New Provisions For Leasing Defence Equipment, Technology Transfer And Innovation

Posted On - 12 June, 2024 • By - King Stubb & Kasiva

For many years, India has relied on imports to fulfil a significant portion of its defence equipment requirements. In recognition of the strategic and economic benefits of domestic production, the Government of India has launched the ambitious ‘Make in India’ initiative. This initiative aims to transform India into a global manufacturing hub, including the critical sector of defence.

As a major step towards achieving self-reliance in defence manufacturing, the Ministry of Defence released the Defence Acquisition Procedure (“DAP”) 2020 in October 2020.[1] This document outlines a comprehensive framework for the acquisition of defence equipment, with a strong emphasis on promoting indigenous development and production.

Application of DAP 2020

  • The DAP 2020 applies to all ongoing defence acquisition programs where a Request for Proposal (“RFP”) has not yet been issued.
  • This includes programs in the pre-Acceptance of Necessity (“AoN”) stage, the AoN stage itself, and those involving Make and Design & Development (“D&D”) procedures.
  • For programs where AoN was granted under previous versions of the Defence Procurement Procedure (“DPP”), the process will be adjusted to ensure the RFP is issued in accordance with DAP 2020.
  • However, if an RFP has already been issued under the previous DPP, the acquisition process for that specific program will continue to follow the provisions of that earlier procedure.
  • The DAP 2020 aims for the following:
  • Fostering Domestic Production
  • Streamlining Procurement and Innovation
  • Offsetting Policy and Self-reliance

Fostering Domestic Production

The DAP-2020 prioritizes the development of a robust domestic defence industry. This is evident in several key measures:[2]

  • New Acquisition Categories: The introduction of categories like “Buy (Global-Manufacture in India)” incentivizes foreign companies to set up manufacturing units in India, fostering technology transfer and job creation. Additionally, the “Innovation” category creates a dedicated avenue for Micro, Small and Medium Enterprises (“MSMEs”) and startups to contribute to defence procurement through their innovative solutions.
  • Increased Indigenous Content: The DAP-2020 raises the minimum Indigenous Content (“IC”) requirements across various procurement categories. This ensures a greater proportion of each defence product is manufactured domestically.
  • Focus on Advanced Materials: The DAP 2020 recognizes the importance of material science. Thus, it emphasizes the need to develop indigenous capabilities for producing high-end military materials and special alloys.

Streamlining Procurement and Innovation

The DAP-2020 also introduces measures to streamline acquisition processes and encourage technological advancements:

  • Dedicated ICT Procurement: A dedicated chapter now guides the acquisition of Information and Communication Technology (“ICT”) systems, crucial for modern warfare.
  • Leasing Flexibility: The introduction of ‘leasing’ as an option allows for acquiring specific equipment through periodic rental payments, potentially reducing upfront costs and offering greater flexibility.

The Offset Policy and Self-Reliance

India’s offset policy traditionally aimed to leverage technology transfer from foreign vendors in exchange for defence contracts. While the revised policy retains this objective, it exempts Inter-Governmental Agreements (‘IGAs’) from offset obligations. This exemption might reduce the inflow of advanced technologies through these agreements, potentially impacting India’s self-reliance goals in the long run.

Commercial and Business Implications

Domestic Industry

  • The import embargo on 101 specific defence items and the ‘Buy (Global-Manufacture in India)’ initiative creates substantial opportunities for domestic industries in India. This policy not only opens a significant market for Indian companies but also incentivizes foreign Original Equipment Manufacturers (“OEMs”) to establish manufacturing units in the country.
  • Consequently, Indian component and sub-component manufacturers stand to benefit greatly as increased domestic production will necessitate a robust supply chain to meet the growing demand for parts and sub-assemblies.
  • Additionally, Indian engineering and design firms can collaborate with foreign OEMs on technology transfer projects, leading to joint ventures and the upskilling of the Indian workforce, thereby strengthening the domestic design and development ecosystem.
  • Furthermore, Indian logistics and maintenance companies are poised to see increased business as the reliance on indigenous equipment grows, driving the need for domestic maintenance, repair, and overhaul (“MRO”) service providers.

MSMEs and Startups

  • The introduction of a dedicated “Innovation” category offers new opportunities for Micro, Small, and Medium Enterprises (“MSMEs”) and startups to engage in defence procurement. This initiative can spur increased innovation and research and development (“R&D”), as MSMEs and startups bring fresh perspectives and agility to the development of defence technology. Such participation fosters a more dynamic and competitive domestic defence sector.
  • Moreover, involvement in defence projects can attract venture capital and angel investors, opening new funding avenues for promising startups. MSMEs with specialized skills and technologies, such as sensors, communication systems, and software development, can also find lucrative contracts, thus fueling growth opportunities for niche players.

Foreign Investment

  • The revised Foreign Direct Investment (“FDI”) policy and the updated definition of ‘Indian Vendor’ aim to balance foreign investment and collaboration with the need for domestic control. While the framework restricts foreign ownership and control in certain categories, it still allows for strategic partnerships.
  • This presents opportunities for joint ventures and technology transfers, as foreign companies can partner with Indian firms to meet the ‘Indian Vendor’ criteria, facilitating knowledge transfer and workforce upskilling.
  • Additionally, foreign companies with specialized technologies can invest in joint ventures or establish subsidiaries to address specific defence needs, thus bolstering the Indian defence sector with niche expertise and innovation.

Challenges and the Road Ahead

The DAP 2020 represents a significant stride towards aligning with the Indian Army’s critical need for modernization and self-reliance. Its provisions are designed to ensure that the armed forces have access to cutting-edge technology and equipment, reducing dependence on foreign suppliers. This initiative is crucial for enhancing operational readiness and maintaining strategic autonomy.[3] For instance, a pivotal element of DAP-2020 is the establishment of Project Management Units (“PMUs”). These units are tasked with overseeing acquisition processes to ensure they adhere to strict timelines and budgets.

However, despite the promising framework provided by DAP-2020, there are notable challenges, particularly concerning delays in indigenous production. These delays can hinder the timely availability of critical defence equipment, thereby impacting operational readiness. Addressing these issues requires a concerted effort to streamline production processes and enhance the efficiency of defence manufacturing.

To ensure the effective execution of DAP-2020, it is imperative to establish clear implementation guidelines and robust oversight mechanisms. This will help in maintaining transparency, accountability, and consistency in procurement activities. Furthermore, efficient execution will require the active involvement and coordination of all stakeholders, including government bodies, the military, and industry partners.

Moreover, the successful implementation of DAP-2020 hinges on robust collaboration between the Indian Army, the Defence Research and Development Organisation (“DRDO”), and the private sector. Such partnerships are essential for the seamless transfer of technology and the joint development of innovative solutions. This synergy is expected to drive significant advancements in indigenous defence capabilities, fostering a self-reliant and technologically adept military force. Thus, creating a level playing field for private sector participation is also essential. By fostering an environment where private enterprises can compete fairly with state-owned entities, innovation and efficiency in defence production can be significantly enhanced. This inclusive approach will not only boost domestic manufacturing capabilities but also attract investment and expertise from global defence companies, thereby strengthening India’s defence industrial base.

Looking Forward

The successful realization of the provisions within DAP-2020 will be pivotal in transforming India’s defence landscape. The innovative measures, such as leasing defence equipment and promoting technology transfer, combined with a strong focus on indigenous production and streamlined procurement processes, are set to enhance the Indian Army’s operational capabilities. However, addressing the challenges of implementation and fostering an equitable environment for private sector participation will be crucial. Through sustained collaboration among the Army, DRDO, and the private sector, and with diligent oversight, India is poised to achieve significant strides towards self-reliance and technological advancement in defence manufacturing.

[1] https://www.mod.gov.in/dod/sites/default/files/wn25423.pdf

Updated upto 18 April 2023.

[2] https://pib.gov.in/PressReleasePage.aspx?PRID=1659746.

[3] https://idsa.in/issuebrief/decoding-dap-2020-acowshish-201120.

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