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Indian Air Force: Meeting the Challenge of Budget Deficit and L1 Minus

Published Feb 20, 2019
Updated May 09, 2020

The double whammy of budgetary deficit and L1 Minus bidding may be the IAF’s bane for the future, May Lead to Increase in Accidents

The loss of three top notch pilots of the Indian Air Force (IAF) in the last couple of weeks is indeed sad and needs serious introspection. While the routine of court of inquiry will establish the underlying cause and come to some conclusions on the reasons for the accidents involving the Mirage 2000 and the SuryaKiran, the larger issue of budgetary deficit and acceptance of L1 minus in procurements denotes the likelihood of increase in the number of accidents for the IAF in the future.

Shortfall in budget has been amply highlighted in 48th Report of the Standing Committee On Defence (2018-19) of the Sixteenth Lok Sabha presented to both houses of the parliament on 7 January 2019. The Standing Committee found that an amount of Rs. 93,982.13 crore was allocated to the Ministry of Defence for Capital Outlay on Defence Services in Budget Estimates (BE) 2018-19.  

Of this Rs. 74,115.99 crore and Rs. 9,318.05 crore, respectively was allocated for Capital Acquisition (including DGOF supplies) and Land and Works of the three Services (including Married Accommodation Projects) for 2018-19. 

The allocation at BE for 2017-18 was Rs. 86,488.01 crore, which remained same at Revised Estimates (RE) stage. The difference between BE 2018-19 and BE 2017-18 is Rs. 7,494.12 crore. The Committee opined that keeping in view the likely cost escalation due to inflation, this increase of Rs. 7,494.12 crore from the previous year was quite minimal to meet requirements of Capital acquisition and other works planned for 2018-19 as per the Standing Committee.

The Committee sought that the Ministry of Defence strongly put its case before the Ministry of Finance for adequate allocation of funds, commensurate with the requirement of Modernisation and acquisition plans for 2018-19.

In the case of the Indian Air Force projections for capital budget for 2018-19, the same was Rs 77,694.74 Crore against which the allocations were Rs 35,770.17 Crore.

The Committee observed that the shortfall stands at Rs.17,756.92 crore, Rs.15,691.70 crore,Rs.1,392.58 crore and Rs.41,924.57 crore for Army, Navy, Joint Staff and Air Force, respectively.

Evidently the shortfall for the Air Force is over 50 % (54%) of the projections.

The year on year shortfall may denote a huge build up of backlog of budget deficit and thus hampering the procurement cycle.

Result is that the IAF is relying on old airframes with upgraded avionics, radars and weapons systems. These airframes have presumably undergone stress tests, yet their performance down the years will deteriorate and the situation is likely to further go down in the coming years for obvious reasons.

The L1 Minus Scenario

The other challenge is the L1 or lowest bidder conundrum which has an impact on the quality of the assemblies and spares as the process allows a local supplier to reduce his price to match a bid by a foreign supplier.

This is evident from the Ministry of Finance Office Note No F 18/3/2017-PPD of 4 July 2017 Order clarifying the Public Procurement Preference Make in India 2017[Order].

In the Order L1 is defined as the lowest tender, bid or quotation receiving in a procurement process.

Margin of purchase preference is defined as the maximum extent to which the price quoted by a local supplier may be above the L1 for the purpose of purchase preference.

The Ministry order states that the lowest bidder L1 if from a local supplier the contract of full quantity will be awarded to him.

In case the L1 bid is not the local supplier 50 % of the order quantity will be awarded to the L1 presumably a foreign supplier and the lowest bidder amongst the Indian suppliers will be invited to match the L1 price for the remaining 50% quantity subject to the local suppliers price in the Margin of Purchase Preference. In case he does not opt for the same, the offer will be followed up down the tendering chain to other local suppliers.

Thus 50 % of the order could go to the local dealer who can be categorised as L1 Minus/

In cases where goods are not divisible the local supplier is asked to match the L1 bid and the same process as above followed.

Clearly there are substantial questions of quality assurance that can arise from such strict norms that have been laid down for L1  Minus purchase from local vendors.

A fighter aircraft which comprises of thousands of moving parts can malfunction for even the smallest compromise in the quality of the same.

Laying down of quality control in case of L1 Minus bidders scraped from the tendering list assumes importance and whether the same is followed or not is not clear.

Thus the double whammy of budgetary deficit and L1 Minus bidding may be the IAF’s bane.