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Procurement Data

 Sep’16

The first full budget of the Modi government presented to Parliament on February 28, 2015 set aside Rs. 2,46,727 crore (US$ 40.4 billion) for defence, which amounts to a 7.7 per cent increase over the previous year’s allocation. The defence allocation is, however, exclusive of another Rs. 62,852.6 crore provided to the Ministry of Defence (MoD) under the heads of Defence Pensions (Rs. 54,500 crore) and Civil Expenditure of MoD (Rs. 8,852.6 crore), both of which do not form part of India’s official defence budget. The latest defence allocation comes in the wake of the Modi government’s all-out push for the ‘Make in India’ initiative, the ‘heart’ of which, as noted by the Prime Minister himself at the Aero India 2015, is the defence industry. The budget also comes in the wake of the government’s acceptance and implementation of the report of the 14th Finance Commission, which has made a number of recommendations that have a bearing on the central government’s budget, a significant portion of which is spent on defence.

The eight per cent growth in the defence budget has to be seen in the light of this development, although there would be plenty of disappointment for the armed forces which would have expected a double digit growth. This disappointment is mainly due to the ever widening gap between the resource requirement projected by the Ministry of Defence and what it is finally allotted in successive budgets. Suffice to mention that the gap, which was eight per cent (Rs. 12,453 crore) in 2009-10 increased to a mammoth 26 per cent (Rs.79,363 crore) in 2014-15 (Figure I). It can be assumed with a reasonable degree of certainty that the gap, both in percentage and absolute terms, would have further increased in 2015-16.

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Make In India in Defence

Sector Overview

The MSME sector is an important pillar of Indian economy as it contributes greatly to growth of Indian economy with a vast network of around 30 million units, creating employment of about 70 million, manufacturing more than 6000 products, contributing about 45% to manufacturing output and about 40% of exports, directly and indirectly. This sector even assumes greater importance now as the country moves towards a faster and inclusive growth agenda. Moreover, it is the MSME sector which can help realize the target of proposed National Manufacturing Policy of raising the share of manufacturing sector in GDP from 16% at present to 25% by the end of 2022.

Definition of the Sector

The sector is defined by the MSMED Act of 2006 to clearly indicate the Micro, Small and Medium enterprises. This has been defined separately for the manufacturing and Services sector as under:-

Manufacturing Sector Enterprises Investment in plant & machinery
Micro Enterprises Rs.25 lakh
Small Enterprises Rs.5 crore
Medium Enterprises Rs.10 crore
Table Table
Service Sector Enterprises Table
Micro Enterprises Rs.10 lakh
Small Enterprises Rs.2 crore
Medium Enterprises Rs.5 crore

The share of MSME products in the exports from the country during last three years is as follows:

 

Year Share of MSMEs  Products in the Exports
2013-14 42.42%
2014-15 44.76%
2015-16 49.86%

Features of MSME Sector

Office of the Development Commissioner, M/o Micro, Small & Medium Enterprises, has conducted 4th Census on MSMEs with reference period 2006-07. Some of the socioeconomic features of MSME sector in India are as given in Table below.

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Whats new in the DPP – 2016

Mar’16

The much awaited DPP[1] 2016 just released by the MoD in absolute harmony with the Inaugural ceremony of the DEFEXPO 2016[2], has created enough hype to justify its formulation or so we would like to believe. For the first time, since it evolved,  the DPP was preceded by an Experts committee that made recommendations for the new DPP and then a task force that took a deep dive into one of the recommendations of the experts committee. The minister this time has been leading from the front, providing the much needed leadership to the bureaucracy and for the first time the MoD gets to hear a first hand account of an entrepreneur, voice of a small enterprise, all of this and more, finding its way into the defence quagmire. The minister has provided a voice to the small enterprises, the entrepreneurs, start ups and many others who never had one, despite the numerous associations that exist.  In many a first, some of these concerns have been addressed.

Lets begin our analysis with the “Preamble”. This DPP incorporates a Preamble, just like the one enshrined in the Constitution. The idea is noble, it is expected to provide the acquisition executive with the wisdom to choose the “spirit” from the “letter”. The acquisition executive is many a time, “Prisoner to Procedure”; MoD officials dealing with acquisition are often called as “Prisoners to Procedures”, since they are most rigid when it comes to the DPP, for fear of enquiries and an unknown, that may haunt them, down the line. Well, the preamble is expected to address some of these concerns and open the acquisition executive’s mind to a more rational application of the procedures in the interest of the acquisition at hand. Should there be a doubt in application of any of the procedural paragraphs, the acquisition executive is expected to refer to the “Preamble”, for a clarification and then follow the preamble, just like what the judiciary would. The question is, if the said preamble has a chosen text, with the ability to provide overarching clarity to the procedures enshrined therein. A great deal of effort is required in choice of words and the formulation of the “Preamble”. The fine print somehow falls short of expectations.

The Preamble sadly begins on a negative note, “Defence acquisition is not a standard open market commercial form of procurement, and has certain unique features such as supplier constraints,…..”, and so on. Well, we could have begun on a positive note, after all, so much effort has gone into making of this landmark DPP. The Preamble definitely lacks the ability to stand out as a Preamble, with an ability to provide overarching support to the execution executive. MoD may do well to take corrective actions in a more robust formulation of the Preamble.

A path changing inclusion in the DPP is the introduction of a new category called, “Buy IDDM”. For the first time, since its inception in 2002, the DPP places importance on “indigenous design”, development and manufacture. Although these attributes such as design, development and manufacture, were present in a subtle manner in the DPP 2013, and inherent in the “Buy Indian” category, they have now got their pride of place in the DPP. This is actually the essential ingredient to “Make in India”, philosophy and will receive more AON awards, as the year begins from April the 01st 2016. This is extremely good and I believe the minister personally intervened for incorporation of such a category. So what then are the implications? The categorisation believes that if the design is indigenous then a manufacturing indigenous content of 40% would suffice to pass muster and should the design not be indigenous then the manufacturing content required is 60%. Well, this beats basic logic. Lets see how.

If the design is home-grown, then the design would most probably rely on indigenous supply chain and chances of indigenous content are high, whereas, if the design is foreign then chances of having higher indigenous content are low, after all, any foreign design would conform to a foreign supply chain attitude. However, paradoxically, the IDDM category demands just the reverse[3]. Is this demand based on realistic assessment of the domestic industry or was it a fancy tool to impress upon a theory[4] devoid of logic? It would be a challenge for the industry to reconcile to the situation.

Does the Preamble clarify, if the spirit of the DPP is to place an emphasis on indigenous design? For example, if there are two solutions for a program, one based on indigenous design and the other on a foreign design, will the MoD encourage a competition between the two? Will not the foreign companies exploit this and push for their design in the systems of Indian Armed Forces[5]?

There is a third challenge here, ie, there is no difference between IDDM with indigenous design and the next higher category, viz, “Buy Indian”. Both of them demand a 40% indigenous content, never mind the lack of design or incorporation of it. How will the MoD, in the former, ascertain that the design is indigenous, considering that every design may not be patented(are we likely to open a Pandora’s box here by asking for patent filings etc?), well we would be entering into a new variety of quick sand.

While recognising the importance of indigenous design and according it the pride of place right on top of the categorisation priorities, MoD has shied away from a complete and total lifting of the abeyance order placed on design services amongst others. The abeyance order[6] that was issued on a knee jerk reaction based on an alleged wrong doing by an IOP[7](still at large), the entire services industry in India was debarred from offsets discharge as eligible IOPs. Despite many representations, this ban, thanks to the rationale application of logic and reason, was lifted, albeit, partially, by the present governemnt. If the government truly believes in promoting indigenous design, then a case exists for a total lifting of the Abeyance order. The entire DPP must be in conformance with the spirit and the spirit needs to be established in the Preamble.

DPP 2016 must have a flavour for all upgrades and MRO type of activity. It would be a treat to see that all upgrades are necessarily under “Buy Indian” category, at best under “Buy and Make Indian”. The type of investments being made by the Indian industry is pretty encouraging, like Reliance in Mehan, VEM in their new integration facility in Andhra and so many more. Indian industry is now ready to take on all type of upgrades and so the DPP may come out clear on this aspect. However, the formulation in the DPP is not exactly that, it reads, “Para 15 ….Such cases could be categorised under any of the categories as given in the paragraphs 6 – 11 (Chapter I)…”. I would like to see all upgrades being covered under either Buy Indian or at best Buy and Make Indian categories. That could encourage domestic industry to make investments ahead of time. Although, I believe, the spirit of the DPP was to get all upgrades in house.

The DPP was expected to clearly differentiate the planning process from the execution process. While the HQ IDS[8] would coordinate the complete planning process till accord of AON, the Acquisition wing would take on from there and issue the RFP and proceed till signature of the contract. This clarity is essential to avoid duplication of work. Everyone in the system need not do everything, it should be teamwork, like a relay race, the baton[9] must pass from one stage to another. There is a tendency in the MoD for each successive stage to re-invent the wheel, this tendency must be curbed, this DPP has not brought in this clarity.

The RFI process must essentially be a commitment for purchase. Many times the industry is encouraged to make investment basis the RFI and hence the MoD must draw up the RFI for a reason and the reason is procurement by the Forces. Sadly, the formulation is otherwise, reads as follows, “The RFI would be published on MoD and SHQ websites for seeking relevant information, on specific procurement schemes. The issue of RFI is not a commitment for procurement”. How do we expect the industry to have a show of hands when the RFI is not serious enough to lead to a commitment of procurement?

In so far as SQRs are concerned, the balance of decision making must shift to the Armed Forces. Let not the necessity, to make generic SQRs, broad based SQRs and SQRs that can generate a multi vendor situation, not deprive the Armed Forces of a system they require. I like the concept of “Essential Parameters A”, “Essential Parameters B”, and “Enhanced Parameters”. While the concept of broad based QRs seems to apply only to the “Essential Parameters A”, the Forces can use the enhanced parameters to get more out of a system, since no system is designed for exclusive use of the Indian Armed Forces. Also by an intelligent use of “Essential Parameters B”, the Forces can get more even as the production begins. This concept is an intelligent insertion by the MoD, based on the leadership provided by the Minister himself. MoD has expressed a willingness to incorporate technical experts to have a deliberate examination at this stage of the planning process, a very welcome move, exhibiting the open-mindedness of the GoI.

There is an effort to cut down the time in the planning process, by reducing the AON to RFP time to 6 months/1 year for either a Buy Indian/Buy and Make Indian programme. This may be cosmetic, since I believe that the planning process may as well take a little longer, cutting down of time is more necessary in the execution process.

Offsets have been pegged at a threshold value of INR 2000 Crores[10], which comes with a mixed feeling. While the industry would have liked to have the offsets continued at the present threshold of INR 300 crores[11] or even lesser, to enable more offsets business. However, considering that the 300 crore limit was fixed more than a decade ago and that more and more programs are likely to go the domestic route, Indian industry is likely to be engaged more effectively by the MoD in the indigenous categorisation, such a decision may have been taken. Also, the MoD is probably not able to effectively manage the offsets, given the other stakeholders/players introduced in the system, such as the CGDA for an audit. For effective monitoring, may be the number of programs will reduce by increasing the threshold. This seems to be a smart move.

A new insertion in this DPP is the design and development by DRDP/DPSUs/OFB at para 71 of Chapter 1. It would have been a great idea to also include private industry at this stage. The confidence reposed in the private industry by the MoD would have been reflective by such an insertion. This therefore leads to a conflict at para 101, that reads, “ … Cases which are being undertaken by DRDO/DPSUs/OFB/Indian private industry as design and development projects, would not fall in the category of Single Vendor cases…”. Therefore the MoD does visualise cases that are undertaken by private industry also, besides the Make I and Make II category of cases. Therefore para 71 may demand a small inclusion of private industry as well.

A great deal of credit is to be given to the MoD for the far sighted “MAKE” procedure, with incorporation of MAKE category 1 and Make 2. Forward looking, industry friendly, ability to give large advances to the domestic industry for undertaking “Make” programs, will provide an unprecedented boost to the indigenous industry. A definite boost for MSMEs is clearly visible in this category, once again a pioneering move by the Defence Minister to encourage the small industry sector. The minister has attacked the “Defence Industrial Base”, and addressed some of the concerns of the small scale units that are pegged at the base of the development pyramid. If India lives in villages, the Industry lives in MSMEs. 90% funding in Make 1 category by the government and a 20% advance are key highlights. A reimbursement of cost of the remainder 10%, should the MoD not procure after a successful development, is another key highlight, once again unprecedented, what a welcome move!! Provision of test facilities for industry and other key benefits accruing from such a move are very encouraging, this will boost exports of defence items from the country.

The fine print is out. Devil is in the details, let us hope this time when we see the DPP on 28th of March, may be The Angel is in the details.

[1] Defence Procurement Procedures

[2] DEFEXPO 2016 for the first time out of New Delhi, held in Goa from 28th till 31st of March 2016

[3] Buy IDDM demands a lower(40%) IC(indigenous Content) overriding on indigenous design and a (60% IC) on a non-indigenous dsign.

[4] The Theory being, “I will demand a higher IC since the design is not indigenous”, after all I must get some compensation for a non-indigenous design

[5] They only need to comply with a higher IC in manufacturing

[6] MoD OM No 9(42)/2013/Offsets dated 23/05/2013 placed on their website on mod.nic.in/DDP/DOMW

[7] Indian Offset Partner

[8] HQ Integrated Defence Staff, responsible for coordination of procurement

[9] Acquisition baton

[10] USD 300 million approximately

[11] USD 45 million approximately

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FDI UPDATE : DEFENCE SECTOR

FDI In Defence : Boon or Bane | Status Paper

Jul’16

On the 20th of June 2016, the Government of India announced a series of FDI measures, all of them relaxations with a view to attract FDI into the country. Before we discuss this important aspect of national policy, it is pertinent to see how this government has taken a wide angle 360o view on the defence sector.

Holistic view

Government of India has taken a holistic view of the Defence Sector and approached reforms in a methodical and integrated manner. While on the one hand the GoI has addressed regulatory aspects from the DIPP side, on the other the MoD has taken concrete steps to enhance ease of doing Business in Defence Sector.

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Electronic Warfare

Sep’16

अशवतामा मरः, on the glorious battlefield of Kurukshetra, this was the strategy adopted by the Chief strategist, the Lord himself, as an Information Warrior, to lead these words out of the truthful mouth of “Yudishtira”. Choice of a weapon system, choice of the right person to do that to make sure the enemy camp believed the story and then to “JAM” the enemy side with the mighty “PANCHAJANYA” and all the other conches, when a query was raised, कुत।ःकु़ञरः व नरः. That is the power of Electronic Warfare, the greatest battle of Kurukshetra was won by effective use of Electronic Warfare, and more so by pure jamming(ECM) to ensure Dronacharya was laid to rest. The Kauravas were JAMMED to defeat, besides the use of the best missile systems the world is yet to come to scientific terms with.

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POLICY UPDATE : DEFENCE SECTOR

Status Paper : ELCINA

ELCINA has compiled a status paper providing a policy update for release during the SES 2016. In the previous edition of SES, ELCINA has provided its delegates and members with an overview of the Strategic Electronics Sector in the country and a detailed policy analysis. This paper is intended to provide an update on the policies to keep our delegates and members update on the progress made in the Defence Sector.

Holistic view

Government of India has taken a holistic view of the Defence Sector and approached reforms in a methodical and integrated manner. While on the one hand the GoI has addressed regulatory aspects from the DIPP side, on the other the MoD has taken concrete steps to enhance ease of doing Business in Defence Sector.

Some of the major reforms affected in the Defence Sector are summarised below :-

  1. Industrial Licencing. In one go, the GoI has eased out the requirement of licencing by removing more than 60% of the products/sub-systems/components and accessories from the compulsory list of licencing. Presently, in the context of Defence Sector, only following items under the ITC HS classification are under compulsory licencing. Items not included in the list would not require IL for defence purposes. It has also been clarified by the MoD that Dual Use Items, having military as well as civilian applications, other than specifically mentioned in the list, would not require IL. This is a great boon for the domestic industry that has been hither-to-fore has been harassed for obtaining IL in the sector. The specific list requiring IL are as under (these are various sections under the ITC HS Code):-
    1. ITC HS 87.10 :: Tanks and other AFV
    2. ITC HS 88 : Defence Aircrafts, space craft and parts thereof :: from 8801 to 8805 : the complete chapter
    3. ITC HS 8906.10 : Warships all kinds
    4. ITC HS 93 : Arms and Ammunition and allied items of defence equipment; parts and accessories thereof :: 93.01 to 93.07
    5. Reference : Press Note 3(2104 Series)
  2. Military products. The above also provides a general clarity for a product to be classified as a Defence Product.
  3. Review of FDI In Defence : Vide PN 7(2014 Series) the GoI has undertaken a complete review of the FDI policy in 2014, thus easing out the decades old restrictive FDI policy in the sector. The Defence Industry was till then subjected to a IL under the IDR Act 1951 and subjected to a 26% FDI cap under the government route and above 26% on a case to case basis the CCS was to be approached wherever it was likely to result in access to Modern and State of Art technology in the country, besides other conditions. Vide the above PN, in 2014, the GoI enhanced the FDI limit to 49% under the government route and beyond that ipso facto under the CCS. Reference FDI circular 2015.
  4. Radical Changes in the FDI Policy regime. The Union Government has radically liberalised the FDI regime on 20 June 2016 with the objective of providing major impetus to employment and job creation in India. This is the second major reform after the previous one in Nov 2015. The GoI has opened up the Defence Sector under the Automatic route upto an investment of 49% and beyond 49% under the government approval route. While the consolidated FDI circular was effective from June 07th 2016, on the 20th of June the FDI policy was further liberalised by dropping the need of “State-of-the-art technology” for FDI above 49% under the government approval route. Under the present policy there is no necessity for approaching the CCS, since the government approval route by itself can approve FDI proposals upto 100%. In addition the GoI has also made applicable the instant FDI limit to manufacturing of Small Arms and Ammunitions under the Arms Act 1959. This indeed is a significant step.
  5. A multitude of radical changes have been made to enable exports of defence products from the country. Following are the major policy initiatives in the regards (these are also elucidated in the update, separately):-
    1. Exports Strategy. Also called as Strategy for Defence Exports
    2. SOP for Exports
    3. Notification No 115(RE-2013)/2009-2014 dated 13 march 2015. This is regarding export of Military stores and the restrictions associated with each of these. Thus the list of military stores that require NOC from DDP have been notified.
    4. Obtaining NOC online
  6. Reduction of Imports. The GoI, has taken a giant initiative in mandating the OFB and DPSUs to increase their outsourcing from domestic industry, the meagre 2 to 3% outsourcing has been flagged with concern. In this regards the web sites of OFB and DPSUs have included list of items for indigenisation, which by itself is a massive list. This provides an immense opportunity for the Indian industry for participation in defence contracts, especially the smaller industries. A sample list is also produced in tis report and for a detailed list it is advised to visit the website of each of the DPSUs/OFB.
  7. Registration by DGQA. MoD has come out with regulations and procedure for registration by DGA, which was suspended a decade ago. This allows for a single point registration and enables expeditious procurement.
  8. Revised DPP 2016. The DPP 2013 has been revised in a pragmatic manner with enabling provisions for domestic industry and the small and medium enterprises. This is a landmark DPP with many innovative and industry friendly provisions to align the defence procurement with the Make in India initiative. This is being analysed threadbare for its major provisions.
  9. Exercise to revise DPM. This is work in progress and is in advanced stage of completion.
  10. Strategic Partnership. Work in progress after intensive consultations with stake holders.

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DPP 2016 Make in India Paradigm | A new era dawns

April’2016

MoD, in absolute harmony with the Inaugural ceremony of the DEFEXPO 2016, released the DPP, has created enough hype to justify its formulation or so we would like to believe. For the first time, since it evolved, the DPP was preceded by an Experts committee and then a task force that took a deep dive into the aspect of Strategic Partners. The minister, has been leading from the front, providing the much needed leadership to the bureaucracy. For the first time the MoD got a first hand account of an entrepreneur, voice of a small enterprise, all of this and more, finding its way into the defence quagmire. The minister has provided a voice to the small enterprises, the entrepreneurs, start ups and many others who never had one, despite the numerous associations that exist.  In many a first, some of these concerns have been addressed.

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