by Amit Cowshish

The publishing of two consecutive lists, one negative and one positive, over a year or so to enhance the pace of indigenisation and create opportunities for the domestic defence industry is no doubt laudable. However, whether or not we are in a position to meet the timelines for producing these items indigenously could well turn out to be a gamble. The author analyses the issue with a lot clarity.

On May 31, the Ministry of Defence (MoD) notified the ‘Second Positive Indigenisation List’ of 108 items ‘to promote self-reliance and defence exports’. The first ‘Negative Import List’ of 101 items was notified in August last ‘to boost indigenisation of defence production’. The mutation in the nomenclature from ‘negative’ to ‘positive’ notwithstanding, the net effect is that there would be an embargo on the import of the listed items after the dates stipulated in respect of each item in the notifications.

Of the 209 items included in both lists, the ban on import of 69 items has already come into effect in December 2020 and would kick in on another 60 items by the end of this year. Twenty-five items would be banned by the end of each of the next two years, 21 in December 2024 and 8 by the end of 2025.

This policy initiative has been lauded by the domestic industry in the na├»ve belief that banning imports was a necessary pre-condition for achieving indigenisation, self-reliance, and higher exports. This initiative also raises questions about the future business opportunities for the foreign vendors and the government’s efforts to attract higher Foreign Direct Investment (FDI) following the raising of the cap on investment through the automatic route to 74 per cent last September.

The tight timeframe stipulated in the orders for enforcing the embargo on imports indicates that some of the listed items may already be under development, testing, or production in India and, therefore, these would be available for procurement after the cut-off date. That being the case, it was not quite necessary to include them in the list because the existing procurement policy anyways requires top priority to be given to equipment made in India under the ‘Buy (Indian Designed, Developed and Manufactured)’ category of the Defence Acquisition Procedure 2020, and its earlier versions.

Be that as it may, the stipulation of the timeframe for enforcement of the embargo could help in building pressure on the agencies concerned to complete the process, where an item is under development or testing, before the cut-off date, provided it does not make the agencies cut corners to meet the deadline. As for other items that are not under design, development or production, the MoD’s decision to notify the lists seems like a bit of a gamble.

Going by the official press release of August 8, the purpose of notifying the list was to sensitise the domestic industry about the future needs of the armed forces so that it could meet the requirement when the occasion arises after the embargo kicks in. Broadly speaking, it was also the objective of the Technology Perspective and Capability Roadmap (TPCR) notified in 2013. However, it failed to produce the intended result because the information contained therein was not sufficient for the industry to take up the challenge.

The second TPCR released in 2018 addressed the industry’s concerns to some extent by giving out some primary information about the broad parameters the listed items were expected to conform to, technologies preferred by the armed forces, expected life cycle of the equipment and the approximate quantity. There is no official report on the outcome of the TPCR 2018 but going by the fact that India continues to be one of the largest importers of arms, it is not unreasonable to conclude that even the second TPCR did not produce the intended results.

The two import embargo lists in question are akin to the unproductive TPCR 2018: both contain cryptic nomenclatures without any supporting details required by the industry to make out a business case for investing in the project. The first list contains items like Water Jet Fast Attack Craft, Ammunition Barges, Survey Vessels, and Floating Dock. The second list too contains similar cryptic nomenclatures, like Sarvatra Kavach, Border Surveillance System, and SCME Clothing. These are only illustrative examples; practically all items are similarly described.

The MoD seems to assume that the prospective suppliers can easily comprehend the requirement and the equipment, complying with all the technical specifications that the armed forces may come up with. The belief is that they would be available when the tender is floated in the indeterminable future after the cut-off date. It also seems to assume commercial viability of investment by the industry for designing and developing the equipment, even in the absence of any knowledge about the specifications, quantity, and the timeframe within which the tender can be expected to be issued, or any certainty that the listed items would be procured by the MoD.

These assumptions are questionable, especially in the face of the enduring resource crunch and absence of credible data about MoD’s past record of buying the items that it has been exhorting the local industry to develop and manufacture. The announcement made in February this year that a sum of Rs 70,221 crore had been set aside for capital procurement from domestic sources may not be enough to build the requisite confidence.

For starters, it is not known how much of this amount would be consumed by the committed liabilities arising from the previously concluded contracts, also referred to as the committed liabilities. Going by experience, it could be as high as 80 to 90 per cent of the allocation, leaving very little for awarding new contracts.

More importantly, this tranche is a part of the overall capital outlay of the armed forces which for the current year, is Rs 77,182.42 crore less than what they had asked for. (For revenue expenditure also, there is a gap of Rs 48,298.01 crore between the projected requirement and the actual allocation.) Consequently, the armed forces would be forced to restrict themselves to the most urgently required items which may be fewer than all the embargoed items.

Meanwhile, these lists have left the foreign vendors wondering about their prospects in the Indian defence market. The Press Release of August 2020 said that notification of the list offered ‘a great opportunity to the Indian defence industry to rise to the occasion to manufacture the items in the negative list by using their own design and development capabilities or adopting the technologies designed and developed by Defence Research and Development Organisation (DRDO) to meet the requirement of the Armed Forces in the coming years.

This unambiguously indicates that the embargoed items must be designed and developed by the Indian industry using their own capabilities or by adopting the technologies developed by the DRDO. This rules out the possibility of the Indian vendors supplying equipment, designed and developed abroad, by manufacturing it in India after obtaining technology from the foreign vendors. While no vendor would anyway be willing to transfer high-end technologies to the Indian vendors, the stipulation about domestic design and development in the August 2020 announcement rules out the transfer of even lower end technologies, thus virtually ruling out the possibility of the foreign vendors playing any insignificant role in manufacturing and supply of embargoed items by the Indian vendors to the MoD.

There is no such stipulation in the second press release of May 2021 but the uncertainty about the role of the foreign vendors remains as the MoD has not specifically retracted the earlier condition. If nothing else, the MoD would do well to clarify its stand on designing and development the embargoed items to retain the foreign investor’s interest in investing in India, which seems to have waned because of the stringent conditions introduced while raising the FDI cap to 74 per cent and the common perception that the resource crunch is likely to endure, despite the impending setting up of a non-lapsable pool of funds for modernisation.

To sum up, it is arguable if mere notification of these lists can produce the intended results. Several issues, some of which are mentioned above, need to be addressed to make things work, failing which the MoD may find itself boxed into a corner as the armed forces will be left with no option but to seek a waiver of the import embargo if a proscribed item, designed and developed locally and meeting all the prescribed specifications, is not available in India when the need arises for procuring it.