by Captain (IN) Vikram Mahajan (Retd)

Promoting Atmanirbharta (self-reliance) in defence manufacturing in India is not new. The first Defence Procurement Procedure (DPP) came out in 2002. Every subsequent DPP introduced something new to promote or enhance indigenisation. Defence offsets (2005), Make procedure (2006), SP chapter (2016), and progressive introduction of new categorisations and increase in Indigenous Content (IC) have been introduced over the past two versions. The new procurement procedure rechristened as Defence Acquisition Procedure or DAP-2020, came into effect on 01 October 2020 with five new chapters and over 200 pages, compared to DPP-16.

A few important things happened over the past year impacting the compilation of DAP-2020. First was the coronavirus pandemic which rekindled the concept of Atmanirbhar Bharat. In DAP-2020, it brought in the concept of ‘Weapons/Platforms Banned for Import’ (negative list). The DAP reserved four categories under which the 100 odd equipment mentioned in the negative list (with more items to be included progressively) can be procured. The pandemic induced recession has also put a question mark on the present and future of defence expenditure.

Second was the release of the Defence Production & Export Promotion Policy (DPEPP) which aims to achieve a turnover of Rs 1,75,000 Crores (US$ 25Bn) including export of Rs 35,000 Crore (US$ 5 Bn) in aerospace and defence goods by 2025. With defence exports of 10,745 crores (US$ 1.5Bn) in 2018-19, the figure of US$ 5Bn is ambitious but not impossible. The DPEPP also stipulates that 60% of the procurement will be from the ‘domestic industry’ during this period.

Just before the final copy of DAP was released, a CAG report brought out that offsets have brought in negligible Foreign Direct Investment, and over $6 Billion of offsets are due to be discharged by 2024. CAG also stated that “objectives of the offset policy remain largely unachieved”. This ‘timely’ report probably swayed MoD’s decision to remove offsets from all ‘single vendor’ and ‘Government to Government’ (G2G) proposals, the largest source of offsets so far. The offset policy in DAP-2020 has trimmed off civil aviation, homeland security, services, offset banking etc. focusing only on manufacturing of defence equipment and transfer of high-end defence technology, as avenues for discharge of offsets. While removal of offsets from G2G (FMS, IGA) proposals is a welcome step for Foreign OEMs (FOEMs), the new offset policy is more restrictive and therefore relatively difficult to discharge compared to DPP-16.

The Ministry of Defence (MoD) has achieved limited success in getting advanced technology despite various methods mentioned in the progressive DPPs over the past 18 years. DAP-2020 premises on gaining defence technology through FDI. The FDI in defence has therefore been increased from 49% to 74% through automatic route. The definition of the Indian Vendor has been tweaked to permit a FOEM with 74% FDI, to participate in all categories except Buy (Indian IDDM), and as a Strategic Partner (SP). This implies that an ‘Incorporated Company’ with 74% FDI can participate in all categories except the two mentioned above, qualifying Incorporated Companies to participate in manufacturing of items mentioned in the ‘negative list’ as well. Also, Incorporated Companies can participate in the 60% projects earmarked for the ‘domestic industry’ in DPEPP.

It is evident from the aforesaid that FOEMs are being incentivised to set up Incorporated Companies in India with 74% FDI. Of course, these avenues have major bilateral benefits. India will have local production line, domestic and reliable availability of equipment for the armed forces, sub-parts manufacturing by MSMEs, enhanced employment, skill development, transfer of technology, contribution to economy, integration with global supply chain etc. And the FOEMs will benefit through access to market, having ‘control’, availability of skilled and affordable manpower etc. With a win-win for both sides, MoD is looking at establishing the long desired eco-system in defence manufacturing through investment in FDI by FOEMs.

Another important aspect of relevance to the FOEMs is the new chapter on ‘leasing’. While leasing in defence has been done in the past in bits and pieces, the process has now been formalised. Although the process of leasing has been abridged compared to a normal procurement process, it might still take up to a year for a proposal to materialise. Apprehension of the authorities on approving something through a new procedure also delays the process, compared to an established procedure.

Many other initiatives like ease of the testing and fast track procedure, setting up of Project Management Unit (PMU), introduction of new chapters on ‘Information Communication Technology’, other capital procurement procedure, post contract management etc. have been introduced to streamline the process. However, the biggest hurdle is the delayed ‘decision-making’ process. The SP chapter introduced in DPP-16 has not seen a single proposal materialise in four years. Many such proposals are languishing and the consistently reducing defence budget (as percentage of GDP) is not helping. Strict implementation by an empowered PMU could help in ensuring timely processing of the proposals. As regards defence budget, despite the drumming of economy due to the ongoing pandemic, the UK recently announced an increase of defence expenditure to £200 billion over the next four years, an increase to 2.2% (as percentage of GDP), above the NATO target of 2%. India should consider doing the same, especially due to the ongoing tension at the northern border. This will also help in decision making by the MoD especially with regards to the building of eco-system in defence, which are required to be taken soon. It should not happen that by the time India starts manufacturing defence equipment for export, they end up in the ‘negative list’ of other countries.