Focus on Indigenisation

SP’s ShowNews (SP’s): What is your vision for India’s domestic defence industry in terms of defence production?

Secretary, Defence Production (Secretary): As India is transforming from a regional power to a global power, the defence sector is increasingly occupying a bigger space in the country’s long-term strategic planning. A confident and resurgent Indian defence industry is making forays into almost all the sectors of manufacturing. Lately, the huge opportunities for growth within the domestic and global defence and aerospace industries have attracted the attention of Indian industry.

It is pertinent to mention here that 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 play an active role in this endeavour; enhancing potential of small and medium-sized enterprises (SMEs) in indigenisation and broadening the defence R&D base of the country.

Pursuant to the above policy and ‘Make in India’ initiative, the government aims to make the country self-reliant in defence production, through various initiatives. Several policy initiatives have already been implemented by the government such as liberalisation of FDI (foreign direct investment) policy and industrial licensing policy, simplification of export procedures, creating level playing field for Indian private and public sector companies, streamlining of offset implementation process, providing preference to ‘Buy (Indian Designed, Developed and Manufactured)’ (Indian-IDDM), ‘Buy (Indian)’, ‘Buy and Make (Indian)’ categories of capital acquisition over ‘Buy (Global)’ category in Defence Procurement Procedure.

SP’s ShowNews (SP’s): The new DPP 2016 is being referred to as game changer for the sector. How do you see it altering the Indian defence growth story?

Secretary: The new Defence Procurement Procedure (DPP) 2016 has come into effect from April 1, 2016. It focuses on achieving the ‘Make in India’ vision by according priority to ‘Buy (Indian-IDDM)’ and ‘Buy (Indian)’ categories. It also mandates increased indigenous content. The ‘Make’ procedure has been simplified with provisions for funding of 90 per cent of development cost by the government to Indian industry and earmarking projects not exceeding development cost of 10 crore (government funded) and 3 crore (industry funded) for the micro, small and medium enterprises (MSMEs).

This would create an ecosystem in defence manufacturing by harnessing the capabilities of Indian private sector specially MSMEs and inculcate the R&D culture in the sector.

SP’s: In your opinion, what are the new key points of DPP 2016 for a foreign original equipment manufacturer (OEM) looking at Indian market?

Secretary: India is in the midst of modernising its armed forces and it is estimated that $250 billion will be spent on capital procurement in the next 10 years. In the new Defence Procurement Procedure 2016, ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy & Make (Indian)’ are the most preferred categories which means that increasingly request for proposals (RFPs) will be issued to the domestic industry. The only way for the foreign OEMs to leverage domestic demand is to tie up with domestic companies either for collaborative R&D followed by production or through transfer of technology for production through joint ventures or they can set up their own manufacturing base.

In addition, a numbers of potential ‘Make’ projects have been identified by the department; which are likely to follow ‘Make’ procedure for development-cum-procurement. The foreign OEMs can collaborate with the Indian vendor, the prime contractor, for development for defence equipment.

Provisions have also been introduced to allow foreign OEM to select Indian production agency of its choice for transfer of technology for maintenance infrastructure.

Moreover, offset implementation process has been made flexible by allowing change of Indian offset partners (IOPs) and offset components, even in signed contracts. Foreign 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 reinstated with certain conditionalities.

“INDIA IS IN THE MIDST OF MODERNISING ITS ARMED FORCES AND IT IS ESTIMATED THAT $250 BILLION WILL BE SPENT ON CAPITAL PROCUREMENT IN THE NEXT 10 YEARS”

SP’s: How exactly are the ‘Make in India’ initiatives for aerospace and defence sector being promoted? What has been the reaction of foreign OEMs to it till date?

Secretary: Make in India’ initiatives for aerospace and defence sector is being promoted though various policy initiatives and amendments in procurement procedures which would result in ease of doing business, encourage and facilitate Indian private sector to participate in defence manufacturing, nurturing R&D culture in defence.

Following initiatives have been taken by the Department of Defence Production to boost the ‘Make in India’ in Defence sector:

• Foreign Direct Investment: FDI policy under which foreign investment is allowed through automatic route up to 49 per cent and government route beyond 49 per cent wherever it is likely to result in access to modern technology or for other reasons to be recorded.
• Industrial Licensing: The Defence Products List for the purpose of issuing industrial licences (ILs) under IDR Act has been revised and most of the components, parts, subsystems, testing equipment and production equipment have been removed from the list so as to reduce the entry barriers for the industry, particularly small and medium segment. The initial validity of the industrial licence has been increased from three years to 15 years with a provision to further extend it by three years on a case-to-case basis.
• Defence Exports:
  • The list of military stores has been ?nalised and put in the public domain so as to make the process transparent and unambiguous. The process of receiving applications for no objection certi?cate (NOC) for export of military stores and for issuing NOC has been made online.
  • The standard operating procedure (SOP) for the issue of NOC for export of military stores has been revised and put on the website. Under the revised SOP, the requirement of end-user certi?cate (EUC) to be countersigned/stamped by the government authorities has been done away with for the export of parts, components, subsystems, etc.
  • Recognising the need for promotion of defence exports to make the Indian defence industry economically sustainable, Defence exports strategy outlining the various steps to be taken has been formulated and put up in public domain.
• Defence Offsets: Offset implementation process has been made flexible by allowing change of Indian offset partners (IOPs) and offset components, even in signed contracts. Services as an avenue of offset have been reinstated with certain conditionalities.
• Level Playing Field:
  • Exchange rate variation protection has been made applicable for Indian private sector at par with public sector undertakings for all categories of capital acquisitions.
  • The preferential treatment given to defence public sector undertakings (DPSUs) in excise duty/custom duty has been discontinued. As per the revised policy, all Indian industries (public and private) are subject to the same kind of excise and custom duty levies.
• ‘Make’ Procedure: The ‘Make’ procedure has been revised to promote indigenous design, development and manufacture of defence equipment/platform. It provides for enhanced government funding of 90 per cent of development cost and preference to MSMEs for certain categories of projects, which will give a tremendous boost to manufacturing of indigenously designed products through collaborative process with Indian industry.
• Buy (Indian-IDDM) in DPP 2016: One of the notable features of DPP 2016 is the introduction of a new procurement category ‘Buy (Indian-IDDM)’ by which priority has been accorded to procurement from Indian vendors of products that are indigenously designed, developed and manufactured.
• Preference to Indigenous Procurement: in DPP 2016, preference has been provided to procurement under ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ categories of capital acquisition over ‘Buy & Make’ or ‘Buy (Global)’ categories.

The foreign OEMs have exhibited a lot of enthusiasm to participate in ‘Make in India’ initiative. Several OEMs have entered into or are in the process of tie-ups with Indian defence companies for supply of defence equipment categorised as ‘Buy and Make (Indian)’ ‘Buy and Make’.

SP’s: India has a large inventory of ageing weapons and equipment. How do you see the ‘Make in India’ play out where upgrades are required?

Secretary: The revised ‘Make’ procedure would be a significant driver for taking up upgrades of existing inventory of weapons and equipment. Under this procedure, the government has made provisions for 90 per cent funding of development cost. There is also a provision to take up development without government funding in low-risk projects. In both the cases there is assurance of orders. The upgrade projects, being low risk-low investment projects, the Indian industry will be encouraged to take up such projects on priority.

SP’s: There seems to be a lot of interest from big Indian corporates who want to invest in manufacturing in the defence sector. How are you going to ensure that quality and safety standards are met by these companies who are new entrants in this sector?

Secretary: Delivery of defence equipment to armed forces by any company is subject to trials/testing and other quality checks prescribed as per terms and conditions of the contract. This ensures the quality of the item.

SP’s: The defence offset policy has not led to any import of core technologies for the defence sector. Can you comment on this?

Secretary: Defence offset guidelines encourage vendors for investment in terms of technology in Indian enterprises. They also provide for acquisition of critical technology by DRDO.

• In case of transfer of technology to Indian enterprises (MSME), a multiplier of 1.5 is given.
• Technology acquisition by DRDO has a multiplier up to a factor of 3 depending upon the rights of utilisation.

The defence offset guidelines provide full freedom to the vendors in selection of avenues for offset discharge. The utilisation/exploitation of any avenue is totally at the discretion of the vendor.

SP’s: The government gives some defence projects, especially for Indian Navy projects, without holding a competition to state-owned defence companies. Why isn’t the government encouraging competition with state-owned companies?

Secretary: As per Defence Procurement Procedure 2016, Indian Navy carries out capacity assessment of the shipyards (both public and private sector) at regular intervals. Thereafter, based on the requirement of Indian Navy, RFP is issued to the shortlisted shipyards based on the aforesaid capacity assessment.

The present generation warships are weapon intensive where the capacity of private sector is rather limited. However, as and when the private sector develops these capabilities, RFP will be issued to them based on their capacity assessment.

Projects like offshore patrol vessels, interceptor boats, floating dock, cadet training ships, etc. besides repairs of warships have already been awarded to private shipyards. Currently, private shipyards are being considered for major shipbuilding projects like landing platform docks, fast patrol vessels, anti-submarine warfare shallow water craft, diving support vessels and survey vessels, etc.

A substantial share of defence shipbuilding is being offered to private shipyards, with 7,043 crore worth of committed contracts, 19,810 crore worth of contracts in the pipeline to be concluded in the next one or two years.

SP’s: What role do you see being played by DPSUs in the near future?

Secretary: Production of defence equipment has been the key mandate of DPSUs. However, to promote ‘Make in India’ initiative of the government and to achieve the substantive self-reliance in defence production there is a need for change in role of the DPSUs in near future.

The OEMs of the defence and aerospace industry worldwide play the role of system integrators by outsourcing a substantial part of the manufacturing process to vendors. DPSUs also need to shift their strategy in a similar way from vertical integration business model to system integration business model. By adopting such a strategic shift, DPSUs can serve their ultimate customers in a better way. The outsourcing effort by DPSUs will add to their capacity enhancement, attain cost-effectiveness and improve competitiveness in global market.

To achieve the India’s cherished objective of self-reliance in defence production, DPSUs need to not only innovate in-house but also create institutional model to foster innovation in the country. They need to aggressively engage with R&D institutes, academia, industries including MSMEs, startups and even individual innovators and provide them award-based grants/funds to carry out innovative development.

SP’s: By when do you expect the 80:20 arms procurement ratio to become 20:80/30:70 with 80 per cent/70 per cent being domestically manufactured? Is this really practically viable?

Secretary: The requirements of defence equipment for the Indian armed forces are met either from Indian companies or through imports. The expenditure on capital procurement for the three services, from the Indian companies for the financial year 2014-15 and 2015-16 had been 60 per cent and 63 per cent respectively. In 2016-17, if we take the figure up to October 2016, it is 70 per cent.

During the last two financial years (2014-15 and 2015-16) 108 contracts with the total value of 1,12,736 crore have been signed for capital procurement of defence equipment, out of which 73 contracts involving a value of 72,303 crore were signed with Indian vendors. Additionally, 85 cases involving 1,60,362 crore have been accorded acceptance of necessity (AoN) by the Defence Acquisition Council under the ‘Buy (Indian)’ ‘Buy & Make (Indian)’ and ‘Buy & Make’ categories.

The government has been consistently making efforts to enhance the procurements from Indian companies through various policy initiatives such as according priority and preference to procurement from Indian vendors under the DPP 2016, liberalisation of the licensing regime and providing access to modern technology to Indian industry by relaxing FDI regime in the defence sector, simplification of export procedure, streamlining of defence offset guidelines, etc.

The new DPP 2016 has been promulgated for capital procurements and has come into effect from April 1, 2016. DPP 2016 has a focus on achieving the ‘Make in India’ vision by according priority to ‘Buy (Indian-IDDM)’ and ‘Buy (Indian)’ categories. It also focuses on enhancement and rationalisation of indigenous content. The ‘Make’ procedure has been simplified with provisions for funding of 90 per cent of development cost by the government to Indian industry and earmarking projects not exceeding development cost of 10 crore (government funded) and 3 crore (industry funded) for MSMEs.

SP’s: Are we likely to see the serious investments in R&D in India (beyond DRDO) which can be one of the catalysts for indigenisation?

Secretary: The government is committed towards facilitating investments in R&D defence sector in India. Accordingly enabling provisions have been introduced in DPP 2016. In order to promote indigenous design and development of defence equipment, DPP 2016 has introduced the ‘Buy (Indian-IDDM)’ category of acquisition and accorded it the top most priority.

Technology acquisition by DRDO in the areas of high technology has been listed as one of the avenues for discharge of offset obligations. Moreover, in discharge of offset obligations related to technology acquisition by DRDO a multiplier up to 3 is permitted.

Government plan to offer at least 8-10 projects every year under ‘Make’ procedure for development by Indian private sector. This is likely to give a fillip to investment in R&D in India.

Technology Development Fund has been established to promote self-reliance in defence technology as a part of ‘Make in India’ initiative. It is a programme of Ministry of Defence executed by DRDO for meeting the requirements of Tri Services, Defence Production and DRDO.

SP’s: The biggest pain point of foreign OEMs today is the time that India takes to decide on any defence procurement. What is being done to cut this time down and expedite the whole procurement process?

Secretary: The Ministry has introduced many provisions in DPP 2016 in order to address the issues of pendency/delays in procurement process. Some of them are:

• Provision for requirement of draft RFP to be submitted along with proposal for seeking acceptance of necessity (AoN).
• Reduction in validity of AoNs from one year to six months in ‘Buy’ and ‘Buy and Make’ categories and from two years to one year in ‘Buy & Make (Indian)’ category.
• Stages of approval for accord of AoN of procurement proposals have been reduced.
• Proposed timelines of procurement process have been further reduced in DPP 2016 as compared to earlier versions.
• The complaints received by the government in respect of defence contracts was one of major hurdles in progressing the cases. Guidelines for handling of complaints have now been notified.
• Provision for change of name of vendor/entity have been incorporated.
• Use of certifications and simulations as much as possible is recommended in DPP 2016.
• Provisions have been made to allow foreign OEM to select Indian production agency of its choice for transfer of technology.
• Single vendor cases at the bid submission and Technical Evaluation Committee (TEC) stages will not be automatically retracted; they can be processed with due justification and approval of DAC.

SP’s: Another major sticking point with foreign OEMs is cancellation of tenders, even after announcing the L-1. Why does it happen so frequently and what are the solutions so that these can be avoided in the future?

Secretary: Does not pertain to defence production, so I won’t be able to comment on this.

SP’s: There have been series of clearances of various programmes however actual contracts being signed are still not that many. Hence the sense still persists that the concrete modernisation process is still something that remains a pipe dream. How do you respond to this?

Secretary: Defence procurement cycle has typically been longer on account of various factors such as long and exhaustive allweather trials, small vendor base, etc. Therefore, the AoN acorded by government takes three to four years to fructify into contracts.

Nevertheless, 108 contracts with total value of 1,12,736.81 crore have been signed for capital procurement of defence equipment during the last two financial years (2014-15 and 2015-16), out of which 73 contracts involving a value of 72,303.34 crore were signed with Indian vendors. Therefore, it shall suffice to say that the government is committed towards defence modernisation with maximum participation of Indian vendors.

SP’s: Blacklisting of companies! What is latest on the policy of banning companies for presumed wrongdoing? And how do we plan to address the scenario of single vendor situation?

Secretary: The guidelines of the Ministry of Defence for penalties in business dealings with entities applicable for both capital and revenue procurement of goods and services have been approved by the Defence Acquisition Council (DAC) in November 2016 and promulgated on the Ministry of Defence (MoD) website. MoD is reviewing the existing cases of suspension/ban/blacklisting, etc., against vendors in the light of the guidelines.

With regard to single vendor situation, DPP 2016 has been suitably amended as per which single vendor cases at the bid submission and TEC stages will not be automatically retracted.

SP’s: What are your expectations from the upcoming Aero India 2017?

Secretary: Through Aero India, the government provides a common platform to leading national and international manufacturers/suppliers of aerospace sector to share their business plan on various topics related to the sectors such as integration of Indian aerospace industry into global supply chain, creation of infrastructure, enhancing rural-regional connectivity, empowering and incentivising Indian MSMEs in defence and aerospace sector, etc.

Bolstering ‘Make in India’ would be the major theme of Aero India 2017. The government expects to have maximum participation of all stakeholders specially foreign OEMs, Indian states and leading Indian defence companies during Aero India 2017 and to have successful B2B or G2B meetings, fructifying into joint ventures/tie-ups/technology sharing agreements in the near future.