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Defence budget may reach $112bn by FY27

Govt. must incentivise private players

SIDM LogoIndia’s gross defence budget is expected to reach US$112 billion (bn) by FY27 from US$45 billion announced by the Government in 2018-19, owing to significant steps been taken by the Centre to bolster country’s position as a major aerospace and defence power.

This was noted by a recent ASSOCHAM-KPMG joint study ‘Creating a level playing field to facilitate Make in India in defence’, said a release on 27 May 2018.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and global professional services firm KPMG, the study also noted that while in 2018-19 the budgetary increase was a meagre 7.8% over the previous year, it is expected to clock an estimated compound annual growth rate (CAGR) of about 11% until FY27.

The study, however, raised concerns that about 10% of defence budget is surrendered to Ministry of Defence (MoD) at the end of each financial year owing to under-utilisation as the reserved budget is not mapped with capital acquisition.

It said that country’s capital expenditure for defence procurement is expected to exceed US$250 billion over the next 10 years, primarily to replace the Soviet-era vintage equipment and meet the growing modernisation needs of Indian Armed Forces.

However, out of this the domestic industry would only be able to manufacture defence equipment worth just about US$80 billion while rest of it would have to be imported.

Thus, the study suggested the government to incentivise private enterprises for 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 defence manufacturing entities is essential for success of ‘Make in India,’ in the defence sector.

Issues plaguing defence 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 defence 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 defence procurement process.

Besides, issues like awarding tenders to defence public sector undertakings (DPSUs) on nomination, higher multiplier for offset discharge through Defence Research and Development Organization (DRDO), difference in cost of capital resulting in undue advantage for foreign players/DPSUs.

The study suggested that the government should treat private players in defence 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 defence manufacturing in India, the ASSOCHAM-KPMG study gave following recommendations to MoD:

1. Award all defence 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 defence manufacturers;
3. Exclusively reserve designated programs only for competitive bidding among private shipyards only as a short-term measure to utilise vacant capacity;
4. Develop an equitable payment structure without significant back-ended payments and include provisions for imposition of penalties in case of delayed payments;
5. Avoid conflict between production and procurement functions;
6. Include provision for cost escalation in defence 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.

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