Defence Manufacturing

Summary
  • India is among the top five countries with the highest military spending in 2019. 1
  • India has the second-largest standing army in the world. 2
  • As per the Union Budget for the financial year 2020-21, the total allocation for Defense is around USD 62.85 Bn.  Around 1/4th of this amount is allocated for capital expenditure. 3
  • On 21st December 2020, Implementing Arrangement on Defence Industry Cooperation between Dept. of Defence Production, Ministry of Defence, India and General Dept. of Defence Industry, Ministry of National Defence, Vietnam to provide a framework for promoting cooperation between the defence industries of the two countries.
  • The value of defence exports in 2020-21 is INR 5711 cr.30 
  • Union Budget 2021-22 has proposed increased funding for Border Roads Organisation (BRO) to boost infrastructure in frontier areas.
Reasons to Invest
  • 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.
  • Since 2014 the Ministry of Defence has signed more than 180 contracts with the Indian Industry, as of December 2019. These contracts were valued over USD 25.8 Bn approximately. 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. 5

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Recent Announcements

21nd July 2021: DRDO successfully flight-tests indigenously developed MPATGM for minimum range.

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20th July 2021: MoD issues RFP for construction of six P-75(I) submarines for Indian Navy to bringing in the latest submarine design and technologies as part of the project.

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08th June 2021: Raksha Mantri Shri Rajnath Singh holds a telephonic conversation with the Deputy Prime Minister & Defence Minister of Israel. Stresses on deepening defence cooperation & advancing strategic partnership with Israel. 

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29th June 2021: MoU was signed between the Indian Navy and M/s Bharat Electronics Limited, Bangalore on 29 June 21at Integrated Headquarters, Ministry of Defence (Navy), New Delhi forcreation of a joint Technology Incubation Forum (TIF).

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28th June 2021: Raksha Mantri Shri Rajnath Singh in Ladakh; Dedicates to the nation 63 bridges built by BRO in six States & two UTs to bolster border infrastructure for the security & development of the nation.

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Statistics
  • India’s total expenditure on modernization and equipment in the defence sector in the last three fiscals (till January 2020) was about USD 37 Bn. 6
  • Around 1/3rd of the allocation to defence (excluding defence pensions) in the budget for FY 2020-21 is allocated for capital expenditure. 7
  • Total defence budget allocation for the Ministry of Defence is 15.49% of the total Central Government expenditure in the 2020-21 Budget. The allocation for Defence in India's budget in 2020-21 is around USD 62.06 Bn. 
  • During 2018-19 to 2019-2020 and 2020-21(till December 2020), the Government has accorded Acceptance of Necessity (AoN) to 112 Defence proposals, worth INR 1,99,860 cr approx, under the various categories of Capital Acquisition to promotes domestic manufacturing as per the Defence Acquisition/Procurement Procedure.32
Growth Drivers
  • Defence Procurement Procedure (DPP) has been revised in 2016 and special provisions for simulating growth of domestic defence industry have been introduced: 8
    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) has been introduced to encourage indigenous design, development and manufacturing of defence equipment.
    3. Preference has been given to ‘Buy (Indian)’, ‘Buy and Make (Indian)’ and ‘Make’ categories over ‘Buy (Global)’ and ‘Buy and Make (Global)’ categories. A clear and unambiguous definition of indigenous content is provided.
    4. The ‘Make’ Procedure has been simplified with provisions for funding of 90% of development cost by the Government to Indian industry.
    5. Separate procedure for ‘Make-II’ category has been notified under DPP to encourage indigenous development and manufacture of defence equipment. Number of industry friendly provisions such as relaxation of eligibility criterion, minimal documentation, provision for considering proposals suggested by industry/individual etc. have been introduced in this procedure.
    6. Defence Products list requiring Industrial Licences has been rationalised and manufacture of most of parts or components does not require Industrial License. The initial validity of the Industrial License granted under the IDR Act has been increased from 03 years to 15 years with a provision to further extend it by 03 years on a case-to-case basis.
    7. Provision for Maintenance Transfer of Technology (MToT) to Indian partners.
    8. Provisions to allow foreign Original Equipment Manufacturer (OEM) to select Indian Production Agency (PA).
    9. The requirement of minimum indigenous content is rationalised.
    10. ‘Services’ as an avenue for discharging offsets is re-introduced. 9
    11. For the year 2021-22, the allocation for domestic procurement has been enhanced compared to previous years and is about 64.09% i.e. INR 71,438.36 cr of the allocated amount for military modernisation.
FDI Policy
  • FDI in the defence sector is allowed up to 74% through automatic route (from earlier 49%) for companies seeking new industrial licenses. FDI beyond 74% and up to 100% will be permitted under the Government route. 10
  • The cumulative FDI equity inflow in the Defence industry is USD 10.15 mn during the period April 2000 to March 2021.25

 

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Sector Policy

PROCUREMENT POLICY 11 

  • Defence procurement is governed by the Defence Procurement Procedure (DPP).
  • 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 the “Make in India” initiative.

OFFSET POLICY 11

  • 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 to categories of procurements where the estimated cost of the acquisition proposal is USD 286.04 Mn or more.

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. 12
  • 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. 13 

DEFENCE ACQUISITION PROCEDURE (DAP)- 202033

  • DAP 2020 encourages indigenous designing and manufacturing of defence items. The ‘Make’ Procedure aims to achieve the objective of self-reliance by involving greater participation of Indian industries including the private sector through the following mechanisms:
  • Make-I (Government Funded): This involves the design and development of equipment, systems, major platforms or upgrades thereof by the industry. Ministry provides financial support upto 70% of prototype development cost or a maximum INR 250 cr per Development Agency (DA).
  • Make-II (Industry Funded): This includes design & development and innovative solutions by Indian vendor, for which no Government funding is provided, but it has the assurance of procurement on successful prototype development.
  • Government has established two Defence Industrial Corridors, one each in the States of Uttar Pradesh and Tamil Nadu. The investments of INR 20,000 cr are planned in Defence corridors of Uttar Pradesh and Tamil Nadu by year 2024.

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Financial Support

KEY PROVISIONS OF UNION BUDGET: 2021-2231

  • Allocations made to Armed Forces {Army, Navy (including Jt. Staff), and Air Force} covering both Revenue (Net) and Capital Heads are INR 3 lakh cr. Basically, the capital expenditure among this INR 1 lakh cr.
  • Union Budget 2021-22 showed Highest ever increase in capital outlay INR 1,35,060.72 cr in the last 15 years.
Investment Opportunities
  • In the Indian Defence Sector, investment opportunities are in the following areas: 16 
    • Supply chain sourcing opportunity
    • Modernization of armed forces
    • Infrastructure development 
    • Research and Development 
  • Defence products manufacturing - Indigenously designed, developed and manufactured (IDDM) is the new method of capital procurement  16

 

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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) 17
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 17
  • Border Roads Organization 26
Key Achievements
  • Indigenous defence products unveiled - Akash Surface to Air Missile System, Dhanush Artillery Gun system and Light Combat Aircraft 18
  • The Defence Procurement Procedure (DPP) has been amended to introduce Buy Indian-IDDM (Indigenously Designed, Developed and Manufactured) 19
  • Strategic Partnership Model introduced to encourage the participation of the private sector, in the manufacture of defence platforms and equipment such as aircraft, submarines, helicopters and armoured vehicles. 20
  • The 11th edition of 'DefExpo' was organised from February 5 to 8, 2020 in Lucknow, Uttar Pradesh. 21
  • The Government of India has decided to set up two Defence Production corridors, one each in Uttar Pradesh (UP) and Tamil Nadu. 22
  • A Defence Investor Cell is also functional in the Department of Defence Production. 22
  • The maiden flight of indigenously developed Automatic Flight Control System (AFCS) integrated on LCH was conducted successfully by Hindustan Aeronautics Limited (HAL). 23
  • Raksha Mantri Shri Rajnath Singh launched SRIJAN (Self Reliant Initiatives through Joint Action) web portal aimed at promoting indigenous production of Defence Goods imported by DPSUs, OFBs and SHQs. Import information and requirement details have been uploaded for domestic vendors. 24
  • Enhanced PINAKA rocket, developed by Defence Research and Development Organisation (DRDO) has been successfully flight tested from Integrated Test Range. The design and development has been carried out by Pune based DRDO laboratories.27
  • Defence Research and Development Organisation (DRDO) achieved a major milestone with the launch of Medium Range Surface to Air Missile (MRSAM). The missile completely destroyed a high speed unmanned aerial target which was mimicking an aircraft with a direct hit.29 
  • Indian Air Force and French Air and Space Force will conduct a bilateral Air exercise, Ex Desert Knight-21 at Air Force Station Jodhpur from 20 to 24 Jan 21.
Sources
    
  1. “The 15 countries with the highest military spending worldwide in 2019,” Statista, https://www.statista.com/statistics/262742/countries-with-the-highest-military-spending/
  2. “Ministry of Defence Annual Report 2018-19,” Ministry of Defence, https://mod.gov.in/sites/default/files/MoDAR2018.pdf 
  3. “Defence Budget 2020-21,” Ministry of Defence, PIB,  https://pib.gov.in/PressReleasePage.aspx?PRID=1601632
  4. “More than 180 contracts valued over Rs 1,96,000 crore signed with Indian Defence Industry since 2014”, Ministry of Defence, PIB, https://pib.gov.in/PressReleseDetailm.aspx?PRID=1595028
  5. “Annual Report 2018-19,” Ministry of Defence, https://mod.gov.in/sites/default/files/MoDAR2018.pdf
  6. “Defence Expenditure as a part of GDP”, Ministry of Defence, PIB, https://pib.gov.in/PressReleasePage.aspx?PRID=1604844
  7. “Defence Budget 2020-21,” Ministry of Defence, PIB,  https://pib.gov.in/PressReleasePage.aspx?PRID=1601632
  8. “FDI in Defence”, Ministry of Defence, PIB, https://pib.nic.in/PressReleseDetail.aspx?PRID=1605127
  9. “Defence Procurement Procedure 2016 – Capital Procurement,” Ministry of Defence, https://mod.gov.in/sites/default/files/dppm.pdf_0.pdf   
  10. PIB Release, https://www.pib.gov.in/PressReleasePage.aspx?PRID=1685013
  11. Defence Procurement Procedure 2016 – Capital Procurement,” Ministry of Defence, https://mod.gov.in/sites/default/files/dppm.pdf_0.pdf
  12. “Defence Investor Cell,” Defence Investor Cell, https://defenceinvestorcell.gov.in/
  13. “Industrial Licences to Defence Sector,” Ministry of Defence, PIB, http://pibarchive.nic.in/newsite/PrintRelease.aspx?relid=123704
  14. “Defence Corridor,” Ministry of Defence, PIB, https://pib.nic.in/Pressreleaseshare.aspx?PRID=1579096
  15. “Defence Budget 2020-21,” Ministry of Defence, PIB,  https://pib.gov.in/PressReleasePage.aspx?PRID=1601632
  16. “Annual Report 2018-19,” Ministry of Defence, https://mod.gov.in/sites/default/files/MoDAR2018.pdf
  17. “Defence Manufacturing – Industry Trends,” Invest India, https://www.investindia.gov.in/sector/defence-manufacturing
  18. “Annual Report 2018-19,” Ministry of Defence, https://mod.gov.in/sites/default/files/MoDAR2018.pdf
  19. Defence Procurement Procedure 2016 – Capital Procurement,” Ministry of Defence, https://mod.gov.in/sites/default/files/dppm.pdf_0.pdf
  20. “Annual Report 2018-19,” Ministry of Defence, https://mod.gov.in/sites/default/files/MoDAR2018.pdf
  21. DEFEXPO 2020, https://defexpo.gov.in/
  22. “Annual Report 2018-19,” Ministry of Defence, https://mod.gov.in/sites/default/files/MoDAR2018.pdf
  23. “Year End Review – 2018 Ministry of Defence,” Ministry of Defence, PIB, http://pibarchive.nic.in/newsite/printrelease.aspx?relid=186966
  24. Ministry of Defence, PIB, https://pib.gov.in/PressReleasePage.aspx?PRID=1645805
  25. Factsheet on FDI - April 2000 to March 2021Department for Promotion of Industry and Internal Trade, https://dipp.gov.in/sites/default/files/FDI_Factsheet_March%2C21.pdf
  26. Border Rods Orgnization (BRO) http://www.bro.gov.in/
  27. PIB Release, https://www.pib.gov.in/PressReleasePage.aspx?PRID=1670104
  28. PIB Release, https://www.pib.gov.in/PressReleasePage.aspx?PRID=1685013
  29. PIB Release, https://www.pib.gov.in/PressReleasePage.aspx?PRID=1683136
  30. PIB Release, https://pib.gov.in/PressReleasePage.aspx?PRID=1685437  
  31. PIB Release, https://www.pib.gov.in/PressReleasePage.aspx?PRID=1703205
  32. PIB Release, https://www.pib.gov.in/PressReleasePage.aspx?PRID=1704883
  33. PIB Release, https://www.pib.gov.in/PressReleasePage.aspx?PRID=1706601
    

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