SUGOSHA ADVISORY

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 lacking, (i) was it indigenous design and development (ii) was it indigenous manufacturing or (iii) was it both? What is more important for our Armed forces to be sustained from within the country for all their needs, is it (i) Design and Development or (ii) Manufacturing or both?

 How did this all begin?

 DPP 2013 already had the requisite flavour so of “Make in India”, by according to priority in categorization of procurements, such as, “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 crore this year as compared to 2015 as reported by the government.

Parliamentary Discussion

According to a written reply by Minister of State for Defence(RRM) Rao Inderjit Singh to K Parasuraman in Lok Sabha on Friday the Sixth of 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 crore (Government funded) and Rs 3 crore (industry funded) for MSMEs, Singh added. With this bold initiative, the total expenditure on purchase of Defence equipment for the three services in 2015-16 is Rs 76,169.57 crore in which the procurement from Indian vendors is Rs 49,979.11 crore and from foreign vendors it is Rs 26,190.46. In 2014-15, the total expenditure was Rs 77,986.32 crore in which Rs 48,826.63 crore was from local vendors and Rs 29,159.69 crore from foreign companies. The numbers prove 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.

Measures Taken by the Government : Policy and Regulatory

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 equipments is encouraged by the Government through several policy measures like; Preference to ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy and Make (Indian)’, categories of capital acquisition over ‘Buy (Global)’ category in Defence Procurement Procedure.

Foreign Direct Investment (FDI) policy has been reviewed and as per revised policy noticed in November 2015, Foreign Investment Cap upto 49% is allowed under automatic route and above 49% under Government route on case-to-case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country.

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. Industrial de-licencing has energized the component manufacturers, especially the small industries (MSMEs) by removing the extra burden of applying and obtaining licence for their products.

There has been a considerable effort to ease exports, by simplifying the export control norms and establishing a system for faster responses and approvals for exports. This has also been made on-line.

Minister of State for Defence Rao Inderjit Singh also informed that Hindustan Aeronautical Limited (HAL) has handed over 156 Dhruv Choppers to armed forces in which 66 choppers are already delivered to Indian Air Force, 78 to Indian Army, 8 to Indian Navy and 4 helicopters to Coast Guards.  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.

So, there has been a holistic approach to the entire defence sector, and IDDM category was the icing on the cake.

So, what are the categories of procurement in DPP 2016 and how does this aid in Make in India?

Categories of Procurement in DPP 2016.  Presently the following categories are incorporated  in the DPP 2016, in their order of priority in procurement :-

(a) Buy IDDM ( Indigenous Design Development and production)

(b) Buy Indian

(c) Buy and Make Indian

(d) Buy and Make (Global)

(e) Buy Global

Priority of procurement is the mantra for make in India. 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 MoD has also placed on its website 23 projects for the industry under the Make category. That’s commitment to Make in India.

Buy IDDM

We shall now analyse the Buy IDDM category. Buy IDDM means Buy from those Indian sources that incorporate Indigenous design, development and Production. This essentially means the following :-

(a) Design has to be Indigenous

(b) Development has to be indigenous

(c) Production  or manufacture has to be indigenous

However the government feels that there could be occasions when such conditions cannot be met by domestic industry, due to its evolving nature. Therefore, the MoD has considered a non-indigenous design and development proposal 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? Government is aware of the infant nature of defence industry especially in the private sector and to help evolve it to the next levels, has therefore allowed even a non-indigenous design, but has made the difference in the manufacturing indigenous content. If the design and development is indigenous, then a indigenous manufacturing content of 40% could suffice, whereas, if the design and development is non-indigenous then a 60% indigenous content is mandated. Thus the MoD has taken care of both the requirements, viz, design/development as well as manufacturing in the same category.

For a given procurement proposal, If the above conditions are met, the planning process would accord highest priority to categorise this accordingly. This actually means:-

(a) Encouragement to Indigenous design and development

(b) Encouragement to indigenous manufacturing content

(c) Manufacturing invariably has to be done indigenously. The content of indigenous manufacturing is called as Indigenous content(IC).

It is important to also understand the concept of Indigenous content since many of the raw materials are not manufactured in our country. So at any given point in time, a minimum of 30% or so of an acquisition program could be already jeopardised in favour of import, on the basis of raw materials alone.

To depict the same as in a Flow chart :-

Apart from overall IC as detailed above, the same percentage of IC 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.

How do we prove 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 SoC( also called as the Sratement of Case, which in fact is 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.

Analysis

(a) 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.

(b) 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.

(c) Early knowledge of proposals likely to be fielded is essential. 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.

We need to have Strategic Partnerships(SP) to promote private industry into the defence acquisition process. If we can dole out contracts to the DPSUs on a single tender basis, then, we must also be able to provide our private industry tenders on a Single Tender basis. This can be achieved if we have SPs. Concept of SP is that we from our private industry identify few that meet given criteria for a given discipline, such as say, Aircrafts, Helicopters, Missile systems, Guns, Materials, Submarines, Surface Ships, Tanks and other specialist A vehicles, small arms and ammunition and so on. Thereafter we may allocate one private industry for each of the above disciplines and harness the relationship for say a period of 20 years(concept of long term partnerships). In this period, the government(MoD) may issue tenders on a single tender basis to these also.

Industry readiness to face the challenge

How does the nation support Make in India and other initiatives? Do we have the raw materials required for Defence Production? By far, from amongst all sectors, Defence Sector is most quality conscious, this includes the Aerospace sector also and we shall also refer to this as the A&D sector. All of military grade steel and other raw materials are imported, all of electronics and the raw materials for the same are imported, all of special materials and alloys required are imported, so how do we reconcile to a situation like this?

Is it possible for us to dedicate a materials Management Division in the Acquisition process for management of materials? Can we address the most crucial aspect of material management in the acquisition process? Are we equipped to deal with this most important discipline in a methodical manner? These are some questions that will squarely affect our entire Make in India concept and can we encourage start ups in these disciplines?

We have been viewing Start-Ups as small niche companies that are usually run by a motivate technical genius, having ideas and looking for funds. We need to look at this quite differently, like a big industrialist like say Godrej or Tatas or Ambanis, creating Start-ups with huge investments in the disciplines that we are lacking, one of them being raw-materials.

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.