DEFENCE MANUFACTURING

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SUMMARY
  • India is among the top 5 countries spending on defence.1
  • India has the 2nd largest standing army in the world.2
  • As per the FY 2018-19, the allocation for defence in India's budget is around US$ 45.61 bn3 (excluding defence pension). Around 1/3rd of this amount is allocated for capital expenditure.
  • Foreign vendors provide for more than 50% of defence equipment procured. This offers a huge opportunity for import substitution.4
REASONS TO INVEST
  1. India’s requirements on defence are catered largely by imports. The opening of the Defence sector for private sector participation will help foreign Original Equipment Manufacturers (OEMs) to enter into strategic partnerships with Indian companies. This will enable them to leverage the domestic markets as well as aim at global markets. Besides helping in building domestic capabilities, it will also bolster exports in the long term.
  2. During 2016 and 2018, 21 defence offset contracts worth US$ 5.56 bn approximately were signed.5
  3. The offset policy stipulates the mandatory offset requirement of a minimum of 30% for procurement of defence equipment with foreign defence players. It is applicable on categories of procurements where the estimated cost of the acquisition proposal is US$ 286.04 mn or more.6 It would also ensure that an eco-system of suppliers is built domestically.
  4. Favourable government policy which promotes self-reliance, indigenisation, and technology upgradation. The policies also aim at achieving economies of scale, including the development of capabilities, for exports in the defence sector.
  5. India’s extensive modernisation plans with an increased focus on homeland security and growing attractiveness as a defence sourcing hub.
STATISTICS
  • India has the 2nd largest standing army in the world.7
  • India was the 2nd largest importer of arms during 2014-18 with a share of 9.5% of the total world imports. During 2009-13, India was the largest imported with 13% of the world’s share.8
  • Around 1/3rd of the allocation to defence (excluding defence pensions) in the budget is allocated for capital expenditure.8
  • Capital allocation for the Ministry of Defence is 32.19% of the total Central Government capital expenditure in 2019-20 Budget Estimate. The allocation for Defence in India's budget in 2019-20 is around US$ 45.61 bn (excluding defence pension).9
  • More than 50% of defence equipment procured between March 2014 and November 2017, were signed with foreign vendors. This offers a huge opportunity for import substitution.10 
GROWTH DRIVERS
  • Defence Production Policy, 2011 has encouraged indigenous manufacturing of defence equipment. Draft Defence Production Policy was introduced 2018.11
  • Defence Procurement Procedure (DPP), 2011 was amended in 2016 to provide for the following:
    1. DPP focuses on institutionalising, streamlining and simplifying defence procurement procedure to give a boost to “Make in India” initiative. It aims to promote indigenous design, development and manufacturing of defence equipment, platforms, systems and sub-systems. It also aims to enhance the role of MSMEs in the Defence industry.
    2. A new category of capital procurement: Buy Indian - Indigenously Designed, Developed and Manufactured (IDDM) introduced to encourage indigenous design, development and manufacturing of defence equipment.
    3. Preference is given to ‘Buy (Indian- IDDM)’, ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ over ‘Buy (Global)’ category for capital acquisition. A clear and unambiguous definition of indigenous content is provided.
    4. Provision for Maintenance Transfer of Technology (MToT) to Indian partners.
    5. Provisions to allow foreign Original Equipment Manufacturer (OEM) to select Indian Production Agency (PA).
    6. The requirement of minimum indigenous content is rationalised.
    7. ‘Services’ as an avenue for discharging offsets is re-introduced.12
  • Defence products list for industrial licensing was articulated in June 2014. It excluded large numbers of parts/components, castings/ forgings from the purview of industrial licensing.13
  • A revised list was published by the government in January 2019.14 The Defence Security Manual for the licenced defence industries is available in the public domain. The manual clarifies the security architecture required to be put in place by the industry while undertaking the manufacturing of sensitive defence equipment.15
  • MAKE procedure aims to promote research & development in the industry with support from the government and the placement of orders, has been promulgated with provision for 90% funding by Government and preference to MSMEs in a certain category of projects.16
  • The simplified MAKE-II was launched in January 2018, for simplification of collaboration between government and private Indian industries for indigenous design, development and manufacture of defence equipment.17
FDI POLICY
  • 100% FDI in the Defence industry: Up to 49% under the automatic route and FDI above 49%: through Government route, where it is likely to result in access to modern technology.18 
  • The Defence industry is subject to industrial licenses under the Industries (Development and Regulation) Act, 1951 and manufacturing of small arms ammunition under Arms Act, 1959. 19
  • The requirement of a single largest Indian ownership of 51% of equity removed.20
  • A lock-in period of 3 years on equity transfer has been done away with in FDI for Defence.21
  • FDI in the Defence industry is subject to Security Manual Guidelines.
SECTOR POLICY

 

PROCUREMENT POLICY

  • The defence procurement is governed by the Defence Procurement Procedure (DPP 2016).
  • The latest revision of DPP was released in March 2016.
  • DPP focuses on institutionalising, streamlining and simplifying defence procurement procedure to give a boost to “Make in India” initiative.

OFFSET POLICY

  • The key objectives of the defence offset policy are to leverage capital acquisitions to develop the domestic Defence industry. The policy stipulates the mandatory offset requirement of a minimum of 30% for procurement of defence equipment by foreign defence players. It is applicable on categories of procurements where estimated cost of the acquisition proposal is US$ 286.04 mn or more.22

PROCEDURES FOR THE GRANT OF INDUSTRIAL LICENSES HAVE BEEN STREAMLINED

  • The initial validity period of industrial licenses has increased from 3 years to 15 years. It also has a provision to grant an extension for a period of 3 years.23
  • Guidelines for the extension of validity of industrial licenses have been issued. Partial commencement of production is treated as the commencement of production of all the items included in the licence.24 
FINANCIAL SUPPORT

KEY PROVISIONS OF UNION BUDGET: 2017-18, 2018-19 and 2019-20 

  • Development of 2 Defence-related industrial production corridors
  • Announcement of an industry-friendly Defence Production Policy 2018 to promote domestic production by the public sector, private sector and MSMEs.
  • Defence Budget has reached US$45.61 bn in 2019-2025
INVESTMENT OPPORTUNITIES
  • Supply chain sourcing opportunity.
  • Modernization of armed forces – around US$ 130 bn opportunities by 2025
  • Infrastructure development - Manufacturing cluster and park planned in Pune and Dholera
  • R&D - US$ 15.4 mn allocated to set up ‘Technology Development Fund’
  • Defence products manufacturing - Indigenously designed, developed and manufactured (IDDM) is the new method of capital procurement 26
FOREIGN INVESTORS
  • Airbus (France)
  • BAE India Systems (UK)
  • Pilatus (Switzerland)
  • Lockheed Martin (USA)
  • Boeing India (USA)
  • Raytheon (USA)
  • Israel Aerospace Industries (Israel)
  • Rafael Advanced Defense Systems Ltd. (Israel)
  • Dassault Aviation SA (France)27
AGENCIES
  • Department of Defence Production, Ministry of Defence
  • Department for Promotion of Industry & Internal Trade, Ministry of Commerce & Industry, Government of India
  • Department of Commerce, Ministry of Commerce & Industry, Government of India
  • Defence and Strategic Industries Association of India
KEY ACHIEVEMENTS
  • Indigenous defence products unveiled - Akash Surface to Air Missile System, Dhanush Artillery Gun system and Light Combat Aircraft
  • The Defence Procurement Procedure (DPP) amended to introduce Buy Indian-IDDM (Indigenously Designed, Developed and Manufactured)
  • The policy on Strategic Partnerships to encourage the participation of the private sector, in the manufacture of defence platforms and equipment such as aircraft, submarines, helicopters and armoured vehicles.
  • ‘No Objection Certificate (NOC) for export: A web-based single window interface created to issue 'No Objection Certificate'. The process is transparent and time-bound, with the maximum processing time reduced to 25 days and 70% of the NOCs issued in 15 days.
  • The 10th edition of 'DefExpo' was organised from April 11 to 14, 2018 in Chennai, Tamil Nadu.
  • The Government of India has decided to set up two Defence Production corridors, one each in Uttar Pradesh (UP) and Tamil Nadu.
  • A Defence Investor Cell is also functional in the Department of Defence Production.
  • The maiden flight of indigenously developed Automatic Flight Control System (AFCS) integrated on LCH was conducted successfully by Hindustan Aeronautics Limited (HAL).28
SOURCES
  1. “These countries spend the most on defence,” World Economic Forum website, https://www.weforum.org/agenda/2018/05/india-worlds-biggest-defence-military-spender/, accessed on 27 May 2019
  2. “Ministry of Defence Annual Report 2017-18,” Ministry of Defence website, https://mod.gov.in/sites/default/files/Annualreport1718.pdf, accessed on 27 May 2019
  3. “Defence Budget 2019-20,” PIB website: Ministry of Defence, http://www.pib.nic.in/Pressreleaseshare.aspx?PRID=1562374, accessed on 27 May 2019
  4. “Self Reliance in Defence Production,” PIB website: Ministry of Defence, http://pib.nic.in/newsite/PrintRelease.aspx?relid=176303, accessed on 27 May 2019
  5. “Defence Offset Contracts,” PIB website: Ministry of Defence, http://www.pib.nic.in/PressReleaseIframePage.aspx?PRID=1563901, accessed on 27 May 2019
  6. “Defence Procurement Procedure 2016 – Capital Procurement,” Ministry of Defence website, https://mod.gov.in/sites/default/files/dppm.pdf_0.pdf, accessed on 27 May 2019
  7. “Ministry of Defence Annual Report 2017-18,” Ministry of Defence website, https://mod.gov.in/sites/default/files/Annualreport1718.pdf, accessed on 27 May 2019
  8. “SIPRI Fact Sheet- Trends In International Arms Transfers, 2018,” SIPRI website, https://www.sipri.org/sites/default/files/2019-03/fs_1903_at_2018.pdf, accessed on 27 May 2019
  9. “Defence Budget 2019-20,” PIB website: Ministry of Defence, http://www.pib.nic.in/Pressreleaseshare.aspx?PRID=1562374, accessed on 27 May 2019
  10. “Self Reliance in Defence Production,” PIB website: Ministry of Defence, http://pib.nic.in/newsite/PrintRelease.aspx?relid=176303, accessed on 27 May 2019
  11. “Draft Defence Production Policy 2018 – Invite for Comments,” Department of Defence Production website, https://mod.gov.in/sites/default/files/dppm.pdf_0.pdf, accessed on 27 May 2019
  12. “Defence Procurement Procedure 2016 – Capital Procurement,” Ministry of Defence website, https://mod.gov.in/sites/default/files/dppm.pdf_0.pdf, accessed on 27 May 2019
  13. “List of Defence Items Requiring Industrial Licence,” DPIIT website, https://dipp.gov.in/sites/default/files/pn3_2014.pdf, accessed on 27 May 2019
  14. “Revised List of Defence Items Requiring Industry License,” PIB website: Ministry of Commerce & Industry, http://pib.nic.in/newsite/PrintRelease.aspx?relid=187164, accessed on 27 May 2019
  15. “Security Manual for Licensed Defence Industries,” DPIIT website, https://dipp.gov.in/sites/default/files/1403158012.pdf, accessed on 27 May 2019
  16. “‘Make-II’ Projects,” Department of Defence Production website, http://makeinindiadefence.gov.in/projects/index/2, accessed on 27 May 2019
  17. “Simplified ‘Make-II’: Major Steps Towards ‘Make in India’ in Defence Production,” PIB website: Ministry of Defence, http://pib.nic.in/newsite/mbErel.aspx?relid=175681, accessed on 27 May 2019
  18. “Consolidated FDI Policy Circular of 2016,” DPIIT website, https://dipp.gov.in/sites/default/files/FDI_Circular_2016%282%29.pdf, accessed on 27 May 2019
  19. “Revised List of Defence Items Requiring Industry License,” PIB website: Ministry of Commerce & Industry, http://pib.nic.in/newsite/PrintRelease.aspx?relid=187164, accessed on 27 May 2019
  20. “DIPP on a Overdrive to Boost Manufacturing,” PIB website: Ministry of Commerce & Industry, http://pib.nic.in/newsite/PrintRelease.aspx?relid=110341, accessed on 27 May 2019
  21. “Investment Commitments under ‘Make In India’progamme,” PIB website: Ministry of Commerce & Industry, http://pib.nic.in/newsite/PrintRelease.aspx?relid=137563, accessed on 27 May 2019
  22. Defence Procurement Procedure 2016 – Capital Procurement,” Ministry of Defence website, https://mod.gov.in/sites/default/files/dppm.pdf_0.pdf, accessed on 27 May 2019
  23. “Defence Investor Cell,” Defence Investor Cell website, https://defenceinvestorcell.gov.in/, accessed on 27 May 2019
  24. “Industrial Licences to Defence Sector,” PIB website: Ministry of Defence, http://pib.nic.in/newsite/PrintRelease.aspx?relid=123704, accessed on 27 May 2019
  25. “Defence Budget 2019-20,” PIB website: Ministry of Defence, http://www.pib.nic.in/Pressreleaseshare.aspx?PRID=1562374, accessed on 27 May 2019
  26. “Defence Manufacturing – industry Trends,” Invest India website, https://www.investindia.gov.in/sector/defence-manufacturing, accessed on 27 May 2019
  27. “Defence Manufacturing – Major Investors,” Invest India website, https://www.investindia.gov.in/sector/defence-manufacturing, accessed on 27 May 2019
  28. “Year End Review – 2018 Ministry of Defence,” PIB website: Ministry of Defence, http://pib.nic.in/newsite/printrelease.aspx?relid=186966, accessed on 27 May 2019
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