RUR: Another Failed Initiative

Major General Mrinal Suman (Gfiles)


The present Government will be remembered primarily for numerous failed policy initiatives with the nuclear issue heading the list. Despite repeated assertions of its progressive pretensions, the Government considers it prudent to sacrifice all innovative proposals at the altar of political expediency and an overpowering urge to remain in power. Proposal to grant Raksha Utpadan Ratna (RUR) status to select private sector companies is the latest addition to this casualty list.

It was in 1998 that the Ministry of Defence (MoD) took the first major step to involve the private sector in defence production. Six Joint Task Forces were constituted with the Confederation of Indian Industry to cover the following aspects:-

1. Defence-Industry Long Term Partnership.
2. Defence-Industry Partnership on Commercial Process.
3. PSUs/OFB/Private Sector Complementarity.
4. DRDO-Industry Partnership.
5. Defence Export Strategy.
6. Defence-IT Industry Partnership.

Consequent to the recommendations of the Task Forces, the Government announced a major policy change and opened defence production to the private sector in January 2002. It also allowed 26 per cent direct foreign investment. The private sector was euphoric and anticipated huge business opportunities. However, their hopes were soon belied when they realised that the public sector continued to get preferential treatment and the private sector had to remain content with the supply of some sub-assemblies and components. Moreover, as the stipulations governing foreign investments were highly skewed, there was no inflow of foreign funds. In short, there was no change in the ground situation.

Repeated representations to MoD resulted in the constitution of Kelkar Committee. It was tasked, inter alia, to examine and recommend modalities of integration of the user (services), the Defence Ministry and the Indian industry (both private and public) in the defence acquisition process. The Committee commenced work in July 2004 and submitted its report in two parts in April 2005 and November 2005 respectively. A number of presentations were made by the private sector entities. They wanted to be treated at par with the public sector as regards receipt of imported technology, fulfilment of offset obligations and joint development with Defence Research and Development Organisation.

Kelkar Committee concluded that the private sector has to be co-opted as an equal participant if India is to achieve the often stated objective of self-reliance in defence production. Instead of issuing a carte-blanche to the private sector, it suggested a discerning and judicious approach. It recommended that select private sector industry leaders be identified as RUR and treated at par with the public sector for all defence acquisition purposes, to include the following:-
· Design and development of high technology complex systems under the new ‘Make’ procedure.
· Bidding for defence contracts, production of platforms and integration of large weapon systems.
· Receipt of contracted foreign technology and indigenous production thereafter.
· Discharge of offset obligations.
· Receipt of funds for developmental projects.
The above suggestions were accepted by MoD. Department of Defence Production issued detailed guidelines in May 2006 spelling out eligibility criterion and laying down selection procedure. It was mandated that a company aspiring for RUR status has to be a public limited Indian company registered for minimum ten years with capital assets in India not less than Rs 100 crores and turnover not less than Rs 1000 crores for each of the past three years. Additionally, the company should have consistent profitable financial record showing profits in at least three years of the last five years and with no accumulated losses. Foreign holding was pegged at a maximum of 26 per cent. The company should have an established track record in engineering (including software) and manufacturing for real value addition. Most importantly, the company should either possess a licence/LOI for production of defence items or obtain the same within six months of application for seeking RUR status, wherever required.

The first Selection Committee was constituted in May 2006 under Mr Prabir Sengupta. It was asked to make recommendations in respect of each applicant company, to be placed before the Defence Acquisition Council for acceptance. Names of the companies recognised as RUR were to be declared by 31 March 2007. The private sector was ecstatic and responded enthusiastically. A total of 41 companies including most heavy weights applied. The Committee invited around 15 of them to make detailed presentations. It is learnt that 12 companies were short listed by the Committee for the award of the status RUR and recommendations forwarded to MoD in June 2007. The list reportedly included reputed players like L&T, Tata Group companies, Kirloskars, Ashok Leyland, Godrej and Boyce and Mahindra and Mahindra amongst others. However, there has been no official announcement so far. When queried, the Minister of State for Defence Production Rao Inderjit Singh admitted in February 2008 that the Committee report was with the Government and under examination.

Although certain amount of opposition was always expected from the public sector, its intensity and stridency has surprised most. For public consumption, imperilment of national security is being touted as the stated rationale for their opposition; whereas the real reason is a creeping sense of insecurity. Opposition has been orchestrated by the public sector undertakings through the trade unions affiliated to the Left parties, as they perceive RUR as a threat to their existing monopoly and domination. Fully aware of their own weaknesses, they are wary of competing against RUR companies on an equal footing. They are conscious of better efficiency of the private sector vis-à-vis their own functioning. Therefore, it is a question of survival for them.

More importantly, the public sector enterprises are exploiting their clout with the Department of Defence Production to scuttle the complete scheme. It has left the private sector wondering whether the Government is genuinely interested in their participation in the defence production. Many companies have invested considerable funds and signed multiple agreements with foreign firms. Their sense of exasperation was duly visible during the last Defexpo in Delhi and their enthusiasm appeared to be on the wane. “We have obtained licenses for the manufacture of a large variety of defence systems, signed a number of MOU with foreign companies and invested considerable resources over the last five years, but we are yet to get an order. I wonder as to how long can we continue like this,” commented a senior executive of a highly active private sector company. “Every time we are close to getting an order, it gets passed on to the public sector on some specious grounds,” he added dejectedly. It is time the Government arrests this slide towards despondency by displaying its resolve and converting stated intentions into implementation on ground.