The Ministry of Defence recently released the Defence Acquisition Procedure 2020 with several new amendments and a stronger push for indigenisation. In this piece, we provide an overview of the key changes introduced by the Ministry.
In March 2020, the Ministry of Defence released the draft Defence Procurement Procedure (DPP) 2020. After seeking comments from relevant stakeholders, the modified draft was released as the draft Defence Acquisition Procedure (DAP) 2020,1 which finally came into effect on 1 October, 2020. In line with India's 'Make in India' policy, the DAP 2020 seeks to further enhance indigenous manufacturing of defence equipment.2 The DAP 2020 also introduces several new ideas such as the need to incorporate artificial intelligence in platforms and systems, use of indigenous software in defence equipment and 'innovation' by Start-ups and Micro, Small and Medium Enterprises (MSMEs) as a new category of defence acquisition. We discuss these and other key changes introduced in the DAP 2020 below:
Key changes introduced in the DAP 2020
Enhancement of indigenous content
A major change in the DAP 2020 is the enhanced requirement of indigenous content (IC) in defence procurement.3 The changes in IC requirements are as follows:
|Acquisition Category||Proposed IC||IC in DPP 2016|
|Buy (Indian – IDDM): Procurement of products from an Indian vendor that have been indigenously designed, developed and manufactured (IDDM).||Minimum 50%||Minimum 40%|
|Buy (Indian): Procurement of products from an Indian which may not have been designed and developed indigenously.||Indigenous design – Minimum 50% Otherwise – Minimum 60%||Minimum 40%|
|Buy & Make (Indian): Initial procurement of equipment in fully formed state in necessary quantities from an Indian vendor engaged in a tie-up with a foreign manufacturer, followed by indigenous production in a phased manner involving Transfer of Technology.||Minimum 50% of the 'Make' portion||Minimum 50% of the 'Make' portion|
|Buy (Global – Manufacture in India): Outright purchase of equipment from foreign vendorsfollowed by indigenous manufacture of the entire/part of the equipment through its subsidiary in India/through a Joint Venture/through an Indian Production Agency (involving Transfer of Technology).||Minimum 50%.||–|
|Buy (Global): Outright purchase of equipment from foreign vendors or Indian vendors.||Minimum 30% for Indian vendors||–|
These acquisition categories are listed in decreasing order of priority. They are prioritised based on the relative importance of indigenisation. Apart from enhancing the minimum IC requirements, the DAP 2020 also seeks to increase the indigenous availability of high-end military materials and special alloys for future needs.4 For this, the DAP 2020 has proposed that public sector platform manufacturers, and research and development establishments identify various materials that can be indigenously developed by them or through transfer of technology under the offset clause.5 The DAP 2020 also seeks to utilise indigenous software for running applications on equipment/systems and mandatorily include them under the Buy (Indian – IDDM) and Buy (Indian) categories.6
Impetus to MSME's and start-ups
To boost defence manufacturing in MSMEs and start-ups, the Ministry of Defence has introduced 'Innovation' as a new acquisition category. This entails procurement of products designed and developed by MSMEs and start-ups through: (1) Innovations for Defence Excellence which provides grants to start-ups and MSMEs for technology development for defence and aerospace; (2) Defence Research and Development Organization's Technology Development Fund which supports defence projects by Indian MSMEs; and (3) research and development establishments.7
Acquisition of ICT products and systems
A new chapter has been incorporated on the acquisition of Information and Communication Technology (ICT) systems, to provide a mechanism to acquire and up-grade ICT systems. This is vital to maintain tactical dominance in electronic warfare and cyber domain.8 These ICT systems include electronic warfare equipment, satellite based communication systems, intelligence gathering equipment, satellite imaging and mapping, surveillance systems and other software intensive ICT programmes including AI projects and cyber systems.9
The DAP 2020 introduces leasing as another category of acquisition of equipment/platforms, to substitute huge initial capital outlays with periodic rental payments.10 For the Ministry, leasing mitigates the effect of equipment obsolescence, allows for faster acquisition of capability, and reduces administrative costs.11 The DAP 2020 permits leasing of equipment in two categories – Lease (Indian), where the lessor is an Indian entity and is the owner of the asset, and Lease (Global).
Revamped offset policy
The key objective behind India's defence offset policy has been to leverage capital acquisitions and technology from vendors to boost India's domestic defence industry.12 In line with this objective, the offset clause requires vendors in the Buy (Global) category to discharge 30% of the estimated cost of acquisition in defence deals worth INR 2000 crores or more.13 The vendor can discharge the offset towards direct purchase of Indian products, investment in defence industry, transfer of technology or research and development.14 In the revamped offset policy, to drive indigenisation, vendors who achieve a minimum 30% IC in 'Buy (Global)' categories, do not have to discharge their offset obligations.15 However, the new policy exempts defence procurement through Inter-Governmental Agreements from the offset obligation.16 This is in direct contrast to the objective behind defence offsets, which is to improve India's defence capabilities. This decision was taken after the Comptroller and Auditor General's recent report noted the failure of foreign vendors to discharge their offset obligations. The report cited the example of French defence firms Dassault Aviation and MBDA who have still not transferred technology to Defence Research and Development Organization as agreed under the Rafale deal.17
Industry Reaction to the DAP 2020
Stakeholders like Boeing India and industry bodies like CII and Assocham have appreciated the DAP 2020 for the proposed enhancement of IC in defence manufacturing and the drive towards self-reliance.18 However, some stakeholders are sceptical that an increase in indigenisation may not be compatible with the Ministry's aim to enhance efficiency in defence procurement, since indigenous production is prone to time and cost overruns.19 A few industry observers have criticised the new offset policy for exempting Inter-Governmental Agreements from offset obligations, as this would drastically reduce the number of foreign vendors carrying out offset obligations.20 Considering such agreements mainly relate to high-end equipment, this will in turn impact the transfer of advanced technology to India from foreign vendors and continue India's dependence on foreign imports.21 Barring these concerns and a call for a few improvements to the DAP 2020 and the offset policy, the boost given to indigenisation by the Ministry has been lauded by stakeholders across the board.
This piece has been authored by Kruthi Venkatesh, a
consultant working with Ikigai Law, with inputs from Anirudh
Rastogi (email@example.com), Managing Partner at Ikigai
1 Defence Aviation Post, Draft Defence Acquisition Procedure 2020: Bubbling with New Ideas, August 17, 2020, available at, https://www.defenceaviationpost.com/2020/08/draft-defence-acquisition-procedure-2020-bubbling-with-new-ideas/.
2 Press Release, Raksha Mantri Shri Rajnath Singh unveils draft defence procurement procedure 2020, March 20, 2020, available at, https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1607400.
3 Defence Acquisition Procedure, 2020, Chapter I: Acquisition Categories, Acquisition Planning and Indigenous Content, at 2, available at, https://www.mod.gov.in/dod/sites/default/files/DAP2030new_0.pdf.
4 Id. at 9.
7 Defence Acquisition Procedure, 2020, Chapter III: Procedure for Procurement under 'Make' and 'Innovation' Categories, supra note 3, 341.
8 Defence Acquisition Procedure, 2020, Chapter VIII: Acquisition of Systems Products and ICT Systems, supra note 3, at 525.
10 Defence Acquisition Procedure, 2020, Chapter IX: Leasing, supra note 3, at 554.
12 Defence Acquisition Procedure, 2020, Defence Offset Guidelines, Appendix E, Chapter II, supra note 3, at 1.1, 108.
13 Id. at 2.1, 108.
14 Defence Acquisition Procedure, 2020, Defence Offset Guidelines, Appendix E, Chapter II, supra note 3, at 3.1, 109.
15 Id. at 108.
16 Id. at 108.
17 Hindustan Times, Military offset part of Rafale deal still pending, flags CAG, September 24, 2020, available at, https://www.hindustantimes.com/india-news/military-offset-part-of-rafale-deal-still-pending-flags-cag/story-buaMwr182Gkuhjt2pGwcpK.html.
18 Livemint, In new weapons buying policy, government drops offset clause for govt-to-govt defence deals, September 28, 2020, available at, https://www.livemint.com/news/india/in-new-weapons-buying-policy-govt-drops-offset-clause-for-govt-to-govt-defence-deals-11601306167592.html; Business Standard, New defence procurement policy gets mixed reaction from industry, April 6, 2020, available at, https://www.business-standard.com/article/economy-policy/new-defence-procurement-policy-gets-mixed-reaction-from-industry-120040600068_1.html.
19 Deccan Herald, Toward a holistic defence innovation policy, April 15, 2020, available at, https://www.deccanherald.com/opinion/in-perspective/toward-a-holistic-defence-innovation-policy-825528.html.
20 Financial Express, Defence Procurement Procedure: Know more about the draft DPP 2020, March 24, 2020, available at, https://www.financialexpress.com/defence/defence-procurement-procedure-know-more-about-the-draft-dpp-2020/1908057/.
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