Make in India – Defence: Review of Key Initiatives

Currently, India has the third largest military in the world and is the sixth biggest defence spender. Indian defence industry is dominated by defence public sector undertakings (DPSUs) and ordnance factories (OFs) which contribute about 90% of the total domestic defence manufacturing output.

Need for Make in India in Defence

• India allocates about 1.8% of its GDP towards defence spending, of which 40% is allocated to capital acquisitions and only about 30% of India’s equipment is manufactured in India, mainly by public sector undertakings. Also, there is large import content in the defence products that are manufactured domestically
• 60% of defence related requirements are currently met through imports.
• As India is one of the largest importer of Defence equipment, through the Make in India initiative India will have advantage of having a manufacturing base in the country but also save much-needed thousands of crores in foreign exchange.

The ‘Make in India’ policy for the defence sector aims to reverse the current imbalance between the import of defence equipment and indigenous manufacture of defence equipment’s without adversely affecting the requirements, capability.

Steps taken by government to promote make in India in Defence:

Government has taken various measures in Defence industry to promote Make in India. Some of the measures are

1. Increasing FDI in Defence sector
2. Revising Defence procurement Policy as per the needs of Make in India
3. Amended India’s Defence off set policy
4. Strategic Partnership policy-Private sectors
5. Fiscal incentives to defence sector

Liberalizing FDI Policy

Foreign investment up to 49% is permitted under the automatic route, foreign investment beyond 49% and upto 100% is permitted through Government approval, wherever it is likely to result in access to modern technology.

Defence Procurement Procedure

To give a boost to “Make in India”, Ministry of defence formulated new Defence Procurement Procedure (DPP). The DPP encourages Make in India by promoting indigenous design, development and manufacturing of defence equipment, platforms, systems and sub-systems. Some of the key provisions in DPP 2016 with respect to Make in India are:

• 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 / rationalised 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.
• Indian companies are allowed for tie-ups with a foreign Original Equipment Manufacturer (OEM) for Transfer of Technology (ToT) under ‘Buy & Make (Indian)’ category.
• Under ‘Buy & Make’ Category of Capital Acquisition, the foreign vendor is required to transfer the Technology to Indian Production agency for indigenous production of the items.

Defence Offset Policy

Offsets are essentially benefits that a buyer gets from a seller in the form of technology or capability that Indian industry gets from a foreign vendor selling equipment to India.

The recent offset policy in capital purchase contracts with foreign defence OEMs, stipulates a mandatory offset requirement of a minimum of 30% for defence contracts. The minimum contract value for which offsets are mandatory has now been revised from INR 300 crore to INR 2,000 crore.

Strategic Partnership Policy

The strategic partnership policy is another step in the ambitious Make in India programme, to attract private sector and foreign investment. The government aims to build a strong defence-industrial base in the country through the SP policy. Some of the key provisions of the policy are:

• Under strategic partnership policy selected Indian private sector companies will partner with foreign original equipment manufacturers (OEMs) to jointly manufacture fighter jets, helicopters, submarines and armoured vehicles like tanks under the “Make in India” framework
• The policy lays down detailed guidelines for the selection of Indian companies as “strategic partners”, which will be “fair, reasonable, non-arbitrary, transparent and rational, and based upon the broad parameters of financial strength, technical capability and capacity/infrastructure”.
• The foreign OEMs will be selected in a separate but parallel process, which will primarily depend on the “range, depth and scope” of the transfer of technology offered in identified areas.

Ease of Doing Business

• Department of Defence production in order to promote ease of doing business to achieve national vision of Make in India has instituted a mechanism of awarding Green Channel status to firms having predefined financial and quality credentials.
• Validity of Industrial Licence granted under the IDR Act has been increased to 15 years from 7 years with a provision to further extend it by 3years on a case-to-case basis. Renewable of registration can be carried out on self-certification basis.
• A ‘Make in India’ portal for Defence Production has been launched. It provides policy and procedural issues relevant for defence manufacturing industry. Test facilities of DPSUs/OFB/DGQA/DGAQA/DRDO/Forces, which can be utilized by the private sector, have been displayed. Investors can also seek clarifications or ask questions related to defence production.
• Large number of parts/components, castings/ forgings etc. have been excluded from the purview of industrial licensing under defence products list for industrial licensing announced in June 2014;

Fiscal Incentives

• In budget 2017-18, defence budget has received a boost of 6.2% as compared to budget 2016-17.
• The preferential treatment given to Defence Public Sector Undertakings (DPSUs) in excise duty/custom duty has been discontinued to create a level playing field. As per the revised policy, all Indian industries (public and private) are subjected to the same kind of excise and custom duty levies (April 2015).
• Exchange Rate Variation protection has been made applicable for Indian private sector at par with Public Sector Undertakings for all categories of capital acquisitions (August 2015).
• The custom duty exemption on import of defence equipment has been removed to encourage imports and incentivize domestic manufacturing.

Achievements and Constraints

India’s first private sector small arms manufacturing plant was started in Madhya Pradesh which will supply world class weapons to the armed forces in sync with the country’s defence indigenisation programme.

several products manufactured in India like the HAL Tejas Light Combat Aircraft, the composites Sonar dome, a Portable Telemedicine System (PDF) for Armed Forces, Penetration-cum-Blast (PCB) and Thermobaric (TB) ammunition specifically designed for Arjun tanks, a heavyweight torpedo called Varunastra manufactured with 95% locally sourced parts and medium range surface to air missiles (MSRAM).

Now Indian companies are partnering with Airbus (France),BAE Systems (UK),Pilatus, (Switzerland),Lockheed Martin (USA),Boeing (USA),Raytheon (USA),Israel Aerospace Industries (Israel),Rafael Advanced Defence Systems Ltd. (Israel),Dassault Aviation SA (France) towards realizing full potential of Make in India in defence manufacturing

Some of the constraints for Make in India in defence include the following:

• Defence is one of the sectors that attracted least foreign investment.
• Development of weapons under Make in India are not meeting the requirements of Army. For example, Assault rifles which are manufactured in India to replace INSAS rifles as it failed the basic test.
• After liberalising norms also, less number of private sectors are participating in defence production due to delay in policy clearance for private sectors.
• Lack of adequate and skilled human capital in research organisations like DRDO.

Steps to be taken

The key suggestions include developing human resources as per requirements of Make in India; spending more funds in Research & development that cater the needs of Make in India in defence; encouraging collaborations with technically advanced countries; focusing more on technology transfers rather than procuring; start-ups should be encouraged in Defence sector and developing infrastructure related to Defence.