MoD scraps plans for Raksha Udyog Ratnas

The Ministry of Defence has decided to retain decades-old barriers against allowing India's private sector a meaningful role in defence production. Minister of State for Defence Production MM Pallam Raju has revealed that the MoD had scrapped its plan to nominate leading defence players from the private sector as Raksha Udyog Ratnas (RuRs), or Champions of Defence Industry, thus granting them the same status as Defence Public Sector Undertakings (DPSUs) and Ordnance Factories (OFs).

The highly-regarded Vijay Kelkar Committee on Private Sector Participation in Defence Sector had recommended in 2005 that selected private sector companies should be permitted to build major defence platforms like tanks, aircraft and ships, effectively allowing them into an inner circle that had been reserved since independence for DPSUs and OFs. In June 2007, the MoD-appointed Prabir Sengupta Committee finished examining more than 40 private sector applicants and recommended about 15 of them for RuR status.

Nothing has been heard of that report since then, and Business Standard can now confirm the burial of that proposal. Pallam Raju has told Business Standard that small private sector companies, which would have been ineligible for RuR status, opposed this initiative.

The MoS said, "I don't want to give any details, since my minister has not spoken on this issue yet. But this idea was opposed by small companies who don't have deep pockets, but have vertical capabilities. They protested and said why should we be discriminated against when we have better capabilities? Taking their views into consideration, better wisdom prevailed. We (the MoD) said, why should we discriminate? We should let everybody have an equal opportunity; why should we give preferential treatment to the big players?"

MoD sources, however, suggest that this decision was prompted less by opposition from private sector companies and more by pressure from the DPSU trade unions, which feared job losses from business flowing to private sector companies. So far, Defence Minister Antony had promised to reassure the DPSU trade unions that there was business enough for everybody.

A key benefit to RuRs would have been the reimbursement by the MoD for 80 per cent of the R&D expenses they incurred on nominated weapons systems. Pallam Raju points out, "Now that's open to everybody… not just RuRs. That offer is open whether it is a small company or a large company. We are just waiting for people to come forward. We will fund 80 per cent of the development cost, [provided] we believe that there is a future in the proposal that they are bringing to the table."

The MoD also argues that the recent amendment to the Defence Procurement Procedure of 2008 (DPP-2008), which has created a new procurement category of "Buy and Make (Indian)", has obviated the need for RuRs. This category allows a private company to lead the development of a weapons platform, by integrating its various components, including a high percentage procured from abroad.

But the private sector is closing ranks against the scrapping of RuRs, which many private companies have become aware of in their conversations with the MoD. Business Standard has learned that all three industry bodies, CII, FICCI and Assocham, are approaching the MoD to point out that the tax and excise benefits that DPSUs and OFs enjoy, continue to make it an uphill playing field for the private sector. Nominating selected RuRs would entitle them to those benefits.

DPSUs, OFBs and other MoD entities like the DRDO have been granted total exemption from excise and enjoy favourable treatment in the payment of customs duty for materials, sub-systems and systems that they import. Private companies do not benefit from these exemptions.