Defence Procurement in India: Procedures, Offsets, Make in India and Strategic Partnerships

India’s defence acquisition framework serves as the core mechanism for modernizing the armed forces while fostering domestic manufacturing. Overseen primarily by the Ministry of Defence through the Defence Acquisition Council (DAC) chaired by the Union Defence Minister, capital acquisitions are guided by the Defence Acquisition Procedure (DAP) 2020. DAP 2020 replaced the earlier Defence Procurement Procedure (DPP) to align procurement strategies with self-reliance goals, procedural efficiency, and domestic technology development.

Defence Acquisition Hierarchy and Categories

The procurement framework establishes a strict priority hierarchy for capital acquisitions, favoring indigenously designed and built platforms over direct imports.

• Buy (Indian – IDDM): Top priority category requiring products Indigenously Designed, Developed, and Manufactured with at least 50% Indigenous Content (IC).
• Buy (Indian): Equipment designed abroad but manufactured in India, requiring a minimum of 60% IC (or 50% if indigenously designed).
• Buy and Make (Indian): Purchase of an initial quantity from a foreign OEM followed by indigenous production through Transfer of Technology (ToT) with a minimum 50% IC in the Make portion.
• Buy (Global – Manufacture in India): Outright purchase from a foreign vendor with mandatory local manufacturing of parts or Maintenance, Repair, and Overhaul (MRO) facilities with 50% IC.
• Buy (Global): Outright purchase from foreign or domestic vendors, given the lowest procurement priority. Requires 30% IC for Indian vendors.

The Defence Offset Policy

Introduced in 2005 under DPP, the offset policy mandates foreign Original Equipment Manufacturers (OEMs) selling weapons systems to reinvest a percentage of the contract value back into the domestic defence industry. Managed by the Defence Offset Management Wing (DOMW), offsets aim to build local technical capacity, encourage foreign direct investment, and promote defence exports.

• Threshold: Applicable to capital acquisitions under Buy (Global) or Buy and Make categories with an estimated contract value above ₹2,000 crore.
• Offset Percentage: Foreign vendors must discharge offset obligations equivalent to 30% to 50% of the total contract value.
• Exemptions: Offsets are excluded from Inter-Governmental Agreements (IGA), Government-to-Government (G2G) deals, and single-vendor ab-initio purchases.
• Discharge Avenues: Direct purchase of defence products from Indian Offset Partners (IOPs), FDI in joint ventures, transfer of critical technology, and funding of research and development facilities in Indian institutions.
• Multipliers: DAP 2020 introduced multiplier credits (up to 4x) for foreign vendors transferring high-end, critical technologies to DRDO or partnering with MSMEs and Micro-enterprises.

Make in India and Indigenization Pathways

To reduce reliance on defense imports, the government uses structured schemes and policy interventions aimed at driving domestic design and manufacturing.

Make Categories in DAP

1. Make-I (Government Funded): Up to 70% government funding provided for prototype development of complex systems led by Indian companies.
2. Make-II (Industry Funded): Projects developed by the private sector with no government funding for prototype creation, aimed at import substitution.
3. Make-III (Import Substitution): Procurement of products manufactured in India as substitutes for imported assemblies or sub-assemblies.

Supportive Institutional Frameworks

• Positive Indigenization Lists (PIL): Multiple lists issued by the Ministry of Defence banning the import of specified weapons, ammunition, and platforms beyond designated timelines to guarantee orders for domestic manufacturers.
• Innovations for Defence Excellence (iDEX): Launched in 2018 to engage startups, MSMEs, and individual innovators in developing dual-use technologies.
• Defence Industrial Corridors (DICs): Two dedicated corridors established in Uttar Pradesh and Tamil Nadu to build integrated supply chain hubs and attract industrial investments.
• FDI Limits: Foreign Direct Investment in the defence sector is permitted up to 74% under the Automatic Route and up to 100% via the Government Route for state-of-the-art technologies.

Strategic Partnership (SP) Model

Notified in 2017 under the defence procurement framework, the Strategic Partnership Model bridges the gap between private sector giants and foreign OEMs. Under this framework, Indian private firms are designated as Strategic Partners to build large-scale complex platforms in India through technology transfers from shortlisted international OEMs.

Defence Procurement Key Facts Summary

• Defence Acquisition Council (DAC): The apex decision-making body for defence capital procurement, established in 2001 following post-Kargil security reviews, chaired by the Defence Minister.
• Defence Procurement Board (DPB): Operates under the DAC to oversee technical evaluations, field evaluation trials, and commercial negotiations.
• DAP 2020 Firsts: Introduced Leasing as a strategic procurement category to reduce upfront acquisition costs for non-mission critical equipment.
• Indigenous Content Calculation: Based strictly on the cost of indigenous material, services, and software relative to total contract value, excluding taxes and duties.
• Defence Offset Management Wing (DOMW): Dedicated body within the Department of Defence Production responsible for monitoring and processing offset proposals.
• Trial and Testing Reforms: DAP 2020 streamlined Field Evaluation Trials by eliminating repetitive testing in foreign environments and accepting certified vendor data.
• Technology Development Fund (TDF): Managed by DRDO to provide grants-in-aid to MSMEs and startups for developing defence technologies.