Analysis: India's defense reform -- Part 2

KOLKATA, India, Aug. 19 (UPI) -- India's new Defense Procurement Procedure, released in August, is intended to make it easier for foreign companies to invest in the country.

The DPP contains an important prevision of previous practices to help achieve this, said Dhiraj Mathur, a defense analyst at consulting firm PricewaterhouseCoopers.

He was referring to the removal of mandatory industrial licensing requirements of production for private companies. Until now, obtaining a license from the government was mandatory for all defense manufacturing in the country, making setting up a defense factory a cumbersome process and discouraging private investment in the industry.

Now that licensing for defense production has been done away with, "partnering with Indian vendors would become faster and easier for foreign vendors," said Mathur.

The new rules are "revolutionary," according to Indian Defense Minister A.K. Antony, in that they take a big step forward in replacing the oft-accused "overmanned and inefficient government-owned" defense corporations and ordnance factories.

The need to modernize India's armed forces was first felt acutely after the Kargil conflict, an armed conflict between India and Pakistan that took place between May and July 1999 in the Kargil district of Kashmir.

India realized it had to reform the National Security System drastically and crafted new defense procurement management structures and systems in 2001, christened the Defense Procurement Procedure. The first DPP, which came into effect on Dec. 30, 2002, was just applicable for "buy" decisions of the Indian armed forces. Its scope was subsequently enlarged in June 2003 to include "buy and make" and again was reviewed in July 2005 to include the "make" category.

This was the first step toward localization of defense manufacturing. Besides including locally made products as part of procurement procedure, the DPP 2005 was enlarged to include a fast-track procedure and a procedure for indigenous warship building. Another revision a year later brought the private sector into the defense procurement fold.

"Armed forces all over the world are in a process of speedy modernization and restructuring," said Antony, "and India cannot lag behind in this trend. We want a highly modern armed force, and we need to do that fast."

In that pursuit, India's plans could easily make the country one of the largest armament markets in the world. According to consulting firm Frost & Sullivan, the upcoming modernization program of the Indian armed forces will make India the Asia-Pacific region's second-highest defense spender within the next five years and the seventh-largest globally by 2016. Including maintenance, repair and overhaul opportunities, the total opportunities for procurement are forecast to exceed $100 billion by 2022.

Other estimates suggest India's military equipment procurement will be worth $50 billion in the next five years, with about $15 billion involving foreign vendors in partnership with Indian companies under the offset clause.

"Opportunities therefore exist for everybody," said Mathur, not just big names like Stonebridge, GE, Techtron, Thales, EADS, Raytheon and the like, which are already participating in current procurements.

Despite all the improvements, one gap remains. "The bad part of this DPP is that it hasn't addressed the foreign direct investment issue," said Mathur. Both local and foreign vendors were hoping the document would increase the limit on foreign investment in Indian ventures from the current 26 percent.

"That has not been addressed, and it is a serious issue," said Mathur. "The 26 percent stake limit is too little going forward. There are, after all, 126 countries vying for global money in their defense sectors, and few foreign vendors would be willing to bring in their intellectual property rights in Indian ventures where they can hold just 26 percent."