MAKE IN INDIA : INDIGENOUS DESIGN DEVELOPMENT & PRODUCTION
Defence Procurement Procedures since inception have been incorporating different categories of procurement to enhance indigenous production. The number of categories having risen from just two categories in DPP 2002 to the present six categories is a significant march made in the duration of a decade and a half. The concept of providing priority to categories in acquisition in Defence procurement was first introduced in the DPP 2013. However, never before had a priority been assigned for indigenous design and development. It is the Manohar Parrikar led ministry that has for the first time provided both importance to indigenous design and development as well as granted the pride of place for design and development as a part of the procurement process.
What does this mean and what are the implications for the indigenous industry? Was there a requirement at all to provide for such a category with overriding priority in the procurement process? Or has this requirement of recognizing the importance of Indigenous Design and Development, come about a bit late into the procedures?
DRDO is the nodal agency for design and development of military platforms, systems, subsystems and in many cases components too, for the Armed Forces. It was designed to be so. It came about into being for this very reason to meet the requirements of our Armed Forces. In its more than six decades of existence, has DRDO even remotely met the expectations set out for? Why is it that our Armed Forces have to remain dependent on foreign sources for more than 70% of their needs even after seven decades of independence? What was constraining our Armed forces to be sustained from within the country - (i) indigenous design and development? or (ii) indigenous manufacturing? or (iii) both?
How did this all begin?
DPP 2013 already had flavour of “Make in India”, by virtue of priority in categorization of procurements being sequenced with “Buy Indian”, had the greatest preference over all the others such as (ii) Buy and Make Indian followed by (iii) Make and then (iv) Buy and Make, with Transfer of Technology, basically for the foreign OEMs and lastly the Buy Global.
Introduction of Buy IDDM to override and sit above all of this in the order of priority of ‘Make in India’ initiative by Government of India in Defence sector is indeed transformational. An indigenous emphasis has increased the business of Indian Defence Vendors and also strengthened the economy by Rs 1,152.48 crores this year as compared to 2015 as reported by the government.
According to a written reply by Minister of State for Defence (RRM) Rao Inderjit Singh to K Parasuraman in Lok Sabha on 06 May 2016,The Defence Procurement Procedure (DPP) 2016 provided strong support to ‘Make in India’ by according highest priority to ‘Buy (Indian-IDDM)’ that is Indigenous Designed, Developed and Manufactured category. It also focused on enhancement and rationalisation of indigenous content and has provisions for involving private industry as production agencies and technology transfer partners. The ‘Make’ procedure has also been simplified with provisions for earmarking projects not exceeding development cost of Rs 10 crores (Government funded) and Rs 3 crores (industry funded) for MSMEs.
With this bold initiative, the total expenditure on purchase of Defence equipment for the three services in 2015-16 is Rs 76,169.57 crores in which the procurement from Indian vendors being Rs 49,979.11 crores with the remainder Rs 26,190.46 being from foreign vendors. In 2014-15, out of the total expenditure was Rs 77,986.32 crores, procurement from local vendors was 48,826.63 crores with the balance Rs 29,159.69 crores from foreign companies thereby establishing that Indian companies got more business than their foreign counterparts in 2015-16. Importance of ‘Make in India’ in DPP-16 also reduced the foreign profit by Rs 2,969.23 crores than last year.
A number of measures have already been taken to achieve self-reliance in defence production by harnessing the capabilities of the public and private sector industry. The DPP-16, 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 possible; creating conditions conducive for the private industry to take an active role in this endeavour, enhancing potential of SMEs in indigenisation and broadening the defence Research and Development (R&D) base of the country.
Indigenous manufacturing of Defence equipment is encouraged by the Government through several policy measures.
Foreign Direct Investment (FDI) policy has been reviewed and the cap on foreign holdings raised to 49% under automatic route. The policy also allows a higher investment ratio on a case-to-case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country.
Defence Research Development Organisation (DRDO) is also working on different indigenous research with the help of Indian vendors which will give a boost to defence procurement and defence preparedness in future.
In addition to all of this the government has also taken efforts to de-regulate the requirements for licensing by removing more than 60% of the products form requirement of compulsory licensing, thus providing relief to the domestic industry. So, there has been a holistic approach to the entire defence sector, and IDDM category was the icing on the cake.
Categories of Procurement in DPP 2016
The following categories are incorporated in the DPP 2016, in their order of priority in procurement :-
• Buy IDDM
• Buy Indian
• Buy and Make Indian
• Buy and Make (Global)
• Buy Global
In addition to the above there is also the “Make” category of procurement, which is now formulated in a more practical and industry friendly manner. The government has pre-positioned the “Make” category to basically enable the Forces to select programs for consideration under the Make category. Within a month of promulgating the truncated DPP 2016, the Ministry of Defence has also placed on its website 23 projects for the industry under the ‘Make’ category. That, truly, is commitment to ‘Make in India’.
Buy IDDM means procurement from those Indian sources that incorporate indigenous design, development and production. This essentially entails the following:-
• Design has to be indigenous
• Development has to be indigenous
• Production or manufacture has to be indigenous
However the government feels that as domestic industry is still evolving, all these conditions cannot be met by it and has allowed a non-indigenous design and development proposal to be also as part of this category. This means, a non-indigenous solution by the industry that incorporates a non-indigenous design and development could also be categorised under this priority-1 category of procurement.
What then is the difference?
To help the private sector evolve, the stipulation is that if the design and development is indigenous, then an indigenous manufacturing content of 40% could suffice, whereas, if the design and development is non-indigenous then a 60% indigenous content is mandated. This takes care of both the requirements, viz, design/development as well as manufacturing in the same category.
It needs to be stressed that apart from overall indigenous content as detailed above, the same percentage of indigenous content will also be required in (a) Basic Cost of Equipment; (b) Cost of Manufacturers’ Recommended List of Spares (MRLS); and (c) Cost of Special Maintenance Tools (SMT) and Special Test Equipment (STE), taken together at all stages, including FET stage.(This condition flows from the DPP 2013).
Proving the Design
The onus of proving that the equipment design is indigenous, rests with the industry, and such claims will be verified by a committee comprising scientists from DRDO and representatives from SHQs, based on documents issued by authorized agencies and presented by the vendors. The process of verifying the availability of indigenous design and development, should be completed prior to fielding of the Statement of Case (the proposal made by the Armed Forces HQs) for categorization; guidelines pertaining to the same will be issued by the DG (Acquisition), with inputs from DRDO.
Modus operandi for proof of design to certify it as indigenous or otherwise, is an activity that needs to precede the planning process for appropriate categorization. This will be a challenge both for the MoD as well as for the industry.
• The process of verification of design precedes the fielding of the said acquisition for the SCAP lower committee. This means that invariably, the prospective vendors need to have an interaction with DRDO even before the proposal is fielded by the services. Early liaison and interaction with DRDO is called for to be eligible for placement under this categorisation.
• Even if design is not indigenous, a good tie-up with a foreign design source can be made and IC can be increased to be eligible under this category. Industry that intends to field a non-indigenous design, must necessarily have an intimate knowledge of the supply chain to integrate this with the design, in order that the manufacturing content is maximized.
• Early knowledge of proposals likely to be fielded is essential. Industry may need to closely follow up the RFI process and have intimate interaction with Services.
How do we then see the Acquisition process evolving?
It will be the endeavor of industry to field their solution against an acquisition proposal in the most preferred category. What do we mean by indigenous design? Supposing, an Indian company bought off a foreign design, does it now become indigenous? Buying off a design with the know-how and know-why along with the IP rights may empower Indian industry to stake claim to participate under IDDM category.
Indigenous industry has yet another option, a more interesting one that has not optimally been exploited. There are many technologies that have been developed by DRDO and available for transfer to industry. Recently, DRDO has also promulgated the guidelines for transfer of technology to industry, the same is available on their website. Industry may like to exploit this opportunity for an eligibility under this category.
DRDO may also face challenges in transferring technology to industry. If Make in India has to happen, then industry is likely to flood DRDO seeking technology transfers for those technologies that DRDO has developed. These are known as “Cat A technologies”, in DRDO’s parlance. DRDO may need to develop an ecosystem for industry interface and enabling smooth transfer of such technologies.
The Challenge and Options for Industry
Industry now has multiple options to meet the requirements of the Armed Forces through indigenous design and development. They could invest in design and development in an organic manner, thus investing heavily in researchers development. They could rely on DRDO for fundamental research and take on engineering design, it is still a tough call.
The second option they have is to seek technology transfers for the already developed technologies by DRDO. These are technologies that have been developed, tested and ready to use, ready to go to production. This will incorporate less lead time in the production process. Domestic industry also has the option to go to a foreign OEM to seek transfer of technology. This can be done either through the Offsets route(which incidentally is more difficult), or through a direct purchase of technology or even through formation of a suitable JV (Joint Venture). The latter two options are more practical and feasible.
What is sought under such conditions is an unconditional transfer of technology, a full and total transfer of technology with unfettered rights. Only under such conditions can the said technology be deemed to be indigenous. When such technology is made available through a JV route there could typically be ownership rights and may not lead to “indigenous” qualification. In a more liberal manner there could be a case of teaming arrangement with the foreign partner willing to transfer technology under pre-stated business conditions that could draw upon the Indian partner to seek IDDM status with a higher manufacturing content.
In conclusion, the government has done well to incentivize industry to strive for indigenous design, development and manufacture. Indian Armed Forces are deployed in intimidating Indian conditions and for the Indian conditions they are deployed in, they require Indian solutions. Innovation is the key to meet the immediate needs of the Armed Forces and innovation can happen only when indigenous solutions are attempted.
It is now for the industry to come up with models to achieve “Make in India in Defence” in its true spirit.