives besides giving a huge fillip to the indigenous private sector R&D, which, today, is reluctant to allocate significant R&D funds in the absence of assured orders from MoD. The IP generated through such R&D will be a property of the MoD which can charge a royalty from export orders to the private vendors, which are bound to follow – A win – win situation for both MoD and Industry.

Industry Bodies like CII (SIDM), FICCI, PHD Chambers etc. play a huge role in shaping Government policies. They need to be an assertive and integral part of the defence procurement chain rather than only offering their recommendations on draft policies framed by the government – recommendations, which, often, are not incorporated in the policies. Industry representation should be there in all committees from the 15-year Long Term Integrated Procurement Plan committee to the Categorization committees and even in the DAC. Reps of industry bodies in the TEC, NCNC trials, GS evaluations and commercial negotiations will bring in a greater level of accountability and transparency in defence procurements. The draft RFPs (Request for Proposal), before being sent for the AoN (Acceptance of Necessity) should be shared with the industry bodies for their comments, which, after discussion with all stake holders, should be incorporated by MoD. Industry bodies should not allow themselves to be exploited by vendors with vested interests, should not operate in silos and never be seen as being in the good books of the Government. On its part, the MoD should take the recommendations of industry bodies seriously and involve them in all stages of the procurement process.

Accountability & Ownership of all agencies in the procurement chain is a must. Costs must be imposed on anyone, whether in Service HQ or the bureaucracy, showing a cavalier attitude to procurement timelines. The most convenient and prevalent practice is to blame the helpless vendor for cost and time over runs and impose LD (Liquidated Damages) on them, even when they are not at fault and the delay was due to the buyer. Both the buyer and seller should be equal partners in defence procurement, and the seller must not be viewed with suspicion. The most common reason for time and cost overruns is Scope Creep – Buyer insisting that seller provide extra contractual features at no extra cost, either citing latest developments in technologies that have happened in the period between issue of RFP and issue of contract or purely on the whims and fancies of individual personalities. This is a patently unfair and unethical practice for which there should be zero tolerance with imposition of costs. The tendency of decision makers on the verge of their posting/retirement, to sit over files also needs to be checked.

Flexibility & Simplicity of the Procurement procedure/policy is the need of the hour. The 750 odd page DAP 2020 is both rigid and complicated and suffers from the following infirmities:

• No involvement of the Private sector/ Industry bodies in the planning process.
• No check on vendors making tall and impractical claims in the RFI (Request for Information) responses, resulting in unrealisable specifications in the RFPs (Request for Proposal). The AoN budget is fixed based on the budgetary quotes given by the vendors in the RFI response. However, the fixed and final cost given by the same vendors in the tender response is much less. In one case of radio set procurements the L1 price was less than 25% of the AoN budget. While this may lead to savings to the exchequer, it also causes avoidable embarrassment to the SHQ. To curb this practice, vendors whose commercial bid differs by +/- 20% of their budgetary quote should be disqualified.
• To further confound the matter, these RFPs are cast in Iron and allow no flexibility for correcting errors that are obvious and highlighted in the pre-bid queries by all vendors. Any change in the RFP, even a minor one, is frowned upon by the MoD and invariably leads to retraction of the RFP, due to fear of possible complaints by the losing vendors. This problem can be fixed by a simple change in procedure – freeze the RFP after the pre-bid query stage and then go in for the AoN and GSEPC (General Staff Equipment Policy Committee) approvals.
• The draconian clause in all RFPs that permits its unilateral and arbitrary retraction by the MoD, without assigning any reasons and at any stage of the procurement process should be deleted. This acts as a huge disincentive to vendors who invest significant amounts for developing/producing prototypes and clearing the multiple evaluations. There should be zero tolerance for RFP retraction and the procedures must allow full compensation to all vendors who participated in the tender.
• The NCNC (No Cost No Commitment) trials are far too detailed – in fact they are as stringent as the ATP (Acceptance Test Procedures) for the production models. The latest decision of the MoD to go in for Single Stage Composite Trials is a welcome step in the right direction, as it combines evaluation by all agencies in a collegiate fashion with all evaluations based on CoC (Certificate of Conformance) and lab simulations. Hopefully this new policy will be implemented by all evaluation agencies in letter and spirit.
• Commercial negotiations with the L1 vendor are far too long winded. As per CVC (Central Vigilance Committee) guidelines, there should be no negotiations with the L1 vendor, if the reasonability of prices has been established. Establishing the reasonability of the quoted price is itself an ambiguous and discretionary process and the vendor is coerced into reducing his prices with a ‘Take it or Leave it’ dictate. While this may earn some brownie points for the Service HQ/MoD/MoD (Finance) reps, it results in the vendor compromising in quality of the deliverables to the end user, thus compromising national security.
• The contractual terms in the orders placed on the vendors are one sided and unconscionable. There are little or no penal provisions for the buyer and even if there are, it is almost impossible to fix the blame on the buyer. Delays on account of non-provision of Buyer furnished equipment/information are ignored and the poor vendor is penalized with Liquidated Damages, for no fault of his. Most vendors avoid legal recourse, so as not to offend the MoD, and give in to the bull dozing and intimidation of the buyer. This too influences the quality of deliverables to the Armed Forces.

Indigenous Content is specified in the DAP for various categorization. However, the procedure for calculation of indigenous content based on FE (Foreign Exchange) content is flawed and lends itself to fudging besides excluding delivery of high-end product/technologies. The RFP must lay down the product/ technologies that have to be indigenous and delink the calculations from FE content. This procedure, incidentally, is followed in the Buy & Make (Indian) categorisation of the DAP. Unless this happens, India will continue to import critical technologies and this can never lead to substantive self-reliance in the defence sector.

Conclusion

As per a MINT analysis of MoD data, India’s defence exports have increased tenfold in the last six years. Defence exports reached an all-time high of `15,918 crore in the fiscal year 2022-23, a 24% increase from the previous year’s exports of `12,815 crore. This is, however, 54% short of the country’s aim to achieve an annual export target of `35,000 crore by 2025. According to a SIPRI report, India was not even among the top 25 countries with the largest share in arms exports – not very flattering for a country that boasts of being the 4th largest Army.

Despite over two decades of privatization, DPSUs, PSUs and OFBs together enjoy a 79% share of defence production with the Private sector getting a paltry 21%. With this skewed ratio, and without private sector participation on a level playing field, Atmanirbharta in defence will remain a distant dream. While the trade deficit in defence sector will not change overnight, the GoI needs to make some drastic reforms in the Defence Procurement Procedures/Policies – some of which have been outlined above.