Delays, abrupt end to tenders mar defence business: Study

NEW DELHI: Urging the government to cut down inordinate delays in the procurement process for military equipment, the defence industry has said that cancellations of tenders midway and uncertain time frames are adversely impacting business and discouraging foreign investments.

A study by an industry house that has been shared with the defence ministry suggests an overhaul of the offsets rules, cutting down of procurement lead times and increasing foreign direct investment (FDI) to 51% under the automatic rule.

“Procurement delays have been a cause for concern for a long time, which is one of the critical issues raised by the industry…. Cancellation of tenders mid-way in the procurement cycle adversely affects participants’ business plans and discourages investment too from foreign defence companies,” says an Assocham-BDO joint study on the aerospace manufacturing ecosystem.

The study echoes long-standing view of big and small industry players that business has not been growing at the expected pace, given that defence manufacturing was to be the cornerstone of the Make in India campaign.

Several large defence companies have either cut down jobs or scaled down business plans in the past two years owing to a lack of orders being placed by the government through the competitive process and a continuing preference for public sector units.

The study says that the offset policy – which mandates foreign players to invest at least 30 percent of the contract value in the domestic market – also needs an overhaul to kick-start work. “Due to the various restrictions to fulfil offset obligations, global OEMs (original equipment manufacturers) have found fewer reasons to invest in more sustainable, advanced and long-term engineering and manufacturing projects within India,” it says.

The defence ministry has a revised offsets plan ready - which offers incentives to invest in two defence corridors and gives more flexibility to foreign companies to execute work – but has been unable to promulgate it since May 2018.

On FDI, the study says that the current limit of 49% under the automatic route is restricting investments in India as foreign players are concerned about control over advanced technology. “The government should allow a minimum of 51% FDI in the defence sector without any riders to linkages with ‘modern technology’ so as to enable international defence companies to exercise adequate control over the joint venture companies, IPR and the product quality,” it says.