Soldiers patrol near the Line of Control (LoC) in Mendhar sector of Poonch district

On March 20, the Ministry of Defence (MoD) released the draft version of the Defence Procurement Procedure (DPP-2020), which aims to enhance the acquisition efficiency, while also steadfastly pursuing self-reliance in defence production. On the face of it, the twin goals are not necessarily compatible, and often involve tricky trade-offs as the indigenous production of defence equipment is prone to time and cost-overruns, especially in the context of catching-up countries like India. The new DPP, nevertheless, firmly commits itself to pursue ‘indigenisation’ and ‘Make in India’ goals, alongside addressing procurement efficiency through several other measures. Drafted by a high-level committee, the DPP 2020 has introduced a variety of forward-looking measures in the areas of indigenous innovation, local value addition, and to enhance acquisition efficiency.

On indigenous innovation, the DPP-2020 significantly expands the scope of ‘make’ procedure by including new features like ‘innovation contests’, and acceptance of ‘unsolicited bids’ from the industry, which adds to existing features like R&D procurement and technology development fund. It emphasises the role of India’s growing fleet of tech start-ups and MSMEs to deliver new-generation defence capabilities. The ‘make’-related procurement in conjunction with the ‘strategic partnership’ model (SPM) of DPP 2016 provides for the accumulation of technological capabilities through both internal and external technology acquisition routes. The distinction presented in chapter three of the DPP between ‘make’ and ‘innovation’ categories, however, is somewhat confusing as the two involve much conceptual overlap.

Under make category, the DPP-2020 calls for leveraging the Indian expertise in the software sector, which holds strong potential for creating a new defence-centric software market, and also to deliver niche capabilities and military advantages to Indian defence. Further, the DPP also aligns itself with Industry 4.0 goals by identifying the need for greater interface with artificial intelligence in defence platforms. Overall, the wide-range of demand-side instruments incorporated in the DPP offer immense potential for infusing innovation dynamism in the Indian industry and proper implementation is vital to exploiting their full benefits.

On domestic value addition, the DPP-2020 introduces new acquisition categories such as ‘Buy’ (Global -- manufacture in India) and increases the level of domestic content requirements (DCR) in various ‘buy and make’ categories by about 10% from DPP 2016. The stipulation of higher DCR, i.e. upto 50% in Buy (Global -- manufacture in India) is aimed at incentivising local value addition by sourcing raw materials, intermediates, special alloys, components, etc., from the local industry. The DCR is regarded as useful to forge backward linkages between MNCs and local suppliers and to induce a technological change. However, the DCR is also prone to causing inefficiencies, especially when there is little R&D or creative technological effort on the part of domestic firms. A periodic review or a sunset clause would be appropriate to ensure that DCR helps to serve ‘Make in India’ objectives.

The offset policy is another important instrument under the DPP to foster the participation of Indian firms in global value chains. DPP-2020 strengthens the offset policy framework by proposing higher incentives, especially to support MSMEs in the industrial corridors in Tamil Nadu and Uttar Pradesh. Among others, the new offset tools incorporated in DPP-2020 include multipliers upto four for critical technologies, offset obligations through the building and exporting of products rather than components, third-party assessment for offset discharge through transfer of technology (ToT), etc., which are promising for the Indian industry.

Finally, in the area of acquisition efficiency, the new DPP proposes several useful reforms to cut down procedural delays and minimise procurement timelines. One of the key provisions, in this respect, includes ‘leasing’ of platforms and equipment, when direct procurement is considered to be unviable or when leasing works out to be cheaper than direct procurement. The leasing option would help the resource-constrained MoD to ease financial pressures in capital acquisitions while also enabling the induction of mega-platforms like transport fleets, trainers, simulators, etc., with minimal lead time.

Also, among various new provisions in the DPP, which were not adequately dealt with in the previous manuals, include ‘optimised’ life-cycle cost approach for new acquisitions, ‘price variation clause’ to deal with cost-escalations during the stages of bid submission and contract negotiations, ‘field evaluation trials’ to be conducted by specialised trial wings, etc.

The optimisation approach, however, is likely to pose challenges for developmental programmes as opposed to systems/platforms with wider user-base. A new chapter on procurement of software and systems has been added with the intent of ensuring flexibility in the procurement process and to keep up with the changing pace of technology.

In sum, DPP-2020 gets the overarching demand logic right as it incorporates diverse instruments to spur innovation and technological capabilities. It might, however, benefit from the experience of other catching-up countries in preparing the technological upgradation of domestic suppliers by combining demand with appropriate supply-side measures. Pushing domestic firms into DCR, offsets and complex innovation projects do not always work if they lack requisite R&D and innovation capabilities. Therefore, an appropriate combination of demand and supply-side incentives are necessary. The DPP by being an acquisition manual, however, leaves R&D and innovation issues out of its scope. It is necessary that the MoD works toward a holistic defence innovation policy that takes into account the entire eco-system, and combines various tools to support ‘Make in India’ goals.