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India’s gross defense budget is expected to reach US$ 112 billion (bn) by FY27 from $45 bn announced by the Government of India in 2018-19, owing to significant steps been taken by the Centre to bolster country’s position as a major aerospace and defense power, noted a recent ASSOCHAM-KPMG joint study.
The study titled, ‘Creating a level playing field to facilitate Make in India in defence,’ jointly conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and global professional services firm KPMG also noted that while in 2018-19 the budgetary increase was a meagre 7.8 per cent over the previous year, it is expected to clock an estimated compound annual growth rate (CAGR) of about 11 per cent until FY27.
The study however raised concerns that about 10 percent of defense budget is surrendered to Ministry of Defence (MoD) at the end of each financial year owing to underutilization as the reserved budget is not mapped with capital acquisition.
It said that country’s capital expenditure for defense procurement is expected to exceed $250 bn over the next 10 years, primarily to replace the Soviet-era vintage equipment and meet the growing modernization needs of Indian Armed Forces. However, out of this, the domestic industry would only be able to manufacture defense equipment worth just about $80 bn while the rest of it would have to be imported.
Thus, the study suggested the government incentivize private enterprises in developing large-scale research and development (R&D) and manufacturing capabilities.
It said that a vibrant domestic manufacturing ecosystem that includes both public and private defense manufacturing entities is essential for the success of ‘Make in India,’ in the defense sector.
Issues plaguing the defense sector:
The study also noted that despite large quantum of opportunities, fast-growing economy and availability of skilled talent pool, India has achieved very limited success in terms of aerospace and defense self-reliance.
It further said that highly protracted procurement timelines and cancellation of tenders together with tenders awarded based on lowest cost and non-existence of a level playing field are certain key issues in the defense procurement process.
Besides, issues like awarding tenders to defense public sector undertakings (DPSUs) on the nomination, higher multiplier for offset discharge through Defence Research and Development Organization (DRDO), the difference in cost of capital resulting in an undue advantage for foreign players/DPSUs.
The study suggested that government should treat private players in the defense industry as partners rather than mere equipment/service providers as similar approach had been highly successful in space and atomic energy programs.
With an aim to provide a level playing field and boost defense manufacturing in India, the ASSOCHAM-KPMG study gave following recommendations to MoD:
1. Award all defense tenders only through competitive bidding.
2. Offer equal multiplier on offsets for Toll Operate Transfer (TOT) to all public and private Indian entities and create a mechanism for priority sector lending or soft loans for private defense manufacturers.
3. Exclusively reserve designated programs only for competitive bidding among private shipyards only as a short-term measure to utilize vacant capacity.
4. Develop an equitable payment structure without significant back-ended payments and include provisions for the imposition of penalties in case of delayed payments.
5. Avoid conflict between production and procurement functions.
6. Include provision for cost escalation in defense procurement contracts on lines of Indian Railways and Department of Atomic Energy.
7. Permit private players to provide indemnity bonds in lieu of bank guarantees to obviate additional financial burden imposed on them.