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The Defence Procurement Policy 2016 proving to be Gamechanger for Make in India for Defence

Make in India is an initiative launched by the Government of India to encourage multi-national, as well as national companies to manufacture their products in India. It was launched by Prime Minister Narendra Modi on 25 September 2014. India emerged, after initiation of the programme in 2015, as the top destination globally for foreign direct investment (FDI), surpassing the United States of America as well as the People’s Republic of China. In 2015, India received US$63 billion in FDI. The major objective behind the initiative is to focus on job creation and skill enhancement in 25 sectors of the economy. The initiative also aims at high quality standards and minimising the impact on the environment. The initiative hopes to attract capital and technological investment in India.

However, India’s record of indigenization in Defence sector is dismal. India ranks among the top 10 countries in the world in terms of its military expenditure and import of defense equipment. It allocates about 1.8% of its GDP to defense spending, of which 36% is assigned to capital acquisitions. However, only about 35% of defense equipment is manufactured
in India. Moreover, even when defense products are manufactured domestically, there is a large import component of raw material at both the system and sub-system levels. Indigenization is only route forward as it is cheaper to build, operate and maintain, results in building of strong defence industrial base and growth of R&D leading to strong technology innovation ecosystem. It is also insurance against denial of critical weapons and spares by foreign countries in crisis or conflicts in pursuit of their political or strategic interests.

“The Defence Production Policy promulgated by the Government, aims at achieving substantive self-reliance in the design, development and production of equipment, weapon systems, platforms required for defence in as early a time frame as possible, creating conditions conducive for private industry to take an active role in this endeavour; enhancing potential of Small and Medium Enterprises (SMEs) in indigenisation and broadening the defence R&D base of the country,” says MOD.

The Defence Procurement Procedure (DPP) has been revised and has come into effect from 1st April 2016. DPP 2016, like preivious DPPs, contains policies and procedures relating to procurement/acquisition from Capital Budget of MoD meant for modernisation of Defence Forces including Coast Guard. DPP is not applicable for DRDO and DPSUs, who have their own rules for the purpose.

The recent Defence Procurement Procedure (DPP) 2016, caters for implementation of Make in India Policy of the Government. “In the new DPP, we have tried to shift the focus on Make-in-India, small and medium scale industries. We are also stressing on time-bound procedures,” said Manohar Parricker India’s defence Minister.

Indian defence market is panning out, especially after the increase in foreign direct investment and new defence procurement policy 2016. There are reports that US defence firm Lockheed Martin is pushing for the production of F-16 combat jets in India, but is waiting for the Trump administration to take a fresh look at the proposal.

“The attractiveness of the fast-growing Indian defence market, plus the increase in foreign direct investment (FDI) limit from 26 to 49 per cent and up to 100 per cent with approval for ‘modern technology or any other reason that may be recorded’, makes the policy workable for the majority of global defence primes,” said Tom Captain, Vice-Chairman, Deloitte LLP Global and US National Aerospace & Defence Sector Leader, and Alaric Diniz, Director, Deloitte Touche Tohmatsu India LLP. The global defence market is focussing on affordability, where the primes and tier I players will look for better cost efficiencies across their supply chains, which will result in movement of work to countries like India, if they are ready and able to take up the work.

The new DPP 2016 has a special focus on the MSME sector. SMEs are searching for team mates and joint venture partners to work with that have the ability to invest, have the requisite skills and technical capabilities. They will play an increasingly important role as the amount of work increases over time.

Many defence offset JVs are already underway or on the anvil in India: between HAL and SNECMA of France; Lockheed Martin (USA) and Wipro Technologies; Boeing and Tata; Thales and Samtel Group (France) with an Indian company; TCS and SAAB; L&T and DRDO; Dassault Systems (DS) and Cummins Info Sys Ltd; Wipro and GE Security (USA); Taneja Aerospace and TIDCO; HAL and CAE (Canada); SAERTEX and KEM – ROC; Sikorsky and Tata Advanced Systems; Airbus, Airspace Infrastructure Ltd and Airlogic Ltd; Wipro and CAE (Canada); BEL and Surinam Armed Forces; Rolls Royce and HAL; M&M Ltd and BAE; L&T and Cassadian; Augusta Westland and Tata Sons Ltd, and: between L&T and Europe’s EAD.

Ray Challis, Head of Sales and Marketing for UK-based Ultra Electronics, says the company has already signed an MoU with Mahindra Defense for manufacturing systems for the Indian Navy. “Ultra is a pioneer in precision control system and has a global supply chain. We are willing to bet on a 100-percent transfer of technology if need be. India has problems that we have already solved in Brazil and the US and it is our endeavor to partner with local companies here in India,” Challis told at Aero India 2017 UK Pavilion.


The current DPP 2016 lays down various categories of procurement processes namely, in priority, Buy Indian – IDDM (Indigenously Designed, Developed & Manufactured), Buy Indian, Buy & Make (Indian), Buy & Make (Global) and Buy Global.

Giving Preference to Make in India

A new category of procurement ‘Buy {Indian-IDDM (Indigenously designed, developed and manufactured)}’ has been introduced in Defence Procurement Procedure-2016 which has been accorded top most priority for procurement of capital equipment.
Besides this, preference has been accorded to ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ categories of capital acquisition over ‘Buy (Global)’ & ‘Buy & Make (Global)’ categories.


MAKE’ Category of Acquisition

The ‘Make’ Procedure has been simplified with provisions for funding of 90 % of development cost by the Government to Indian industry and reserving projects and exceeding development cost of Rs. 10 crore (Government funded) and Rs. 3 crore (Industry funded) for MSMEs.

The new DPP splits 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.

– ‘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.

– ‘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.



Vendors of commercial equipment say commercial Vehicles, the ministry would specify two sets of essential parameters A and B. “Essential Parameters A” would evaluate only the automotive performance of vehicles, and only selected vehicles would be tested for “Essential Parameters B” after they are fitted on Vehicles. The vendors will make changes to existing product specifications, only on receipt of assured orders.

The structure of the Annual Acquisition Plan (AAP), which is a subset of the five-year Services Capital Acquisition Plan (SCAP) and the guiding document for procurement, has undergone a change to include, for the first time, a number of ‘Make’ projects that have already been given in-principle approval or are to be considered for in-principle approval by the higher procurement authorities. Besides, the existing Technology and Perspective Plan (TPCR), which has been criticised for being too vague, is now given a new life by requiring it to reflect the “details of the acquisition plans for a period of 15 years, for use by the industry.” These two developments on the planning front are likely to lead to the greater visibility of ‘Make’ projects and, more importantly, accountability on the part of the procurement authorities.


Introduction of L1-T1 Methodology for Award of Contracts

The new L1-T1 methodology, in essence, means that the final bidder would not necessarily be selected on the basis of lowest price quoted by the technically-compliant vendors (the so-called L1 methodology), but by a combination of price and superior technology offered by qualified vendors.

The Request for Proposal (RFP) will have a provision for ‘enhanced performance parameters’ wherein vendor’s additional credits will be given to a vendor based on product’s performance,/if its system displays better qualities than required, giving it an edge over pricing. Vendors meeting the enhanced parameters will be provided additional credit score while evaluating their product cost. The L‐1 bidder would no longer win a defence contract automatically, if another bidder were offering an obviously superior product at a marginally higher cost. However, the enhancement in price cannot exceed 10 percent of the cost.

The new methodology is intended to provide an additional incentive to equipment suppliers who would otherwise be reluctant to participate in the bidding process because their products are much superior and, therefore, expensive and uncompetitive vis-à-vis the ones fielded by rival bidders with no EPP.


Level Playing field

Issues related to level-playing field between Indian & foreign manufacturers, and between public sector & private sector have also been addressed. These include Exchange Rate Variation (ERV) protection for all Indian vendors, removing anomalies in customs/ excise duty etc.
• Making combat equipment available for development of prototypes.
• Equal sharing of national assets like Test Ranges, Validation Labs, EMC/EMI facilities and more on payment basis, as applicable.

The defence sector has a strange set of procurement procedures, which do not normally exist for other procurements. One obvious reason is that products need to be tested as unless successful testing is conducted, the costly equipment can’t be procured. So testing is a major criteria and this was, so far, not allowed to Indian private companies and was resulting into major delays, said So the new DPP opens up testing facilities, said Manohar Parricker India’s defence Minister. Various defence PSUs are also offering facilities to the private sector. The new DPP will address these concerns of the industry in detail.

• Industrial licensing regime for Indian manufacturers has been liberalised and most of the components/ parts/ sub-systems have been taken out from the list of defence products requiring Industrial Licence. This has reduced entry barriers for new entrants in this sector, particularly SMEs. The initial validity of Industrial Licence has been increased from 3 years to 15 years with a provision to further extend it by 3 years on a case to case basis.

• FDI Policy has been revised and under the revised policy, FDI upto 49% is allowed through automatic route and beyond 49% under Government approval route wherever it is likely to result in access to modern technology or for other reasons to be recorded.

• Offset guidelines have been made flexible by allowing change of Indian Offset Partners (IOPs) and offset components, even in signed contracts. Foreign Original Equipment Manufacturers (OEMs) are now not required to indicate the details of IOPs and products at the time of signing of contracts. ‘Services’ as an avenue of offset have been re-instated.


The process for export clearance has been streamlined and made transparent & online. As a result of aforesaid measures, following achievements have been made:-

• Defence Acquisition Council (DAC) accorded approval of 136 capital procurement cases at an estimated cost of Rs. 4,00,714 crore during the last two financial years (2014-15 and 2015-16) and current year 2016-17 (upto January 2017), out of which 96 cases involving Rs. 2,46,417 crore are under the ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy & Make (Indian)’ and ‘Make’ categories.

• Capital expenditure of Rs. 1,75,420 crore (approx.) was incurred on purchase of defence items for Armed Forces during the last two financial years (2014-2015 and 2015-2016 and current year 2016-2017 (upto December 2016), out of which Capital expenditure of Rs. 1,05,030 crore (approx.) was incurred on purchase from Indian vendors.

• The Government has issued 342 Industrial Licenses (ILs) covering 205 companies for manufacture of a wide range of defence equipment, to Indian companies, till June 2016. Out of 342 ILs, 116 ILs have been issued since the launch of Make in India initiative.

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