New defence acquisition policy to come into force from October 1

Defence Minister Rajnath Singh on Monday unveiled the new Defence Acquisition Procedure of 2020 (DAP 2020), which will govern the procurement of defence equipment from the capital budget. It will supersede the Defence Procurement Procedure of 2016 from October 1. 

Taking its cue from the prime minister’s Atmanirbhar Abhiyan (self-reliance campaign), DAP 2020 reserves several procurement categories for indigenous firms. “The categories of Buy (Indian designed, developed and manufactured), Make I, Make II… and SP model will be exclusively reserved for Indian vendors…,” stated the MoD on Monday.

DAP 2020 defines an “Indian vendor” as a company that is owned and controlled by resident Indian citizens, with foreign direct investment (FDI) not more than 49 per cent.

The new policy introduces a significant new procurement category called “Buy (Global–Manufacture in India).” This stipulates indigenisation of at least 50 per cent of the overall contract value of a foreign purchase — for example fighter aircraft — bought with the intention of subsequently building it in India with technology transfer. Meeting the difficult indigenisation requirement would force the vendor to build the equipment in India, rather than supply most of it ready-built from abroad.

This category also encourages vendors to set up facilities in India to manufacture spares and assemblies for the basic equipment, and to set up maintenance, repair, and overhaul (MRO) facilities. With the FDI cap recently raised to 74 per cent, the foreign vendor could do this through a joint venture (JV) firm in India.

The new procedure promotes greater indigenous content in arms and equipment of the military procures, including equipment manufactured in India under licence. In most acquisition categories, DAP-2020 stipulates 10 per cent higher indigenisation than DPP 2016.

For the contentious business of measuring indigenous content, DAP 2020 has instituted a simple benchmark. “Indigenous content will now be calculated on ‘Base Contract Price’, that is Total Contract Price, less taxes and duties,” stated the MoD. The “import embargo list” of 101 items that the government promulgated last month has been specifically incorporated into DAP 2020.

The new policy seeks to curb the long-running equipment trials the military carries out on equipment offered for procurement. “DAP 2020 emphasises the need to conduct trials with an objective to nurture competition based on the principles of transparency, fairness and equal opportunities to all and not as a process of elimination,” stated the MoD.

There are also important changes in the “Make” procedure, under which the MoD reimburses Indian vendors a percentage of the cost they incur on developing equipment. The Make-1 procedure now incorporates a limit per vendor of Rs 250 crore and reimburses only 70 per cent of the development cost, as compared to 90 per cent in DPP 2016. Under the Make II procedure, defence companies themselves fund the development of equipment to offer the military. 

DAP 2020 incorporates a new Make III procedure in which indigenous firms manufacture equipment, platforms or spares for import substitution.

Offsets 

DAP 2020 features important changes in the offset guidelines, which under current norms, require vendors who win contracts worth over Rs 2,000 crore to plough back 30 per cent of the contract value into designated defence R&D, manufacturing and services. The new policy exempts vendors from offset liability in contract processed under the government-to-government route, as was the Rafale purchase or most contracts concluded with Russia. Nor will offsets be imposed on single-vendor purchases.

 Under the new offset policy, “preference will be given to manufacture of complete defence products over components”, states the MoD. In addition, multipliers have been introduced to direct offsets to chosen sectors, e.g. micro, small, and medium enterprises (MSMEs).

The new procedure has been drawn up by a review committee headed by the acquisition chief of the Ministry of Defence (MoD), Apurva Chandra. Reacting to the new policy, the Confederation of Indian Industry stated: “DAP 2020 is expected to provide a major boost to the Indian industry… It mandates the MOD to engage with the Indian industry during early stages of capability planning.”