Procurement policy in making holds promise
The new clauses of the proposed Defence Procurement Policy, cleared by the Defence Acquisition Council on Monday, point to steps being taken in the right direction. Though the full impact will only be known once the policy is released in its entirety, and the industry responds to fresh contracts issued under the new guidelines, the initial assessment for now is positive. The focus is on procuring quality products while also encouraging domestic manufacturers, especially in the private sector. This is broadly in keeping with the Modi Government's oft-stated policy-intentions and also fits well into the administration's flagship Make in India plan, of which defence manufacturing is a core element. In this regard, the Indigenously Designed, Developed and Manufactured equipment category promises to be a game-changer. Such equipment — defined as those whose content is at least 40 per cent locally sourced — has been earmarked as most preferred for procurement. The Government is also making a concerted effort to bring micro, small and medium enterprises in to the defence manufacturing field. It has, for instance, decided to aggressively fund research and development by private Indian companies. Of course, these early steps are no guarantees for success. Remember, ‘indigenisation' and ‘privatisation' have been buzzwords in defence procurement for more than a decade, and yet even today a handful of large public enterprises dominate the field, while India has become the world's largest buyer of military equipment and weaponry, accounting for 15 per cent of all international imports. However, if, as is being envisaged, domestic private players, particularly MSMEs, do indeed come up in a big way, especially by leveraging the country's frugal engineering credentials that already celebrated around the world, then India will not just save billions of dollars in defence purchases but also have the potential to become a major defence exporter as well.
That said, in the short to medium term, India will have to depend on foreign firms for its defence needs. The key is to strike a balance so that foreign firms can easily do business with India but do not snuff out the new domestic players. In this context, changes to the offset policy have come under some criticism though much of it is unfounded. The new DPP proposes raising the offset baseline from Rs 300 crore to Rs 2,000 crore — in other words, for foreign firms to be compelled to locally buy 30 per cent of their components, the purchase order has to be over Rs 2,000 crore. This, of course, works well for the many foreign firms eyeing a slice of the India pie, but it is also in keeping with the ground realities of the Indian defence manufacturing industry and better reflects the economies of scale. Simply put, if a foreign seller were to collaborate with an Indian player and still make a profit, it would only make sense if the project was big enough to justify setting up new facilities or production lines etc in India.