The Ministry of Defence (MoD) recently released the draft Defence Procurement Procedure (DPP) 2020. The new draft DPP amends existing military procurement rules in line with Governments’ long-running targets to boost indigenous defence capability and reduce reliance on imports under its “Make in India” initiative. The draft document like its previous iteration in the DPP 2016 continues to carry along a few below par policies and notions that may hinder India’s attempts at indigenisation vis-à-vis direct procurement which is generally cheaper and more efficient.
The draft DPP 2020 proposes higher levels of local content, new multipliers in defence offsets, a procurement category for leasing, and new options for equipment sustainment activity. It attempts to better the 2016 iteration of the draft. The intent of the new DPP is to further promote indigenous design capacity and higher localisation, both of which, if implemented effectively, could potentially increase the role of domestic industry, especially the private sector, in defence production.
The most preferred category to process defence procurement, called Buy ‘Indian Indigenously Designed Developed and Manufactured’ or (Indian-IDDM), towers over and above all other categories in preference. Under Indian-IDDM, it is proposed any order will require at least 50 percent indigenous content if the design is indigenous in addition to development and manufacture, an increase from 40 percent. Or under Buy-Indian category with an indigenous design and manufacture, the required percentage of indigenous content will be 50 percent or 60 percent if product has not been designed and developed indigenously.
|Proposed Indigenous Content
|Indigenous design and ≥ 50%
|In case of indigenous design ≥ 50% otherwise ≥ 60%
|Buy and Make (Indian)
|≥ 50% of the ‘Make’ portion
|Min 50% of Make
|Buy and Make
|Buy (Global - Manufacture in India)
|Foreign Vendor – Nil Indian Vendor ≥ 30%
(Draft DPP 2020)
This crucial industry policy document while favouring “Make in India” does not make provisions to analyse or compare the cost premium and consequent potential decrease in output delivered in implementing such high levels of indigenous content in platforms. Indigenisation is about reducing dependency and increasing India’s capability to meet its own security needs. However, India lacks several core sub-systems manufacturing capability, production expertise, resulting in many of the systems being developed and produced for the first time in India. The MoD continues to falter in this aspect in its myopic pursuit of indigenisation.
Consequently, the history of indigenous development in India is replete with examples of mismanagement, time delays, late stage design modifications and cost escalations. The Light Combat Aircraft produced by Hindustan Aeronautics; the Arjun Main Battle Tank; Air Independent Propulsion (AIP) systems for the Indian Navy’s Scorpene submarines; and the acquisition of a weapons locating radar for the Army before Kargil, form part of a long list pointing to the risks associated with the development sub-systems and platforms afresh.
For example, Japan, which is currently assembling 42 F-35 stealth fighters domestically through Mitsubishi Heavy Industries, is in the midst of a debate of discontinuing production versus the import of finished aircraft from the U.S. to reduce cost and maximise the number of platforms. Similarly, the UK decided to purchase a new Apache fleet 'off the shelf' from Boeing instead of paying extra to have them remanufactured to UK-specific standards under licence by AgustaWestland (now part of Leonardo) resulting in cheaper per unit cost.
Leasing has been introduced in the draft DPP 2020 as another category of acquisition in addition to the existing ‘Buy’ and ‘Make’ acquisition templates for the first time. Under this option, equipment or platforms may be leased from defence firms or countries rather than purchased for ownership by the armed forces. Firms would enter into longterm/medium term contracts offering to provide a guaranteed number of operationally available frontline equipment on a daily basis (e.g. combat aircraft or tanks) with the contractor responsible for maintenance and repair for the duration of the contract. The draft says:
“Leasing provides means to possess and operate the asset without owning the asset and is useful to substitute huge initial capital outlays with periodical rental payments. Leasing would be permitted in two sub categories i.e. Lease (Indian), where Lessor is an Indian entity and is the owner of the asset, and Lease (Global).”
Risk assessment would be a major challenge when writing such contracts, with the need to allow for use, destruction and replacement in both peace and conflict. Also, such options would need a through evaluation of the benefits and costs of leasing versus an outright purchase, where the purchase option requires the armed forces to assume the responsibility for maintenance, repair and replacement of equipment.
The draft continues to carry the controversial “Chapter-7” sans any edits or changes from the previous iteration in 2016. This key chapter outlines the rules governing Strategic Partnerships in the manufacture of four programs — fighter aircraft, helicopters, armoured vehicles and submarines — to be done in collaboration with a domestic partner company in India. The rules in this chapter continue to restrict foreign manufacturer’s stakes to 49 percent in any such partnership, creating a plethora of issues around the willingness of these companies to share the latest technologies to IPR issues. The rules place the burden of performance guarantees in terms of quality and timely deliveries on the foreign manufacturer owning a 49 percent stake while mandating the Indian partner to be the prime contractor and bidder.
Amidst much criticism it is important to point out that the fact, that the Ministry of Defence has made information available to the public in order to solicit opinion leaves much hope that some course corrections is eminently possible. Offsets are going to be the short-term trigger to create a sustainable eco-system for defence production and will be key to helping shape the development of the Indian defence industry.
The draft DPP 2020 like its previous iteration has left out issues of improvements in procedures, institutional structures and issues related to accountability. How effective will the new DPP be without these amendments? It will eventually be contingent on how the Ministry of Defence, Service Headquarters, Integrated Defence Staff now headed by the CDS and the DRDO which constitute the labyrinthine procurement set up implement these.
Identifying key strategic capabilities or platforms and promoting the development of core competencies maybe a more conservative and risk averse approach in pursuing indigenous defence capabilities. Balancing costs and risk between equipping the armed forces with the items they most desire and sustaining a national industrial capability is important given the fiscal climate. India can’t afford to have small batches of indigenous capability of everything, achieving economies of scale in production is key to offsetting development costs.
Though to conclude, the fundamental issue remains the quantum of funds allocated for capital expenditure or modernisation, more so with the COVID19 pandemic’s impact on the economy. In the near term, acquisition programmes including committed liabilities face being disrupted and delayed. The Ministry of Finance has already issued directives to restrict expenses for the first quarter to either 20 or 15 percent of the year’s budget estimates to battle the fallout of COVID19 on its revenues. The MoD needs to anticipate and plan the prioritisation of spending and hard choices regarding cuts in line with the looming fiscal reality. Deliberating the comparative costs associated with such a single-minded pursuit of indigenisation as laid out in the 2020 draft defence production procedure maybe a prudent exercise too.
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Pushan was Head of Forums at ORF. He was also the coordinator of Raisina Dialogue. His research interests are Indian foreign and security policies.Read More +