This is the seventh revision of the DPP since it was first drafted in 1992 and its latest edition is expected to see some dramatic changes in keeping with the Modi Government’s ‘Make in India’ campaign. While the basic idea behind the new DPP is the need for “simplification of defence procurement procedures”, as Defence Minister Manohar Parikkar said, it also involves “a change in mindset.” The acknowledgement of the need for “agents” in defence procurement— considered taboo so far— for instance, is a major departure from older versions of the DPP.

The MoD’s new stance was recently confirmed by Mr. Parikkar when he spoke of a definite role for “representatives” in defence purchases, which means it is only a matter of time before such agents acquire legal sanctity. Similarly, the practice of blacklisting of companies for their transgressions also seems set to be diluted so that offenses committed by one subsidiary of a company do not affect the business dealings of its other subsidiaries.

New Delhi has been rearranging its priorities in the national security realm and has identified 25 key areas that are considered very important for the government’s ‘Make in India’ policy. Defence manufacturing tops this list and the new DPP, from all accounts, devotes much attention to the country’s indigenisation programme. Indian defence companies have always been at a disadvantage when competing with their foreign counterparts in the military market for equipment. With India’s defence budget allocation expected to touch $620 billion by 2022, foreign vendors including US, Israeli, French, and Russian firms are all keen to consolidate their suppliers’ role here.

The new DPP may introduce a slew of measures to encourage private industry in the country so that Indian defence firms could produce hardware for the armed forces at the local level. This would also encourage more private sector companies to manufacture military hardware by forming collaborative ventures with their overseas partners.

As part of the new policy, the Ministry of Commerce and Industry, has decided to withdraw excise and customs duty exemptions currently exclusively enjoyed by the Ordnance Factory Board (OFB) and other state-owned defence companies that manufacture military hardware for the three services. This lopsided tax immunity helped defence PSUs and their suppliers who manufactured (or imported) equipment for the armed forces, just as it hamstrung private companies by pushing up production costs. Never mind if the private sector seldom got the opportunity to bid for deals in a market dominated by defence PSUs anyway. By changing this equation, however, the new DPP would not only boost domestic manufacturing, but also prompt private players to bid for big-ticket defence deals.

In a sense, the new policy tweaks, rather than discards, its previous version—DPP 2013—which required the military to mandatorily exhaust every other option for developing weapon systems in India before turning to the global marketplace to buy ‘off the shelf’. The DPP 2013 clearly outlined 'a preferred order of categorisation, with global cases being a choice of last resort.” In other words, ‘build’, rather than ‘buy’ is the new mantra, with the focus on enabling India’s defence industry to boost its infrastructure capabilities and augment investments in its almost non-existent R&D base. The new regulations make it binding on the military to clarify in detail the reasons for preferring platforms from global vendors.

This spells bad news for foreign vendors who will no longer be able to influence the buyer-seller relationship with the Indian military. For even as the field of competition is enlarged, the advantage enjoyed by foreign firms—thanks to their established ‘links’ with Indian defence PSUs—would be neutralised. In other words, foreign majors would find it increasingly difficult to sustain their exclusive ties with defence PSUs, and thus have less chance of tapping into government policy.

The good news for foreign players, however, is that there will be new avenues of defence cooperation with private Indian firms (who will have equal access to the military’s acquisition plans as the defence PSUs). The new DPP encourages—in fact, incentivizes—joint ventures (JVs) between private Indian and foreign companies. Foreign firms will also be able to choose their Indian partners for transferring maintenance technology. Currently, maintenance transfer of technology (MToT) contracts go exclusively to defence PSUs and ordnance factories. Add to this the tax rationalization norms loaded heavily against them, and it is easy to see why private firms are forced on to their back-foot every time they bid against foreign vendors for contracts. The DPP 2013 introduced a key corrective for this by providing exchange rate variation (ERV) protection—another exclusive privilege enjoyed by defence PSUs and ordnance factories—for private companies.

A revised DPP could build on this and make it a win-win situation for all players: the domestic companies empowered with equal opportunities to compete and foreign vendors with a much larger JV menu to choose from. Along with the “Make in India” thrust, this may finally end the misery of a military constantly plagued by shortages of equipment like fighter aircraft, artillery guns, helicopters, night-vision devices, and anti-submarine capability. (IPA Service)