Defence Ministry’s major thrust towards ‘Make-in-India’; all modernisation to be done indigenously

In yet another shot in the arm towards bolstering the domestic defence ecosystem, the Defence Acquisition Council (DAC), which includes heads of the three services, the Defence Minister & other officials, amended Defence Acquisition Procedure (DAP) 2020 for all modernisation requirements of the Defence Services and Indian Coast Guard indigenously.

As per the amended provisions, the Indian defence forces will now have to source all their modernization requirements from the domestic defence sector, with the outright import of weapons and platforms being resorted to only as an exception with the ‘specific approval’ of the Defence Minister and the Defence Acquisitions Council (DAC).

“Going forward all modernisation requirements of the Defence Services and Indian Coast Guard are to be indigenously sourced irrespective of the nature of procurement. Import of defence equipment/sourcing from Foreign Industry of capital acquisitions should only be an exception and undertaken with specific approval of DAC/Raksha Mantri,” the Ministry of Defence said in a statement.

Other amendments include measures to reduce the ‘financial burden’ on the Indian Defence industry while maintaining financial safeguards. The requirement of IPBGs (integrity pact bank guarantees) has been dispensed with, for instance, and EMD (earnest money deposit) will be taken as bid security for all acquisition cases costing over Rs 100 crore.

“To encourage wider participation and broad base the indigenous defence manufacturing sector in the country, the total order quantity will be split between shortlisted vendors, wherever viable,” MOD stated

Additionally, other technically qualified bidders who don’t get awarded the contract will be issued a certificate by the Services stating that the product has been successfully trial evaluated to facilitate vendors to explore other markets.

Deciphering the imperativeness of DAP

To promote ‘Make in India’ and ‘Aatmanirbharta’ in defence and enable Ease of Doing Business, DAP paves way for the hassle-free procurement and acquisition of upgraded technology, products, and services for the Tri-Services and other allied defence services.

Through its many improved features, it aims to boost sectors like MSMEs and establish a greater degree of public accountability, transparency, fair competition, and a level playing field in the defence sector.

Reservation in Categories for Indian vendors: With FDI in defence manufacturing permitted up to 100% (up to 74% under the Automatic route and beyond 74% under the Government route), there is an opportunity for the domestic industry to increase production in the sector.

With the new Foreign Direct Investment policy, DAP 2020 has adequately consisted of provisions to encourage Foreign Direct Investment (FDI) to establish manufacturing hubs both for import substitution and exports while protecting the interests of the Indian manufacturers.

Under this, FDI in defence manufacturing permitted up to 100% (up to 74% under the automatic route and beyond 74% under the Government route), which leads to an opportunity for the domestic industry to increase production in the sector.

Salient reforms of DAP

Indigenisation of Imported Spares:

(i) Request For Information

The RFI stage explores the willingness of the prospective foreign vendors to progressively undertake the manufacture and set up an indigenous ecosystem at the spares/sub-component level.

(ii) New Category of Buy (Global – Manufacture in India)

The new category consists ‘manufacture of either the entire/part of the equipment or spares/assemblies/sub assemblies/Maintenance, Repair and Overhaul (MRO) facility for the equipment, through its subsidiary in India.

(iii) Co-production through IGA

In this stage establishment of co-production facilities through IGA achieving ‘Import Substitution’ and reduce Life Cycle Cost.

(iv) Contractual Enablement

Buyer’s Right to optimise Life Cycle Support costs and system enhancements through indigenous eco system incorporated.

The FDI push

With the announcement of the new FDI Policy, suitable provisions have been incorporated like new category ‘Buy (Global – Manufacture in India)’ that encourages foreign Original Equipment Manufacturers (OEMs) to setup ‘manufacturing/maintenance entities’ through their subsidiary in India.

Rationalisation of the development process

Make-II procedure of DAP-2020 involves the indigenisation of defence equipment through industry funded projects at the prototype development stage. The process has been simplified by incorporating ‘Single Stage Composite Trials’ of prototypes and dispensing off with quantity vetting and scaling for initial procurements in the delegated cases.

Once the trials are done, the post simplification process will kick off, which will reduce to 101-109 weeks from an existing total time period of 122-180 weeks.