IDSA COMMENT

You are here

Impact of Embargo on Defence Imports

Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence; and also former Consultant, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
  • Share
  • Tweet
  • Email
  • Whatsapp
  • Linkedin
  • August 14, 2020

    The Ministry of Defence (MoD) announced an embargo on the import of 101 items through a press release issued on August 9, 2020.1 The annexure to this press release lists a wide range of embargoed ammunition, weapon systems, radars, simulators, and other platforms. The embargo will come into effect in December 2020 for 69 of the 101 items, and in phases between December of 2021 and 2025 for the remaining 32.

    The objective of this exercise in self-restraint is to apprise the Indian defence industry about the anticipated requirements of the armed forces and offer it the opportunity “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)”.2 The Technology Perspective and Capability Roadmap (TPCR) first issued in 2013 and later revised in 2018 had a similar objective,3 which is also the case with 53 ‘Make’ projects notified by the MoD.4

    A second press release issued on August 10 clarifies that “for a product to be considered as an indigenous system, the percentage of indigenous content has to meet the minimum laid down specifications”, adding another dimension to the negative list.5   Read together, the two press releases indicate that the embargoed items must not only use technologies designed and developed by the Indian defence industry or the DRDO but also meet the specified requirement of indigenous content (IC).

    In effect, it all boils down to one thing: from the date the embargo takes effect in respect of a particular item on the list, it can be procured only under the ‘Buy (Indian – Indian Designed, Developed and Manufactured)’ category, or ‘Buy (IDDM)’ for short, with IC of 40 per cent as stipulated in the Defence Procurement Procedure (DPP) 2016 but proposed to be raised to 50 per cent in the draft Defence Acquisition Procedure (DAP) 2020.

    All other procurement categories envisaged in DPP-2016 – ‘Buy (Indian)’, ‘Buy and Make (Indian)’, ‘Buy and Make’, and ‘Buy (Global)’, or even ‘Make’ – or in DAP 2020 which includes a new category – Buy (Global – Manufacture in India) – would be irrelevant as all of them entail, or could potentially entail, procurement of products that are not designed and developed by the Indian industry or the DRDO. In most cases processed under these categories, the basic design and development are by foreign Original Equipment Manufacturers (OEMs).

    If procurement of the embargoed items under ‘Buy (IDDM)’ category indeed constitutes the core of the exercise, the promulgation of the negative list may have little additional impact on furthering the cause of self-reliance in defence – a goal which is being pursued at least for the past 27 years since a committee headed by late Dr APJ Abdul Kalam recommended a plan in 1993 “to improve our self-reliance quotient from 30% in 1992 to 70% by 2005”.6 There is enough empirical evidence to support this.

    The August 9 press release says that the negative list has been prepared by the MoD “after several rounds of consultations with all stakeholders, including Army, Air Force, Navy, DRDO, Defence Public Sector Undertakings (DPSUs), Ordnance Factory Board (OFB) and (the) private industry to assess current and future capabilities of the Indian industry for manufacturing various ammunition/weapons/platforms/equipment in India”.7

    This leaves no doubt that the indigenously designed and developed items that figure in the negative list, with IC of 50 per cent (as proposed in DAP 2020), will be available when the embargo comes into effect.8 That being the case, the MoD will anyway have no option but to procure these items under the ‘Buy (IDDM)’ category which is the first of the five prioritised procurement categories prescribed in DPP-2016. The existing procedure will not allow the MoD to opt for any category that is lower down in the hierarchy of prioritised categories, like ‘Buy and Make’ or ‘Buy (Global)’.

    The most likely impact of the negative list would, therefore, be on the number of procurement proposals getting approved under the ‘Buy (IDDM)’ category in the coming years. This should not affect proposals involving collaboration between the Indian industry and the foreign OEMs under other procurement categories and even the Strategic Partnership Model if the proposal does not relate to any item on the negative list.

    Whatever be the advantage, the MoD has boxed itself into a corner by promulgating the negative list. If, for whatever reason, an indigenously designed and developed embargoed item with requisite qualitative requirements and IC is not available in the domestic market after the embargo comes into effect, and it is operationally imperative to procure it, there may be no choice left but to waive the self-imposed restriction. This could be time consuming, depending on what procedure is laid down to deal with such a situation.

    Besides promulgation of the negative list, the August 9 press release also announced the bifurcation of the capital procurement budget 2020-21 for domestic and foreign procurements, earmarking nearly Rs. 52,000 crore for domestic capital procurement under a separate budget head. This amounts to roughly 50 per cent of the total capital budget allocated to the three services (excluding the allocation for DRDO, OFB and the Director General for Quality Audit) for the current year.9

    Considering that the capital budget allocated to the services this year is approximately Rs. 59,416 crore less than what the services had asked for10 and the extent to which the allocated amount is already blocked for defraying expenditure on committed liabilities, the advantage of carving out a separate budget head to back up the negative list is not quite clear. It is also not known if this bifurcation is intended to be made a permanent feature of the capital budget in the coming years.

    Formal bifurcation of the capital budget into two moieties could be problematic. For example, in a situation where funds remain unspent under one segment while the other segment is in dire need of additional funds, shifting of funds will require going through the time-consuming process of re-appropriation. The proposed bifurcation would also reinforce the unseemly practice of judging the efficacy of budgetary allocations through the prism of allocation and utilisation of funds, rather than with reference to the intended outcomes, measured in terms of accretion to the capability of the armed forces.

    It would help if the MoD issues a formal order addressing the concerns expressed by various stakeholders about certain aspects of the negative list, especially its impact on ongoing and forthcoming projects that involve cooperation with the foreign OEMs, as well as the purpose of bifurcating the capital budget without increasing the overall allocation, which is the core problem besetting modernisation of the armed forces.

    Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.

    Top