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Why 2016 will be a game-changer for the Indian defence sector

Suhas Munshi | Updated on: 14 February 2017, 5:28 IST

The manual

  • A new Defence Procurement Procedure manual is expected next month
  • According to Defence Minister Manohar Parrikar, it will be a game-changer for defence and industry

The sector

  • The Indian defence market will be worth an estimated $620 billion (Rs 38 lakh crore) by 2022
  • India is the world\'s biggest arms importer, and this isn\'t something the country is proud of
  • In the next few years, around $130 billion worth of contracts are expected to be awarded locally

More in the story

  • What makes the new DPP a game-changer?
  • Apart from big industrial houses, will it benefit micro, small and medium enterprises?

For all the talk about the modernisation of the India's armed forces, only one major defence deal was inked last year - the order for Chinook and Apache helicopters during PM Narendra Modi's visit to the US last September.

In 2015, the attempt by the Indian defence sector was to kill two birds with one stone - upgrade the military and produce the hardware for it locally. But this attempt was unsuccessful. In addition, there was no news about the application of the Make in India programme to this sector either.

Also read - Meet INS Vishal. The vessel may turn out to be India's flagship

But this year is expected to be different, according to Defence Minister Manohar Parrikar. A news report quoted him as saying that the Defence Procurement Procedure will be released next month.

If and when it does see light of day, DPP 2016 will be a game-changer for the Indian defence sector and industry, which has already seen remarkable growth since the Narendra Modi government raised the cap on Foreign Direct Investment in the sector to 49%.

What is DPP?

DPP is basically the master manual of capital defence procurements in India. Based on this framework, procurements are made for the Indian defence market, which will be worth an estimated $620 billion (Rs 38 lakh crore) by 2022.

Around $130 billion worth of contracts in the local defence market are expected to be awarded within the next few years. Big industrial houses like the Tatas, the Mahindras, the Hero group, Anil Ambani's ADAG, Mukesh Ambani's Reliance Industries, Bharat Forge and the Hinduja group have committed a lot of capital to this market.

Defence Minister Manohar Parrikar says the DPP will be out next month, and will be a game-changer

India is the world's biggest arms importer, and this is something the country isn't too proud of. With a new procurement manual, the government is looking to get rid of this tag.

Though DPP 16 hasn't been made public yet, some portions of it have been discussed with media. And it seems the government is backing the indigenous defence market like never before.

Here is how the new DPP aims to bring Make in India to the defence sector.

Giving preference to 'made in India'

The Defence Acquisition Council (DAC), which is working on the DPP, has introduced a new category as the preferred one for procurements. This is 'Indigenous Design Development and Manufactured (IDMM)'.

Previously, through the DPP 2013, the Indian government had set a 'Buy Indian' category as the most preferred category of suppliers and manufacturers of arms.

The equipment procured under the new category will be required to have 40% indigenous content, if designed indigenously. If the design is not indigenous, it should have 60% indigenous content.

Subdivision of categories

The UPA-II government had introduced a 'Make' category for local manufacturers in the DPP document back in 2006. It was given preference, but not a single project took off under this category.

The new DPP hopes to change this by splitting this category into three subcategories - Make I, Make II, and Make III - and incentivising local production for each category of arms manufacturers.

- 'Make I' will be for government-funded projects

The government will help boost the local defence production by funding 90% of the projects in the first category. It will also reimburse the remaining 10% if a project doesn't bag a Request for Proposal (RFP), which prerequisite to issuing a contract, within two years of the local firm developing a successful prototype of the product.

The Indian defence market will be worth an estimated $620 billion (Rs 38 lakh crore) by 2022

- 'Make II' will be for industry-funded projects

Under the Make II category, the cost of development will have to be borne by the developer. However, if the RFP is not issued within two years of the successful development of the prototype, the Ministry of Defence will reimburse the full cost of development to the developer.

This is good news for local manufacturers, because it means that a firm which invests time and resources in developing a product for the Indian armed forces will still recover its full investment, even if the contract doesn't work out.

- 'Make III' will be reserved for Micro, Small and Medium Enterprises (MSMEs)

All projects whose estimated development cost is less than Rs 3 crore will fall under the third category, and projects up to Rs 10 crore will first be offered to enterprises in this category. The project will have to be self-funded by the developer.

Incentives such as those offered to enterprises falling under the Make I and II categories haven't been extended to those falling under this category.

One thing not clear about incentives under the three Make categories, right now, is whether the funds for 'Make' projects would come from the defence budget, which has already been put under strain by the new One Rank One Pension (OROP) policy, or from the Defence Technology Fund promised by the Finance Minister in his first budget speech on 10 July 2014, which hasn't been put together yet.

Also read - Whistle blow: why OROP in the armed forces will be disastrous

Other major changes

Apart from these revisions, some other big policy changes have been made in the DPP. One of these is the lowering of the offset limit.

Offset agreements are basically conditions put on the seller of a technology to buy products or services from the client. In the current context, it is a bit like asking France to invest a particular amount in the Indian educational industry in return for the Rafale jets India is buying from them.

At the moment, the offset has been marked at 30%.

Offsets can scare away potential sellers, because even after the buyer agrees to purchase a certain number of products, long-drawn negotiations go on about the investments the supplier is asked to make.

To increase local manufacture, govt plans to introduce incentives in 'Make I, II & III' categories

The existing DPP mandated that for any contract above Rs 300 crore in the 'Buy' and 'Buy and Make' categories, 30% offsets were compulsory. The new policy raises the threshold of the offset to Rs 2,000 crore.

Another big change is the government giving extra 10% weightage, during the bidding process, to those products which satisfy the minimum requirements and include additional features.

Tackling corruption

DPP 16 is also expected to make the business of lobbying and dealing with 'agents' of foreign arms suppliers more transparent, in order to reduce corruption in the system. It is also likely to do away with the blacklisting of firms, as was the practice followed by earlier governments.

Instead of blacklisting a firm that is found involved in corruption, the government will put some curbs on it, so that spares and service of the purchased products can continue seamlessly.

There will be more clarity on the process when the final, approved, draft of the DPP is released.

Parrikar has promised that 2016 will be a 'game-changer'. It may also be the shot in the arm he himself needs, since he has little to show for his one year in the chair.

But along the way, if he's able to help local industry and regulate lobbying in this sector, he might help create thousands of new jobs and put in a lot of money in the country, just at the time when his government needs it most.

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First published: 23 January 2016, 6:21 IST
Suhas Munshi @suhasmunshi

He hasn't been to journalism school, as evident by his refusal to end articles with 'ENDS' or 'EOM'. Principal correspondent at Catch, Suhas studied engineering and wrote code for a living before moving to writing mystery-shrouded-pall-of-gloom crime stories. On being accepted as an intern at Livemint in 2010, he etched PRESS onto his scooter. Some more bylines followed in Hindustan Times, Times of India and Mail Today.