Ministry of Finance to work out the modalities for the creation of Defense procurement

Context

• The Ministry of Defence (MoD) has gone back on its demand for a non-lapsable capital fund for defence procurements.

Report

• The Parliamentary Standing Committee (PSC) on Defense asked the Ministry of Finance to work out the modalities for the creation of such a fund in consultation with the MoD.
• The Committee would like the Ministry of Finance to work out the modalities for the creation of a ‘non-lapsable defence capital fund account’ in consultation with the Ministry of Defence and apprise the Committee of the progress made in this direction at the earliest, and not later than three months of the presentation of this report to Parliament.
• However, it is surprising that the MoD is going back on its original demand for such a fund.
• It was earlier keen on such a fund to prevent the unspent amount in a financial year from being returned to the Finance Ministry as defence purchases generally tend to have long procurement cycles.
• The reasons for no longer seeking the fund are: the limited utility of such a fund, rules governing its creation that state the Government should have surplus funds, which is not so in the prevailing fiscal situation, and assurance from the Finance Ministry for additional funds, if required.

Defence Procurement Policy (DPP)

• Defence Procurement Procedure (DPP)-2016, which has come into effect from April 2016, focuses on institutionalizing, streamlining and simplifying defence procurement procedure to give a boost to “Make in India” initiative of the Government of India.
• It does so by promoting indigenous design, development and manufacturing of defence equipment, platforms, systems and sub-systems.
• Defence procurement widely speaks of the procedure through which the officers in service acquire all manners of equipments, goods, services and works they require to counterbalance their duties and charge.
• Defence Procurement Procedure in essence is a set of guidelines sanctioned by Defence Acquisition Council (DAC)in order to procure defence equipment and technologies.

Features

Defence acquisition isn’t a regular open market industrial mode of procurement. It is rigidly bound by nonpareil features like-

• Technological complexity
• Foreign suppliers
• Steep prices
• Foreign exchange associations
• Geo – political ramification

Acquisition Categories of Equipment Procurement

• A new category of procurement ‘Buy {Indian-IDDM (Indigenously Designed, Developed and Manufactured)}’ has been introduced in Defence Procurement Procedure-2016 and the same has been accorded top most priority for procurement of capital equipment.
• Preference has been accorded to ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ categories of capital acquisition over ‘Buy (Global)’ & ‘Buy & Make (Global)’ categories.
• Requirement of Indigenous content has been enhanced / rationalized for various categories of capital acquisition.
• The ‘Make’ Procedure has been simplified with provisions for funding of   90 % of development cost by the government to Indian industry and reserving projects not exceeding development cost of Rs. 10 crore (government funded) and Rs. 3 crore (industry funded) for MSMEs.

Aim of DPP

• The prime aim of DPP is to facilitate the armed forces with military equipments, systems and other needful platforms with an assurance of never fading quality standards, performance capabilities through matchless utilization of budget allocation.
• DPP also emphasizes upon transparency and simplicity in the procedure to procure defence mechanism and equipments to food and daily usable used by the forces around the country.
• It also aims towards increasing the designing, drafting, producing and manufacturing capacities of the enterprises associated to MSME (Ministry of Micro Small and Medium Enterprise).
• Another fundamental aim of DPP is to timely procure the products as the delay or the buffer period between procuring and procurement of goods, equipments can be a big differential gap if any troublesome situation emerges or if any help is requested by any country worldwide.
• It also aims to include government funding for research and development process to be conducted within India for faster, cost-effective and local analysis oriented results.

Scope of DPP

• The scope of DPP is to cover all kinds of capital acquisitions whether undertaken by Ministry of Defence (MoD), Defence Services and Indian Coast Guard from both the heads i.e. indigenous sources as well as ex-import parties except for medical equipment.
• DPP-16 has also raised the offset clause to Rs. 2000 cr. from Rs. 300 cr. which was set previously for Buy (Global) category, which means that if a foreign player sells arms and ammunitions to India, it’ll be mandatory to invest 30% of procurement cost into Indian firms directly or in-directly.
• The scope of DPP has been drastically enhanced by the DPP-16, where Government will assure 90% of the funds for acquisition of equipment, components or upgrades thereof, to be designed, developed and manufactured by India for the projects under ‘Make’ category; previously the funds provided for “Make” category projects carried out in India was 80%.
• DPP-16 takes a step towards transforming the Indian defence system to a self-reliant system which can curtail its imports and fulfill its own needs.
• DPP-16 also states 100% refund from the government, in case of delay of procurement from vendor. The government will be bound to pay the base cost plus Research & Development (R&D) cost to the vendor if the procurement gets delayed for more than 24 months.
• The scope has also been duly amplified for small vendors who can now supply indigenous parts to the foreign vendors.
• With this increased scope we can now buy more form India; companies would have to establish manufacturing plants in India to meet the defence requisites.
• With present prescribed procedure the companies rather than bribing the officials can lower the quotes of the contract, helping India with another darkened corner of our system.

Achievement have been made by the Government under this programme

• Defence Acquisition Council (DAC) accorded approval of 136 capital procurement cases at an estimated cost of Rs. 4,00,714/- crore during the last two financial years (2014-15 and 2015-16) and current year 2016-17 (upto January 2017), out of which 96 cases involving Rs. 2,46,417/- crore are under the ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy & Make (Indian)’, ‘Make’ categories.
• 141 contracts with total value of Rs. 2,00,010/- Crore (approx.) were signed during the last two financial years (2014-15 and    2015-16) and current year 2016-17 (upto December 2016), out of which 90 contracts involving a value of Rs. 83,344/- crore (Approx) were signed with Indian vendors.
• Capital expenditure of Rs. 1,75,420/- Crore (approx.) was incurred on purchase of defence items for Armed forces during the last two financial years (2014-15 and 2015-16) and current year 2016-17 (upto December 2016), out of which of Capital expenditure of  Rs. 1,05,030/- Crore (approx.) was incurred on purchase from Indian vendors.