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Indian Arms Policy Proposal Called Harmful for Small Firms

February 5, 2016 (Photo Credit: Roberto Schmidt/AFP/Getty Images)




NEW DELHI — A recommendation by an Indian Defence Ministry committee that strategic partners for major defense projects be limited to domestic companies with healthy balance sheets has raised objections that such a policy would unfairly restrict new, emerging firms that likely would have greater debt.

"The report of the special committee [Aatre Committee] headed by India's former Defence Research and Development Organization chief Dr. Vasudev Kalkunte Aatre, if accepted, will change the way India will acquire future weaponry," said Nitin Mehtaa a defense analyst here.

The recommendations, submitted to the MoD last week but not made public so far, lay down criteria for selection of strategic partners that would favor a few major defense companies and leave out the upcoming ones, said an MoD source. The report recommends selections be based solely on commercial strength.

Such a standard could lead to rejection of rising domestic companies as they would have debt related to investment in defense infrastructure. Rejecting these companies as strategic partners could spark opposition to the effort and threaten the whole initiative.

Based on the Aatre Committee report, the government would decide which private sector defense companies would be selected as strategic partners and then award defense projects on nomination basis — a process that until now was limited to  state-owned defense companies

An executive of private sector company Tata Group said selection criteria should be a mix of financial status, long-term vision, stability and capability of a company.

Making a case for promoting private sector participation in building India's defense infrastructure, the Tata Group executive said, "Some sectors where India is good like automobile, communications, etc., need to be pushed even further for defense requirements. The recent nomination of state-owned Ordnance Factory Board for the Future Infantry Combat Vehicle is ridiculous. If this trend continues, the entire concept will get killed."

However an executive of another private sector defense major, Larsen & Toubro, said, "It is prudent for the MoD to ascertain that the company selected as SP has sound financial health, so that MoD is assured that the SP would be able to execute such long-term and financially demanding systems/platforms successfully."

An executive of a new private sector defense company said there will be opposition if the government moves to promote only a select few defense majors. Commercial criteria should not be the only basis for selection; technical know-how should be given adequate weight, the executive said. 

"Opposition from the domestic defense companies to the Aatre Committee report will have to be taken into consideration by the government and [it is] hoped the ruling Narendra Modi government will give a chance to new companies also to get defense projects."

There is unanimity in views that India will continue to depend on weapon imports for a long time and the strategic partner process could help build defense infrastructure.

"Imports will continue to play a large role for the foreseeable future. However the [strategic partner] model will go a long way in enhancing India's defense manufacturing base," said Ankur Gupta, defense analyst with E&Y India.

Vivek Rae, former director general of the Defence Procurement Board in the MoD, said, "Only companies with deep pockets and established credentials can qualify as strategic partners. Others will have to be satisfied as tier 1 or tier 2 vendors to strategic partners. This is a welcome initiative by MoD and [I] hope it will be carried to a successful conclusion."


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