Indian industry critical of DPP 2013 after rupee crash

Industry representative body, the Federation of Indian Chambers of Commerce and Industry (FICCI) on Thursday sent a letter to Defense Minister AK Antony criticizing the failure of the Defense Procurement Procedure 2013 (DPP 2013), promulgated earlier this month, to offer enough encouragement to Indian private industry and create a competitive, ‘level playing field’ for it.

StratPost had reported the unhappy reactions of industry executives to DPP 2013, when it was first announced last April.

Noting the Indian rupee hitting an all-time low on Thursday, a FICCI statement said its Secretary General, Dr A. Didar Singh, appealed to Antony over the issue of the Exchange Rate Variation (ERV) of the rupee which has left prospective Indian private defense industry at a disadvantage with respect to competitors like foreign companies (or Original Equipment Manufacturers – OEMs) and state-owned Defense Public Sector Units (DPSUs).

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When a foreign company bids for an Indian defense contract, it quotes prices in its own or other, popular, internationally-traded currencies like dollars or euros. When an Indian company bids for a contract it quotes prices in rupees. In a situation where both a foreign company and an Indian company are bidding, changes (like depreciation) in the value of the rupee do not affect the bid of the foreign company, but affect the offer of the Indian company, since the value and buying power of the rupee goes down.

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FICCI’s statement titled Rupee At All Time Low: Private Defense Players Badly Need Exchange Rate Variation (ERV) Risk Cover in DPP 2013 said that ‘companies are left to fend for themselves in the tough economic conditions’ because of the failure of DPP 2013 to address the critical survival issue before the private sector today of risk cover against ERV.

Singh wrote in his letter that ‘the total denial to recognize the realities faced by the defense industry on ERV and need for rationalization of taxes and duties for private sector in the revised policy by the MoD has left the industry sour’.

The new policy document (DPP 2013) while going extra-mile with focus on indigenization and speedier procurements, does not convert policy intent into action.

Saying that ‘the private sector in defense has taken an unprecedented toll’ and ‘will continue to reel under the effects of a depreciating value of rupee and high cost of inflation, losing on competitiveness vis-a-vis foreign OEMs’. FICCI said that this was especially stark given the methodology (Discounted Cash Flow or DCF), which favored foreign OEMs, keeping in mind the relative ‘currency stability in the western world’.

This methodology in evaluating L1 (lowest technically qualified) bidder ‘will continue to hamper selection of Indian private sector companies in global programs’ and make indigenization difficult, said the industry body.

It also pointed out that delays in conclusion of contracts require vendors to ‘hold prices over long periods and at times running into years’. “In the absence of any automatic provision to submit a revised bid, the industry is expected to hold the price for prolonged periods,” pointed out the statement, which it said, aggravated the problem.

FICCI also criticized DPP 2013 in its statement saying it fails to end the practice of nomination of DPSUs for major defense programs and creating a ‘level playing field’ for the private sector, in spite of the defense minister’s publicly stated intentions, and ‘compromises MoD’s stated intent to make private sector a key player in defense production’.

The industry group warned that a failure to rationalize of taxes and duties on offsets would leave the Indian defense sector at sub-component level and prevent it from moving up the value chain to achieve ‘System Integration capabilities’.

While approving of steps to create a hierarchy for categorization with Buy (Indian) as the most preferred choice, introduction of indigenous value addition norms and transfer of ‘Maintenance ToT’ to the private sector, FICCI called for a similar approach to ‘services eligible for offset obligation to avoid misuse’.