govts-new-defence-acquisition-policy-drops-offsets-in-3-types-of-contracts

 

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Context: The government’s new policy for defence acquisitions Defence Acquisition Procedure (DAP) – 2020  was approved by the Defence Acquisition Council.

Key takeaways:

  • Atmanirbhar Bharat: It aims at empowering Indian domestic industry through Make in India initiative with the ultimate aim of turning India into a global manufacturing hub. 
    • It has included provisions to encourage FDI to establish manufacturing hubs both for import substitution and exports while protecting interests of Indian domestic industry. 
  • Offset clause removed: The government removed an offset clause in procurement of defence equipment if the deal is done through inter-government agreement (IGA), government-to-government or an ab initio single vendor. 
    • Offsets will continue to be part of multi-vendor competitive procurement contracts.
    • The offset clause requires a foreign vendor to invest a part of the contract value in India.
    • Rationale behind: The offset clause policy had not brought any critical technology to India yet.
    • It had only resulted in foreign vendors loading extra costs in contracts.
    • The deal to buy 36 Rafale fighter jets was signed as an IGA with the French government, which included a 50 per cent offset clause.
    • The Comptroller and Auditor General (CAG) audit report noted that obtaining technology transfer has been a particular failure, as the CAG did not find “a single case where the foreign vendor had transferred high technology to the Indian industry.
  • The multiplier value for offset transactions to earn offset credits will be focused towards technology transfer, with Transfer of Technology for critical technology.
  • Reservation for Indian vendors: 
    • The DAP has reserved procurement under several important categories for Indian vendors with ownership and control by resident Indian citizens with up to 49 per cent maximum FDI.
    • The categories include
      • Buy (Indian — Indigenously Designed, Developed and Manufactured), 
      • Make I — with 70 per cent initial government funding, 
      • Make II — industry funded, Production Agency in Design and Development, and 
      • Strategic Partner model 
  • Increase the indigenous content (IC) requirement for all projects from 40 per cent to 50 per cent earlier, depending on the category, to 50 per cent to 60 per cent now. 
    • Only under procurement through Buy (Global), foreign vendors can have 30 per cent IC from Indian companies.
  • Leasing or “asset acquisition for a limited period” finds a dedicated chapter in the procurement policy for the first time, allowing the government to hire equipment from either domestic or foreign vendors.
  • The chapter on Information Communication Technology will look at “peculiar issues related to procurement of ICT intensive equipment especially of Interoperability & Built-in Upgradability, enhanced security requirements and change management
  • A new Make III category has also been introduced, which will be indigenously manufactured defence equipment and platforms or spares and assemblies intended to enable import substitution.
  • Price variation in long-term projects worth more than Rs 300 crore with a duration of over 3 years will be looked into.
  • Services Qualitative Requirement, which defines the capabilities sought for any equipment, weapon or platform, will now include a comparative analysis for products available within the country and internationally.
  • Rationalise the trial and testing procedures to bring down the defence procurement timelines.
  • The Long Term Integrated Perspective Plan has now been re-designated as Integrated Capability Development Plan (ICDP), and will cover a period of ten years.

Background

  • DPP 2016 had redefined design and development by the private sector—by dividing the ‘make procedure’ into two
  • Make I with 90 per cent government funding and Make II with no government funding. 
    • Make I is meant for major platforms involving critical technologies, large infrastructure and high investment. 
  • Make II provides opportunity to private industry to design and develop minor platforms, ­systems and components. 
    • Make IT caters to the needs of the three ­services so far, but can be extended to the central armed police forces ­managed by the Ministry of Home Affairs. Component requirements of ­defence PSUs and ordnance factories should also be met by Make II.
  • The strategic partnership model, whose concept was first suggested by the Dhirendra Singh Committee report, seeks to identify a few Indian private companies as Strategic Partners who would initially tie up with a few shortlisted foreign Original Equipment Manufacturers (OEMs) to manufacture big-ticket military platforms. 
    • The ultimate aim of the model is to enhance India’s self-reliance index in defence procurement 
    • India’s self reliance is at a low level despite a huge defence industrial complex much of which is managed by state-owned Defence Public Sector Undertakings (DPSUs) and the Ordnance Factory Board (OFB).
  • FDI limit: Govt. has permitted foreign direct investment (FDI) in defence production above 74 per cent on the automatic route. This would be subject to access to modern technology or for 'other reasons' that needs to be recorded.

Image source: ToI

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Q) India’s self reliance in defence manufacturing is at a low level despite a huge defence industrial complex. Critically analyse. (250 words)