Changes in Defence Procurement Policies to Boost Make in India

In a meeting scheduled to be held on 23 February, the Defence Acquisition Council (DAC) headed by Manohar Parrikar will give approval to major changes regarding the policy on blacklisting of defence manufacturers, who violate their contractual obligations by indulging in corrupt practices.

After a preliminary enquiry into allegations of corruption, the company will be blacklisted and the procurement of the concerned item would be put on hold. If the charges are proved, the company will be penalised monetarily based on the gravity of the offence. Only in exceptional cases will a company be barred completely from bidding for Indian contracts.

The new policy will provide some relief to 15 defence companies that are blacklisted at present, including six MNCs and 23 others that are being scrutinised for non-compliance. It will also give a fillip to the military modernisation process that has been stalled due to the automatic blacklisting of errant companies.

Giving Boost to ‘Make in India’

Based on the recommendations of the Dhirendra Singh Committee, the Defence Minister has approved several major changes to the current Defence Procurement Procedure (2013) in recent months. The new policy emphasises reduction in the import content of weapons system and defence equipment, encourages indigenous design and gives a boost to the small-scale sector. In keeping with the Prime Minister’s exhortation, “Make in India”, the new policy lays stress on “Make” rather than “Buy and Make” for future defence acquisitions.
According to the new policy approved by the DAC in January 2016, the highest priority will be given to indigenous design and manufacture. A new category called “Buy Indian (Indigenously Designed, Developed and Manufactured – IDDM)” has been introduced.

This category will replace “Buy Indian” as the category that is the most favoured for awarding future contracts. To qualify, vendors must ensure that not only is the product indigenously designed, but also that at least 40 percent of it is manufactured in India. In case the design is not indigenous, 60 percent of the product must be manufactured in India.

Doubts Over the Indigenisation Move

The implementation of this policy will gradually result in greater investment in indigenous research and development. It will also aid in the harnessing of Indian talent for military modernisation. India will eventually become a source of state-of-the-art military technology rather than being reduced to a mere recipient.
While the cardinal features of IDDM are unique, it will be difficult to implement as the indigenous component of both design and manufacture will not be easy to determine. Also, given the lack of success with the “Buy Indian” category since its inception, it is extremely doubtful whether the introduction of IDDM will result in a rapid growth in indigenous manufacture.

The ‘offsets’ policy, the implementation of which has been hampering the award of contracts for defence equipment, is also being tweaked to make it more viable. Earlier it was mandatory for foreign manufacturers to source at least 30 percent of the parts of the item being sold from Indian suppliers if the contract was for Rs 300 crore or more. This is being raised to Rs 2,000 crore as most Indian companies were not in a position to absorb such offsets. Also, offsets will now be permitted in the services sector as well. Both of these seem to be right steps as these will allow better utilisation of the concept of offsets – which is to gradually enhance the participation of Indian industry in defence manufacture – without being encumbered by them.

Reducing India’s Dependence on Imports

The L1 – lowest bidder – method of awarding defence contracts is also proposed to be amended. The DPP will allow for a bid from a single vendor to be accepted if there is no other manufacture who meets the qualitative requirement. The government has also decided to subsidise research and development, particularly for micro, small and medium-scale enterprises (MSMEs).

The government’s policy for defence exports needs to be reviewed and made more liberal. Companies in the private sector will be in a better position to consider investing in defence manufacture if they are free to export their products to overseas buyers. Obviously, any changes will need to take into account the fact that sales cannot be permitted to states under UN sanctions and non-state actors. One policy element that has still not been addressed is the formulation of guidelines for the selection of international partners for joint ventures in the defence sector.

India is expected to spend up to US$ 100 billion on defence acquisitions over the next ten years.

According to a February 2016 report by SIPRI, It is now the largest importer of weapons systems and defence equipment in the world and accounts for 14 percent of the world’s defence imports. India imports three times as much defence equipment as China and Pakistan.

The pragmatic steps being taken by Defence Minister Parrikar will gradually result in increasing the indigenous content in defence manufacture, and will also aid in raising India’s technological threshold. These will go a long way towards making India a design, development, manufacture and servicing hub that will one day be a far cry from the present state of importing 70 percent of its requirements.

(The writer is former Director, Centre for Land Warfare Studies (CLAWS), New Delhi.)