The Defence Acquisition Council has approved a revised Defence Procurement Procedure (DPP), aimed at boosting indigenous defence procurement and encouraging better participation from the Indian private sector. The Council is headed by Defence Minister Manohar Parrikar and includes key stakeholders of the defence establishment. Among its key decisions is a proposal to introduce a new category of acquisition termed Buy Indian (or IDDM, indigenous design development and manufacturing), which would become the most preferred acquisition category. Under Buy Indian, domestically designed equipment with 40 per cent indigenous components or foreign-designed equipment with 60 per cent local components will be considered. The new DPP has significantly increased the offset threshold for foreign contracts from Rs. 300 crore to Rs. 2,000 crore (with 30 per cent of the contract value to be procured from within India), while it has certain provisions for encouraging Micro, Small and Medium Enterprises. At first glance, the DPP is an incremental improvement over recent efforts to reduce India’s import dependence, which stands at 65 per cent of total defence procurement, to help create a robust military industrial complex within the country.
It is imperative that India succeeds at the earliest in creating a cutting-edge domestic military industrial base: no major nation state has transitioned to becoming a developed economy without one. Such a complex would create not only latest war machines but also hothouse innovations and technologies to improve overall scientific capabilities, and make India self-reliant at least in critical areas. If the ambition is to truly make Make in India a reality in the defence sector, then the DPP falls significantly short of expectations. Many private sector participants have been flagging a host of issues, and inbuilt biases against indigenisation. There are two key impediments to India’s private sector becoming active participants in defence R&D and production: the monopoly enjoyed by defence public sector units, and the favours that foreign suppliers enjoy. DPSUs are the workhorses of the sector as well as the biggest drag on indigenous military research. A significant number of them are merely assembling foreign kits. Given India’s over-dependence on foreign military vendors, several biases have crept in favouring them in procurements. A foreign vendor gets most of his payment on self-certification of project progress, while Indian vendors have to wait for a government inspector’s certification, which can delay payments by several months. A foreign vendor enjoys upfront customs duty exemption, while the excise duty exemption for a local supplier is a reimbursement months after he has supplied an item. The new DPP may work towards expanding the number of participants in military tenders, but it may not help dramatically improve the present environment for all participants. Going by the present trend, the $100 billion and more that India will spend over the next decade will mostly end up in foreign markets. Political boldness and radical reform are needed in defence procurement. Neither is visible in the new DPP.
