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The Defence Expenditure Review Committee (DERC) of India has recently made recommendations for the Defence Sector, which includes an increase in the foreign direct investment (FDI) limit in the defence sector to 49 per cent and divestment of defence public sector units (PSUs).
The DERC is a high-level committee, headed by former Secretary (Defence Finance) Mr. V.K Misra, and comprises of three former senior officers representing each of the defence wing. The DERC was formed to look into the discrepancies in arms procurement and rectify time delays, as well as other contentious issues like scams and mismanagement of defence funds.
The DERC, whose report has not been made public yet, has criticised the procurement procedures of the three Indian defence services who, between 2001 and 2008, could not utilise funds to the tune of $8.53 billion.
The DERC report has clearly indicated that an across the board increase in FDI limit to 49% is needed, with the provision for a case by case enhancement to 74%-100%. The DERC report states that a clear-cut disinvestment plan is needed for the PSU to increase accountability and efficiency. The report has also emphasised that the Armed Forces and the Ministries must adopt Information Technology for futuristic network-centric operations.
The DERC also seeks a five-fold increase in the financial powers of the defence minister to roughly $100 million. This, in turn, will bring about effective change in structure and reforms pertaining to the Indian Defence Ministry. The DERC has urged the Indian government to apply the reforms in the Rama Rao Committee report, to bring about changes in the state-owned Defence Research and Development Organization (DRDO). There must be complete synergy among DRDO, Ordnance Factory Boards, defence PSUs and the private sector to address design, manufacturing and maintenance concerns of India’s defence. “The private sector needs to be encouraged for participation”, the report added. The committee suggests that the government encourage the private sector to take over foreign defence firms, and look at setting up a sovereign wealth fund for this purpose.
Other committee recommendations include reduction of time lost between the request for information and final acquisition by way of efficient procurement processes. The DERC has clarified that, except in “strategic and operational” reasons, single source situation should be avoided. India has suffered setbacks in single vendor purchases which have led to price escalation and other contractual hazards. The DERC 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 sector.
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