So far, Make in India, a pipe dream for defence

Some officials serve on DPSU boards causing conflict of interest


Chennai: 

Amid efforts to showcase India’s defence manufacturing prowess at the DefExpo held recently, a survey showed that the total FDI in defence manufacturing sector under the ambitious ‘Make in India’ initiative has been a dismal $0.18 million (about Rs 1.2 crore). This was in the backdrop of signing 187 defence contracts worth $37 billion in the last four years.

The Assocham-KPMG report, released by Defence Minister Nirmala Sitharaman, at the 4-day DefExpo, outlines the challenges equivocally as stakeholders seek a level-playing field and greater collaboration between public and private defence manufacturing enterprises. 

Amber Dubey, Head — Aerospace and Defence, KPMG, was vocal about the issues faced by stakeholders. He flagged it saying, “There is a distrust between the private and public. Look at some of the best armies in the world, which are fighting wars. They don’t have a Defence Public Sector Undertaking (DPSU). This is not meant to take anything away from the DPSUs as they have done a great job. But, somehow, we must crush this artificial divide between the private and the public enterprises.” 

Citing the example of ISRO partnering with a private player to launch a satellite, he said there were many contours of the manufacturing activity that were acting as obstacles. Some of them included tenders being awarded to DPSUs on nomination, difference in cost of capital leading to undue advantage for foreign players or DPSUs, fiscal incentives for DPSUs, change in price bid post award of tenders and conflict of interest. 

For instance, the department of defence production, which has administrative control of all DPSUs, is represented in the decision-making committee responsible for taking key decisions pertaining to defence acquisition and manufacturing within the MoD (Ministry of Defence). This, in his view, triggers a “mini” conflict of interest arising out of MoD officials also serving on the Board of different DPSUs. Therefore, there should be an “arm’s length” between the MoD and DPSUs. 

Private manufacturers too faced issues of unfavourable schedule of payments and delay in final payments. The three-instalment system — 15 per cent in advance, 75 per cent after factory acceptance test and remaining 10 per cent at the user acceptance stage through the Controller of Defence Accounts, was a factor that impacted the capex plan of a private enterprise. “We have only one customer — Defence. If he doesn’t smile, it is not good enough. Private sector does not have the wherewithal to withstand this kind of financial pressure,” Dubey said. 

Like infrastructure, which got priority lending status, defence too should get it, the report said. Given its critical nature, such a status is imperative for ‘Make in India’ to turn into reality.

Hurdles Abound

• To meet modernisation needs of armed forces, the MoD will need to acquire defence equipment worth over $250 bn by 2027 

• Underused reserve budget is not tied to capital acquisition. Due to this, about 10% of the defence budget is surrendered at each financial year end 

• Over the last four years, MoD has inked 187 defence contracts worth $37 billion. Of these, 119 were awarded to Indian players, while the rest went to foreign firms 

• Domestic aerospace industry limited to few Indian firms. While Airbus, Rolls Royce and Honeywell have set up engineering and design centres, the core manufacturing is still carried out in their home countries 

• Aircraft carrier Vikrant built by Cochin shipyard six years behind schedule. Cost up 6-fold to $3 billion 

• Kolkata-class stealth guided missile destroyers, built by Mazagon Dock Ltd, saw a 3-fold rise in production cost from $650 million to $2 billion.