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Abstract<\/span><\/strong><\/span><\/p>\n 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\u2019s 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.\u00a0<\/span><\/p>\n 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\u2019 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.\u00a0\u00a0<\/span><\/p>\n <\/u><\/strong><\/span><\/p>\n Indigenisation of the Indian Defence Sector<\/strong><\/span>\u00a0<\/strong><\/span><\/p>\n 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\u2019s Report<\/a><\/span> announced India as the world\u2019s 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<\/a><\/span> in 2001, permitting 26 per cent foreign direct investment (FDI) in defence equipment manufacturing organisations. Subsequently, in 2002,the MoD<\/a>revised<\/a>the Defence Procurement Procedure (DPP)<\/a><\/span> 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.\u00a0Another revision in the draft for defence sector procurement for DPP was introduced in March 2020, and subsequently,DAP 2020 <\/a><\/span>was introduced.\u00a0<\/span><\/p>\n Following these, the Government of India, under its \u2018Make in India\u2019 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, \u2018Srijan\u2019 was developed<\/span><\/a>. It has been developed as a non-transactional online marketplace, which caters to the notion of \u2018Atmanirbhar Bharat\u2019 and further provides the private participants with an option for \u2018Make in India for Defence.\u2019<\/span><\/p>\n A few measures<\/a>\u00a0<\/span>to increase private participation include<\/span><\/p>\n Foreign Direct Investment (FDI) and Licensing Requirements<\/strong><\/span><\/p>\n Foreign Direct Investment or FDI plays an important role in the development of the domestic industry for defence.<\/span><\/p>\n Today, theFDI limit<\/a><\/span> 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<\/a><\/span> 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) <\/span><\/a>and the creation of seven new Defence Sector Public Undertakings.<\/span><\/p>\n As mentioned above, the aspect of investment is not a child\u2019s 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)<\/span><\/a>, which makes it mandatory for the potential defence manufacturers to obtain an industrial license underChapter III of the Industries (Development & Regulation) Act of 1951<\/span><\/a>. The Union Government took within its sphere of influence the \u2018arms and ammunition\u2019 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<\/span><\/a> prescribed the defence items that require compulsory licensing under the IDRA. Entry 13 merely states that industries involved in the business of \u2018Arms and Ammunition and allied items of defence equipment; parts and accessories thereof\u2019 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<\/span><\/a>, 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 \u2018arms and ammunition,\u2019 other items include- tanks, and other armoured fighting vehicles, defence aircraft, space craft and other parts thereof, and warships of all kinds.<\/span><\/p>\n <\/strong><\/span><\/p>\n The Defence Acquisition Procedure 2020 and the Procurement Process<\/strong><\/span><\/p>\n The Ministry of Defence (MoD) released in September 2020 theDefence Acquisition Procedure 2020 (DAP 2020)<\/span><\/a>, 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\u2019s defence procurement system and promote indigenisation efforts and \u2018Make in India\u2019 in defence manufacturing.\u00a0DAP 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<\/span><\/a> 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 \u2018forcible indigenisation\u2019 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.<\/span><\/p>\n <\/strong><\/span><\/p>\n Procurement Categories<\/strong><\/span><\/p>\n The DAP 2020 has refined the procurement categories by tweaking the most prioritised category: Buy (Indian-Indigenously Designed, Developed and Manufactured) or \u2018Buy (Indian-IDDM)\u2019.<\/span><\/p>\n Via <\/em>the DAP 2020, a new category was formulated. This new category, \u2018Buy (Global-Manufacture in India)\u2019 replaced the old category of \u2018Buy and Make\u2019 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 \u201cof 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\u201d. This particular category also gives an opportunity to the foreign companies to establish MRO (Maintenance, Repair, and Overhaul) facilities in India.<\/span><\/p>\n As of the year 2022<\/a><\/span>, 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. \u00a0<\/span><\/p>\n Keeping in view both the \u2018Make in India\u2019 initiative and Atmanirbhar Bharat Abhiyan (Self-Reliant India Mission), the DAP includes a host of enabling provisions to promote greater indigenisation in arms manufacturing.<\/span><\/p>\n\n