Indian Defence

Why Private Sector Thinks Twice To Invest In Indian Defence?

Indian private sectors have not yet been able to meet up the demands of the Indian defense sector. There are plenty of opportunities available, still, they think twice before investing in India.

But first why there is a need for the Private sector? When a person works in a comfortable environment he doesn’t innovate. Neither he takes his job seriously if no sense of responsibility is given to him. Also, if there is no policy of Firing people. A person gets more and more comfortable and doesn’t care about work. He will just think he has to go to the park be there from morning 10 AM to evening 6 PM. What do you think the output of the industry will be? Very less and inappreciable

Now there is a private sector, where are person has to work and prove himself at every time. If their job is taken for granted, he could also be fired. If responsibility not taken well, he could get salary cuts, etc. However, there are also small disadvantages of Private but they can easily be brought down by market competition.

So where would one like to work, of course in 1st one, but for the country it is not useful. The first one is government-owned (here we don’t have China like government owned companies, where, work is to be done on the nozzle of gun) liberal, and democratic. But for the nation to increase innovation and creativity private sector is most important.

One must remember that development of India was not that high before the reforms of 1991.

Here, we will understand some of reasons, why this happens:-

Failure In Creating Economies Of Scale

India has always been a failure in terms of creating Economies of scale. What are Economies of Scale?

Let’s say, you are going in the market for a purchase of critical technology. Your purchase is very less in quantity. Now here, you just bought this off the shelf. The seller might give you a discount. Now here, since you just purchased everything off the shelf, not only you didn’t get access to technology, and neither your industrial base got a good enough sustainable supply chain of the same. with a cherry on top, you also paid really high amount for the same, while you could have paid a bit less if manufactured at the house. Also, you paid extra for modifying as per Indian Requirements.

Now here at the same time if you had ordered in bulk, what would have happened? Since you have a good order quantity, a company can share its technology with a domestic supplier, which would have created a sustainable supply chain. Since the order is bulk, the cost of modifications also reduces at each part. Also since a domestic supply chain is created you could have also got more jobs in-country and also develop industrial know-how in your country which is really important as it takes a certain amount of time to mature technology.

So bulk ordering and creating economies of scale indirectly brings down the cost of per unit production.

The best example is Vajra K-9 Howitzer, even though we had the requirement of 500+ towed howitzers, DAC brought only 100 Vajra Howitzers and now assembly is now empty. This indirectly leads to the shutting down of an assembly line. A mechanical engineer knows that how much time, effort, and cost escalated once the assembly line closed.

Domination Of PSU

The PSU also dominates the market and doesn’t allow the Private sector to participate. Competition is really good but a competition which unfair advantage to one while not is other is not good

The PSU still are funded times by the government. Now here, when a tender is to be filled out between PSU’s and Private, a private has to keep a certain margin of profit, and at the same time, PSU’s doesn’t care that much about profit margins. Even though being publicly listed at the end of the day they are still going to get orders from the government and if the PSU gets in debt government will come to save it. Due to this PSU’s fill the tenders with low margins at times.

OFB is not a PSU as of now, but still, it’s a major contributor in creating a Lose-Lose situation for government and private, and in the end, the army suffers. OFB is getting orders anyhow, at any given time, which they manufacture with lots of cost overruns and poor quality. Still, they get orders, if same is done by the private sector, it gets blacklisted which shows an unfair advantage.

Slow Process In Clearing Deals

One of the major reasons which every defense Enthusiast knows. All the defense deals have stuck for a long time. The major one which everyone knows is MMRCA 1.0 which almost 15 years, as it is dated back to the year 2000. Even if see it from 2007, still it took 8 years for the government to realize the cost overrun and feasibility. A recent fast track Caracal deals even get canceled after 1 year. A small air defense deal was canceled after a span of 7 years.

Not only this, Project P-75I, P76, Naval Utility helicopters, aircraft carrier, etc for Navy. Mid-air refuellers, Helicopters, Medium weight fighters for Air-force and AK-203 for the army, howitzers are still stuck.

Strong-Hand Import Lobby

This is a one of reasons which is very less highlighted by many News and other channels, but it is still it is one of the most important one. There have been several cases in Defense Procurement where the product was to be purchased a different one or could be made indigenously but still, there were some people by anyhow tried to get it imported.

There are many examples of this. Now here, it is not about the Russian lobby, but there is also Israel Lobby, the French lobby, and the slowly growing American Lobby. The people sitting at top many Imported equipment only. There are many reasons for the same, the main is Corruption.

Re-order And Renegotiation

The Re-order only happens once the earlier order is fully delivered. Now here, let’s consider the 36 Rafale case. Everyone knows that we would be needing at least more than 36. So now, if we have ordered more, we will wait till all 36 gets delivered.

So here, after 36 gets delivered, again the negotiation will be done. Now here, if a clause of further purchase in first-order itself is kept or even it is started before last delivery, a lot of time can be saved and it can also be made much cheaper.

The same has happened with very much known P8-I Poseidon aircraft. They have been ordered totally thrice and will be ordered 4th time, but not reordered until they are delivered. And as delivery completes, negotiation is done, almost takes a year, and signing the contract months of time. A lot of time and money is lost in opportunity. If it gets reordered the delivery could be constant and the order line remains running as well.

Emergency Purchases

Last year itself India spent a whopping Rs 20,776 crore on emergency and unbudgeted defense expenses in the last year as the armed forces went on a global hunt for equipment and stores to respond to the China challenge on the Ladakh border. Now you see here if planning and delays wouldn’t have been there at times. These purchases are costly since you are spending much more during emergencies. Also, as it an emergency, one cannot even negotiate properly and has to give the amount that is demanded.

Change Which Is Seen

However, a lot of changes have been done after the NDA government as many Schemes have been created like Aatmanirabhar Bharat, Make in India, and Make for the world for Increasing the private sector participation in India.

Make in India

Now the government is Gradually decreasing the stake in PSU and moving towards privatization so that they can function independently and professionally. Privatization of BHEL is part of it. Along with that, the Lease option is made available. The emergency purchase powers of each chief are increased to 500 Crores. The offsets clauses are kept in the deal to create a domestic supply chain. Defense corridors are also established. Make 1 category and Make 2 category are introduced in DPP in order to create more private sector. 70221 Crores allocated for domestic procurement and increasing FDI share.

A recent article also noted that more than 460 companies have got Licenses approved to make defense products in India and along with that many companies have also received export licenses to sell products over the world. Public-private partnership is also encouraged a lot in defense Deals. Last but not the least, a Negative import list part 1 is also created in order to boost the confidence of indigenous players (Part 2 in the pipeline). Defense startups are also given much funding from the government.

It’s not that, that private doesn’t/cannot produce quality, One can look at the vast range of Artillery from Kalyani, L&T shipyards. Other small companies like SSS Defense and Tonbo Imaging are working really hard and producing a quality defense product. Gradually many items are now just researched by DRDO, then they give the technology to the private player for mass production.

Conclusion

Even though we have improved, still there are much more things yet to be resolved. Private participation cannot be increased until the purchase is increased. And with a limited budget, proper planning is still to be found lacking to utilize the budget in the proper manner. Even during the NDA government, several deals are pending.

MMRCA 2.0 is still flying somewhere, Air defense System whose RFP was declared in 2013 is also shot down. P-75 I, P-75 alpha all of them are still not a reality. AK-203 deal is struck. Also, most important the purchase of Sukhoi-30 MKI in 12 numbers and Mig-29 from Russia to overcome the shortfall of the airforce is still on the ground.

These are a few, There are several MSME that dwells on these deals. And until unless the indigenous lobby becomes stronger following the downfall of the Import lobby’s worth, it would be really hard to bring up and harness the Professionalism, Quality, and Creativity of the Private Sector.

Nirav Kotak

A Mechanical Engineer and a Defense Enthusiast wanting to share knowledge and learn more from others as well.

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