The defence sector in India has great strategic importance. The recent policy decision to allow 100% FDI in the sector can structurally change the sector.
Amit Cowshish, former Financial Advisor (Acquisition), Ministry of Defence (MoD), and presently a Distinguished Fellow at the Institute for Defence Studies and Analyses (IDSA), New Delhi, spoke to BE’s Varsha Singh about the Indian defence sector and the Defence Procurement Procedure (DPP).
However, recognizing merit in your argument, it makes sense to pay a little extra to buy a product which is technologically superior to the cheapest product.
The Ministry of Defence (MoD) has introduced a new provision in the Defence Procurement Procedure (DPP) 2016.This provision is based on the L1-T1 concept. It implies that wherever considered appropriate, MoD will lay down Enhanced Performance Parameters (EPP) in the Request for Proposal (RFP). These EPPs will be in addition to the Essential Parameters.
While all products offered in response to the RFP will have to meet the Essential Parameters laid down in the RFP, products with EPPS as specified in the RFP will be given weightage in price for determination of the lowest bid. The manner in which the weightage is to be accorded is laid down in the DPP. This provision will enable MoD to buy a product that is technologically superior to the cheapest of all products that meet the Essential Requirements, even at a higher price.
The Indian government under Prime Minister Narendra Modi has been keen to project India as an investment-friendly destination for foreign capital. The government has, since its inception, been in favour of opening up Indian markets more overtly for foreign capital. The recent decision to allow 100% Foreign Direct Investment (FDI) in the defence sector has been met with much enthusiasm by Indian defence manufacturers. According to a report by Ernst and Young, if the government’s ambitious plans for indigenous manufacturing take off properly, India can save as much as $50 billion from its likely spend of over $260 billion on defence equipment in the next 12 years.
Indian defence market is huge and worth millions of dollars. Globally, it is one of the most promising defence markets. Indian industry body, the Confederation of Indian Industry (CII), has published reports stating that the defence industry not only has the potential to augment manufacturing but also has potential to add nearly one million direct and indirect jobs. The body has also welcomed the release of the Defence Procurement Procedure (DPP 2016), which is expected to expedite defensce procurements. The new guidelines seem to be more flexible and leave more space for end-users and the industry to work together on development projects. A new category had been formulated by the government, termed as Indigenously Designed, Developed and Manufactured (IDDM), which has been given top priority. The Ministry of Defence (MOD), in a major policy decision, to encourage the MSMEs associated with the industry has decided it would fund up to 90% of their project’s prototype development cost. Adding another safeguard, the ministry has also stated that it will reimburse the remaining 10% prototype development cost, if the order is not placed within a stipulated timeframe after the successful test of prototypes.
The MOD is also making minor policy alterations to ease the field for stake-holders in the defence industry. In July 2015, the ministry eased export regulations and stopped demanding multiple assurances on end use from foreign governments even for sale of parts from Indian entities. In case of defense equipment, it is often seen that different parts are manufactured in different regions and are later assembled in one place. This is a multi-layered process as assembling takes place at different levels and at various regions prior to the final assembly. Earlier, rules required Indian firms to obtain clearances from all the governments in the process. Due to such rules, the small and medium enterprises lost international orders as foreign companies were not interested in such complex processes. The change in rules has immediately benefited players in the industry who are now being preferred by international companies. Private players have exported about `600 crore of defense material in the last financial year, which is substantially more than the last year where the figure stood at around `132 crore.
The Modi government has also shown its intent of improving the performance of the defence sector by simplifying the offsets policy, which was initiated during the United Progressive Alliance (UPA) regime. The policy required that foreign players who had secured defence contract, had to invest 30% of the value of their contract in local defence and aerospace industry. The policy had cumbersome permission taking and monitoring processes at different levels, which acted as a major impediment. The NDA government has made significant changes to the policy, allowing foreign companies more flexibility in choosing local partners. This has helped unlock nearly $3.5 billion foreign investment in the sector. The policy change has also entailed the provision for the foreign companies to give out contracts to local manufacturers at the ‘execution’ stage. This is bound to be a shot in the arm for domestic defence manufacturers. A new policy is to review work orders worth `44.5 billion that has been signed in 2008. Only about 25% of those orders have been fulfilled as of now.
The MOD has also restored ‘services’ as eligible offsets of military contracts. It was discontinued after allegations of corruptions arose over a $530 billion chopper deal, which involved some service providers. The change is also seen to be a game-changer for the domestic defence manufacturing industry.
These changes have made the private sector content. In a bid to encourage more involvement of the private sector, the MOD had issued 56 licences, a record number, to national players till June last year. The government has also revoked the policy, which forced Indian firms to freeze rates at the time of bidding. This left them at the risk of currency fluctuations. The new amendments protect them from variations of currency fluctuations.
The Indian defence industry was always more dependent on foreign technology than on indigenous designs. The move by the government to pull in more foreign capital in the sector is bound to reflect in the manufacturing sector as it will be cheaper to manufacture in India. By easing the export regulations, the government seems to give out a well-directed signal to international players to invest in the setting-up of manufacturing units in India. The government seems intent in clearing the red tape, giving ample incentive to foreign players to pump in funds in India. The result might unlock a plethora of new economic opputinites for India, which may have long-standing political impact on the country’s global moorings.