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India's New Rules Could Mean More Overseas Tie-ups

Global Buys Represent 'Last Resort' Under New Rules

Apr. 30, 2013 - 10:08AM   |  
By VIVEK RAGHUVANSHI   |   Comments
A Rafale. Credit: Dassault Aviation
A Rafale. Credit: Dassault Aviation (Dassault Aviation)
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NEW DELHI — India’s decision to buy foreign weapons only if it can’t find a domestic source is likely to drive more joint ventures between Indian and international firms, while further slowing down an already notoriously slow and tedious procurement system.

New amendments to India’s Defence Procurement Policy (DPP) approved April 20 by the Defence Acquisition Council (DAC) require that foreign-made weapons be purchased only after all other options are exhausted.

The new order of precedence for acquisition categories is:

■Buy Indian;

■Buy & Make Indian, through joint ventures with overseas vendors;

■Make Indian, in which the domestic company is asked to design, develop and build a full-fledged system;

■Buy & Make with Transfer of Technology, which would come from overseas firms; and

■Buy Global.

“Any proposal to select a particular category must now state reasons for excluding the higher preferred category/categories,” states the MoD release describing the policy changes.

The amendments do not apply to ongoing procurement programs, however, so the Medium Multirole Combat Aircraft program, in which France’s Dassault Aviation has been chosen as the preferred vendor for its Rafale fighter, is unaffected.

Analysts here view the amendments as a knee-jerk reaction to recent defense-related scandals, especially one involving Italy’s Finmeccanica, whose former CEO was arrested this year in connection with alleged bribes paid to India to secure an order of helicopters.

But because the domestic defense market is still in its infancy, Indian firms generally are ill-equipped to meet high-end military requirements on their own.

A senior executive of an overseas defense company said the new rules could lead to forging tie-ups with domestic companies to sell their equipment “repainted” as made in India.

Making “Buy Global” a last resort will also mean delays in finalizing tenders as the bureaucracy must now ascertain whether the weapon can be bought from home, said a senior Indian Air Force official. “In the end analysis, there will only be further delays in procurement as the policy has been made cumbersome and complicated.”

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Rahul Bhonsle, retired Indian Army brigadier general and defense analyst, however, said the policy is not anti-overseas. “Contrary to popular belief, the latest policy is not unfavorable towards foreign companies. Given that ‘Buy Indian’ entails only 30 percent [indigenous content] and ‘Buy and Make Indian’ only 50 percent indigenous content, the policy encourages joint ventures by Indian companies with foreign companies, which should be effectively exploited,” he said.

India imports nearly 70 percent of its weapons from overseas; the domestic sector, especially the private sector, has a meager contribution of less than US $500 million a year.

The new amendments aim to boost indigenous weapons production, but analysts here are unsure whether that will become reality.

“It is very difficult to say how the whole process will be done,” said Bhupinder Yadav, CEO of New Delhi-based defense consulting firm Q-Tech Synergy. “It is a good move, will push Indian firms to make investments and capability acquisition. Even if this would push some major project by a couple of years, still it will be worth a try. As with every project, a thorough evaluation of Indian industry’s capabilities will be done to come to any conclusion.”

Domestic defense lobbyists welcomed the move, but domestic defense companies were cautious in their response to the amendments. “The devil lies in the detail,” said Rahul Chaudhry, CEO of private-sector defense major TATA Power SED. “[I] can only comment after DPP 2013 is released.” The full DPP incorporating the amendments is expected to be released in two months.

Defense analysts here were unanimous in the notion that while emphasis should be made toward indigenous products, India cannot afford to overlook imports.

“Prioritization of procurement categories is a step in the right direction, yet its implementation must be taken in true spirit, else despite emphasizing on ‘make,’ India would still be dependent on outside sources,” said Deba Mohanty, CEO of New Delhi-based defense consulting firm INDICIA Research & Advisory.

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Samir Advani, vice president, Strategic Business Development for domestic defense major Mahindra Defense said, “Currently, the Indian industry does not have the technical capability to provide the required weapon technologies that the Indian defense services want.”

On making buying from overseas the last resort, Advani said, “This is a necessary evil, which needs to be accepted as part of the development of indigenous capabilities.”

Prospects for Rafale

In Paris, the amendment is seen mainly as a bid to win votes in parliamentary elections due in April or May 2014, as there has already been a steady move over time to promote buying from domestic sources, said a defense expert with knowledge of the Indian market.

Although the amendment will not affect talks over a planned buy of 126 Rafale fighters, the tender’s terms reflected a policy to boost local industry.

If India does sign an order with Dassault, only the first 18 units will be built in France, with the remainder assembled from kits and eventually built, from raw materials to components to full systems, in India.

In the first stage of negotiations, Dassault has been asked to hand over full documentation of Rafale production plans so Indian authorities can assess the work for local industry.

But Dassault is reluctant to hand over the papers, as India also insists on the French company acting as overall prime contractor providing guarantees for program performance. Dassault is concerned over the Indian partner’s ability to deliver the aircraft to standard, on time and on budget. That single corporate guarantee is seen as “deal-breaker,” the expert said. ■

Pierre Tran in Paris contributed.

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