Made in India arms: Pvt players eye long-term contracts under new policy

Lack of long-term contracts had choked off private investment in the sector

Defence Minister Arun Jaitley's statement last week about a new defence manufacturing policy has raised hopes that the ministry will finally sign the dotted line for the long-pending strategic partnership policy.

“Under the policy, private sector companies will be chosen for 'strategic partnerships' in six broad areas — ranging from aircraft and warships to tanks and guided missile systems. The 'strategic partnership model', which is meant to create capacity in the private sector on a long-term basis, over and above the capacity and infrastructure that exists in defence PSUs (public sector units), will gradually replace the existing system of awarding contracts only to the lowest bidder,” said a person with direct knowledge regarding the policy.

The proposed defence manufacturing policy could allow private companies to enter into long-term commitments for complex technology programmes in a bid to replace current imports, according to industry sources.

“With a long-term commitment in place, domestic companies are expected to make higher financial and human resource investments to cater to this segment. These could include mega-platform projects like fighter aircraft, helicopters, submarines and strategic materials,” said a second person with direct knowledge of the ongoing discussions.

Larsen & Toubro Ltd (L&T), Reliance Defence, Punj Lloyd and Bharat Forge are some of the companies who could emerge as immediate beneficiaries once such a policy is in place. Concerned officials for these companies did not comment on the proposed policy.  

Once a long-term arrangement is in place, private companies are expected to invest further in required manpower and other resources. “Absence of long-term commitment under a trust-based model was missing all along in defence procurement since repeat buying from a vendor was not allowed. This made it unviable for anyone to make long-term investments and that resulted in building India's import dependence,” the second person quoted earlier said.

According to the latest report of Stockholm International Peace Research Institute (SIPRI), India is the world's largest arms importing country accounting for 13 per cent of global arms imports between 2012 to 2016. According to the same agency, between 2007 and 2016, China has seen the biggest growth in military spending, with an increase of 118 per cent, followed by Russia (87 per cent) and India (54 per cent).

Though long under consideration, the policy has also seen discussions over issues related to limiting each company to one vertical and other monopoly related issues. If restricted to one vertical, companies with presence across defence sub-segments may see a limited upside. However, industry officials add not all sub-segments would be under the strategic partnership policy, leaving enough scope for competitive to continue.

  

“The Strategic Partnership chapter in DPP 2016 is still to be finalised, which would clarify and possibly provide further impetus to involvement of private players in the defence sector. Some considerations around whether participation for each private player should be focused on specialisation to specific verticals or be open ended and the matter of monopolistic situations arising are some thoughts that are being grappled with, and government decision on the policy is long awaited,” said Alaric Diniz, Director, Deloitte India.

In March 2016, the ministry of defence came out with Defence Procurement Procedure that set a priority scale for purchases in which “buy global” implying imports is last in preference. It was quiet a paradox, however, that the new offset policy announced last year raised the contract threshold for compulsory domestic procurement from Rs 300 crore to Rs 2,000 crore. This was done since the companies were finding it hard to source from India.