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Editorial Articles


Issue no 44, 28 January - 03 February 2023

Indigenisation of Defence Production Towards AatmaNirbhar Bharat

Advitya Bahl

The Government has identified the defence systems, equipments and services sector as a focus area for the 'AatmaNirbhar Bharat' or 'Self-Reliant India' initiative, with a formidable push on the establishment of indigenous manufacturing infrastructure supported by a requisite research and development (R&D) ecosystem. In Budget 2022-23, total allocation under capital outlay of Defence Services was enhanced to Rs 1.52 lakh crore with 68% of capital procurement budget earmarked for domestic industry. In Prime Minister Shri Narendra Modi's words, the strides taken by the country's indigenous defence sector is a testament to "New India" - the beginning of a future that will boost India's security, economy, and innovation. There are a number of reasons why India has been focusing on indigenising its defence production:

·         To reduce reliance on imports: India emerged as the second-largest importer of arms between 2016 and 2020, with a share of 9.5% of global arms imports. Even so, its imports fell 33% from that between 2011 and 2015. A recent report by the Stockholm International Peace Research Institute (SIPRI) attributes this decline to the country's complex procurement procedures and efforts to reduce its dependence on imported weapons. Correspondingly, Russia has been the worst hit by India's decreased share, although it still ranks as the subcontinent's largest arms supplier, delivering 49% of its total imports, ahead of France (18%) and Israel (13%). Interestingly, defence transfers from the US to India declined by 46% as well. India's goal, thus, seems to have been to cut its dependence on other countries for defence systems across the board rather than to pivot from one supplier to the other. This underlines India's resolve to drastically cut down on imports and promote indigenous defence manufacturing and export.

·         To reduce costs: Importing defence equipment can be expensive, as it involves paying for the equipment as well as transportation and other associated costs. Indigenising defence production can help reduce these costs and make the country's defense budget more efficient

·         To boost domestic industry: Indigenising defence production can help stimulate the growth of domestic industry, which can create jobs and boost economic growth.

·         To enhance technology transfer: Defence production often involves the transfer of advanced technologies, which can help boost the country's overall technological capabilities. Indigenising defence production can help facilitate the transfer of these technologies to domestic firms, which can then be used for other purposes as well

·         To enhance strategic autonomy: By being self-sufficient in terms of its defence needs, a country can have greater strategic autonomy.

Top 5 arms importers

Country

Share of arms imports (%)

Change %

 

2016-2020

2011-2015

 

Saudi Arabia

11

7.1

61

India

9.5

14

(-)33

Egypt

5.8

2.4

136

Australia

5.1

3.6

41

China

4.7

4.4

5.5

Source: SIPRI Arms Transfers Database

Procurement Policy: A smooth, efficient, and well defined procurement/acquisition procedure is a pre-requisite for lending impetus to defence manufacturing locally. The procurement of defence-related equipment and services by the Indian Government is governed by a set of rules known as the Defence Acquisition Procedure (DAP). The DAP 2020 (which replaced the Defence Procurement Procedure 2016) prioritises indigenously designed, developed and manufactured category of defence procurement. The main categories of defence procurement are enlisted below in order of priority

(a)    Buy (Indian- IDDM) - refers to the acquisition of products from an Indian vendor that have been Indigenously Designed, Developed and Manufactured (IDDM) with a minimum of 50% Indigenous Content (IC) on cost basis of the base contract price.          

(b)   Buy (Indian) - acquisition of products from an Indian vendor which may not have been designed and developed indigenously, but having 60% IC (Indigenous Content) on cost basis of the base contract price.  

(c)    Buy and Make (Indian) - an initial acquisition of equipment in Fully Formed (FF) state from Indian vendor(s) engaged in a tie-up with a foreign Original Equipment Manufacturer (OEM). This is followed by indigenous production in a phased manner involving Transfer of Technology (ToT). Under this category of acquisition, a minimum of 50% IC is required on cost basis of the 'Make' portion of the contract.  

(d)   Buy (Global-Manufacture in India)- an outright purchase of equipment from foreign vendors followed by indigenous manufacture of the entire/part of the equipment. It also necessitates indigenous manufacture of spares/ assemblies/ sub-assemblies as well as local maintenance along with Repair and Overhaul (MRO) facility for the equipment. This is to be done through the foreign vendors' subsidiary in India or through a Joint Venture or through an Indian Production Agency (PA) with Transfer of Technology, meeting a minimum of 50% IC on cost basis of the base contract price.

(e)    Buy (Global) - outright purchase of equipment from foreign or Indian vendors. In case of procurement through foreign vendors, Government to Government (G2G) route/ Inter Government Agreement (IGA) may also be adopted, for equipment meeting strategic/ long term requirements. An Indian Vendor participating in this category would be required to meet minimum 30% IC, failing which such vendor would be required to discharge offsets as applicable in the case. Foreign vendors will need to discharge offsets in all Buy (Global) case.

'Offsets' Clause: The 'offsets' clause requires foreign defence companies that win contracts to invest a portion of the contract value back into the Indian defence industry. The goal of the offsets clause is to increase the competitiveness of the Indian defence industry, enhance technology transfer, and promote the development of indigenous defence manufacturing capabilities. The offset requirement is typically between 30% and 100% of the contract value, depending on the type of contract and the nature of the equipment being procured. Offsets may be fulfilled through a variety of means, including the direct purchase of equipment or technology from Indian defence firms, the transfer of technology to Indian firms, or the establishment of joint ventures with Indian defence companies.

Depending upon factors such as the Indian industry's capability, access to technology, time frame required and available for development, three other categories have been enunciated in the DAP which can be pursued in isolation, in sequence or in tandem with any of the five main categories.

·         Make and Innovation

·         D&D (Design and Develop)

·         SPM (Strategic Partnership Model)

The provision of 'Make' category of capital acquisition in defence procurement is a vital pillar for realising the vision behind the 'Make in India' initiative, by fostering indigenous capabilities through design & development of required defence equipment/product/systems or upgrades/sub-systems/components/ parts by both public and private sector industry/organisation in a faster time frame. There are two sub- categories of 'Make' Procedure:

'Make-I' (Government Funded): Projects under 'Make-I' sub-category will involve Government funding of 90%, released in a phased manner and based on the progress of the scheme, as per terms agreed between Ministry of Defence and the vendor.

'Make-II' (Industry Funded): Projects under 'Make-II' category will involve prototype development of equipment/ system/platform or their upgrades or their sub-systems/ sub-assembly/ assemblies/ components, primarily for import substitution/innovative solutions, for which no Government funding will be provided for prototype development purposes.

Positive Indigenisation List: India has a list of items that it considers to be of strategic importance for the defence sector, and which it aims to indigenise (that is, produce domestically). This list, updated by the Ministry of Defence from time to time, is known as the "Positive Indigenisation List" or the "Buy (Indian-IDDM) Category" for which there would be an embargo on imports beyond the timelines indicated against them. The list includes a wide range of items, including aircraft and aircraft parts, missiles and missile systems, naval vessels and equipment, land systems and equipment, electronics and communications equipment, and others. The Ministry of Defence first unveiled a Positive Indigenisation List in August 2020 and followed it up with one each in May 2021, April 2022, and October 2022.

Simplification of Industrial Licensing Process: Manufacturing in defence sector is governed through industrial licensing under the Industries (Development and Regulation) Act, 1951 and Arms Act 1959/Arm Rules 2016. Prior to 2001, manufacturing in defence sector was limited to public sector companies only. However, in 2001, the then Government allowed 100% participation by Indian private sector in defence manufacturing subject to licensing. Recently, the government announced the simplification of the industrial licensing process. According to official data, after simplification of the process, a total of 595 industrial licences have been issued to 366 private companies operating in the defence sector till October 2022. The simplification process led to cost reduction in repeat orders which was seen as a major impediment.

Liberalisation of Foreign Direct Investment (FDI): In September 2020, the Government liberalised and allowed FDI (Foreign Direct Investment) in defence under automatic route up to 74% and up to 100% through Government route wherever it is likely to result in access to modern technology. Since the notification of revised FDI policy, the total FDI inflow reported till May, 2022 is approximately Rs. 494 crores. The Department of Defence Production (DDP) has brought in number of policy reforms and outreach programmes for attracting foreign direct investment.

Promoting Exports to Fuel Indigenisation: Relying solely on domestic demand limits the domestic industry's scope for investment in R&D and production. Therefore, Indigenisation efforts are supplemented by the strategy for defence exports without which the economic base of the defence industry would be difficult to sustain in the present competitive environment. Of late, India's defence export has seen a massive growth (sixfold increase between 2017 and 2021) backed by policies to support the export of military hardware to friendly foreign countries. In 2021-22, India's defence exports stood at a record Rs 14,000 crores. It has been estimated that by 2025, defence exports will cross Rs 25,000 crores. India currently exports defence equipment to more than 75 countries. The draft Defence Production and Export Promotion Policy 2020, is currently undergoing different stages of approval. The policy will serve as a new roadmap to India's defence manufacturing and exports.

Lines of Credit: The EXIM Bank provides LoCs, subject to prior approval, to overseas financial institutions, regional development banks, sovereign governments, and other overseas entities. These LoCs enable buyers in partner countries to import developmental and infrastructure projects, equipment, goods, and services from India, on deferred credit terms. The Ministry of External Affairs leverages this Line of Credit (LoC) facility to promote exports including defence systems and equipments from India. Afghanistan, Bangladesh, Bhutan, Maldives, Mauritius, Mangolia, Myanmar, Nepal, Seychelles, Sri Lanka are countries that have received Lines of Credit from India in recent years for different developmental purposes including import of defence equipments from India.

2014-2022 (Till Dec 2022) Total Lines of Credit $22,604.68 Million USD

·         2014-15

$1,707.47mn

·         2015-16

$3,137.93mn

·         2016-17

$7,187.52mn

·         2017-18

$1,428.52mn

·         2018-19

$1,963.30mn

·         2019-20

$3,216.55mn

·         2020-21

$2,227.10mn

·         2021-22

$1,077.29mn

·         2022-23

$659.00mn

(Source: MEA Dashboard)

Defence Industrial Corridors: Government intends to develop a robust defence manufacturing ecosystem including supply chain for giving push to production and testing & certification to create economies of scale and facilitate development of internationally competitive enterprises in the country. With this aim, two Defence Industrial Corridors have been created in Uttar Pradesh and Tamil Nadu. The state governments of these regions have also developed Aerospace & Defence policies to attract private companies and foreign Original Equipment Manufacturers (OEMs) to invest in these corridors. So far, INR 2,242 crore (about USD 309 million) and INR 3,847 crore (about USD 528 million) have been invested in the Uttar Pradesh and Tamil Nadu Defence Industrial Corridors, respectively.

 

SRIJAN Defence Portal: The Ministry of Defence has developed a portal named www.srijandefence.gov.in opening opportunities for the private sector to become partners of DPSUs (Defence Public Sector Undertakings) and the armed forces in the Indigenisation efforts. It is a non-transactional online market place platform. The DPSUs display items in this portal which they have imported or are going to import as well as those items that they plan to indigenise in the coming years. The private sector can express their interest to locally design, develop and manufacture such items as per their capability or through joint ventures with the Original Equipment Manufacturers (OEMs).

 

iDEX-Encouraging Start-Ups: The iDEX (Innovations for Defence Excellence) framework launched in 2018 is being implemented by Defence Innovation Organisation (DIO), established under Department of Defence Production. The program aims to support Start-Ups in the defence sector by providing grants for the development of high-end solutions. This support is available for projects that require funding between Rs 1.5 crore and Rs 10 crore. The program focuses on the development of sub-systems for the armed forces in a number of key areas, particularly Artificial Intelligence (AI). Within a short span of time iDEX, which has also been awarded the prestigious Prime Minister Award for Public Policy in Innovation Category for the year 2021, has emerged as a game changer in the defence ecosystem through its flagship programmes like DISC, Prime, and Open Challenges (OC). iDEX has been able to build the required momentum and generate a critical mass of Start-Ups in the defence sector. Till date, iDEX has received more than 6,500 applications from individual innovators, MSMEs and Start-Ups. It has also been able to generate thousands of jobs and attract India's talent back to the country. The iDEX is working at path-breaking pace to ensure that its agreements with the Start-Ups and innovators reach logical conclusions timely, eventually opening a myriad of options for the budding soon-tobe-unicorns and at the same time, addressing the requirement of the Services.

 

Corporatisation of Ordnance Factory Boards (OFBs): The Corporatisation of Ordnance Factory Boards (OFBs) refers to the process of converting the Ordnance Factory Boards, which were earlier under the administrative control of the Ministry of Defence, into 100% government-owned corporate entities. Seven new Defence Public Sector Undertakings (DPSUs) have been carved out of the erstwhile Ordnance Factories. These companies had commenced operations from October 01, 2021. The erstwhile OFBs were strategic asset of the country, and with its infrastructure and skilled workforce, it played a valuable role in the national security. However, in recent years, there have been concerns raised by the Armed Forces about the high costs, inconsistent quality and delays in product delivery. As a government department, the OFB was not held accountable for profits. The outdated procedures, practices, paperwork, and regulations had become irrelevant. In order to address these issues, it was necessary to eliminate these practices and corporatisation was the best solution, according to Defence Minister Shri Rajnath Singh. The corporatisation of OFB is expected to bring about greater efficiency, transparency and accountability in the functioning of the new units, and to enable them to compete effectively in the global market. It will also help to enhance their capability to produce advanced technology and equipment as per the requirement of Indian armed forces.

 

Handholding of New DPSUs: The Government has taken steps to initially handhold and support the new DPSUs in starting their business as corporate entities. In this regard, outstanding indents with erstwhile OFB were grandfathered and converted into deemed contracts valuing about Rs 70,776 crore for five years. These deemed contracts provide annual targets for delivery of products. Every year, 60% of amount pertaining to that year's target would be paid by the Services to the new DPSUs as advance. The advances provide the working capital to the newly constituted DPSUs. With more functional and financial autonomy, these new DPSUs are focusing on widening their customer base, including exports to augment the volume of defence production. The DPSUs are pursuing export opportunity through interaction with Defence Attaches at various Indian Embassies and Missions abroad.

 

Top Defence Public Sector Units

1.       Hindustan Aeronautics Limited (HAL)

2.       Bharat Electronics Limited (BEL)

3.       Bharat Dynamics Limited (BDL)

4.       BEML Limited (BEML)

5.       Mishra Dhatu Nigam Limited (MIDHANI)

6.       Mazagon Dock Shipbuilders Limited (MDL)

7.       Garden Reach Shipbuilders and Engineers Limited (GRSE)

8.       Goa Shipyard Limited (GSL)

9.       Hindustan Shipyard Limited (HSL)

10.   Advanced Weapons and Equipment India Limited (AWEIL) – New

11.   Gliders India Limited (GIL) – New

12.   Troop Comforts Limited (TCL) – New

13.   Armoured Vehicles Nigam Limited (AVNL) –New

14.   Munitions India Limited (MIL)-New

15.   Yantra India Limited (YIL) – New

16.   India Optel Limited (IOL) – New

 

Top Private Defence Manufacturing Companies

·         TATA

·         Reliance

·         Mahindra

·         Adani

·         Kalyani Rafael Advanced Systems

·         Larsen and Toubro

·         Ashok Leyland

·         Alpha Design Technologies Pvt Ltd.

 

Role of DRDO: The present industry base for defence production in India consists of 1,800 MSMEs along with DPSUs, large-scale industries and StartUps. The Defence Research and Development Organisation (DRDO) has undertaken major initiatives to involve the Indian industry as Development cum Production Partners, offering its technology at nominal cost. Policy for free access of DRDO patents by the Indian industry has been promulgated. Technology Development Fund (TDF) Scheme also funds industries, especially StartUps and MSMEs upto an amount of Rs 50 crore for innovation, research and development of defence technologies in the field of defence and Aerospace. Till now, 64 projects have been awarded under TDF scheme to various MSMEs, StartUps and large industries amounting to total projects cost of approx. Rs 280 crore.

Conclusion: The value of indigenous defence production for Financial Years 2020-2021 and 2021-2022 are Rs 84,643 crore and Rs 94,846 crore respectively. India's push towards selfreliance, or Indigenisation, has come at a critical juncture as recent global developments have underscored the risks of depending on foreign nations for vital imports. The ongoing conflicts have brought to the fore the significance of new-age defence equipment like drones, anti-drone systems, missiles, airdefence systems, among others. Countries at war have found it challenging to secure steady supplies in times of crisis. Moreover, localising production is crucial to create large and sustainable opportunities for domestic players. By utilising the technological capabilities developed by academic and research institutions, India has made significant strides in enhancing the potential of its industry. However, there is still scope for improvement in terms of new product development and scaling up production. The curbs on foreign imports must now be complemented with structured government policies that aid the private sector in developing India's military industry. Without this support, our aspirations may remain unfulfilled

 

 (The author is a Delhi-based journalist. He can be reached at aditya90.bahl@gmail.com) Views expressed are personal.)