Lok Sabha Question No. 364 (STARRED), answered on 2017-08-11
Subject: Modernisation of Armed Forces
Ministry: DEFENCE
Asked by: MANOJ RAJORIA, E. T. MOHAMMED BASHEER

## GOVERNMENT OF INDIA MINISTRY OF DEFENCE DEPARTMENT OF DEFENCE

## LOK  SABHA

## STARRED QUESTION NO.364

TO BE ANSWERED ON THE 11 TH  AUGUST, 2017

## MODERNISATION OF ARMED FORCES

*364.  DR. MANOJ RAJORIA:

SHRI E.T. MOHAMMED BASHEER:

Will the Minister of DEFENCE j{kk ea=h be pleased to state:

- (a) the budget estimates, revised estimates and actual expenditure on modernization of armed forces during the last five years and the current year;
- (b) whether there has been an underutilization of the allocated funds for modernization of armed forces during the said period and if so, the details thereof and the reasons therefor;
- (c) the details of investment made in the production of military equipment during the last three years and the current year;
- (d) the  mechanism  put  in  place  for  auditing  the  allocated  amount  for  the  purpose along with the defence agreements signed for procurement of defence equipment during the said period;
- (e) the  percentage  of  funds  allocated  for  modernization  of  armed  forces  spent  on buying indigenous equipment; and
- (f) the steps taken by the Government for modernisation of armed forces to improve weaponry like tanks and missiles and to reduce the dependence on imported equipment along with the contribution to the defence sector under 'Make in India' for the purpose?

## A    N    S    W    E    R

MINISTER OF DEFENCE                                            (SHRI ARUN JAITLEY)

j{kk ea=h

¼Jh v#.k tsVyh½

(a) to (f): A Statement is laid on the Table of the House.

*******

## STATEMENT REFERRED TO IN REPLY TO PARTS (a) TO (f) OF LOK SABHA STARRED QUESTION NO. 364 FOR ANSWER ON 11.8.2017

- (a) & (b): Details of funds allocated and utilized under Capital Acquisition for the last five years and current year is as under:-

(Rs. in crores)

| Year     |   Budget Estimates (A) | Revised Estimates (B)   | Modified Appropriation (C)   | Actuals Expenditure (D)   | Excess(+)/ Saving(-) (D-C)   |
|----------|------------------------|-------------------------|------------------------------|---------------------------|------------------------------|
| 2012- 13 |                66003.1 | 57395.46                | 57944.37                     | 58768.86                  | 824.49                       |
| 2013- 14 |                73444.6 | 66406.41                | 66201.92                     | 66850.30                  | 648.38                       |
| 2014- 15 |                75148   | 66151.73                | 65706.04                     | 65862.38                  | 156.34                       |
| 2015- 16 |                77406.7 | 65400.00                | 61699.39                     | 62235.54                  | 536.15                       |
| 2016- 17 |                69898.5 | 62619.36                | 64853.86                     | 69280.17                  | 4426.31                      |
| 2017- 18 |                69473.4 | --                      | --                           | 33553.21*                 |                              |

*As on 31 st July, 2017

The above figures indicate that with reference to Modified Appropriation (MA) there  has  been  no  underutilization of expenditure  under  Capital  Acquisition segment in each of the last five years.

- (c) The  details  of  Capital  Investment  made  by  the  PSUs  and  OFB  in  the production of military equipment are as under:

(Rs. in crore)

|   2014-15 |   2015-16 |   2016-17 |   2017-18 (upto June, 2017) |
|-----------|-----------|-----------|-----------------------------|
|   2533.63 |   2913.39 |   3437.83 |                      500.18 |

(d) & (e): Modernization of Armed Forces is a continuous process undertaken as per the extant Defence Procurement Procedure (DPP) to keep the Forces in a state of  readiness  to  meet  operational  and  security  challenges.  Government  is  taking measures  for  modernization  of  the  Armed  Forces,  through  inducting  of  new equipment and upgrading of existing equipment and systems. The modernization projects  are  progressed  as  per  approved  Services  Capital  Acquisition  Plans (SCAP) and Annual Acquisition Plans (AAP) in terms of the extant DPP.

During  the  last  three  financial  year  and  current  year  (upto  30.06.2017),  99 contracts  involving  Rs.1,07,580.47  Crore  have  been  signed  with  Indian  vendors and  61  contracts  involving  Rs.1,23,142.30  Crore  have  been  signed  with  foreign vendors for capital procurement of defence equipment for Armed Forces such as Aircraft, Helicopters, Rockets, Artillery gen, Missiles, Simulators and Ammunition.

Government is taking steps to promote indigenization and self-reliance in the defence  sector.  These  measures  include  according  priority  and  preference  to procurement  from  Indian  vendors  and  liberalization  of  the  licensing  regime. Government  has  also  promulgated  the  policy  on  Strategic  Partnership  in  the Defence Sector intended to institutionalize a transparent and objective mechanism to  encourage  broader  participation  of  the  private  sector  in  manufacture  of  major defence platforms and equipment.

Ministry of Defence is undertaking the following two types of Audit:

- i) Internal Audit :  It  is  conducted  by  Defence  Accounts  Department  while performing function of payment and accounting of all Defence expenditure.  In  certain  cases  this  is  pre-audit  i.e.  before  release  of payment  and  in  other  post-audit  i.e.  after  payments  have  been  made. Internal  Audit  is  clearly  intertwined  with  the  payment  and  accounting functions  of  Defence  Account  Department.  The  major  findings  of  the Internal Audit are highlighted in the Internal Audit report issued by CGDA.
2. ii) External Audit : This is the statutory audit done by Controller and Auditor General (C&AG) as in the case of other Ministries/Departments. This is periodic and conducted as per Audit calendar of C&AG.
3. (f) Defence Production Policy promulgated by the Government, aims at achieving  substantive  self-reliance  in  the  design,  development  and  production  of equipment, weapon systems, platforms required for defence in as early a time as frame possible, creating conditions conducive for private industry to play an active role in this endeavour; enhancing  potential of SMEs  in  indigenisation  and broadening the defence R&D base of the country.

In view of the above and 'Make in India' initiative of the Government, several policy measures have been taken by the Government which are briefly described as below:-

- i. Industrial Licensing :  The Defence Products List for the purpose of issuing Industrial  Licences  (ILs)  under  IDR  Act  has  been  revised  and  most  of  the components, parts, sub-systems, testing  equipment  and  production

equipment  have  been  removed  from  the  List,  so  as  to  reduce  the  entry barriers  for  the  industry,  particularly  small  &  medium  segment.  The  initial validity  of  the  Industrial  Licence  granted  under  the  IDR  Act  has  been increased from 03 years to 15 years with a provision to further extend it by 03 years on a case-to-case basis.

- ii. Defence Exports :    Defence  Exports  Strategy outlining the various steps to be taken, has been formulated and put up in public domain along with List of military  stores  to  make  the  process  transparent  &  clear.  The  Standard Operating Procedure (SOP) for the issue of No Objection Certificate (NOC) for export of military stores has been revised and put on the website. Under the  revised  SOP,  the  requirement  of  End  User  Certificate  (EUC)  to  be countersigned/ stamped by the Government authorities has been done away with for  the export of parts, components, sub-systems etc. Recognizing the need for promotion of defence exports to make the Indian defence industry economically sustainable.
- iii. Defence Offsets :  Offset implementation process has been made flexible by allowing  change  of  Indian  Offset  Partners  (IOPs)  and  offset  components, even in signed contracts. Foreign Original Equipment Manufacturers (OEMs) are now not required to indicate the details of IOPs and products at the time of signing of contracts. Services as an avenue of offset have been re-instated with certain conditionalities.
- iv. Foreign  Direct  Investment  (FDI): Foreign  Direct  Investment  (FDI)  Policy under which Foreign Investment Cap is allowed through automatic route upto 49%  and  Government  route  beyond  49%  wherever  it  is  likely  to  result  in access to modern technology or for other reasons to be recorded.
- v. Level-Playing Field :  Issues related to level-playing field between Indian vs . Foreign  Manufacturers  and  public  sector vs private  sector  have  also  been addressed. Exchange  Rate Variation  protection  has  been  made  applicable for  Indian  Private  sector  at  par  with  Public  Sector  Undertakings  for  all categories of capital acquisitions. The preferential treatment given to Defence Public Sector Undertakings in excise duty/ custom duty has been discontinued.  As  per  the  revised  policy,  all  Indian  industries  (public  and private) are subject to the same kind of excise and custom duty levies.
- vi. 'Make'  Procedure :    The  Make  Procedure  has  been  revised  to  promote indigenous design, development and manufacture of defence equipment/platform required by the armed forces with a view to achieve selfreliance. The new procedure will give a tremendous boost to manufacturing

......4/-

of indigenously designed products through collaborative process with Indian industry. It also provides for enhanced government funding and preference to MSMEs for certain  categories  of  projects.  The  main  objective  is  to  ensure that the Make procedure is unambiguous and transparent.

- vii. Buy (Indian-IDDM) in DDP-2016 :  One of the notable features of DPP-2016 is  the  introduction  of  a  new  procurement  category  Buy(Indian-IDDM).  This category  refers  to  procurement  from  Indian  vendors  of  products  that  are indigenously designed, developed and manufactured, and have at least 40% indigenous content. If the product is not designed and developed indigenously,  it  will  have  to  have  60  percent  indigenous  content.  The  'Buy (Indian)' category, in which the product is to be procured from Indian vendors, will  now  require  to  have an indigenous content of 40%, instead of the 30% present  requirement.  Preference  has  been  provided  to  procurement  under 'Buy (Indian-IDDM)', 'Buy (Indian)' and 'Buy and Make (Indian)' categories of capital acquisition over 'Buy & Make' or 'Buy (Global)' categories.
- viii. Outsourcing  and  Vendor  Development  Guidelines : To  promote  the participation of private sector, Outsourcing and Vendor Development Guidelines  for  DPSUs  and  OFB  have  been  formulated  and  circulated  to them.  The  guidelines  mandate  each  DPSU  and  OFB  to  have  a short-term and  long-term outsourcing and  vendor  development  plan to gradually increase the outsourcing from private sector.

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