The goal: to play a major role in making India a $5 trillion economy by 2024.
The plan: self-reliance through import substitution, indigenous manufacturing, and strategic partnerships.
The defence sector houses the second-largest military force in the world, yet has a weak in-house R&D apparatus and a concerning dependence on foreign markets for vital components. It is also the third-largest military spender in the world¹ – a position achieved quite recently in response to brewing tensions with China.
The Defence Acquisition Procedure (2020) is an ambitious undertaking by the Ministry of Defence to sustainably evolve indigenous defence manufacturing capacity, and make transactions within the sector smoother and more equitable. It came into force on October 1st, 2020 – replacing its predecessor, the Defence Procurement Procedure (2016). This new document contains several industry-friendly measures. Let’s go through some of them.
Purchasing Priority and Indigenous Content
The main thrust of the procedure lies with their renewed purchasing policy, which is the basis from which all other changes flow.
For the categories under ‘Buy’ and ‘Buy and Make’, this is the purchase priority in descending order along with the indigenous content (IC) required for each category:
| Priority | Category | Indigenous Content |
| 1 | Buy (Indian – Indigenously Designed, Developed, and Manufactured) | ≥ 50% |
| 2 | Buy (Indian) | In case of indigenous design ≥ 50%,otherwise ≥ 60% |
| 3 | Buy and Make (Indian) | ≥ 50% of the ‘Make’ portion and transfer of critical technologies from foreign vendors as per the specified range, depth and scope. |
| 4 | Buy (Global Manufacture in India) | ≥ 50% |
| 5 | Buy (Global) | Foreign Vendor – Nil, contracts of 2000 cr and above will have to discharge offsets.Indian Vendor ≥ 30%, failing which, offsets are to be discharged. |
DAP 2020, p. 6
The fourth category – ‘Global Manufacture in India’ is a new addition, as is the percentage of IC, which has increased from prior required percentages of mainly 30%. The process of calculating and verifying IC has also been simplified; it will now be calculated on Base Contract Price (Total Contract Price minus taxes & duties). Furthermore, vendors will now be rewarded for using indigenous raw material. Several provisions embolden possibilities for operating base applications on indigenous software in Buy (Indian- IDDM) & Buy (Indian).
Independent Expert Monitors would be constituted to oversee the integrity of this process. These experts would be a nominated panel of retired central government officers.
Developing important subsystems indigenously is a huge task, especially seeing as India currently lacks in this capacity. This prioritization of small-scale, in-house talent is therefore part of a long-term vision – the positive impacts of which might be realized later rather than sooner. Most importantly, this reorientation to purchasing indigenously developed goods, has to be heavily supplemented by support for local manufacturing.
Provisions for MSMEs under ‘Make’ and ‘Innovation’ Categories
The most exciting aspect of this initiative is its compulsory inclusion of smaller players in the Indian R&D start-up ecosystem. The MoD has over the past decade been reckoning the importance of MSME’s in the road to self-reliance, and affirming the potential it has to “contribute towards the burgeoning defence exports market” (2019, MoD).
Both ‘Make’, and ‘Innovation’ categories in the Defence Acquisition Procedure, 2020 attempt to expand R&D initiatives and provide a “focused, structured and significant thrust to development of defence design and production capabilities in the country” (DAP 2020, p. 321).
Projects under the ‘Make’ categories with Acceptance of Necessity cost not greater than ₹ 100 crores will be reserved for Micro, Small, and Medium enterprises, provided there are at least two or more MSMEs eligible to participate in the category. “If at least two MSMEs do not express interest for a Make programme earmarked for them, the same shall be opened up for all, under the condition that interested MSME(s), if any at that stage and meeting the eligibility criteria, will get preference over Non-MSMEs in the selection of development agencies” (ibid. p. 325).
Make I projects are to be largely government funded (70%), and Make II projects are industry funded – both have to be indigenously designed and developed such that “Indian companies either hold the IPR, including where it has been acquired from the foreign companies, or have the ownership of the design of the main system/equipment” (ibid. p. 321). An important distinction between Make I and II (and the reason one is government-funded while the other is not) is that the former is meant to aid the development of major platforms, central systems, and sensitive prototypes, while the latter will be used to develop equipment / platforms or their upgrades / subsystems / sub-assembly/ assemblies / components / materials etc., primarily for import substitution, as is the case for Make III.
Make III on the other hand, does not have to be designed/developed indigenously, but can be manufactured in India as import substitution for product support of weapon systems/equipment held in the inventory of the Services. Indian firms may manufacture these either in collaboration or with ToT (Transfer of Technology) from foreign OEMs (Original Equipment Manufacturers). In this category, an Indian vendor can enter into a joint venture with the OEM (ibid. p. 322). In these categories, as well as in Buy (IDDM), FDIs are allowed up to 49 %.
‘Innovation’, a new category under DAP 2020 boasts two schemes under the DIO (Defence Innovation Organization) and the DRDO (Defence Research and Development Organization) called Innovations for Defence Excellence (iDEX) and Technology Development Fund (TDF), respectively. These schemes may be availed by “individual innovators, technocrats, professionals, academics, smaller enterprises, start-ups and MSMEs” (ibid. p. 341 – 344). “The categories of Buy (Indian designed, developed and manufactured), Make I, Make II… and the Strategic Partnership model will be exclusively reserved for Indian vendors” the MoD stated in September 20202. Catapulting indigenous design and development to the forefront, 101 items are going to be phased out for import, out of which 69 items have been banned with effect from December 2020. The rest will be phased out over the next five years. The last of these is the long-range land attack cruise missile, which is to be phased out by December 2025. You can find the complete list of embargoed items here.
Cost Cutting Changes – Offsets, FDI, Leasing
The requisite value transfer and offset criterion in other categories (‘Buy’ and ‘Buy and Make’) are meant to allow external resources to be utilized without creating a dependence. However, DAP 2020 has made significant changes to the offset criteria – restricting it to projects above 2000 cr. (up from 300 cr) and removing it entirely for ab-initio single vendor contracts, or deals and agreements among governments (Intergovernmental agreements and Government to Government deals).
A former Financial Advisor (Acquisition) at the Ministry of Defence notes that “considering that a large proportion of procurement in the recent years has been through these routes (IGA, G2G, and ab-initio single vendor), the number of offset obligation carrying contracts exceeding ₹ 2,000 crore – the present cut off for stipulating the offset requirement in a contract, would come down significantly”3. The justification for doing away with offsets is that “vendors load extra costs onto the final contract and doing away with them can reduce final costs”4.
This will make it economical for the government to acquire large foreign contracts, but the sustainability of these investments come into question. The lack of technological or operational offsets will not allow these large projects to be successfully indigenized without a long and complex process of reverse engineering. Nonetheless, this might be considered a calculated trade-off for the sourcing of strategically important, superior quality goods.
DAP 2020 further encourages foreign investment by raising the FDI cap to 74%, while simultaneously creating provisions that are meant to encourage these investors to establish manufacturing hubs in India for both imports and exports.
For projects under ‘Buy and Make (Indian)’ and ‘Buy (Global)’ categories, the provision of transfer of technology (ToT) to an Indian Vendor for setting up the maintenance infrastructure would be approved by the AoN According Authority – Defence Procurement Board (for projects between 300 and 500 cr) or Defence Acquisition Council (for projects above 500 cr). Based on the Services Qualitative Requirements, a Statement of Case will be prepared to justify the purchase of the product. Acceptance of Necessity (AoN) will be framed on the finalization of this Statement of Case.
The Request for Proposal would have to cover any or all of the following as requirements of the ToT:
Vendors, while responding to the RFP shall ensure that their foreign partner from whom Transfer of Technology is obtained should be OEMs or their authorized licensees, design agencies or Govt. sponsored export agencies.
Another cost-saving effort introduced for the first time by the Defence Acquisition Procedure is the option of ‘Leasing’. The draft issued in April 2020 had introduced this provision, “which allowed the defence forces to lease the equipment from defence firms or countries rather than purchasing them”. Subsequent updated versions carried a detailed chapter on the subject. According to the MoD’s reasoning, the leasing process would cut down on expenses by “substituting huge capital outlays with periodical rental payments”.
Trial Process
This aspect of the procedure has also been simplified and streamlined to remove deterrents to potential systems developers and vendors. The Trial Methodology will be part of the RFP and should be “feasible, comprehensive and un-ambiguous in its scope” (p. 36).
The Trial Methodology should provide vendors a clear and objective assessment of the extent of trial evaluation, including parameters where vendor certification, certification from accredited labs and trials by simulation are accepted. As far as feasible, Services Headquarters (SHQ), along with trial agencies may interact with OEM(s)/vendors prior to finalising the Trial Methodology. It should include the trial matrix (with details of qualifying parameters that will be part of trial evaluation, i.e. physical characteristics, operational and technical and environmental parameters, MET and EMI / EMC tests, as applicable) and the Certificate of Conformance.
The trial stage (FET or NCNC) in the acquisition process may be omitted in purchases where:
- there is no prototype available (like in the acquisition or construction of Ships, Submarines, Yard Craft, Tugs, Ferry Craft and Barges), or
- in the case of simulators being built for the first time.
However, for the latter, technical evaluation and delivery acceptance trials will be carried out.
Commercially off-the-shelf equipment meeting IS or BIS or an equivalent certification may on the other hand be accepted on the basis of vendor certification without conducting EMI-EMC (Electro Magnetic Interference-Electro Magnetic Compatibility), MET (Maintainability Evaluation Trials), and technical trials.
In the event where field evaluation trials are not feasible, the document spells out the possibility of conducting evaluations through computer simulations or documented historical data of validation of the parameters produced by the vendor.
These provisions are meant to ease the process further, and remove deterrents that would prevent deserving vendor candidates from seeking to engage in business with the government.
The mechanism by which the defence sector conducts business has been witnessing incremental change over the years. This newest iteration as taken another, larger step toward making the defence industry transparent, easy, inclusive and approachable – facilitating an open dialogue with potential vendors in the Indian market. The long-standing mind-set of the defence industry as a market based primarily on liaising is slowly but surely changing. The message being sent is that the MoD is here to conduct pure business based on merit, with a sharp focus on incubating knowledge that is developed indigenously.
So, the long climb to self-reliance commences. Now to wait and see how well this undertaking fares.
Citations
- Gurung, S. (2020). India third largest military spender in world, after US and China. The Economic Times.https://economictimes.indiatimes.com/news/defence/global-military-spending-saw-largest-increase-in-decade-in-2019-china-india-in-top-3-study/articleshow/75404166.cms?from=mdr
- Shukla, A. (2020). New defence acquisition policy to come into force from October 1. Business Standard. https://www.business-standard.com/article/economy-policy/new-defence-acquisition-policy-to-come-into-force-from-october-1-120092900065_1.html
- Cowshish, A. (2020). Decoding Defence Acquisition Procedure 2020. Manohar Parrikar Institute for Defence Studies and Analyses. https://idsa.in/issuebrief/decoding-dap-2020-acowshish-201120
- Cowshish, A. (2020). Issues in Reckoning Indigenous Content in Defence Procurement. Defence ProAc. https://defproac.com/?p=7609
- Shukla, A. (2020). Explained: What has changed in new draft DPP issued by MoD?. PSU Watch. https://psuwatch.com/draft-dpp-defence-procurement-procedure-mod
- Atmanirbhar Bharat: Complete list of 101 items banned for import by Defence Ministry. (2020). Times Now News. https://www.timesnownews.com/india/article/atmanirbhar-bharat-complete-list-of-101-items-banned-for-import-by-defence-ministry/634138
Kaushik, K. (2020). Explained: What are defence offsets? Here’ everything you need to know. The Indian Express. https://indianexpress.com/article/explained/defence-ministry-acquisition-procedure-offsets-6654837/Tags:DAPDefenceDefence acquisition procedureDRDOFDIIDDMInnovationMODMSMEOEMOFB Previous Post