India's Defence policy: A major shift from Importer to Producer (G.S.Mains Paper III)

Date: April 15, 2016

DRDO Akash Narendra Modi Make in India

India has the third largest armed forces with an annual budget of around $ 40 Billion. 40 % of it is for capital acquisition. The budget is also growing to take care of the needs of the armed forces.

India also happens to be one of the largest importers of Defence goods. The nation aspires to change this situation. While ensuring that the Defence services always get the best quality equipment, India aims to achieve substantial self reliance and indigenization in Defence equipment technology.

f

Outlining the roadmap to bold reforms in the Defence Procurement Procedure (DPP), Defence Minister Shri Manohar Parrikar announced the salient features of the new DPP during the 9th edition of DEFEXPO 2016, a biennial exhibition on Land, Naval & Internal Homeland and Security Systems Exhibition, which was held in South Goa this year. Participation from 47 countries is a clear indicator of India’s growing prominence and stature internationally; this year’s exhibition was the largest Defexpo held till to date. In all, over 1000 companies, both foreign and Indian participated in the exhibition this year.

Shri. Manohar Parrikar said that the Indian-Designed Developed and Manufactured (IDDM) category will have the topmost priority now. Further simplification of procedure, reduced timelines, quick decision-making, transparency are added features of the new DPP.

Shri. Parrikar while answering a question on the importance of research and development said, “R&D is very close to my heart. Being an engineer myself I know that we are on the right path. Technology is changing almost every year and India is one country which has a huge pool of people in engineering and technology who can convert many defence requirements into actual production. Under the supervision of the Defence Research and Development Organisation (DRDO), we have also been working with many academic institutions like the IITs, IISCs and NITs to take this cause to new heights”.

The Defence Minister added, “This DPP, I believe, can actually push the agenda of ‘Make in India’ and India’s target of achieving major successes in creating a defence industry network for its own need as well as for exports”.

‘Make in India’ is an initiative launched by the Prime Minister Shri. Narendra Modi to encourage multi-national, as well as national companies to manufacture their products in India. The major objective behind the initiative is to focus on job creation and skill enhancement in 25 sectors of the economy, including defence manufacturing.

Talking about the steps that the Government of India has been taking in furthering the cause, Secretary (Defence Production), Ministry of Defence, Shri. Ashok Gupta in an exclusive interview said that during 2014-15 and 2015-16, 66 capital procurement cases which Defence Acquisition Council (DAC) has approved at an estimated cost of Rs.1.98 lakh crore, 88 % of these cases by value have been approved under Buy Indian and Buy & Make Indian categories which means that request for proposals will be issued to the Indian vendors and they either on their own or in collaboration with the foreign Original Equipment Manufacturers (OEMs) will supply these items. This is going to create a huge domestic demand. This implies that if foreign OEMs want to leverage the Indian demand, the only route available is to enter into collaboration with Indian vendors.

Secretary (DP) also outlined several steps which have been taken in the last 2 years in order to promote the entry of private sector into Defence manufacturing :

1. The Foreign Direct Investment (FDI) Policy for the Defence sector has been revised. Now, the composite foreign investment up to 49 % is allowed under automatic route and beyond 49 % also with the approval of the Foreign Investment Promotion Board (FIPB). Several conditions attached to the policy have also been removed to make the process simpler.

2. In order to reduce the entry barrier, the Defence products list for the purpose of issuing industrial licenses (ILs) under IDR Act has been revised and most of the components, parts, sub-systems testing equipments, production equipments have been removed from the list.

3. Level-playing field has been provided to Indian Private Sector. Public Sector no longer enjoys the special status in terms of excise and custom duty levies.

4. To create a level - playing field between the Indian and foreign industry, the Exchange Rate Variation (ERV) protection has been allowed on foreign exchange components to all Indian companies, including private companies in all categories of capital acquisitions.

5. Since domestic industry cannot survive purely on domestic demand, the entire procedure for exports has been streamlined. Now NOCs for exports are issued online. The Standard Operating Procedure (SOP) for the issue of No Objection Certificate (NOC) for export of military stores has been revised and put on the website. Under the revised SOP, the requirement of End User Certificate (EUC) to be countersigned / stamped by the Government authorities has been done away with, for the export of parts, components, sub-systems etc.

6. For the first time, a specific Defence Export Strategy has been formulated and put in public domain. The strategy outlines specific initiatives to be taken by the Government for encouraging the export of Defence items.

7. The provision of ‘Make’ category of capital acquisition is a vital pillar for realizing the vision of the ’Make in India’ initiative. ‘Make’ procedure has been restructured and a number of provisions have been made to incentivize the industry e.g. increasing the share of Government funding, full reimbursement incase of foreclosure and non issue of RFP (Request for Proposal) and giving preference to Micro, Small and Medium Enterprises (MSMEs) in smaller projects. These ‘Make’ projects will not only help in creating eco-system in terms of vendor development but also kick-start race for development and/or technology acquisition by the industry, which will help the Defence manufacturing in the long run. Such indigenously developed systems will also be available for export to establish India as a global Player in Defence market.

8. Offsets (Liability of foreign OEMs to invest certain percentage of the contract value in manufacturing industry in India to offset a foreign exchange payment) play an important role in development of domestic industry and facilitating it to become part of global supply chain. Offset implementation has been one of major issues with foreign OEMs as far as doing business in India is concerned. We have undertaken the task of significantly overhauling the guidelines. The requirement of prescribing Indian Offset Partners and components for offset discharge for the entire period of contract, at the time of signing of contract, has been done away with. One of the major demands of the industry has been to re-instate the provision of services for discharge of offsets. This also has been done.