IDSA organized a two-day national seminar on defence acquisition on April 26-27, 2010. Delivering the Keynote Address, Admiral Nirmal Verma reiterated that the armed forces required speedy defence acquisition. He apprised the audience of the initiatives that the government had taken in the wake of the Kargil conflict to ensure speedy acquisition. Emphasizing the important role of complete and accurate information, he highlighted the lacklustre attitude on the part of vendors in giving full information beforehand, which caused inconvenience at the time of actual acquisition. Admiral Verma also insisted on the need of aligning the country’s time-frame of acquisition with global standards. Finally, he remarked that defence acquisition in India had considerably improved in the last decade or so and would continue to improve further since the country wanted its soldiers to use the right capability at the right time.

Earlier, the Director General of IDSA noted in his opening remarks that the money spent on arms acquisition had gone up from Rs. 10,000 crore to Rs. 40,000 crore and that it could go up to Rs. 50,000 crore, and that India was the second largest importer of defence equipment in the world. But acquisitions have been delayed on most occasions. He underscored the need for an integrated process for smooth acquisition. He pointed out that all the developed countries followed the integrated process for acquisition. But, in India, the army alone has 10 or 11 acquisition agencies with each having 10 or 11 levels of approvals. According to him, the answer to this problem lies in integration. However, there were always vested interests involved which resist change. He also argued that scandals should not be allowed to come in the way of acquisitions.

In his speech, Shri Vinod Mishra, Distinguished Fellow, IDSA, suggested the option of keeping 20 to 25 per cent of the budget aside for fast-track acquisition. According to him, long-term order book, assured orders, and association with best of Indian private players and best of class abroad are a way forward. Besides, offset tracking and DPP require attention.

Rajkumar Singh, Secretary (Defence Production), Ministry of Defence, delivered a special address in the inaugural session. He was of the view that delays in acquisition had been reduced. And that the government was doing better than earlier. Last year, the money allocated for acquisitions was not surrendered. He said that, in fact, the money was generally not surrendered. The utilization of unspent money is a subject of an ongoing interaction between Defence Ministry and Finance Ministry. At the end of the inaugural session, Dr. Thomas Mathew, DDG, IDSA, gave the vote of thanks.

Ambassador R. Rajagopalan chaired the first session. In this session, Dr. K. G. Narayanan, Former Chief Advisor, DRDO, spoke at length about India’s security scenario and its defence requirements. He argued that there were many stakeholders in India’s defence industrial base and acquisition, but the armed forces remained at the core. They have valid concerns about time-bound and speedy delivery of arms. He emphasized that delay in arms supply was counterproductive and thus has to be stopped. He also pointed out that, in commonsensical parlance, there was confusion between acquiring high technology and acquiring technology as such. Brig. (Retd.) Anand Mehra, Advisor (Marketing), BEL, highlighted the basic differences between commercial industry and defence industry. He said that they differed on many counts such as the size of market, public accountability and political considerations. Unlike ordinary commercial market, technology is not proven and matured in the defence market. He opined that defence business is generally supposed to be predisposed to fraud. Besides, unrealistic SQR, ‘play safe’ attitude, a large number of decision centres, and long wait for acquisition are some of the important weaknesses of Indian defence acquisition. However, the good thing is that the government is serious about these issues and is willing to make the acquisition process more efficient. He concluded his presentation by saying that rather than making defence industry free for all, there should be some government rationalization. The government must retain the right to regulate entry, exit, merger and acquisition in the industry, at least in the initial years; and successful procurement, not adherence to procedures, should be the criterion to measure success in the field of arms acquisition.

Subimal Bhattacharjee, Country Head, General Dynamics International Cooperation, explained the rationale for having a vibrant and robust defence industry. According to him, it serves military needs, and social and economic responsibilities. It helps focus on independent capabilities and improve national postures. He argued that in view of utilizing resources optimally, streaming procurements and filling up existing gaps, the defence industrial base needed to be strengthened. According to him, although, as of now, there is a predominance of Defence Public Sector Undertakings (DPSUs), there exists an emerging but strong private sector in the domestic defence market. Besides, participation of foreign vendors is also increasing.

Laxman Kumar Behera, Associate Fellow, IDSA, underscored a perceptive change that had taken place after 2001. According to him, before 2001, private players were basically supplying raw materials, parts and components to DPSUs, whereas since 2001, they were not only participating in manufacturing activities but are also acquiring foreign companies. In this context, he mentioned Mahindra’s simultaneous acquisition of two companies. As to the scope for private participation in defence industry, he said that it was difficult to map, but there was good scope. He also identified some key areas where private companies could play an important role. According to him, foreign companies are not interested in investing in an Indian company with a 26 per cent upper cap of FDI, which would leave them without any control of the company. He argued that when FDI was allowed in this field, it was done mainly to get technology, not because of any financial considerations. According to him, the upper cap for FDI should be 49 per cent. He was of the opinion that because of favouritism shown by the defence production department towards its own companies, private companies get discouraged.

Air Marshal S.C. Mukul chaired the second session. Professor Dinesh Kumar, IIM, Bangalore, made the first presentation in this session. He put forward the idea of performance based logistics. Besides, he made a strong point that what is wanted is capability, not a weapon; and how to change the process to get the right capability was the fundamental question. Air Marshal (Retd.) P. K. Nagalia argued that we should understand the whole business of defence requirement by braking down the system into two parts; one being the existing inventory and another being what we want to procure. He further argued there was a strong case for digitization of Indian arms depots. He also put forward the suggestion that every item in the inventory should be given a unique identification number, readily available for all the three services. He argued that training should be cost-effective. His suggestion was that simulators should extensively be used to impart training in order to avoid damages to equipment. Interestingly, he stated that the government generally makes 90 to 95 per cent of all payment in advance which leaves very little incentive for timely supply by the supplier. Vice Admiral Ganesh Mahadevan averred that logistics was sine qua non for our forces, and it is a subject of primary importance which needed urgent attention. He concurred with Professor Dinesh Kumar that soldiers are paid to fight, not to repair weapons. But he added that they were legitimately anxious whether their weapon was being repaired properly. He argued that logistics covered the entire life cycle of a weapon. Incidentally, he noted that the Indian Navy would have to have its own designing organization. Besides, the Navy has successfully moved its aviation into PB2.

Shri Shashi Kant Sharma, Director General (Acquisition), Ministry of Defence, chaired the third session. In this session, Wg. Cdr. (Retd.) Neelu Khatri, Defence Advisory Services, KPMG, identified some grey areas like consideration of life cycle cost and government categorization of defence production in India. She went beyond conventional understanding, or rather consensus, about these areas and tried to explain that prevalent Indian understanding about them may not be the best. Citing global examples, she said that caring for life cycle cost may not be advisable from an economic point of view. Besides, the categories of defence production like ‘make’, ‘buy and make’, and ‘buy’ need to be simplified. Lt. Col. Peter Garretson, Visiting International Fellow, IDSA, presented the American experience in defence acquisition. Another participant in this session was Dr. Vivek Lall, India Country head of Boeing Integrated Defence systems.

Dy. CAG Ms. Rekha Gupta chaired the fourth session. She said that although media was always keen on picking up CAG’s report and selectively highlighting its contents, CAG had never been overenthusiastic to bring anybody to book. In this session, Financial Advisor (Acquisition) & Additional Secretary, Ministry of Defence S. Chandrasekaran underscored the point that while some perceptions regarding defence acquisition and its delay were valid, others were unfounded. One has to be judicious when putting forward suggestions to fix the problem. He argued that a balance should be struck between the existing structure of acquisition and improvements required in it. Officer-on-Special-Duty to CVC Shri K. Subramaniam presented perspectives of two key oversight agencies – CVC and CAG. He reiterated that these agencies are driven by the cause of good governance, transparency and efficiency imperatives. These imperatives, in turn, emanate from one paramount concern – ensuring ‘value for money’. He pointed out that the oversight does not delay acquisition as it is very minimal in India. The CVC thoroughly investigates only those transactions that are above Rs. 75 crore. He argued that there were three major sources of delay: formulation of faulty service quality requirements (SQRs), delay in trials, and complex and cumbersome approval structure. He pointed out that a proposal had to secure approval from 60 to 62 approval points. Besides, the fact that procedures of approval are followed in letter and not in spirit also adds to the problem. He made a case for a professional and specialized cadre for the oversight agencies because it was difficult for them to distinguish between what was bonafide procedural deviation and what was irregularity. Such a cadre will be able to tide over many of the acquisition oversight related problems. Defence analyst and former Project leader on Arms Procurement, SIPRI, Ravinder Pal Singh argued that the problems related to oversight mechanisms lay in the fact that all oversight examinations were done post facto. About literal adherence to the procedures, he averred that rule of law had to be followed, not law of rule.

Shri Vinod Mishra, Former Secretary (Defence Finance), Ministry of Defence and Distinguished Fellow, IDSA, chaired the last session. In this session, Deputy Director General, IDSA, Dr. Thomas Mathew pitched for a calibrated offset policy so that India could gain maximum benefit out of scarce recourses that it had. He recounted the lack of FDI in Indian defence market as a major dampener. He strongly argued for liberalizing the FDI regime in Indian defence industry. According to him, the FDI in the defence industry could be allowed up to 100 per cent, though in a calibrated fashion. Dr. G Balachandran, Distinguished Fellow, IDSA, challenged figures and data on Indian defence industry that were being accepted at face value. He raised several pertinent methodological questions. Regarding offsets, he said that they had their gains and pitfalls. He cautioned that defence trade was a highly regulated trade. Companies are bound by the laws of their respective countries. He made this point in the particular context of the United States and said that the FDI coming from there would not automatically ensure any technology transfer. We have to see whether the US laws permit the transfer of technology that we may be looking for. The last speaker at the seminar was Dr. Jeykar Vedamanickam who represented HAL Corporate Offices as its GM (Marketing).

Concept Note and Programme

Report prepared by Prashant Kumar Singh, Research Assistant, Institute for Defence Studies and Analyses, New Delhi