By Ajai Shukla
Business Standard Comment, 15th Jan 16
Private defence companies are rightly pleased about the Defence Procurement Procedure of 2016 (DPP-2016), the eighth version of the DPP, which Defence Minister Manohar Parrikar outlined on Monday but will take another two months to be promulgated. Private industry chiefs believe that the central issues that have dogged equipment acquisition have finally been addressed. Besides recommendations from the private sector, the new policy also reflects many ideas offered by the Dhirendra Singh Committee last year.
Perhaps the most far-reaching change in DPP-2016 is the recognition of indigenous design and development as more important than manufacturing components to blueprints given by foreign vendors. While manufacture indeed creates blue-collar jobs, and a manufacturing eco-structure is essential for a defence industry; it is the design and development of systems and weapons platforms that create strategic and technological autonomy, and long-term self-sufficiency in defence. It is one thing to manufacture aerospace and defence components for global defence supply chains, and quite another to design and develop a fighter aircraft, even one with many foreign components, sub-systems and systems. Besides strategic autonomy, indigenous design and development creates intellectual property and white-collar jobs for India’s large scientific and technological community. The incorporation of a new procurement category into DPP-2016 --- termed Indigenous Design, Development and Manufacture (IDDM) --- and the top priority it will enjoy in the procurement hierarchy, signals new intent.
Since the past few years, a vibrant procedure to encourage indigenous manufacturing, with the government funding indigenous design and development of specific platforms to the extent of 80 per cent of the project cost, has been recognised as central for developing the defence industry. Yet, cumbersome procedures and inefficient implementation have allowed only two “Make” projects to be awarded since. Now DPP-2016 intends to revitalise “Make” by creating three separate categories. In the first, government funding has been increased to 90 per cent of the project cost. In the second category, which is being called “industry-funded Make”, companies would put their own money into a project (and thus be spared the ministry’s oversight), while being assured of orders for a successful development. The third category reserves projects worth less than Rs 3 crore for small-scale industry, which is where high-technology innovation traditionally occurs in defence.
The key to success in indigenous development lies, firstly, in choosing projects wisely and then, secondly, in letting the companies focus on their project without government interference. Allowing industry to fund its own design and development, while providing assurances that their expenses would be met, is an ingenious solution for this. It is now up to industry to take up the baton.
What the government would do well to change before DPP-2016 comes into force is the defence ministry’s decision to raise the offset threshold from Rs 300 crore to Rs 2,000 crore. There will be few buyers for the ministry’s rationale that offsets raise the cost of equipment by 20 per cent. If that were indeed so, why have offsets been imposed on contracts worth more than Rs 2,000 crore? The reality is that the defence ministry has proven unable to formulate suitable offset demands, contract them effectively and account for the fulfilling of offsets obligations. It would be a pity if defence manufacturers are denied orders because of this inefficiency.