Panel proposes FDI hike in defence sector to 49%

A high-level committee looking into defence expenditure has recommended a host of sweeping reforms, including a hike in the foreign direct investment (FDI) limit in the defence sector to 49% and divestment of defence public sector units (PSUs).

The committee has also suggested that the government encourage the private sector to take over foreign defence firms, and look at setting up a sovereign wealth fund to assist this activity. Besides, it seeks a five-fold increase in the financial powers of the defence minister — up to Rs500 crore, and effecting several new structures and reforms within the ministry of defence (MoD).

The defence expenditure review committee (DERC) was set up by the United Progressive Alliance government following complaints of delay and corruption in procurement of arms. India spends over Rs100,000 crore in revenue and capital expenditure in defence annually, and is among the biggest spenders in the arms market.

Headed by former secretary (defence finance) VK Misra, the committee comprised three former senior officers representing each of the defence arms. Its report, submitted a few weeks ago, has not been made public yet.

The report — accessed by DNA — has pointed out serious drawbacks in the acquisition process, stating the three services wasted opportunity to utilise Rs42,691 crore between 2000-01 and 2007-08.

“For furthering the cause of full accountability, transparency and efficiency, time-bound disinvestment plans should be worked out for each PSU,” the report says, besides recommending an “across the board increase in FDI limit to 49% with the provision for a case by case enhancement to 74%-100%”.

The committee has also recommended extensive use of information and communication technologies in the defence procurement process. “All contemporary armed forces and controlling ministries have adopted IT for network-centric operations and e-governance.
However, the Indian MoD and armed forces continue with their laborious, manual and paper-based transaction,” the report says.

The committee has called for compressing the time taken between the request for information and final acquisition, through a series of efficient procurement processes. It has also advised that except in “strategic and operational” reasons, “single source situation should generally be unacceptable”.

In recent years, Indian defence purchases have hugely favoured single vendor purchases, which are visibly resulting in exorbitant prices and flawed contracts. DERC has also recommended the setting up of a defence regulatory authority to deal with a range of issues concerning offsets, defence industrialisation, capital acquisitions and potential reforms in defence on a permanent basis. It has also called for significant reforms in the Defence Research and Development Organisation (DRDO), ordnance factories and defence PSUs. It calls for “full synergy among DRDO, Ordnance Factory Boards, defence PSUs and the private sector to address design, manufacturing and maintenance concerns of India’s defence”.

The government should immediately adopt the Rama Rao committee report, which looked into reforms needed in DRDO, the committee says, while calling for “drawing up a long range technology roadmap”.

DRDO’s indigenous projects must be peer reviewed every 18 months, it recommends. It says that for defence PSUs “a stage has clearly been reached when they should be prepared to compete strongly with the private sector in areas where long-range requirements of the defence services clearly suggest inclusion of a tier 1 private sector company in India”.

To encourage development of defence manufacturing capabilities within India, the committee says, the government needs to “put in place a strong defence industrial monitoring mechanism to ensure that the technology clusters and the corresponding defence production clusters do deliver as broadly planned”.

It has also called for bigger participation for the private sector.