Post AgustaWestland, govt opening up defence for Indian private cos

The shell of secrecy around Indian defence procurement is beginning to crack and the Indian private sector is likely to see windfall gains as it gets increased access to the market.

The government is changing defence equipment procurement procedures to give “first opportunity to Indian companies, including those from the private sector”, a report in the Times of India said today. Procurement from foreign companies will be the last option, the report said.

[caption id=“attachment_655082” align=“alignleft” width=“380”] The very offset policy shows the government’s preference for foreign companies. AFP[/caption]

The change in policy is significant, considering at present foreign companies dominate the Indian defence procurement market with a 70 percent share, followed by Indian public sector. Domestic private sector has only a marginal presence.

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The very offset policy shows the government’s preference for foreign companies.

As per offset policy, in any contract worth Rs 300 crore or above foreign companies are required to invest 30 percent of the contract value back in India.

Larsen & Toubro, Mahindra & Mahindra and Tatas are the key companies that are likely to gain from the likely policy change.

Another change likely to be introduced in the policy is removal of software and consultancy services from defence offsets, the report said.

In the AugustaWestland scandal, investigators had found that the kickbacks were routed through two software companies - IDS Infotech of India and IDS Tunisia - “in the form of fake software exports from India”.

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Better access to the defence procurement market has been a long standing demand from the Indian private companies. The government had also expressed its intention to increase the participation of domestic companies in defence contract bidding. This promise has until now largely remained on paper.

However, only giving preference to Indian companies is unlikely to help much.

According to a post by Major General Mrinal Suman in indiandefencereview.com (read here), one of the biggest problems that domestic private players face in the defence market is that there is no communication channels open with the defence procurement agencies.

“There is a total absence of an effective institutionalised interface between the MoD, the services and the private sector for regular interaction at the policy making level,” he said.

While procurement agencies are unaware of industry’s potential, industry lacks knowledge of defence requirements and procedures, he said.

To rectify this, he suggests “all joint committees should be represented at the level of decision makers, so that follow up action can be taken in a time bound manner”.

Moreover, there are scores of procurement agencies, which also is a deterrent for the private sector, he says. The government should put in place a centralised procurement mechanism for defence, which will encourage private sector participation.

The key reason behind the abundance of controversies in defence procurement globally is the lack of transparency. It has been more so in India, as proved by various scandals right from Bofors, due to the preference for foreign companies.The government is willing to alter, and this augurs well.

According to Transparency International, competition is one of the fundamentals for fair and transparent defence procurement. In that sense, the changes envisaged by the government is likely to result in higher transparency.

But for full transparency, shedding the shroud of secrecy surrounding the defence establishment is key. However, there is a limit to which this can be done, given the sensitivity of the defence matters.