In 2006, winds of change swept defence sector

Just days ago, on December 12th, the Ministry of Defence (MoD) announced with some fanfare that two private Indian companies, L&T and Astra Microwave, would sign contracts with Israeli defence supplier, M/s ELTA, for supplying Rs 250 crore worth of components, for Rs 833 crore worth of radars being supplied by ELTA to India.

This, it was announced, was the first contract signed under the new offsets policy, promulgated earlier this year. Simply put, the offsets policy stipulates that in every defence contract worth more than Rs 300 crore signed with a foreign vendor, the supplier must source 30 per cent of the contract value from domestic Indian suppliers.

It is not the new offsets policy alone that points to changing mindsets within the MoD. Most countries that spend big on foreign arms have far more demanding offsets clauses.

More indicative of a shift is the remarkable fact that private companies have benefited from India's first offsets deals, rather than the public sector monoliths like Bharat Electronics and Bharat Heavy Electricals that have traditionally been handed such titbits.

For Indias eight defence PSUs and 39 ordnance factories, for decades the beneficiaries of a monopoly on defence production, this is an unwelcome sign of competition from the private sector.

Over the coming 11th Five-Year Plan (2007-2012), India will spend some Rs 600,000 crore on defence, one-third of this probably on foreign weaponry. That means offsets contracts worth Rs 60,000 crore will be up for grabs.

It may be premature to read too much into the signing of just one contract but this followed an earlier straw in the wind: the promulgation, in August 2006, of the Defence Procurement Policy 2006 (DPP-2006).

This had signalled a shift from India's traditionally autarkic approach towards defence production in which self-sufficiency, rather than economic efficiency, was the overriding imperative. DPP-2006 did not abandon the rhetoric entirely.

However, it opened the defence production field to the private sector, creating entities called Raksha Udyog Ratnas, private sector companies with a commitment to defence production.

The field of defence production had actually been opened up in May 2001 when private Indian companies (with up to 26 per cent foreign equity) were invited to participate.

But at the beginning of 2006, the private sector had only 10 per cent of the defence market, amounting to Rs 3,100 crore, the bulk of it in low-tech materials, sub-assemblies and components.

Now many private players are waiting so see if the regulatory framework of DPP-2006 will be matched by equal treatment from the decision-making elite within South Block which draws privileges and pelf from the defence establishment.

The MoD is increasingly becoming aware of a demand for change. Growing public awareness and a sudden spate of press reports on the inefficiencies of the existing system are building pressure.

Contributing to this is the increasing assertiveness of external audit authorities like the Comptroller and Auditor General (CAG), which are now outspoken in their insistence on shedding the veil of "national security" and looking at issues like value for money.

Bureaucratic mindsets are also being changed by international exposure. In November, a seminar on Defence Finance and Economics was addressed by experts from 26 countries, the majority of whom strongly advocated the abandoning of India's model of a monopolistic, public-sector-driven defence industry.

If official concurrence was required, Finance Minister P Chidambaram provided it, flatly declaring that supporting public sector inefficiency was no longer possible with efficient private sector alternative available.

A new defence minister provides an unpredictable element in any move towards genuine change. On the one hand, AK Antony provides a focused leadership who can concentrate on the matter at hand.

His predecessor, despite his formidable intellect, was so caught up in party matters and in chairing group of ministers meetings that there was simply not enough time to focus on defence.

On the other hand, Antony's leftist leanings are not the ideal background for a reformer. His initial steps have been in the right direction. 2007 will be his real test in opening up defence production.