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Buy (Indian) and Buy (IDDM) — Clash of the Titans

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The creation of a new category 'Buy (IDDM)' is a good move, but therein lies the rub as this category overlaps and conflicts with the 'Buy (Indian)' category. The question is whether 'Buy (IDDM)' is designed to promote indigenisation in a way that 'Buy (Indian)' could not.....

In a somewhat surprising move the Defence Acquisition Council (DAC) decided in January this year to create a new procurement category, called 'Buy (Indian Designed, Developed and Manufactured)', or 'Buy (IDDM)' for short. It was surprising because the Committee of Experts (CoE) set up last year by the Ministry of Defence (MoD) had expressed satisfaction with the existing categories: 'Buy (Indian)', 'Buy and Make (Indian)', 'Make', 'Buy and Make', and 'Buy (Global)', all of which were arranged in a descending order of preference in 2013.

The Defence Procurement Procedure (DPP) 2016, an incomplete version of which was released on the opening day of Defexpo 2016 on March 28, has positioned 'Buy (IDDM)' category at the top of the hierarchy. This will henceforth be the most preferred category for procurement of equipment, weapon systems and other platforms. With the introduction of 'Buy (IDDM)' there will now be one more category to choose from but therein lies the rub as this category overlaps and conflicts with the 'Buy (Indian)' category. What made MoD think of this stratagem is difficult to fathom.

While DPP 2016 throws little light on the reason why this category has been created, a 'Press Note' circulated by MoD in January 2016 after the DAC meeting simply said that it is intended 'to promote indigenous design development and manufacturing'. The question is whether 'Buy (IDDM)' is designed to promote indigenisation in a way that 'Buy (Indian)' could not. Was there something that was holding back the Indian industry from offering Indian designed, developed and manufactured products under the 'Buy (Indian)' category which, up till now, was the most preferred category. This requires a closer look at these two categories both of which aim at sourcing of products from the Indian vendors.

What are these categories all about?

According to DPP 2016, 'Buy (IDDM)' category 'refers to the procurement of products from an Indian vendor meeting one of the two conditions: products that have been indigenously designed, developed and manufactured with a minimum of 40% Indigenous Content (IC) on cost basis of the total contract value; or, products having 60% IC on cost basis of the contract value, which may not have been designed and developed indigenously'.

This is strikingly reminiscent of what DPP 2013 said by way of explanation, as it were, to hierarchical ordering of the procurement categories: 'Preference will be given to indigenous design, development and manufacture of defence equipment' and, therefore, 'whenever the required arms, ammunition and equipment are possible to be made by (the) Indian industry within the time lines required by the Services, procurement will be made from indigenous sources'.

It was in this background that 'Buy (Indian)' was made the most preferred mode of procurement. As for the requirement of indigenous content, DPP 2013 stipulated that products procured under this category must have a minimum of 30% indigenous content on 'cost basis' which, in simpler terms, means that the value of the indigenous content should be 30 percent of the total value of the contract. This requirement has now been raised to 40 percent in DPP 2016.

Commonalities between the two categories

As the things stand now, there are at least three commonalities between the two categories. One, both these categories entail procurement of equipment through outright purchase. Two, under both these categories the equipment can be procured only from the Indian industry/vendors.  Three, the equipment offered under these categories must have an indigenous content which is calculated in a similar manner with reference to the total value of the contract.

The commonalities between the two categories notwithstanding, DPP 2016 seeks to create a distinction between them on account of the extent of requirement of indigenous content in the product but, in the process, ends up creating a conflicting overlap.

Overlap between 'Buy (IDDM)' and 'Buy (Indian)'

  • If the product is indigenously designed, developed and manufactured it must have indigenous content of 40 percent when it is procured under 'Buy (IDDM)'.
  • The same product can be procured under 'Buy (Indian)' also as products purchased under this category are required to have a minimum of 40 percent of indigenous content.

Conflict between 'Buy (IDDM)' and 'Buy (Indian)'

  • If the product is not indigenously designed, developed and manufactured it must have indigenous content of 60 per cent when it is procured under 'Buy (IDDM)'.
  • But the same product, even when not designed, developed and manufactured in India, can be procured under 'Buy (Indian)' category with indigenous content of 40 percent.

It is possible that this confusion is on account of the way these two categories are described in DPP 2016 but it is precisely this kind of polysemous provisions in the DPP which create bottlenecks in processing of the procurement proposals as different officials tend to interpret the same provisions differently.

In fact, the way these two categories are intertwined could create difficulty for those responsible for preparing the statement of case as they may find it difficult to decide which of the two procurement categories should be recommended.

Conflict with 'Buy (Global)'

The 'Buy (IDDM)' and 'Buy (Indian)' categories are not just in conflict with each other but also with the 'Buy (Global)' category, which figures at the end of the hierarchy of procurement categories. 'Buy (Global)' category refers to outright purchase of equipment from foreign or Indian vendors. DPP 2016 does not prescribe the extent of indigenous content required in the product offered by the Indian vendors who participate in 'Buy (Global)' tenders. (Even DPP 2013 did not prescribe the extent of indigenisation in such cases.)

It would imply that Indian vendors participating in global tenders issued by MoD could escape the condition regarding the indigenisation content applicable to 'Buy (IDDM)' and 'Buy (Indian)' categories. But there is a catch. In the context of offsets there was a stipulation in DPP 2013 that if the indigenous content in the product offered by the Indian companies participating in global tender is less than 50 percent, the company concerned will be required to discharge offset obligation on the foreign exchange component of the contract.

The offset provisions of DPP 2016 have not been notified as yet but assuming that threshold for offsets for Indian companies participating in global tenders will remain unchanged, three different percentages will be applicable in three different categories for the same product that is not designed, developed and manufactured in India:

  • 60 percent under 'Buy (IDDM)'
  • 40 percent under 'Buy (Indian)'
  • 50 percent under 'Buy (Global)' if the Indian vendor has to escape the offset obligation; it could even be lower if the vendor is prepared to discharge the offset obligation

Meeting the requirement of indigenous content an arduous task

All the three variants of the 'Buy' category - 'Buy (IDDM)', 'Buy (Indian)', and 'Buy (Global)  are to be invoked for outright commercial off-the-shelf (COTS) purchase of equipment.

These categories are distinct from 'Buy and Make' and 'Buy and Make (Indian)' categories in which outright purchase of a limited quantity of the product is followed by transfer of technology by the foreign manufacturer to the Indian companies for production of the remaining quantity in India.

These categories are also distinct from the 'Make' category which entail indigenous design, development and manufacture of prototype of high technology complex systems for use by the armed forces in future. Thus there is hardly any scope for the Indian companies to start designing and developing a product for production after MoD comes out with the requirement either by way of the Request for Information (RFI) or Request for Proposal (RFP). They have to be ready with the product to meet the requirement. How realistic is this expectation?

It is widely believed that India meets between 60 to 65 percent of the requirement of military equipment through imports. It is no secret that this is largely because there are very few products that can be purchased from indigenous sources through the 'Buy (Indian)' route although the requirement of indigenous content under this category has so far been as low as 30 percent (now raised to 40 percent). Under 'Buy (Global)' category also there have been very few instances of participation by the Indian companies.

Considering that the Indian companies have been struggling to make products even with 30 percent indigenous content, it is difficult to visualise how raising of this threshold to 40 percent with additional stipulation that the product should have been designed, developed and manufactured in India, and to 60 percent if the product does not comply with this stipulation, is going to provide an impetus to indigenous defence manufacturing.

The difficulty in achieving the stipulated level of indigenisation is compounded by the manner in which the indigenous content is to be calculated. (See the Table) It is going to be difficult for the Indian vendors to ensure prescribed extent of indigenous content not just in the main equipment but also in the spares, tools and test equipment, most of which will be made by their sub-vendors.

This story does not end here. The manner in which MoD will satisfy itself about the claim of indigenous content in a product is fraught with uncertainties for the vendors. The bureaucratese of the relevant provision in DPP 2016 is intimidating. It says,

“The onus of proving that the equipment design is indigenous rests with the vendor, and such vendor claims will be verified by a committee comprising scientists from DRDO* and representatives from SHQs, based on documents issued by authorised agencies and presented by the vendors. The process of verifying the availability of design and development should be completed prior to fielding of SoC* for categorisation; guidelines pertaining to the same will be issued by DG* (Acquisition) with inputs from DRDO.”

(*DRDO: Defence Research & Development Organisation; SHQ: Services Headquarters; SoC: Statement of Case; DG: Director General)

While one must wait for the guidelines to be issued to see how this provision is likely to play out, the prescribed procedure is inherently complex and, by implication, prone to delays.

Promoting higher levels of indigenisation

One could argue that since 'Buy (IDDM)' is now the most preferred category, an Indian vendor, who may have a product that is not designed, developed and manufactured in India, will at least feel encouraged to increase the extent of indigenisation to 60 per cent to be able to sell the product under the preferred category.

In other words, if two vendors have the same product that is not designed and developed and manufactured in India, with indigenous content of 60 percent and 40 percent respectively, it is the former who will have a better chance of selling as MoD will be obliged to categorise the purchase under 'Buy (IDDM)' category. The other vendor whose product has indigenous content of 40 percent will not even be able to participate in the tender.

Viewed in this light 'Buy (IDDM)' may incentivise higher level of indigenisation of products but two things need to be borne in mind. Higher level of indigenisation does not necessarily lower the price of the product. Secondly, as brought out earlier, the track record of indigenisation of COTS product has not been very encouraging in the past.

Keeping it simple

The procurement procedure was first promulgated in 2002. Despite several revisions since then it continued to be criticised for being tardy, cumbersome and complex. Simplification of procedure has always been considered as important as the steps required to make India self-reliant in defence production. Creation of the 'Buy (IDDM)' category does not simplify the procedure any. It has actually ended up in clogging the categorisation process because of its conflicting overlap with the 'Buy (Indian)' category and even with the 'Buy (Global)' category to some extent. The uncertainty arising from this militates against the objective of simplifying the procedures and ensuring timely procurement of military equipment.

Preamble to DPP 2016 states that it focuses on 'institutionalising, streamlining, and simplifying defence procurement procedure to give a boost to 'Make in India' initiative of the Government of India, by promoting indigenous design, development and manufacturing of defence equipment, platforms, systems and sub-systems'.

These are lofty ideals but what the DPP 2016 does not answer is in what way 'Buy (IDDM)' category provides a greater impetus to indigenous design, development and production than the 'Buy (Indian)' category which has been a part of DPP since its first version was promulgated in 2002.

The question as to what is expected to be achieved under 'Buy (IDDM)' that could not be achieved under 'Buy (Indian)' needs to be addressed. Numerous seminars held by defence think tanks, industry associations and others would be an ideal platform for the MoD officials to spread awareness and understanding of these categories, as indeed of the entire DPP 2016.

The writer is former Financial Advisory (Acquisition) and Additional Secretary and Member, Defence Procurement Board, MoD.

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