DEFENCE MANUFACTURING

SUMMARY

  • Third largest armed forces in the world.
  • 31.5% of budget spent on capital acquisitions.
  • 60% of requirements met by imports.
  • INR 250 Billion to be invested in 7-8 years.

REASONS TO INVEST

  • India’s current requirements on defence are catered largely by imports. The opening of the strategic defence sector for private sector participation will help foreign original equipment manufacturers to enter into strategic partnerships with Indian companies and leverage the domestic markets and also aim at global business. Besides helping build domestic capabilities, this will bolster exports in the long term.
  • Opportunities to avail defence offset obligations to the tune of approximately INR 250 Billion during the next 7-8 years.
  • The offset policy (which stipulates the mandatory offset requirement of a minimum 30% for procurement of defence equipment in excess of INR 3 Billion) introduced in the capital purchase agreements with foreign defence players would ensure that an eco-system of suppliers is built domestically.
  • The government policy of promoting self-reliance, indigenisation, technology upgradation and achieving economies of scale and developing capabilities for exports in the defence sector.
  • The country’s extensive modernisation plans, an increased focus on homeland security and India’s growing attractiveness as a defence sourcing hub.
  • High government allocation for defence expenditure.

STATISTICS

  • India has the third largest armed forces in the world.
  • India is one of the largest importers of conventional defence equipment and spends about 31.5% of its total defence budget on capital acquisitions.
  • About 60% of its defence requirements are met through imports.
  • The allocation for Defence in the Budget 2015-16 was approximate INR 2467.27 Billion.

GROWTH DRIVERS

  • Defence Production Policy, 2011 to encourage indigenous manufacture of defence equipment. Defence Procurement Procedure (DPP) has been amended to provide for the following :

1. Preference to ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ over ‘Buy (Global)’.
2. Simplification of the procedure for ‘Buy and Make (Indian)’.
3. Clear and unambiguous definition of indigenous content.
4. Provision for Maintenance TOT to Indian Industry partners.

  • Defence products list for industrial licensing, has been articulated in June 2014, wherein large numbers of parts/components, castings/forgings etc. have been excluded from the purview of industrial licensing. The same is available at the DIPP’s website, www.dipp.gov.in.
  • The defence security manual for the private sector defence manufacturing units has been finalised and put in public domain by the Department of Defence Production. The manual clarifies the security architecture required to be put in place by the industry while undertaking sensitive defence equipments.
  • The MAKE procedure, which aims to promote R&D in the industry with support from the government and the placement of orders (if R&D effort is successful), is also being revised to make it more attractive and unambiguous for the private sector.

FDI POLICY

  • Up to 49% investment is allowed under the government route, above 49% on a case-to-case basis on approval by the Cabinet Committee on Security, wherever it is likely to result in access to modern and state-of-the-art technology.
  • Investments by foreign portfolio investors/FIIs (through portfolio investment) are permitted up to 24% under automatic route.
  • The defence industry is subject to industrial licenses under the Industries (Development and Regulation) Act, 1951.
  • The requirement of single largest Indian ownership of 51% of equity removed.
  • A lock-in period of three years on equity transfer has been done-away with in FDI for defence.
  • FDI in the defence sector is subject to other security conditions.

SECTOR POLICY

PROCUREMENT POLICY:

  • The defence procurement is governed by the Defence Procurement Procedure (DPP). The government has now decided to revise the DPP every year.

OFFSET POLICY:

  • The key objectives of the defence offset policy is to leverage capital acquisitions to develop the Indian defence industry. Mandatory offset requirements of a minimum of 30% for procurement of defence equipment in excess of INR 3 Billion have been envisaged.

GUIDELINES FOR ESTABLISHING JOINT VENTURE (JV) COMPANIES BY DEFENCE PSUs:

  • A well laid out policy for formulation of joint venture between Defence PSUs and private sector keeping in view the objective of Defence Production Policy.

PROCEDURES FOR THE GRANT OF INDUSTRIAL LICENSES HAVE BEEN STREAMLINED:

  • The initial validity period of industrial licenses has been increased to three years from the present two years.
  • Guidelines for the extension of validity of industrial licenses have been issued.
  • Partial commencement of production is treated as commencement of production of all the items included in the license.

FINANCIAL SUPPORT

KEY PROVISIONS OF THE 2015-16 UNION BUDGET:

  • Provision of INR 2,46,727 crore for defense services in the FY 2015-16 Union Budget.
  • Capital outlay for Defence in 2015-16 is INR 94,588 crore.
  • Out of this, INR 77,704 crore has been allocated for Capital Acquisition of the Defence Services.
  • INR 17,181 crore provided under “Other than Capital Acquisition” segment for capital expenditure of Defence R&D Organisation (DRDO), Ordnance Factory Board, Inspection Organisation & other agencies and Capital Works projects of the Services.
  • Either of the following two deductions can be availed:

1. Investment allowance (additional depreciation) at the rate of 15% to manufacturing companies that invest more than INR 1 Billion in plants and machinery acquired and installed between 01.04.2013 to 31.03.2015 provided the aggregate amount of investment in the new plants and machinery during the said period exceeds INR 1 Billion.

2. In order to provide a further fillip to companies engaged in the manufacture of an article or thing, the said benefit of additional deduction of 15% of the cost of new plants and machinery, exceeding INR 250 Million, acquired and installed during any previous year until 31.3.2017.

TAX INCENTIVES:

  • R&D Incentives – Industry/private sponsored research programmes.
  • A weighted tax deduction is given under Section 35 (2AA) of the Income Tax Act.
  • A weighted deduction of 200% is granted to assesses for any sums paid to a national laboratory, university or institute of technology, or specified persons with a specific direction that the said sum would be used for scientific research within a programme approved by the prescribed authority.
  • For companies engaged in the manufacture of an in-house R&D centre, a weighted tax deduction of 200% under Section 35 (2AB) of the Income Tax Act for both capital and revenue expenditure incurred on scientific research and development. Expenditure on land and buildings are not eligible for deduction.

STATE INCENTIVES:

  • Apart from the above, each state in India offers additional incentives for industrial projects. Incentives are in areas like subsidised land cost, relaxation in stamp duty exemption on sale/lease of land, power tariff incentives, concessional rates of interest on loans, investment subsidies/tax incentives, backward areas subsidies, special incentive packages for mega projects.

EXPORT INCENTIVES:

  • Export promotion capital goods scheme.
  • Duty remission scheme.
  • Focus product scheme, special focus product scheme, focus market scheme.
  • Incentives as per ‘merchandise Exports from India Scheme (MEIS)' under new Foreign Trade Policy.

AREA BASED INCENTIVES:

  • Incentives for units in SEZ/NIMZ as specified in respective Acts or for the setting up of projects in special areas such as the North-east, Jammu & Kashmir, Himachal Pradesh and Uttarakhand.

INVESTMENT OPPORTUNITIES

  • Defence products manufacturing.
  • Supply chain sourcing opportunity.
  • Defence offsets.

FOREIGN INVESTORS

  • Airbus (France)
  • BAE India Systems (UK)
  • Pilatus (Switzerland)
  • Lockheed Martin (USA)
  • Boeing India (USA)
  • Raytheon (USA)
  • MBDA (France)
  • IAI (Israel)
  • Rafael (Israel)

AGENCIES