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Column: New DPP guns for Make-in-India

The Defence Procurement Procedure 2016 seeks to encourage MSMEs

The ministry of defence, in a build-up to the DefExpo, chose to bang the drum for Make-in-India, by unveiling the Defence Procurement Procedure (DPP) policy that centres around the concepts of indigenisation and self-sustenance.

Even the industry players seem euphoric, with defence stocks soaring in the recent weeks. Such joie de vivre comes for no trivial reason. Historically, capital acquisition has been plagued with chaotic planning and mystifying procedures, thus, holding off domestic investments in this sector. With the government claiming that DPP 2016 will iron out all complexities, domestic players are enthused.

The imprint of indigenisation lies in the fact that the DPP introduces a new category of capital acquisition—Buy (Indian-Indigenously Designed, Developed and Manufactured), or Buy (Indian-IDDM). To qualify under this category, now accorded the highest priority, the equipment procured from an Indian vendor would have to be indigenously designed, and account for a minimum of 40% of indigenous content (IC) on cost basis.

This is a sterling move, as this completely restyles the fundamentals of defence acquisition. So far, technology was imported and the products manufactured at home, at cut-rate prices. Now, the emphasis is on ensuring that Indian players tap the best domestic technical intellect, generously invest in R&D, and thereby , retain ownership of the all-important technology applied. Though a bit late, the value impact of innovation and design in defence sector has found its place in the Make-in-India programme.

The DPP further states that even if the equipment is not indigenously designed, but constitutes 60% IC on cost basis of total contract value, it would be treated as Buy (Indian-IDDM). Stressing on the need for domestic sourcing, the policy also increases the minimum IC threshold for other categories. For example, under Buy (Indian), an equipment from Indian vendors could be procured, only if it comprises of a minimum of 40% IC on cost basis of the total contract value.

Other than the ‘Buy’ and ‘Buy-and-Make’ brackets, there is also the ‘Make’ category, a decade-old classification which has, until now, yielded very dispiriting results. This was originally devised to boost indigenous design and development of prototypes, involving matured technologies. However, a muted response to this initiative has impelled the government to re-energise the MSME sector.

The new policy divides this category into two sub-categories: Make-I (government-funded) and Make-II (industry-funded). Make-I category utilises critical technologies and involves huge infrastructure investment; on the other hand, Make-II category entails use of commercial, military or even dual-use technologies, and is operated on a smaller scale. Any project, under the Make-I sub-category, whose estimated cost of development is less than R10 crore, will be reserved for MSMEs. In case, not even two MSMEs indicate interest, it will be opened to non-MSME.

As much as 90% (previously, 80%) of the development cost will be borne by the government for such projects. On top of that, the vendors would be repaid the 10% development costs borne by them, if no Request for Proposal (RFP) is issued within 2 years, from the date of successful completion of prototype development.

Similarly, in the Make-II sub-category, if the cost of prototype development is reckoned to be less than R3 crore, the project will be earmarked for MSMEs, provided at least one MSME exhibits interest. Even though, unlike Make-I, no government funds are involved here, the selected vendors in Make-II will be fully reimbursed, in case RFP for the developed prototype is not issued within the stipulated time. Such provisions encouraging MSME investments have Make-in-India inscribed all over them.

The threshold for discharging offset obligations has been marked up, from the existing R300 crore to R2,000 crore. Even though the government seems to have soothed the concerns of foreign investors, this may limit the openings for Indian entities to become offset partners. On the finer side, it is likely to fast-track the finalisation of such contracts. Besides, the period of validity of Acceptance of Necessity, or the in-principle approval, for ‘Buy’ and ‘Buy-and-Make’ schemes has been reduced to 6 months from the existing one year.

Even though the DPP streamlines the procedures, some vacuity will remain until all chapters and appendices are finalised. For example, the issue around the intellectual property rights in the ‘Make’ programme, or the eligibility criteria for participation in it, still remains unresolved. We are waiting to ascertain if the gaps in the existing Standard Contract Document have been plugged or not, for these were not released at the time of writing this piece. The chapter on strategic partnerships is still treading water.

Be that as it may, the government has definitely made the right moves, by putting forth a policy, installed on the basics of self-reliance. But, for any policy to succeed-it takes two to tango. Whether the Indian players will join dance is still what remains to be seen.

Sharma is partner and Gaind is an associate with JSA, Advocates and Solicitors. Views are personal

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First published on: 02-04-2016 at 00:25 IST