Venue: Room No 005, IDSA

Concept Note

1. In the quest for self-reliance in the crucial sector of defence, the Government has been continuing its efforts to indigenize defence equipment wherever technologically feasible and economically viable. It has been a part of indigenization efforts to locate and develop broad-based indigenous supply source – both in the public & private sector for many complicated and intricate equipment. After the announcement of policy changes from 2001 onwards, there has been a shift in the role of private sector in the field of indigenisation, i.e., from the role of supplier of raw materials, components, sub-systems, they are now expected to become partners in the manufacture of complete advanced equipment/system. Despite these efforts the share of the private sector in the supplies procured domestically is very small. India has emerged as the largest arms importer. High level of imports tacitly admits to the failure of the domestic defence production establishment, barring a few exceptions, to meet the requirement of the armed forces, both in terms of requisite volume and cutting-edge sophistication. Lack of policy clarity and the risks perceived by the private sector has restricted private sector participation in defence procurement to supplying components and subsystems.

2. The Govt has continued the process of reforms to facilitate private sector participation in defence. The Defence Production Policy issued on 01 Jan 2011 emphasises Government’s endeavour to build up a robust indigenous defence industrial base by, proactively encouraging larger involvement of the Indian private sector in design, development and manufacture of defence equipment. Towards this end, it has also stated that efforts would be made in progressively identifying and addressing any issue, which impacts; or has the potential of impacting the competitiveness of the Indian defence industry in comparison to foreign companies.

3. The Govt’s resolve is conveyed through this policy which seeks to synergize and enhance the national competence in producing state of the art defence equipment/ weapon systems/ platforms within the price lines and timelines that are globally competitive; all viable approaches such as formation of consortia, joint ventures and public private partnerships etc. within the Government approved frame work will be undertaken. The Academia, Research and Development Institutions as well as technical and scientific organizations of repute will be involved for achieving this objective.

Order Book

4. Defence PSU’s are faced with the enviable situation of having an ever growing order book reflecting the appetite of the customers for modernisation of weapon systems with the DPSU’s struggling to timely meet the customers expectation. (As per 2010 -11 annual report, HAL had firm orders for new aircraft and Helicopters worth Rs 68,265 Crs with more orders in the pipeline. BDL has a healthy order book position of around Rs 20,000 Crore as per the annual report of 2010-11 and has challenging times ahead with delivery commitments with respect to major ATGM & SAM projects.) The other DPSU’s and shipyards are similarly placed.

Capacity Augmentation

5. To meet the challenges of augmenting their capacity for meeting the future orders as well as timely delivery against the existing orders, the DPSUs need to harness the potential of SME’s and create capabilities and capacities so as to outsource production and processes to SMEs. The economy of SME operations has the potential to reduce the production cost for the DPSUs.

Export Potential

6. The economies of scale can be achieved by the DPSUs if they could pursue the export potential of indigenously designed & manufactured systems for meeting the requirement of friendly foreign countries. This would have to be done concurrently while meeting the demands of our own defence services. SME’s could be harnessed both for capacity augmentation as well as product support to the friendly foreign countries.

Product Support

7. DPSUs being the nominated production agency in license production (ToT) projects also have the responsibility to provide product support over the life of the product. The life cycle costs of product support could be brought down and the response times improved if the SMEs are mentored to be able to be provide product support of select items. The DPSUs can then concentrate on weapon system upgrades and development of higher versions of the systems.

Off Sets

8. The recently issued Defence Offset Guidelines (DOG) provide for a multiplier factor of 1.5 in the discharge of offset obligations where the Indian Offset Partner (IOPs) are SMEs. This would provide an incentive to the foreign vendor to seek IOP in MSME category. DPSU mentored SMEs would be the default choice given their exposure to defence manufacturing. The DPSUs through such partnerships will be the indirect beneficiary of new technology, processes, upgrading of skills and infrastructure of which they would be the long term users.

Joint Ventures

9. The Govt has issued guidelines for formation of JV’s and MDL has been first off the block to sign two JVs with two private sector shipyards, Pipavav Defence & Offshore Engineering Co Ltd and Larsen & Toubro Ltd for construction of surface warships and conventional submarines.

Public Private Partnership (PPP)

10. The country has already witnessed considerable growth in PPPs in the last one and half decade. It has emerged as one of the leading PPP markets in the world, due to several policy and institutional initiatives taken by the central as well as many state governments. PPPs are now seen as the preferred execution mode in many sectors and an elaborate eco-system for PPPs has developed, including institutions, developers, financiers, equity providers, policies and procedures. For implementing a larger number of projects across diverse sectors a National PPP Policy has been formulated by the Govt to facilitate the expansion in the use of PPP and PPP rules have also been drafted and would be issued soon.

11. The time is therefore ripe for DPSUs to use these policy changes for creating conditions conducive for the private industries to play an active role to achieve the objective. DPSUs need to mentor and enhance potential of Small and Medium Enterprises (SMEs) for indigenisation as also for broadening the defence research and development base of the country and use the policy changes to form JVs and PPPs with Tier II & III private sector defence industry to meet their production targets and enable these industries to graduate to Tier I.