With Defence Production and Procurement Policies in Place – Are We Headed Correctly?

‘Year of Covid’ – an Important Year for Defence Sector

The stigma, ‘year of Covid’ notwithstanding, 2020 has been a very important year when it comes to self-reliance in defence and aerospace sector. It was in this year when the Ministry of Defence (MoD) came out with two cardinal documents which were meant to set the pace for the way forward in defence manufacturing, defence acquisitions and defence exports in the years ahead.

While the comprehensive documents, policies and provisions are in place, this article examines where are we on the ‘roll out’? Are we correctly headed to achieve in the targets set therein? The following is a report card of sorts.

Briefly Revisiting the Two Cardinal Documents

The two documents mentioned above are Draft Defence Production and Export Promotion Policy (DPEPP) released on 03 Aug 2020 and Defence Acquisition Procedure (DAP) released on 28 Sep 2020. A brief re-visit to each:-

1. DPEPP 2020¹

DPEPP is an over-arching document. It sets out an ambitious aim of achieving a defence manufacturing turnover of $25 billion (Bn) which includes a defence exports target of $5 billion by the year 2025.

Drawing strength from the twin anchors of Make-in-India and Atmanirbhar Bharat, DPEPP aims to provide a focussed, structured, and a significant thrust to make the Indian defence and aerospace sector competitive, robust and dynamic, reduce import dependence, promote exports, encourage R&D, reward innovation and create intellectual property (IP). In specifics, the DPEPP has identified eight thrust areas for action. For each of these, it has suggested multiple strategies to achieve them. The areas are:-

1. Carrying out reforms in procurement procedures.
2. Promoting indigenization and enhancing support to Micro Small and Medium Enterprises (MSMEs).
3. Optimizing resource allocation for defence.
4. Carrying our investment promotion and enhancing Ease of Doing Business (EoDB).
5. Encouraging innovation and R&D in defence.
6. Phased disinvestments of Defence Public Sector Undertakings (DPSUs) and corporatization of OrdnanceFactory Board (OFB).
7. Enhancing quality assurance and testing facilities.
8. Policies and actions towards export promotion.

DAP 2020²

While the DPEPP was just bout sinking in the in the user domain, came a complementary document, the DAP 2020.

In its name itself, the DAP brought in a fresh air through replacement of the passivity of ‘procurement attitude’ with the assertiveness, proactive action and ‘buyer on top’ status of the ‘acquisition attitude ’. That much is indicated by the change in nomenclature (read DNA) from the erstwhile Defence Procurement Procedure (DPP) to Defence Acquisition Procedure.

DAP aimed to implement much of what was stated in the DPEPP. In particular it laid down specific action points regarding the following:- ( very briefly)

1. New FDI guidelines and limits.
2. Negative import list.
3. Indigenisation support and indigenisation policy.
4. Enhancing indigenisation in defence and aerospace sector by specific actions.
5. Implementing procurement reforms.
6. Enhancing indigenization and encouraging innovation.
7. Bringing in alternative procurement categories and provisions.
8. Allowing for leasing of equipment without owning it.

The Report Card

A Huge Agenda

The two documents taken together have put out a huge agenda of policies, procedures and action points. To assess where we are on various issues is indeed a huge task. In order to get a sense of the larger picture, an attempt has been made to assess some key indicators and outcomes.

Turnover Targets

The Targets

As stated, a target of $25Bn in defence manufacturing turn over including $5Bn in defence exports by 2025 has been set out in DPEPP.

Salient Points

1. The above targets are ambitious by any standard. Why?
1. The total defence manufacturing turn over for the Financial Year (FY) 2018-19 was $ 8.0 Bn for the public sector (DPSUs+OFB) and $2.4 Bn for the private sector. Total 10.4 Bn (8.0+2.4). In the same FY, the export turnover was $1.5Bn.³
2. Although the similar figures for the FY 2019-20 are not available, the challenge is to achieve a near three times increase in five financial years starting 2018-19.
3. In the above calculation the multiple impacts of the pandemic on manufacturing turnover - lost work hours; shrunk demands; channeling of meager resources towards higher priority sectors like life-saving /healthcare etc; have to be factored in.
4. Even in the Defence budget announced in Feb 2020 just prior to the onset of the pandemic, an allocation of 4.71378 lakh Crore amounted a to a measly 5% increase in the revised BE of FY 2019-20 of 4.48820 lakh Crore⁴. This insignificant increase would now take the Covid hit in the period Apr 2020-Mar 2021.
5. The Govt. is actually on a ‘saving the small industry’ mode as some 86000 Small and Medium Enterprises (SMEs) and some 24000 MSMEs (8000+ in defence sector) are likely to face dire financial crises⁵. Sample the following⁶:-
1. Revising the definition of MSMEs (which can be expanded) and removing thedistinction between manufacturing and services.
2. Initial package – collateral free loan of Rs 3 lakh Crore for MSMEs
3. Subordinate debt provision of Rs20,000 Crore for two lakh MSMEs.
4. Equity infusion of 50,000 Crore through mother-daughter fund scheme for needy SMEs.
5. Setting up 10,000 Crore fund of funds for capacity enhancement for small units.
6. The effect of pandemic has been huge on defence industry. According to an assessment, even during the short period of initial lockdown (Mar 24-Mar 31 2020), the loss to Indian defence companies has been to the tune of $3Bn⁷. These figures can be extrapolated on a prediction model to see the colossal hit taken by the Indian defence industry in Year+ (and counting) of lockdown period.
7. Shrunk demands, manpower blues, shutting of doors for import for spares, mounting sustenance costs, huge sunk costs… all have combined to push many companies to close shop, some others have managed to stay afloat by changing gears to produce other than their core-competent inventory (ventilators, concentrators, masks etc).
8. However the hopefuls are at it. The whole-time Director and Senior executive VP (defence and smart technologies) Mr. Jayant Patil, riding high on the on-time deliveries and crossing indigenisation targets in several mega projects (Pinaka, K-9 Vajra and more) has opined that Covid blues notwithstanding, the defence industry will bounce back in the FY 2021-22 and achieve normalcy in say 2-3 years subject to MoD’s push for contracts, post Covid meltdown in order books⁸.

Assessment

With the realities on both sides of the fence having been stated, it is the sense of the author, that the targets of 25Bn and 5 Bn are unlikely to be achieved by 2025, though we may reach some 60-70% of the target figures (14-16Bn in turn over and 3-3.5 Bn in exports). The big fact is that we are headed correctly.

Efforts Towards Indigenisation Target

The indigenisation is moving on a twin-track approach; 1. Indigenisation support to MSMEs and start-ups and 2. Overall indigenisation

1. Indigenisation support to MSMEs and Start Ups

DPEPP 2020 lays down the indigenization policy which is basically focussed as a support to MSMEs and start-ups. This policy envisages an indigenization of 5000 items by 2025 by the above organisations. Many items which were till date getting imported (alloys, special materials, sub-assemblies for defence equipment and platforms etc.) are earmarked for indigenisation. Following is stated as to this policy⁹ :-

1. It is a subset of the overall support and hand-holding package for MSMEs as described earlier.
2. As of Aug 2020, there were more than 50 start-ups manufacturing equipment ‘ready for combat use’¹⁰.
3. The Directorates of Indigenisation along with the Service-wise Design Bureaus are functional in identifying the items to be indigenized in quantum and timelines and offloading the work in the order books of MSMEs and start-ups (hopefully this process will gain further momentum. The current pace is slow).

Assessment –While all looks in place as per policy and plans, the on- ground achievement of indigenization is a painfully slow process and the current throughput is well short of achieving the 5000 mark by 2025.

Overall Indigenisation

The mainframe indigenization theme is actually ‘THE AGENDA’ be it Make-in-India or Atmanirbhar Bharat. This theme finds meaning by way of many a provisions and policies in the above two documents. Salient ones being:-

1. Negative Import list Version 1.0 and now 2.0 or their new coinage ‘Positive indigenization list’. While the first list progressively banned 101 items from Dec 2021 to Dec 2024, the second list did similar thing for 108 items¹¹.
2. Amendment to General Financial Rules of GoI has been affected wherein, goods and services valued less than 200 Crs are to be procured from domestic firms only.¹²
3. As of Mar 2021 over 460 licenseshad been issued to private players for undertaking production of defence equipment.¹³
4. Out of approximately $130 Bn likely to be spent on defence modernisation, some $55.17 Bn worth of contracts are likely to be placed on Indian players. This will hugely benefit some 24000 MSMEs engaged in the defence supply chain¹⁴.
5. Host of other complimentary support measures have been put into place :-
1. iDEX (Innovations for Defence Excellence) established in Apr 2018 is finding its feet and is gaining ground steadily in achieving a degree of self-reliance and fostering innovation and technology development¹⁵.

2. Taking the next steps in iDEX, ‘Defence India Startup Challenge’ has been launched by MoD promoting creation of prototypes or commercializing products and solutions by startups/MSMEs/ innovators¹⁶.
3. In order to promote export, several online procedures have been started and Defence Line of credits ( LoC) have been extended. DPEPP has called for setting up export facilitation vehicles such as Export Promotion/Facilitation Body and Defence Export steering Committee.¹⁷
4. The new Defence offset guidelines aim to leverage defence capital procurements to strengthen the Indian defence industry by fostering development through top-of-the-line foreign OEMs and plough in the best of R&D through the offset route (presently at hope stage).¹⁸

1. While the negative import list is a step in the right direction, it needs to be further extended through inclusion of many new items. Take for instance the case of simulators. The list mentions only a few only (at serials 8, 9, 10, 11, 12, 13, 60, 61 and 62)¹⁹. Today we have reached a stage where except for some equipment-specific high tech simulators that come as a package with the main-frame equipment, everyother type of simulatorcan be made by the domestic industry. Practically the entire range, be small arms/ infantry support weapons/all types of radars/ guns/missiles/tanks/UAVs/anti-drone trainers/electronic warfare trainers/ customised specialist trainers and more, all can be made in India. Simulators need to come in a very big way in these lists.

1. Assessment

All the above indicates that we are strongly moving towards indigenisation. The multiple platforms and multi-directional policies of the MoD seem to be unfolding positively. The effects will show up in the years to come. The bottom line requirement will however remain THE NEED IS TO WALK THE TALK, by implementing the policies and provisions PUT INTO PLACE.

PROCUREMENT REFORMS

Multiple Provisions

DAP 2020 has laid down multiple provisions to deal with many a procurement (Acquisition) blues that are the main obstacles that keep the Services deprived of their urgent operational requirements. Most of the new provisions strongly support indigenisation.

Very briefly these reforms are:-²⁰

1. Change in rules to encourage FDI (enhanced from 49%to 74% on the automatic route and upto 100% with Govt. approval)
2. Negative import list (as explained).
3. Indigenisation support to MSMEs (as explained).
4. Provision at RFI stage itself to ask for willingness of foreign OEMs to set up business in India.
5. Bringing in a new category of acquisition –‘Buy global manufacture in India.’
6. Facilitation of co-production through foreign OEMs on the Inter-Governmental Agreement (IGA) route.
7. Optimising life-cycle support cost by indigenisation of the eco-system.
8. Setting up bodies likeProject Management Unit (PMU) and Technology Assessment Cell(TAC) to bring in best practices in the acquisition process.
9. Simplifying trial procedures to cut time delays.
10. Encouraging innovations and R&D.
11. Bringing in the policy of leasing - a whole new concept (details not covered).

The Rollout

Following points are stated as to therollout:-

1. While the multiple provisions stated above cover a very vast ground, these will take time to get embedded and start showing effect.
2. Since multiple agencies and multiple disciplines are aimed to be aligned through the above processes and practices, the results thereof is likely to be a mix of pass and fail.
3. As regards the growth of FDI under the new FDI guidelines, the same is making some progress (albeit slow). As of Jun 2021, 44companies have been given FDI approval for joint production with foreign OEMs in India. Also the reported FDI inflows in defence and Aerospace sector post new policies has been 4191Crore which is considered to be a positive trend. ²¹

Assessment

The roll out of the DAP provisions per se, does not let itself to any quantified yes/no assessment. It can however be said that the policies and procedures provide a very strong framework positively wired to achieve indigenization’.

Corporatisation Status

A Bold Initiative

The decision to corporatise the OFB and phased disinvestment of the DPSUs was a bold initiative. The entire monolith of 41 Ordnance Factories and the board was to be restructured into two or three 100% Govt-owned corporate entities.

The aim was to usher a degree of functional autonomy in key decision-making, and in expanding business market base through level-field competitive practices and freedom in choosing MoUs and JV players. Cutting across red-tape and the era of Govt control, the new arrangement was to improve quality and quantum by making the monolith lean and mean to survive in a competitive market place²².

Resistance

For reasons which are too obvious to state, the above decision of the Govt. is being resisted tooth-and-nail by the OFB workers federations (All India Defence Employees Federation – AIDEF, Bhartiya Pratiraksha Majdoor Sangh – BPMS and Indian National Defence Workers Federation –INDWF). The usual tools of strikes, dharnas, complaints to Labour Commissioner under Industrial Disputes Act etc. are being employed to resist the Govt.’s move²³ (details not covered).

Status

It should come as a good news that despite all the above the MoD appears to be going ahead with the corporatisation drive to covert the OFB into a 100% Govt.-owned corporate entity. The issue has been presented by both the warring parties to the Standing Committee on Defence²⁴. The duel is in progress.

Govt. does it…^25,26

As this is being written, the news has just come that the Govt. has approved the cessation of 246 year old Ordnance Factory Board (OFB) and has approved the re-structuring of the OFB into seven new corporate entities all of which will be 100% Govt.-owned. It is reported that the service conditions, pensions and post-retirement benefits of the work-force have been retained. Initial reports also indicate that the seven entities (each of which will include a number of core-competent Ordnance factories) are Ammunition and Explosive Group, Vehicles Group, Weapons and Equipment Group, Troop Comfort Items Group, Ancillary Group, Optro-Electronics Group and Parachute Group.

An Empowered Group of Ministers (EGoM) has been constituted which has been tasked to decide about the multiple issues related to the implementation of the above said decision of the Govt.

Phased Disinvestment of DPSUs

As regards phased disinvestment of DPSUs, the Govt. seems to be moving ahead. Open sources report that the plan of the Govt. is to start by decreasing its stake of shares in three DPSUs (Bharat Earth Movers Limited - BEML, Garden Reach Shipbuilders and Engineers Ltd -GRSE, and Mishra Dhatu Nigam Limited (MIDHANI) . The idea is to unlock value, improve ownership by public as per shareholding norms of SEBI and enhance accountability in the organization^27,28.

Assessment –positive development but a long and uphill road ahead.

Some Final reflections

To close the Report Card here are some final reflections.

1. We are at a stage when the make-in-India initiative is well past its sloganeering phase and has kind of taken root in the minds of the foreign OEMs. A larger and larger number of them are showing willingness to comply with the make-in-India dream.
2. The concept and the soul of Atmanirbhar Bharat has been a shot-in-the- arm for the make-in-India story. The latter has increasingly found a firm base in the five strong pillars of Atmanirbharata.
3. From the point of view of policies and provisions, the Covid year 2020 has been a defining moment as it has ushered in the two bedrock documents , namely the DPEPP and DAP.
4. It was unfortunate that soon upon their birth they suffered the crippling blow of the pandemic, shattering most of the lofty targets and timelines.
5. There is a hope again, provided the Govt. stays the course, shows muscle (as it has shown in the recent OFB restructuring), keeps promises, keeps contract momentum, keeps order books ticking and also, makes a multitude of stakeholders follow the rule-book.
6. That said, a cold statistical arithmetic, sans of emotions, however holds the lofty targets of $25Bn in defence manufacturing turnover including $5Bn in defence export by 2025 are unlikely to be met though we may be 60-70% home.
7. The good news is that we are headed correctly.

Endnotes

1. “Draft Defence Procurement &Export Promotion Policy,” at www.ddpmod.gov.in [3]. Accessed on 03 Jun 2021.
2. “Defence Acquisition Procedure (DAP) 2020- Department of Defence,”at www.mod.gov.in [4]. Accessed on 03 Jun 2021
3. “Defence manufacturing,” at www.investindia.gov.in [5]
4. Defence Budget 2020-21:An analysis,” at www.defproac.com [6]. Accessed on 05 Jun 2021
5. “Covid-19 and impact on Indian Defence Industry,” at www.defproac.com [6]. Accessed on 05 Jun 2021
6. Evaluating the impact of Covid 19 pandemic on India’s defence manufacturing,” at www.thedailyguardian.com [7]. Accessed on 05 Jun 2021
7. “India’s defence industry is set to loose $3Bn from nationwide lockdown,”atwww.defensenews.com. Assessed on 05 Jun 2021.
8. “Defence Sector in India will bounce back in FY 2021-22, says L&T JayantPatil,” at wwwdefence.capital. Accessed on 09 Jun 2021.
9. “Draft Defence Production and Export Policy 2020,”at www.mod.gov.in [4] Accessed on 10 Jun 2021.
10. ibid
11. “India expands negative list for defence importswith 108 new items,” at www.thenewindianexpress.com [8]. Accessed on 10 Jun 2021
12. “Govt notifies changes in rues disallowing global tender for procurement upto Rs 200 Crs,” at www.e,economictimes.com [9]. Accessed on 10 Jun 2021
13. “Over 460 licenses issued for private players in defence production,” at www.thehindubusinessline.com.Accessed [10] on 10 Jun 2021.
14. ibid
15. “iDEX-Home,” at www.idex.govin [11]. Accessedon 11 Jun 2021.
16. :Defence India start up challenges,” at www.idex.gov.in [12]. Accessed on 11 Jun 2021.
17. “Startegy for defenceexports,” at www.ddpmod.gov.in.Accessed [13] on 12 Jun 2021.
18. “Defence Offset Guidelines-Ministry of Defence”,atwww.mod.gov.in. Accessed on 12 Jun 2021.
19. Explained: the negative import list for defence” at www.indianexpress,com [14]. Accessed on 12 Jun 2021,
20. “DAP 2020: Solid provisions demand solid implementation,” at www.indiandefencereview.com [15]. Accessed on 13 Jun 2021.
21. “44 companies given fdi approval…<” at www.m.economictimes.com.Accessed [16] on 14 Jun 2021.
22. “Govt determined to corporatize OFB despite opposition,” at www.bharatshakti.com [17]. Accessed on 14 Jun 2021.
23. “Department of defence violating conciliation statement..”” at www.indianexpress.com [18]. Accessed on 14 Jun 2021
24. “Weigh all pros-cons in favour of OFB …,” at wwwindianpsu.com. Accessed on 14Jun 2021.
25. “246 years old Ordnance Factory Board scrapped..,” at www.tribuneindia.com.Accessed [19] on 17 Jun 2021.
26. “Cabinet approves re-structuring of Ordnance Factory Board..’” at www.theweek.in.Accessed [20] on 17 Jun 2021.
27. “Government plans to divest its stakes from three defencePSUs,” at www.newindianexpree,com [21]. Accessed on14 Jun2021.
28. “Disinvestment of Defence Sector DPSUs,” at https.//pib.gov.in.Accessed on 14 Jun 2021.

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>

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