The L1 Trap: Why India’s Defence Needs Capability Over Cost

Article by Mr Gaurav Sharma and Dr Biplab Rath

In the high-stakes arena of national security, India can’t afford to pinch pennies on its shield. The 1999 Kargil War exposed this brutally cost-driven procurement, leaving troops with a 30% ammunition shortfall, per CAG reports, turning hills into graveyards. Fast-forward to 2026, with a ₹6.2 lakh crore defence budget and border tensions simmering, the outdated L1 (Lowest Cost) model still reigns the defence sector of India. It awards contracts to the lowest bidder after basic technical checks, rooted in 1990s fiscal caution, but warfare doesn’t reward thrift—it demands dominance. Therefore, it’s time to pivot to capability-led procurement, where mission effectiveness outdoes the price tags.

The L1 Trap: Savings That Cost Lives

The L1 procurement promises prudence but delivers peril. First, it guts the capability of defence systems crucial for national security. In the 2016 Field Howitzer tender, bids slashed radar range and engine life to hit rock-bottom prices. This race to the lowest bid resulted in systems that lack the necessary endurance and coverage, ultimately leaving India trailing behind China’s superior PLZ-05 systems, which offer advanced technology and military effectiveness. Such compromises highlight the significant risks associated with prioritising cost over quality. As a consequence, the long-term implications for defence preparedness and operational efficacy become increasingly concerning in a rapidly evolving geopolitical landscape which requires a major indigenous boost.

As innovation continues to struggle, indigenous giants such as Tata and L&T are investing heavily in research and development. Despite their efforts, they often find themselves outmatched by foreign competitors who offer significantly lower prices. According to data from FICCI, private defence research and development remains alarmingly low, hovering below 1% of total turnover. This lack of investment is compounded by the harsh reality that high upfront costs are often penalised, ultimately hindering India’s ambitious Aim for Self-Reliance initiative, which strives to achieve a target of 70% indigenous production. The situation calls for a more supportive environment for these companies to thrive.

Worse is that the L1 procurement ignores the lifecycle realities of military aircraft procurement. Everyone is well aware of the so-called “bargain” MiG-21 fleet. However, its total cost has ballooned to an astonishing ₹50,000 crore solely in maintenance expenses. This situation highlights a critical oversight, as globally, 60–70% of total expenditures occur post-purchase, according to the metrics from the US Department of Defence regarding Total Cost of Ownership (TCO). Yet, the focus remains on Day One price tags, obscuring the long-term financial implications and operational readiness challenges that come into play when evaluating the true value of defence investments.

Operationally, risks skyrocket as the situation evolves. The ageing T-72 tanks consistently provide low results in LAC simulations as the Russian spare parts vanish in the aftermath of the Ukraine conflict, leaving military units struggling to maintain their equipment. Consequently, indigenous manufacturing capabilities remain stagnant, lingering under 40%, which effectively locks India into a cycle of unreliable imports that compromise national security. This dependence on foreign sources not only affects operational readiness but also hampers the development of a robust defence industry, ultimately undermining the government’s efforts to achieve self-reliance in defence production for the future.

The L1 Issue: Industry Perspective

• Price becomes the only weapon—not capability: the use of the L1 (Lowest Bidder) and RA (Reverse Auction) reduces everything to a mere numbers game. Regardless of how advanced, innovative, or reliable a system may be, the cheapest option ultimately prevails. In the context of defence, this approach poses significant risks, as it neglects the complexities and unpredictabilities of real-world conflict. The war is not fought on spreadsheets, and decisions based solely on cost fail to account for the strategic intricacies and human elements involved. Ensuring national security requires investments that prioritise capability and effectiveness over mere price.
  
• Compromised system at a compromised price: the RA forces vendors to undercut each other beyond sustainable levels, creating an environment where competition spirals downward. To survive this intense pressure, companies resort to various strategies. They may cut corners in their production processes, reduce the quality of their offerings, and rely on cheaper components that significantly compromise the integrity of the whole product. The result of this cycle is that the Armed Forces ultimately purchase a system that is not only compromised in quality but is also sold at a price that reflects these deficiencies. This race to the bottom can have long-term negative consequences for both vendors and buyers alike.
  
• System ends up rewarding the wrong ecosystem: this, in turn, shall put down the serious and capable players in the industry. Reputed and skilled firms often choose not to engage in irrational price wars, as these can undermine their quality and reputation. In turn, who remains in the market? Typically, it’s the low-cost, low-quality players who are more than willing to take risks for short-term gains. This creates an imbalance where the system ultimately rewards the wrong ecosystem. Such environments not only diminish competition but also lead to a decline in standards, adversely affecting the overall market. If a company invests years and crores into building a robust Indian system—but loses to a cheaper import or assembler in RA— You’ve just punished innovation.
  
• No respect for research and development and indigenous capability: the biggest drawback is that this system stifles the growth of innovation in the crucial sector. If a company dedicates years and substantial financial resources to create a robust Indian defence system but is overshadowed by a cheaper import or assembler in the region, it effectively undermines the efforts to promote self-reliance. This scenario not only discourages local innovation but also hampers the Atmanirbhar Bharat initiative aimed at achieving greater independence in defence manufacturing.
  
• Paper compliance replaces battlefield performance: vendors often begin the design process for their products with the primary goal of merely meeting specifications and passing necessary trials. This approach seldom emphasises the aim of achieving excellence or dominance in real operational environments. Instead, the focus typically shifts towards ensuring paper compliance, which, while it may fulfil regulatory requirements, does not guarantee effective performance in actual use. As a result, the products may lack the robustness and reliability necessary for challenging conditions. This mindset can lead to a disconnect between theoretical success and practical application, ultimately hindering the product’s true potential in this strategic marketplace.
  
• Life cycle costs are often overlooked: when considering the total cost of ownership for L1/RA systems, the focus tends to be predominantly on the initial purchase price. However, a comprehensive evaluation of costs should encompass several important factors beyond just the upfront investment. Maintenance expenses can accumulate over time, significantly impacting the total cost. Additionally, the availability and expense of spare parts must be taken into account, as these can directly affect operational efficiency. Downtime due to system failures can lead to productivity losses, further inflating costs. Finally, potential upgrades and enhancements should be factored in, as they are essential for keeping the system updated and efficient over its operational life. After all, cheap today can become an expensive liability tomorrow. Real cost includes:
  • Maintenance
  • Spares
  • Downtime
  • Upgrades
    
• Strategic Vulnerability: the low-cost imports, such as Chinese systems, often prevail in the L1/RA procurements. This situation leads to several significant consequences: it creates a dependency on foreign suppliers, which can undermine national interests. Additionally, there are inherent security risks associated with relying on external sources for critical technologies and systems, as this may expose sensitive information and infrastructure to potential threats. Moreover, the absence of a robust domestic capability build-up stifles innovation and growth within local industries. This reliance on imports ultimately hinders the development of a self-sufficient technological landscape, which is essential for national security and economic resilience.

The L1 and RA are not procurement tools; rather, they function as cost-cutting mechanisms that are often utilised inappropriately within the sector. For effective defence procurement, it is crucial to prioritise several key factors. First and foremost is capability, ensuring that the equipment meets the operational demands. Reliability is equally important, as it guarantees that systems perform consistently under pressure. Additionally, life-cycle value plays a significant role, taking into account the total cost of ownership throughout the asset’s lifespan. Lastly, strategic importance must influence procurement decisions, reflecting the broader goals and security needs of the nation. By focusing on these criteria, the Armed Forces can ensure that the procurement processes are effective and aligned with the national security objectives, notes Mr Gaurav Sharma, the Vice President Sales and Government Relations at the Big Bang Boom Solutions (BBBS) Private Limited

Capability-Led: Building Battle-Winners

So, what’s the medicine to cure?

Flip the script, one possible solution can come with L1-T1 hybrids—tech evaluation first (60–70% weight), the price tags come second. Mission effectiveness leads, wargame tests ensure gear like Akashteer air defences integrate seamlessly. This ignites innovation, as the iDEX has funded over 200+ startups; imagine tripling private R&D with rewards for breakthroughs as L&T’s K9 Vajra proved under hybrid rules.

Lifecycle management strategies and insights are becoming increasingly essential in today’s fast-paced economic environment. Net Present Value and Total Cost of Ownership models, such as those implemented in Australia, offer significant advantages, yielding impressive net savings ranging from 15% to 25%. These savings can be achieved through the strategic management of efficient spare parts and timely upgrades, ensuring that organisations not only minimise unnecessary expenditures but also maximise their operational efficiency. By focusing on these models, companies can better allocate their resources, improve asset utilisation, and ultimately enhance their overall financial performance, paving the way for sustainable growth and competitive advantage.

It matches modern wars too— prioritising AI, cyber resilience, and swarms over obsolete specifications. Timelines shrink to 30% as the DPP 2020, fuelling 5–7x job multipliers as inputs from NITI Aayog suggest.

Lessons from Global Powerhouses

Mature players ditched pure L1 long ago. The US “Best Value” weights tech over 60%, birthing F-35 supremacy. Israel auctions on capability, exporting $10B Spike missiles yearly. Australia’s SEA 1000 subs balanced cost with sovereignty via hybrids. China’s state-backed capability focus delivered J-20 stealth edge over India’s delayed AMCA. India’s own pilots—Arjun Mk1A, Project 75I—show 20–30% gave superior results.

India’s Action Plan

1. Mandate 70% tech scoring in DPP 2025+. Embed TCO in GeM portals.
2. Empower DAC for fast-tracks, pump iDEX to ₹10,000 crore, and offer PPP tax breaks.
3. Phase it: Pilot 10 Army deals, scale Navy/Air by 2027, sunset L1 promptly.
4. Counter risks with CAG audits and blockchain bids for a secured future.

Conclusion

Ultimately, it’s the answer to the question, “Do we buy gear or forge capability?” L1 builds budgets; capability builds nations. With China flexing a $300B+ modern force, India must lead with tech, not lag on price. Issue the directive in Budget 2026—turn Aatmanirbhar from a slogan to a shield. National security demands winners, not winners’ curses.

Views are those of the Author(s)