NEW DELHI — India's efforts to cut imports and boost homemade weaponry and equipment has hit a major roadblock, as the domestic, private defense industry is sharply divided over a not-yet-implemented policy that seeks to identify a select few private sector defense companies to be named Strategic Partners (SP), who could then be nominated to big ticket defense projects.
The nomination process is run of big ticket defense projects to preselected SPs by the Ministry of Defense (MoD). If the policy is adopted, it will change the way weaponry is acquired in the country.
The controversial policy meant to give the special status of SP to select private sector companies, currently under consideration by the MoD, had been recommended by a select panel nominated by the MoD, under the chairmanship of former Defense Research and Development Organization (DRDO) chief Vasudev Aatre.
Now, the private defense industry is divided over the selection criteria and the need for such a policy. An MoD source said the policy's consideration could be postponed, given the fierce opposition from various sections of the domestic industry.
"The very fact that the Aatre report, which seeks to detail criteria for selection of SPs, has been made public (April 19) — after the formulation of the Defence Procurement Policy DPP-2016, end March 2016 — suggests that the selection of SPs has been delayed," said Nitin Mehta, a defense analyst in India.
A senior executive with the Indian lobbying agency ASSOCHAM, or the Associated Chambers of Commerce and Industry of India, strongly opposes the policy move on creating select few SPs.
"A valid interpretation of SPs is that it will give the MoD an official process to outsource its defense procurement in key sectors, to select large private sector groups via a sophisticated nomination process," the executive said. "If this interpretation is valid then it is a cause of concern."
Another executive with a domestic defense company said the policy on SPs will lead to the creation of "tiers" among domestic defense companies, relegating the small and medium enterprises to only outsource at the mercy of the selected SPs. The selection criteria of few SPs from the private defense sector is likely to remain controversial, the executive added.
Amit Cowshish, MoD's former financial adviser, said: "I am not quite convinced about the need for preselection of strategic partners (SPs) by MoD for Buy and Make cases, which is what the Committee of Experts has recommended. While much will depend on the fine print of the scheme, which is yet to be notified, [prima facie], it is not going to be easy for MoD to implement it unless strong costing and audit mechanisms are created. The process of selection itself may get mired in controversies."
The Aatre Task Force in its April 19 report divided the defense industry into two categories and recommended that preselected SPs by the MoD should be entitled to only one project in the first category and up to two projects in the second category.
The first category includes aircraft; helicopters; aero engines; submarines; warships; guns, including artillery guns; and armored vehicles, including tanks. It's been suggested that only one partner should be finalized for these.
The second category includes metallic material and alloys; nonmetallic material, including composites and polymers; and ammunition, including smart ammunition, for which the Task Force said two partners can be identified.
"The big companies are very enthusiastic about it but I believe they also have reservations about the idea that one strategic partner will be eligible for only one project. Alternative models for forging long-term relationships lasting the life cycle of a product do not seem to have been considered by MoD," Cowshish said.
The small and medium enterprises numbering over 6,000 are opposed to the concept of SPs, as they fear "the big SPs may not leave enough for them on the tray," according to Mehta.
Anil Jai Singh, a retired Indian Navy commodore and defense analyst, said: "They (small and medium enterprises) feel that they will go out of business as the big guys will not offload enough work to them and that they will forever remain tier 1 and tier 2 companies and will never get the opportunity to grow into a prime contractor status."
However, he said, "consolidation has been successful to a large extent — for example, nuclear submarine construction is divided between two shipyards in the US. There are similar models in Europe, too, but that template cannot be applied in our scenario."
A, MoD official admitted it is not easy to implement the strategic partners policy because though there are several positives, the policy can distort the market dynamics and competition could get nipped in the bud.