Elevation of Smt Nirmala Sitharaman to the post of the Defence Minister is a master Stroke in Modi’s strategy. Defence industry is the major ailment of the defence sector suffers in its road to progress. The Synergy between the Ministry of External Affairs, Ministry of Commerce and industry and the Defence Ministry would ensure harmony In International relationships and a show of strength on the military diplomacy. For a democracy it is essential to optimise international relationships with an element of military diplomacy and that’s exactly what the Modi government is doing. We cannot but appreciate the choice of the Defence Minister at this point in time when many programs are held up and the newly announced strategic partnerships policy is ailing. The path to success will be pinned on the initiatives from Nirmala Sitharaman to push the strategic partnerships towards logical conclusion and conclude the contracts before October 2018. Major programs and inviting of foreign direct investment into the Defence sector is one of the key areas that the Prime Minister was looking at. This can be achieved if at all, only by Nirmala Sitharaman. We are in for good times and interesting times. – Col K V Kuber
Government of India has taken a number of measures to increase the participation of Indian companies in the Defence Sector. From liberalizing the licencing regime to making remarkable changes in the Defence Procurement Procedures, according AONs on the Make in India platform provided by the Buy Indian, Buy and Make Indian and Make provisions of the DPP, the government has done all that it could to energize the Indian Defence Industry. Easing of provisions of NOC for exports through timebound online processes has been accomplished and Populating the SCOMET chapter on Defence products, which hitherto has been vacant for a long time, is a work in progress as is the membership to various control regimes. In consonance with all of this the government has also revisited the extant FDI policy and brought it in sync with the other policies and procedures, by taking a bold step of inviting FDI in the Defence Sector upto 100% with a 49% through the automatic route. FIPB is also being eased out to simplify processes.
The formal thrust of the DPP 2016 has been incorporated in the “Buy IDDM(indian designed and manufactured)”,”Buy Indian” and “Buy and Make Indian” with simplified procedures for effective implementation. The “Make” acquisition strategy has been completely redesigned to include the small industry segment(MSMEs) with great incentives and purchase guarantees.
As outlined by the DPP 2016, “Buy” would mean an outright purchase of equipment and could be “Buy (Indian)” or “Buy” (Global)’. “Indian” would mean Indian vendors only and “Global” would mean foreign as well as Indian vendors. “Buy” Indian’ must have minimum 30 per cent indigenous content if the systems are being integrated by an Indian vendor. Buy IDDM is the key for creating an ecosystem in the country with emphasis on Indian design or with a caveat Indigenous manufacture.
“Buy & Make” would mean purchase from a foreign vendor followed by licensed production/indigenous manufacture in the country. “Buy & Make (Indian)” would mean purchase from an Indian vendor including an Indian company forming joint venture/establishing production arrangement with an original equipment manufacturer (OEM) followed by licensed production in the country. “Buy & Make (Indian)” must have minimum 50 per cent indigenous content on a cost basis.
Included in the DPP 2016 is a liberal offsets guidelines of 30-50 per cent for any arms imports above a a threshold of INR 2000 crs to promote transfer of technology amongst other avenues such as direct purchase and FDI in terms of equity and transfer of technology as well as investment in kind in terms of assembly lines, jigs and fixtures.
These measures were incentives for foreign OEMs to bring in technology into the country, however, this has not happened, we are still grappling with screw-driver technology. In the prevailing global geo-political-economic order, it would be difficult for foreign OEMs and their countries that control these technologies, to part critical technologies. Control regimes are very strong and technologies are well guarded. War-machines and arms-industry lead the global technology innovation and applications. We as a nation are at a cusp of technology breakthrough and proliferation in manufacturing sector. We have established a niche space in the IT sector but are we there in engineering design and high-end critical design element?
This is a serious question we must ponder on.
There is a time in history of nations when the revolution is forced upon the state to come up to what is expected of the state. While the Armed Forces are at nerves-end in combating terror and busy protecting the strategic interests of the nation, it is the nation’s call to respond. We have tried the organic route of the DRDOs and the DPSUs for too long, they have delivered to the Forces in time of need and continue to do so. Is that enough?
Are we still satisfied with the 70% or more imports that we make even in the Buy Indian categories of procurement? Is the MoD in sync with the “Make in India” initiative of the nation? Do we have to do more?
Where is FDI in all of this?
FDI is not a magic wand with all the solutions for the Defence Industry. However, it is also a fact that very little has happened in this space. Is this because of the lack of confidence of the foreign OEMs and their governments in the ease of doing business in India? Is this because of the bureaucratic lethargy in extra-ordinary delays in decision making to push programs through? Or is this because the nation cannot fund the programs for the Forces and hence a deliberate delay is caused sometimes tending to infinity. All of this causes uncertainty in the minds of the industry, both, domestic and foreign.
One of the key defence industry reforms initiated by the Manohar Parrikar led Defence Ministry, mooted by the Dhirendra Singh Committee, the Strategic Partnerships, has seen the light of the day. Will the programs listed therein be signed off before October 2018? Any delays in execution could once again put the policies and programs associated , in jeopardy.
One of the major causes for delays in most programs has been attributed to the Finance wing of the Defence ministry as also the Ministry of Finance. Most objections on procedures and processes and often-times, fundamental issues have been raised at late stages in the procurement time-cycle. Is this because we as a nation are unable to fund the programs and therefore we use the bureaucracy to do the honours to cause delays, through effective use of English language? It could be only an apprehension or may be true too.
Do we need to go only the organic route and hold the Forces on, till such development takes place indigenously, could be infinity, or the DRDO or the other organs of the government come up with a development when the Forces no more require the system, or even the other world has gone far ahead fighting our Armed Forces with superior weapon system?
In the situation that we are in, the latent potential energy in the industry is overwhelming. The government has done well to support the domestic industry, has opened up the private sector in more ways than one to support the Forces. What then is holding up FDI in the sector?
There is a definite requirement to infuse money into the sector. This could be done by external borrowings, foreign line of credit, and even through banks, that lend to governments to support their programs. This however, may not be the best of options. Therefore, FDI with its instruments of support is considered essential. FDI could typically include, equity, technology, investment in kind, institutional investors, NRIs(who of late are in the news for sending back home huge sums of money) and others.
Technology is critical to development of the sector, however, foreign OEMs are more comfortable in transfer of technology, if they have management control over the JV/Indian company so formed for this purpose. Management control, however does not mean total control, and hence checks and balances are necessary. In all such ventures, it may be pertinent for the government or one of the organs of the government to hold a golden share, with representation on the Board, that will help monitor the progress and health of these companies.
Thus, it is essential, that we embark on both, organic and inorganic growth. While the government may approve a JV or a fully owned subsidiary with 100% FDI, it may also parallelly launch a indigenous program for home-grown technology. This will enable our DRDO to compete, a timeline would be set for the same. In course of time, we could witness collaboration between our government institutions and industry both domestic and foreign.
Where do we go from here?
There have been a number of debates since the time of complete protectionism prior to the 1991 industrial policy to the changes affected in the PN 4 of 2001 and PN 4 of 2002, inviting 100% participation of private industry in the Defence Sector with a 26% cap. Then it was argued that a 49% will make a difference. It took more than a decade and a new government with a dynamic outlook to implement that. It now seems this is not enough. After all, between 26 and 49 nothing has changed, in so far as the industry structures are concerned. Of course, some restrictions have been removed, and the process eased, well that is not enough.
The call of the hour is to take bolder steps like permitting 100 per cent FDI in defence industry, and incentivise the OEMs to set up plants in India. Just 100% FDI may not be enough, this will need to be dovetailed into progressive A&D policies of states in sync with the federal reforms. This way you can ensure that key technology will not be denied and Indian vendors would have the opportunity to get into the global supply chains of world leaders, till such time we become one.
While the industry is opened up with unrestricted FDI, following must be mandated :-
- Outsourcing with clear norms of upto 50% or above
- Development of supply chain : this has to be a demonstrated for furthering business.
- Integration of Development partners, in consonance with above.
- Integration into global supply chain, demonstrated capability.
- Buy India : Buy raw material from India where available; this has to be done with scant respect to lowest bidder(else, China would take away this business). Quality assurance will be the norm, while adhering to such policy. Also, in the first instance even iof the raw material is sourced at say a 90% quality, the Indian company can be encouraged to exceed expectations in the next order and so on. A systematic encouragement to industry is called for.
- Develop, raw material suppliers, where this is not available indigenously.
- Focus on exports from such subsidiaries.
What happens to my DRDO/OFB/DPSUs
The new steps taken by the MoD indicate that it is reluctantly moving in the right direction, but as of now it remains much too protective towards the government companies. There would be a few large corporates who also advocate this type of protectionist tendencies to maintain their monopoly of what little they hold. This fear holds us back.
Can the government companies be let free and compete? How long will the government hold on to them and how long will they be made more inefficient with government breathing down their necks. Can an ill experienced bureaucrat, with a generalist intellect dictate and run high-technology companies? Can we learn something from the ISRO? Let them free, disinvest and make them more efficient, must be the mantra, they must learn to compete in this highly efficiency driven, technologically supreme, and skill oriented sector.
There is one more fear, what if the OEMs run away after making the investment? Well, the investment is made in kind in the geography of our country and there can be no occasion that they will be allowed to slip away, some personnel may make the grade, well the reminder of the IP and skill remains in the country and hence can be strengthened with little effort. A parallel can be drawn from Australia, where the global majors have made 100% subsidiaries, and are flourishing well. The dictat in Oz, is that the complete work-force must be Australian, the technology developed and transferred will reside in Oz, and they are mandated to develop an eco-system of small industry.
Concept of Cost to Country
It is not necessary to always follow the finance department for determination of L-1 bidder. There is a concept of cost to country that needs to be advocated. Even if the cost of an indigenous supply is costlier by 50% or so, let us be aware that this money spent is rotating within the country, in rupees, amongst the tax payers who have contributed to the national exchequer. A simple analysis would reveal this is a cheaper option, also saving precious FE.
- FDI could be free-flowing with no limits
- Limits and mandates on work-force and skill, 100% Indian
- IP to reside in India
- Concept of IDDM be dove-tailed into FDI oriented industries with mandated outsourcing and demonstrated development of MSMEs.
- Raw material if available in India will be procured from India only. Buy from India is an essential pre-requisite for “Make in India” and “Made in India”.
MAKE IN INDIA | INDIGENOUS DESIGN DEVELOPMENT AND PRODUCTION
Defence Procurement Procedures since inception have been incorporating different categories of procurement to enhance indigenous production. From its just two categories in DPP 2002 to the present six categories, the march has been significant, in the decade and a half. Concept of providing priority to categories in acquisition in Defence procurement was first introduced in the DPP 2013.
Never before in the history, a priority been assigned for indigenous design and development. Having recognized the importance of indigenous design and development, the Manohar Parrikar led ministry has for the first time provided both importance to indigenous design and development as well as granted the pride of place for design and development as a part of the procurement process. What does this mean and what are the implications for the indigenous industry, let us see.
Was there a requirement at all to provide for such a category with overriding priority in the procurement process? Or has this requirement of recognizing the importance of Indigenous Design and Development, come about a bit late into the procedures?
DRDO is the nodal agency for design and development of military platforms, systems, subsystems and in many cases components too, for the Armed Forces. It was designed to be so. It came about into being for this very reason to meet the requirements of our Armed Forces. In its more than six decades of existence, has DRDO even remotely met the expectations set out for? Why is it that our Armed Forces have to remain dependent on foreign sources for more than 70% of their needs even after seven decades of independence? What was lacking, (i) was it indigenous design and development (ii) was it indigenous manufacturing or (iii) was it both? What is more important for our Armed forces to be sustained from within the country for all their needs, is it (i) Design and Development or (ii) Manufacturing or both?
How did this all begin?
DPP 2013 already had flavour so of “Make in India”, by according to priority in categorization of procurements, such as, “Buy Indian”, had the greatest preference over all the others such as (ii) Buy and Make Indian followed by (iii) Make and then (iv) Buy and Make, with Transfer of technology, basically for the foreign OEMs and lastly the Buy Global. Introduction of Buy IDDM to override and sit above all of this in the order of priority of ‘Make in India’ initiative by Government of India in Defence sector is indeed transformational. An indigenous emphasis has increased the business of Indian Defence Vendors and also strengthened the economy by Rs 1,152.48 crore this year as compared to 2015 as reported by the government.
Say “Yes” or “No” was the thought that was engaging the minds of many corporates both domestic and foreign. While the industry was confused and apprehensive on the decision-making ability of the government, well, the corridors of power were busy sifting the various reports from different committees and trying to build a consensus. As it is normal in such policy formulation, there were differences in opinion from the stake holders and it was important for the government to take them all together.
The concept and fundamentals were laid down by the Dhirendra Singh Committee. To quote, “There are cases however where certain platforms are of strategic importance. For these, we are recommending the ‘Strategic Partnership model’ for creating capacity in the private sector on a long term basis. Such a capacity will be created over and above the capacity and infrastructure that exists in Public Sector units. This is expected to spur the sectors towards a more efficient and effective mode of operation. Likewise, there are cases where quality is critical and vendor base is very narrow. For these we are recommending a model of ‘development partnership’”. The committee further recommended few segments like aircrafts, warships, AFV, complex weapons networks, materials, and suggested a well defined protocol for selection of SPs. The follow-on task force dwelled into the details to lay down parameters for selection of SPs followed by Industry-led discipline oriented sub-committees. Issues concerning requirement of industrial Licence, minimum revenue of 4000 crs, three years of growth, weightages on segment specific criteria and more were deliberated in an Industry interaction on 11 June 2016. In less than one year, the the cabinet approves the policy and chapter VII of DPP 2016 stands populated.
Before we have an understanding of the polisy enshrined, let me address a few apprehensions such as, (a) What will happen to the JVs already established? Many of them may be in sectors now not declared as SP. (b) It jettisons the idea that market forces should drive development and competition. (c) Will value for money be achieved if orders on exclusive basis are given ? (d) What will happen if MoD decides not to buy the equipment after the SP produces it.
The reasons for such apprehensions can be figured out with less difficulty. They want to keep the pot boiling so that the Indian establishment continues the consultation process without speeding up implementation. As I see it, the initial efforts at forming JVs was only to take advance action and gain experience. No Indian company has wasted resources in actually building platforms. Market Forces do not work in monopsony conditions and the investment are so high that no one can risk it. However, it can be noticed that market forces have a role to play in the determination of SP, since it is the lowest bidder amongst the shortlisted ones that makes the grade. In fact, Value for money is achieved by various ways and not only thru competition, these have been illustrated in the spirit enshrined in the Dhirendra Singh committee report as well as the policy. In fact the standard procedure for value chain build up and long term vendors is based on constant interaction to improve quality and reduce costs. This is the standard procedure in civil Industry and in India the auto industry is a good model. So giving exclusive orders can be more beneficial to the country in the selected platforms. The question of not placing an order does not arise as the SP model is based on the RFP being issued on the basis of assured demand. The Indian Industry ( big for SP and small for DP) must whole-heartedly support the GOI in this venture, not miss this golden opportunity, ignore the doubting Toms and make India self sufficient in defence equipment manufacture.
The fundamentals of the policy are strong. For any strategic procurement, the nation needs to have a say in the choice of the platform and the supplier. For “Make in India” to be effective the nation must drive the initiative through reforms and choose their partners in progress. MoD will have control over the short-listing of the OEM on the one hand and the SP on the other, thus having a say in both the platform under procurement and the SP. In addition, the GoI has given due importance to Market Forces in actual determination of SP.
GoI has now come out with a business oriented policy, business first. This is a program based policy, addressing in the first phase four programs, viz, (i) Fighter Aircraft (ii) Helicopters (iii) Submarines and (iv) Armour Fighting Vehicles. The corresponding programs are easily interpolated, SAAB Gripen/Lockheed for the single engine, Airbus Helicopters and others for the Naval Utility Helicopter program and other multi utility helicopters, DCNS, HDW and other probable OEMs for the P75 I, and the FICV/FRCV program with multiple choices including RADS, BAE and others. With a clear business visibility, the MoD has proceeded to pick up their OEMS and SPs.
Initial shortlisting of SPs will be based on the model recommended by the Task Force with two gates, first being the minimum qualification criteria to include financial, technical and other general criteria and the second stage would be a site verification with an evaluation of financial and technical capabilities. Thus, the MoD intends to create a pool of SPs from the private sector. At this stage no apriori allocation of disciplines or segments is being made and therefore none of the SPs in the pool can lay claim on a particular discipline/segment. This is indeed a very smart move, providing a level playing field to the prospective SPs to compete for their rightful place in the choice of discipline.
As a part of parallel processing technique, MoD would send out an EOI or RFI to the prospective foreign OEMs for these particular programs seeking requisite technology in range and depth. From a purely technological perspective, based on an assessment of the responses received, two OEMs per program/discipline would be shortlisted. Thus, the MoD would have made a choice on both the platform/OEM and the desirous prospective SP.
Now it is time for the market forces to come into play. For the programs short-selected in the first phase, as above, the MoD will now issue an EOI/RFP to the prospective SPs, indicating in the RFP the short-selected OEMs for the program. Prospective SPs are expected to indicate their preferences for segments concerned. Prospective SPs in turn are expected to find their comfort zone with the OEMs and submit a single bid. The lowest bidder is the SP for the segment/discipline/program. In this final selection stage the GoI has left room for assessment/evaluation of segment specific capabilities within the SPs so contending, thus indicating a L-1/T-1 concept.
Evaluation criteria follows the task force recommendations thus reposing confidence, that included two stages of evaluation, stage 1 based on minimum qualification criteria and the second stage comprising of financial and technical parameters. Subject to compliance to certain aspects such as wilful default to the banking system or being black listed by the RBI or any joint lenders forum, debt restructuring and not classified by any bank as NPAs, all participant companies that qualify the first stage evaluation, will be considered for the second stage evaluation.
Few questions emerge, such as, While considering the single engine aircraft, is it wise to also consider the power pack and hence call for an SP for engine manufacturing? Should the percentage of R&D spend be the only criteria or there also be an absolute number to it? Could the third and fourth segment experience a single vendor situation with only few in the pool? Should the selected SP not perform, is there any exit clause and what options does the government have to fill the voids in defence preparedness?
What are then the outsourcing norms? From the concept outlined by the Dhirendra Singh committee, one aspect stands out loud and clear, SPs and DPs go together. What are DPs and how do they affect the defence industrial ecosystem? DPs are Development Partners; what SPs are to the GoI, DPs are to SPs. If the GoI is reposing trust on the SPs, the SPs are in-turn expected to repose their trust on the DPs, else this system will collapse. If India lives in villages, industry lives in MSMEs. The policy on SP must mandate a minimum specified amount of outsourcing, say 50% of which another 50% must find favour with DPs. It is expected that invariably DPs are from the MSME segment. It is perceived that the major beneficiaries of the SP model would be the small-scale industries, well only then will the ecosystem develop.
The question that comes up is what next? One of the highlights of the draft policy is that aspects like Performance based logistics for ten years, spares, MRO, life cycle support, upgrades, setting up of testing and proving laboratories, all of which are by themselves huge follow-on contracts during the life of the system. Therefore, MoD has kept it open for market forces to determine an SP for a future requirement in the same segment. While the initially nominated SP may have the first-mover advantage, room is provided for a new entrant and hence room for innovation and no-room for complacency. This is clearly a win-win situation for the Armed Forces as well as for the industry. For future acquisitions MoD has provided incentives such as investments made to improve segment specific infrastructure, nature of R&D investments made which is qualitative, development and acquisition of relevant technologies and extent of ecosystem created.
No country can win wars with other’s arms. It is time we introspect and develop a formidable indigenous defence industry to support our Armed Forces that are forever in combat, without any respite. To build a formidable indigenous defence industry, it is imperative that the ecosystem is developed, and once the ecosystem is developed, only system of system integrators remain, sourcing can be done at will. New industry champions will emerge, new trends will be set, knowledge will grow and the nation will emerge stronger.
The preamble to the policy, the definition of SP and the clauses relating to issue of EOI make it absolutely clear that there is NO ROLE for DPSUs in the SP model. The SP has to be private industry. The only role of DPSUs/OFB is to team up with the SP along with MOD, DRDO etc to carry on indigenous efforts to make India self-sufficient in defence products . It is clear that the SP production will be over and above the DPSU capacity . This is as per the Expert Committees recommendations. It is the Private Sector for whom this policy has been carved out and that the policy states that along with the SP the Development Partner will also have a role and most of them will be MSMEs.
Is there a price the nation has to pay? Unfortunately, our Finance experts in the confines of the government buildings understand only L-1, the lowest bidder; ie, the lowest cost quoted by a bidder for a particular system or equipment. Has anyone spoken about the cost to the country? In the path to progress with great emphasis laid on “Make in India”, it is possible that the cost of design, development, supply chain management and production may be costlier than a foreign made fancy toy. Well, since the complete development, ecosystem and production is taking place within the geography of this country, the entire tax-payers money so billed against the Indian manufactured system under consideration, is circulated within the same geography many times. Thus, the cost to the country would be far less than the L-1 cost, if seen in this perspective. This is a perspective that needs to be dovetailed with the SP policy.
Is there a case for management control with the foreign OEMs within the existing framework of 49/51 FDI to enable the FOEMs to transfer technology seamlessly? Since the segment wise technical capability could be a challenge for SPs to showcase, should this be evaluated in a more comprehensive manner to include the “Offered Technology”? Once this is done, the FOEM will be incentivised to transfer technology in range and depth in sync with the spirit of creating the ecosystem in India. What are the limitations to Liaibility and how is this carved out for protecting the nation’s interest? Will the GoI hold a “Golden Share” in the SP, thus enabling protection? This is essential, to ensure that the SP/FOEM do not sell their shares in the market thus causing a disturbance in the existing relationship.
The document is great and aspects mentioned herein need attention to make it robust and encourage sound relationships.
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.
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|
|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|
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.
The much awaited DPP 2016 just released by the MoD in absolute harmony with the Inaugural ceremony of the DEFEXPO 2016, 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. Is this demand based on realistic assessment of the domestic industry or was it a fancy tool to impress upon a theory 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?
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 that was issued on a knee jerk reaction based on an alleged wrong doing by an IOP(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 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 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, 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 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.
 Defence Procurement Procedures
 DEFEXPO 2016 for the first time out of New Delhi, held in Goa from 28th till 31st of March 2016
 Buy IDDM demands a lower(40%) IC(indigenous Content) overriding on indigenous design and a (60% IC) on a non-indigenous dsign.
 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
 They only need to comply with a higher IC in manufacturing
 MoD OM No 9(42)/2013/Offsets dated 23/05/2013 placed on their website on mod.nic.in/DDP/DOMW
 Indian Offset Partner
 HQ Integrated Defence Staff, responsible for coordination of procurement
 Acquisition baton
 USD 300 million approximately
 USD 45 million approximately
FDI In Defence : Boon or Bane | Status Paper
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.
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.
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.
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.
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 :-
- 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):-
- ITC HS 87.10 :: Tanks and other AFV
- ITC HS 88 : Defence Aircrafts, space craft and parts thereof :: from 8801 to 8805 : the complete chapter
- ITC HS 8906.10 : Warships all kinds
- ITC HS 93 : Arms and Ammunition and allied items of defence equipment; parts and accessories thereof :: 93.01 to 93.07
- Reference : Press Note 3(2104 Series)
- Military products. The above also provides a general clarity for a product to be classified as a Defence Product.
- 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.
- 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.
- 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):-
- Exports Strategy. Also called as Strategy for Defence Exports
- SOP for Exports
- 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.
- Obtaining NOC online
- 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.
- 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.
- 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.
- Exercise to revise DPM. This is work in progress and is in advanced stage of completion.
- Strategic Partnership. Work in progress after intensive consultations with stake holders.