Strategic Partnership Model Can Boost Defence Manufacturing: Jayant Patil

Mumbai-headquartered Larsen & Toubro has for long been one of India’s leading suppliers of defence equipment and systems. BW Businessworld caught up with Jayant Patil, Whole-time Director (Defence & Smart Technologies) & Member of the Board, L&T for his take on the key issue of policy implementation in defence. Excerpts:

On the Strategic Partnership model to implement Make in India

The dropping volume of orders to Indian companies and preference for acquisition from foreign countries in recent years have highlighted the urgency to award the Strategic Partnership programmes as soon as possible to put India firmly on the path of indigenisation and self-reliance in building major platforms. 

The Expression of Intent (EoI) for Naval Utility Helicopters were issued on 12 Feb 2019. Responses to this were submitted on 26 April 2019. The shortlisting of strategic partners and foreign OEMs is still pending while the same was to be completed and RFPs issued by September 2019. The EoI for the P75(I) conventional AIP submarines were issued on 20 June 2019 to Indian companies and on 3 July 2019 to foreign OEMs. These were responded on 11 and 24 September 2019 by Indian and foreign OEMs respectively. The RFPs were scheduled to be issued to shortlisted Strategic Partners in December 2019. They are still awaited, so are issuance of EoIs for the FRCV and fighter aircraft programmes. While both were announced and RFIs issued to foreign OEMs, responses received and issuance of EoIs was expected in 2019 itself.  

The SP programmes have the potential to boost the entire defence manufacturing ecosystem in the country provided a level playing field between private and public players is ensured. Sooner the procurement of platforms is initiated through this policy, the sooner the positive spin-offs to develop system platform capabilities to realise indigenous requirements at differentiated cost structure and eventually build exports. 

On increasing allocations for defence modernisation 

Defence indigenisation has remained a focused agenda of the government, as clearly visible from the reversal of acquisition category hierarchy in favour of indigenous acquisition and according Acceptance of Necessity (AoN) worth more than Rs 4,09,000 crore for Indian industries to participate. Also, there has been gradual increase in nominal defence modernisation budget. However, inclusion of the GST (since July 2017) and customs duties (since April 2016) as additional outflows from funds allocated to MoD have, in effect, cut the capital allocations to defence in real terms. Further, after factoring in inflation, the current year’s allocation just matches the budget for FY16-17. The consequent decrease in funds available for defence modernisation are evident from the dropping volume of orders placed on Indian companies and preference for imports instead. 

Based on the Parliament answers and Standing Committee reports, it can been observed that the defence modernisation budget allocation was not sufficient even to cover the committed liabilities over the last two years, leading to acquisition programmes getting deferred, cancelled or subjected to unprecedented cut in supply quantities after issuance of RFP. Given the Letters of Credit payment terms, the foreign companies get paid on due date while Indian industry continues to suffer payment deferrals. The lack of funds for new acquisitions resulted in very low order placement of about Rs 77,000 crore on Indian industry over the past three years. 

Increasing the allocation for defence capital acquisition through Acceptance of Necessity (AoNs) worth Rs 4,09,000 crore granted since 2014 will bring about immediate positive impact on Indian defence industry with its ecosystem of large players as well as MSMEs leveraging their respective strengths. 

On level playing field issues — stopping nomination of orders to DPSU/OFB

Even in cases where Indian industry has demonstrated capabilities, and there has been an announcement of stopping nomination of acquisition programmes, nomination of DPSUs can be seen to have continued in line with old AoNs or on the pretext of security concerns. And wherever private industry has to compete with government-owned entities (OFBs, DPSUs) anomalies such as use of government-funded plant and machinery as well as assets like earlier transfer of technologies (ToT), and skill development at nil cost make it a non-level playing field. This acts as a disincentive to the Indian private industry resulting in gross underutilisation of private sector capacity. 

While there are a large number of AoNs in favour of Indian industry (more than Rs 4,00,000 crore worth of programmes in the last five years), RFPs released thus far are not commensurate to kick-start the procurement process through Indian industry. A typical defence procurement cycle from release of RFPs to contract signing takes anywhere between three and seven years, and even in the case of repeat orders for similar systems the process consumes a minimum of two years. Firm implementation of time frames from AoNs to issuance of RFPs to contract signing by periodic monitoring at the apex level will boost Make in India in defence. 

On funding of R&D in defence by industry 

Investments in R&D have led to success stories in India across sectors. Defence, by its very nature, is capital intensive even for investments. To compound this, defence continues to be an import dominant sector. With R&D cycles being long and complex and averaging 5-10 years, special policies are needed to promote defence R&D in the industry. The MoF provided income tax benefits for R&D with sunset clause till 2016-17 which was later extended up to March 2020. 

Considering the strategic nature of the defence sector, the targeted R&D spend deduction rate multiplier needs to be increased and the sunset clause for R&D tax benefit should be extended/ deferred up to 2030. The cost of financing in India being high, this would allow for part relief to industries investing in R&D. This will also be a low-cost option and a very effective enabler for driving up investments and promoting industrial R&D in the defence sector with long-term impact. 

On the push for ‘Make-1’ programmes

In line with this thinking, the ‘Make-I’ procurement procedure was introduced in the Defence Procurement Policy 2006 to develop complex, multidisciplinary indigenous defence solutions through maturing Indian industry supported by government hand holding and funding for the prototype development. In spite of initiating the procurement activity for few Make-1 programmes in 2009, after more than 10 years later, none of the Indian Make-I programmes have taken-off so far, probably due to the fear of funding the private sector to do R&D that by very nature is fraught with uncertainties. 

Putting ‘Make-I’ programmes on track and announcing many more Make-1 programmes is a key imperative for the long-term indigenisation in the defence sector. While the DRDO gets funding to the tune of Rs 20,000 crore every year, even a small proportion of this earmarked for the industry through Make-1 will go a long way to encourage R&D in the defence sector.