By Sarah Watson —
India’s new Defence Procurement Policy (DPP) was released in March with one section missing. Defense Minister Manohar Parrikar promised that he would soon release an additional chapter on Strategic Partnerships (SPs): a plan to identify one or two Indian private-sector companies in each of ten defense sectors that would then act as the government’s partner for all future procurement in that sector, without needing to undergo a competitive bidding process. SPs are in some sense an understandable response to India’s anemic defense sector and the country’s need to rapidly build capacity in defense manufacturing. But the program risks overloading the limited capacity of India’s industrial base, ensuring that it is unable to produce high-quality defense products in any sector, much less all of them.
The new DPP has two ambitious goals: to attain “self-reliance in design, development, and manufacturing in [the] defense sector” and to put “Make in India” at the center of defense procurement efforts. It reflects India’s long-standing (and long unfulfilled) goal of indigenizing 70 percent of defense production from its current base of roughly 35 percent. The SP program, as originally conceived by the Shri Dhirendra Singh Committee, was meant to help private-sector manufacturers make necessary investments in capacity by ensuring long-term contracts, thus creating a high-quality indigenous defense industrial base.
The V.K. Aatre Task Force, assigned to elaborate on the Singh Committee’s framework, recommended that a single SP be identified in each of seven sectors (aircraft, helicopters, aircraft engines, submarines, warships, guns (including artillery guns), and armored vehicles, including tanks); and that two SPs be identified for metallic material and alloys, non-metallic material, and munitions. The Task Force’s report, envisioning SPs as essentially project managers who will coordinate the work of a large group of subcontractors, lays out a set of selection criteria for SPs that focuses on financial health and general capacity rather than experience in defense engineering. A company identified as an SP in one sector cannot be an SP in another sector, ensuring that at least ten different companies will be selected.
Thus India is proposing to pre-identify the supplier of its next fighter jet, for instance, based not on the quality of a vendor’s proposal ten years hence but of the company’s current financial stability and proven capacity to manage complex contracts. When the Aatre Task Force looked to leading defense exporters for best practices, it found that there was no precedent for pursuing this course. (The Singh Committee was apparently under the impression that France and the United States employed similar systems.)
India has had a great deal of difficulty getting its Strategic Partnership program off the ground. Private sector defense contractors — both excited by the possibilities inherent in guaranteed, no-bid contracts, and concerned about the proposed rule limiting them to one sector each — approached the proposal with trepidation. According to media reports, the private sector has now agreed to get on board with the plan provided that the government split the six sectors into subsectors — allowing more companies to be designated as SPs — and allow a single company to be designated as the SP for multiple subsectors. Although such a change in the structure of the program might give more companies a bite at the apple, it vitiates the only viable rationale for SPs: the argument that defense contractors need large, assured contracts to justify and support investment in capacity. The greater the number of subsectors, the thinner India’s limited defense budget will be spread. It is not clear that allowing a single defense contractor to serve as an SP in multiple subsectors will overcome this problem, since investment in submarines, for example, may not help to build capacity in the manufacture of munitions.
If India succeeds in its plans to eliminate imports equally across defense sectors it will join a rarefied group. According to a database maintained by the Stockholm International Peace Research Institute (SIPRI), most of the world’s top 20 exporters of defense articles are also major importers, especially in areas where their own domestic industries are relatively weak. Spain, the 7th-ranked exporter, imported $1.2 billion in armored vehicles between 2005 and 2015 while exporting goods worth only $6 million in this category. Israel, ranked 10th, imports nearly as much as it exports and is particularly reliant on imported aircraft. Most of the countries towards the bottom of the list of top exporters earn a large majority of their exports from one category: Australian ships, South African and Turkish armored vehicles, Norwegian remote weapons systems.
In short, outside of the big five (the United States, Russia, China, Germany, and France) most countries have chosen to specialize in certain sectors where they have a competitive advantage while accepting that they will continue to be reliant on imports in other areas. Even China spent more than $8.5 billion between 2005 and 2015 on imports of military aircraft and engines, two areas where it has had difficulty developing indigenous capacity. Although India’s DPP is not export-oriented, in planning to develop its indigenous capacity in nearly every major sector India is essentially hoping to vault into the ranks of the top five exporters without the intermediate step of developing its industrial base through investments in one or two sectors.
The SP program is a dramatic response to India’s heavy dependence on defense imports. But successful execution under the current plan will require a corruption-free contracting environment, a clairvoyant’s prescience as to which contractor is best suited to fill future needs, and a defense budget far higher than the defense ministry has historically received (or even asked for). India’s search for shortcuts to improved defense capacity could end up impeding its drive for defense modernization.
Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.