The Defence sector in India is at a critical point, given the increased focus on modernisation and indigenisation measures being undertaken by the Government. This development of the defence sector in India is of paramount importance, owing to the 2.15% share of the defence budget of the country’s total GDP. Furthermore, to push the Indian Defence Manufacturing sector to greater heights, the Union Government of India has kept a vision to push the turnover for the said sector by $25 billion by the year 2025.
The authors of this article wish to discuss a few facets of the Indian Defence Manufacturing Sector by briefly discussing the framework policy governing procurement by the Government, i.e., the Defence Acquisition Procedure (DAP’ 2020), along with the requirements of indigenisation under various categories of procurement by the Indian Defence Sector. The policy framework around indigenisation, set-off and the measures taken by the Ministry of Defence, the Government of India to encourage the reduction of dependency on imports has put the country on the cusp of innovation and proliferation of technology. Lastly, we have discussed a few challenges that are faced by the defence sector and certain allied recommendations.
Indigenisation of the Indian Defence Sector
For the past few years, India has taken active steps towards the indigenisation of its defence manufacturing sector, contrary to the sector, which heavily relied upon imports from other nations. This fact saw the light of day when theStockholm International Peace Research Institute’s Report announced India as the world’s second-largest importer of defence equipment for the years 2013-2017. The Ministry of Defence (MoD) opened up the previously exclusive domain of thepublic sector to participation by the private sector in 2001, permitting 26 per cent foreign direct investment (FDI) in defence equipment manufacturing organisations. Subsequently, in 2002,the MoDrevisedthe Defence Procurement Procedure (DPP) to set up new procurement management structures and systems. Keeping the requirements of the armed forces in mind, the DPP underwent several subsequent revisions until 2016. Another revision in the draft for defence sector procurement for DPP was introduced in March 2020, and subsequently,DAP 2020 was introduced.
Following these, the Government of India, under its ‘Make in India’ program, has undertaken an array of policies that specifically target bringing in reforms to the Indian Defence Sector and encourage indigenous designing, development, and manufacture of defence equipment. This process has various elements which complete the process of indigenisation of the Indian defence sector. Now, to boost the PPP (Public-Private Partnership) Model between the private sector in India and the Defence Public Sector Undertakings (DPSUs), DPSUs, and the Armed forces, ‘Srijan’ was developed. It has been developed as a non-transactional online marketplace, which caters to the notion of ‘Atmanirbhar Bharat’ and further provides the private participants with an option for ‘Make in India for Defence.’
A few measures to increase private participation include
- DRDO’s Technology Development Fund (TDF) for MSMEs & startups to indigenous cutting-edge defence technologies. 135 Technologies being indigenised, USD 20 Mn funds sanctioned, 1236 experts and 2563 companies engaged.
- India has around 194 defence tech start-ups building innovative tech solutions to empower and support the country’s defence efforts. Ongoing DRDO projects in India are worth $7.3 bn.
- SRIJAN portal launched to promote indigenisation. 19509 defence items have been displayed on the portal for indigenisation.
Foreign Direct Investment (FDI) and Licensing Requirements
Foreign Direct Investment or FDI plays an important role in the development of the domestic industry for defence.
Today, theFDI limit for the defence sector has been placed at 74% via the automatic route and 100% via the government route, which results in the country procuring modern technology. However, this was not always the picture. The defence manufacturing sector in India was not kept open for the foreign players. This quite made sense, owing to the sensitive nature of the defence sector. When it comes to the point where the foreign vendor or the Original Equipment Manufacturer (OEM) sells the defence technologies, the OEM is bound to lose control over the same to a major extent. Hence, making it strategically impossible to establish control over the same, and the decision on how to utilise the said investment (with regards to the technology) would completely depend upon the purchaser.This was one of the reasons why only $3.72 million FDI was allotted to the defence sector, out of the pool of $1,60,094.45 million FDI inflow in the country during the years 2000-2012. All these tussles, intensive scrutiny, and the increasing bureaucracy made it seemingly impossible for the foreign investment to find its way to the Indian defence manufacturing sector. In the light of the above, it becomes pertinent to discuss the recent finding of the Defence Sector in the Economic Survey 2021-22. One of the significant discussions pertains to the approval of the corporatization of theOrdnance Factory Board (OFB) and the creation of seven new Defence Sector Public Undertakings.
As mentioned above, the aspect of investment is not a child’s play in India, be it domestic, or foreign. There exist licensing requirements, which one must follow, if the organisation plans on taking up the role of a defence manufacturer. These compliances with the licensing requirements are governed by theDepartment of Industrial Policy and Promotion (DIPP), which makes it mandatory for the potential defence manufacturers to obtain an industrial license underChapter III of the Industries (Development & Regulation) Act of 1951. The Union Government took within its sphere of influence the ‘arms and ammunition’ industries vide Section 2 read with Entry 37, Schedule I of the Industries (Development and Regulation) Act, 1951 (IDRA). Subsequently, Entry 13, Schedule II of Notification No. S.O. 477 (E) dated 25th July, 1991 as amendedby Notification No. S.O. 11(E) dated 3rd January, 2002 2 prescribed the defence items that require compulsory licensing under the IDRA. Entry 13 merely states that industries involved in the business of ‘Arms and Ammunition and allied items of defence equipment; parts and accessories thereof’ would require licenses, thus making the licenses essential even for those components, sub-components and equipment that are used for both military and civilian purposes. Additionally,vide Notification No.998(E), dt. 10.4.2015, the department has omitted the list of items reserved for exclusive manufacture in the Small-Scale Sector from the list of items under compulsory licensing from Schedule III of the I (D&R) Act, 1951. Along with the aspect of ‘arms and ammunition,’ other items include- tanks, and other armoured fighting vehicles, defence aircraft, space craft and other parts thereof, and warships of all kinds.
The Defence Acquisition Procedure 2020 and the Procurement Process
The Ministry of Defence (MoD) released in September 2020 theDefence Acquisition Procedure 2020 (DAP 2020), which at present serves as the overarching framework for procurement by the Government. DAP 2020 supersedes the Defence Procurement Procedure 2016 (DPP 2016), with the objective to further restructure to India’s defence procurement system and promote indigenisation efforts and ‘Make in India’ in defence manufacturing. DAP 2020 builds upon some of the existing provisions in the precursor document, and adds new ones as well. The new manual, which came into effect from 1 October 2020, comprises modification to the procurement plan documents, new chapters and additional procurement categories. It also puts emphasis on higher indigenous content in procurement, and faster acquisition. As in the previous versions, certain aspects procurement processes have been retained, namely, domestic manufacture of arms, a multi-stage procurement process, special procedures for certain types of procurement, a standardised template for tender document, and a detailed offset guideline. The issue with the DPP 2016 (Defence Procurement Procedure 2016) was zeroed down to the deficiency in the process of capital procurement, and hence the MoD (Ministry of Defence) issued the DAP 2020 which although brings a sophisticated structure for the process of capital procurement in the Indian Defence manufacturing sector.Additionally, the DAP 2020 introduced certain conceptual, structural, and procedural changes to streamline the process of procurement of the military equipment, system, and platforms as per the requirement of the Armed Forces within a certain time, coupled with the state-of-art defence technology. Another feature of the DAP 2020 is the aspect of ‘forcible indigenisation’ which prohibits the import of certain items from time to time, by a notification issued by the MoD. Now under this indigenisation, there are certain aspects, which are to be taken note of.
The DAP 2020 has refined the procurement categories by tweaking the most prioritised category: Buy (Indian-Indigenously Designed, Developed and Manufactured) or ‘Buy (Indian-IDDM)’.
Via the DAP 2020, a new category was formulated. This new category, ‘Buy (Global-Manufacture in India)’ replaced the old category of ‘Buy and Make’ which formed an essential feature of DPP 2016. The novel category has been formed to provide certain incentives to the foreign companies for the manufacturing purposes, who in turn have contracted to manufacture the required equipment either wholly or partially(as per the contract formed), provided that the manufacturer meets the minimum of 50% IC (Indigenous Content) as per the cost basis of the base contract. This category involves the purchase of equipment from a foreign vendor in pre-determined quantities, followed by indigenous manufacture “of the entire/part of the equipment and spares/assemblies/sub-assemblies/Maintenance along with Repair and Overhaul (MRO) facility (only in cases these are part of the main contract) for the equipment, through its subsidiary in India/through a Joint Venture/through an Indian Production Agency (PA) (with ToT of critical technologies as per specified range, depth and scope to the Indian PA, meeting a minimum of 50 per cent IC [indigenous content] on a cost basis of the Base Contract”. This particular category also gives an opportunity to the foreign companies to establish MRO (Maintenance, Repair, and Overhaul) facilities in India.
As of the year 2022, the Defence Minister of the country put forth the third positive indigenisation list of 101 items, which comprises major equipment and platforms, which is spread over the span of the next five years. The negative import list, which presently consists of 101 items, with regard to implementation, would span for the next three years. It is expected to proliferate indigenous manufacturing and transfer technology from government/public sector enterprises to private entities. The policy changes spoken of above give an insight to the Indian Defence Manufacturing sector by providing them with opportunities to make investments and plans beforehand.
Keeping in view both the ‘Make in India’ initiative and Atmanirbhar Bharat Abhiyan (Self-Reliant India Mission), the DAP includes a host of enabling provisions to promote greater indigenisation in arms manufacturing.
IC% (Indigenous Content)
RFP (Request For Proposal) issued to foreign/Indian participants
Indigenous design, and either more or equal to 50%.
Indigenous design and either equal to or more than 50%; otherwise, either more than or equal to 60%.
|Buy and Make (Indian)||
Either equal to or more than 50%, coupled with the transfer of the important technologies from the foreign vendors.
|Buy (Global Manufacture in India)||
Either equal to or more than 50%.
Both Foreign and Indian
With regards to a foreign investor, the IC is set at nil, and with regards to an Indian vendor, it is either equal to or more than 30%.
|Both Foreign and Indian|
Special Categories under the Procurement Procedure – Fostering the Development of Technology and Innovation through Policy Changes
Prototype design and development an essential to nurturing the domestic capability of domestic manufacturers, given that know-how and technology are often licensed out or assigned by owners of intellectual property of the platforms under development.
Therefore, the introduction of the ‘Make’, ‘Innovation’, and ‘Design and Development’ categories are meant to promote design and development by domestic industrial players. An essential feature for the procurement of any commodities developed under the categories mentioned above are to be mandatorily processed either via ‘Buy (Indian-IDDM) category, or via ‘Buy (Indian)’ category. These processing requirements depend solely on the category under which the said prototype has been manufactured.
Another addition to the procurement framework in the DAP, 2020 that requires collaborative efforts by national and international entities is theStrategic Partnership Model (SPM) under Chapter VII. Under this category of procurement, a request for proposal is issued to both the Indian strategic partner and the Original Equipment Manufacturer (OEM), i.e., the foreign collaborator. The joint participation by the foreign companies and Indian manufacturers results in the development of an ecosystem by enabling Indian private companies to become system integrators and supply essential equipment and post-production support to the armed forces.
The ‘Make’ category was inducted in the year 2006 to encourage and promote the research and development of prototypes of defence equipment. Furthermore, the ‘Make’ category is bifurcated into
- Make-I (Government Funded);
- Make-II (Industry Funded); and
- Make-III (Under this category, the products which are not designed/developed indigenously but can be manufactured in the country as per the Transfer of Technology from the Original Equipment Manufacturer are classified).
Additionally, ‘Innovation’ has been also added as another special category for the procurement procedure. Via this category, the government plans on a systematic inclusion of the innovators, technocrats, start-ups, MSMEs, et cetera to furnish the defence sector with innovative ideas and solutions, either via theiDEX (Innovations for Defence Excellence) scheme, or theTDF (Technology Development Fund) scheme or byindigenous development by services through IOs (Internal Organisations).
The aspect of leasing has been termed as ‘an innovative technique’ by the MoD which involves the armed forces enjoying the possession, and right to operate the assets (defence), without actually owning them. This has been done as a way to reduce the initial capital cost, with regular payments to the lessor(s), who actually own the assets. This category has been further bifurcated into Lease (Indian) and Lease (Global).
The DAP 2020 makes several significant changes to strengthen the existing offset guidelines. To focus on technology, investment, and export of major platforms—as opposed to components, the revised offset guidelines enable the Indian industry to receive technologies for which the foreign vendors will now be eligible to receive direct credit. Few technologies are earmarked for the government entities – Defence Research and Development Organisation (DRDO), Defence Public Sector Undertakings (DPSUs) and Ordnance Factory Board (OFB). Furthermore, the policy provides for Technology Development Fund, which aims to promote self-reliance in defence technology and boost Indian defence manufacturing companies, especially MSMEs and start-ups and embolden public-private partnerships.
Strategic Partnership Model (SPM)
Another addition to the procurement framework in the DAP, 2020 that requires collaborative efforts by national and international entities is the Strategic Partnership Model (SPM)under Chapter VII of the DAP, 2020. Under this category of procurement, a request for proposal is issued to both the Indian strategic partner and the Original Equipment Manufacturer (OEM), i.e., the foreign collaborator. The joint participation by the foreign companies and Indian manufacturers results in the development of an ecosystem by enabling Indian private companies to become system integrators and supply essential equipment and post-production support to the armed forces.
Challenges and the Way Ahead
India’s defence manufacturing industry policy is going through speedy modifications. To meet the enhanced demand, the participation by domestic participants is likely to increase, given the various amendments introduced by the Government, like that of the DAP 2020. With policy changes like the positive Indigenisation list and the amendment to procurement policy, import is anticipated to profit Indian defence vehicle manufacturers, especially the defence aircraft manufacturers in India. Moreover, the requirement for greater indigenous content is projected to benefit defence equipment and platform makers in India as well as boost overseas companies to participate in domestic programs.
However, the Indian defence manufacturing industry has a long road ahead. The defence industry is plagued by a myriad of challenges like lack of growth in defence modernisation and defence capabilities, namely the slow pace of defence modernization, the long-drawn procurement procedure, and the slow development of indigenous capabilities mainly due to inadequate budgetary allocations towards long-term investments, and research and development; deep-rooted institutional inefficiencies and delays in domestic production by government lead organizations and the long drawn timelines involved to grant defence contracts to India’s private sector by the Government leading to production delays andcost overruns. In the total defence budget for 2020-2021, 58.6% is allocated for salaries and pensions, whereas only 22.7% has been allocated forcapital outlay. Further review of the budget allocation for the defence is warranted to ensure adequate funds for the long-term and larger capital investments. To fast-track decision-making processes in defence procurement, a restructuring of the decision-making process may be considered.
About the Authors
Ms. Rhea Panda is an Assistant Manager, Legal at L&T Defence.
Mr. Abeer Tiwari is a 4th-year B.A. LL.B student from Balaji Law College, Pune, and an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastava & Muskaan Singh
Senior Editor: Aribba Siddiqui
Associate Editor: Abeer Tiwari
Junior Editor: Nupur Barman
Preferred Method of Citation
Rhea Panda and Abeer Tiwari, “Defence Manufacturing in India: Policy, Indigenisation, and Technology” (IJPIEL, 26 August 2022)