India’s Defense Manufacturing Sector: Challenges and Opportunities – Explained, pointwise

Introduction

The Indian defense manufacturing industry is a significant sector for the economy. The industry is likely to accelerate further with the rising concerns of national security. Demand for defense equipment has been growing as India prepares to modernize its forces with rising threat perception of a two-front war. The international pressure on India to give-up its defense ties with Russia in the wake of Russia-Ukraine conflict indicates risks of import dependence for meeting our defense needs. Although India has one of the largest armies in the world, it is also one of the largest importers of defense equipment which calls for developing robust domestic manufacturing capability.

What is the current status of the Defense Sector?

India’s defense manufacturing sector has been witnessing a CAGR of 3.9% between 2016 and 2020. The Government of India has set the defense production target at US$ 25 billion by 2025 (including US$ 5 billion from exports by 2025). 

Source: Indian Defence Manufacturing Industry Analysis Report 2021, IBEF

Defense exports in India were estimated to be at US$ 1.29 billion in 2019-20. India is providing Made in India defense equipment and services to more than 75 countries.

The value of defense imports stood at US$ 463 million for FY20. As per recent data of Stockholm International Peace Research Institute (SIPRI), India is the second largest arms importer just behind Saudi Arabia.

According to another SIPRI report; Russia (49%), France (18%) and Israel (13%) were India’s top arms suppliers between 2016-20. 

What is the need to focus on indigenous production?

National Security: A country must possess own unique weapon capabilities which are not available with rivals to give a strategic advantage in warfare. Imported technologies which are available to enemy nations reduces the capabilities of defense forces e.g., the BrahMos missile has certain unique features which are not matched by any other missile in the world.

Fiscal Relief: It will help in reducing the import bill as India is currently one of the largest importers of defense equipment. This would eventually help in saving a lot of forex outflow and strengthen the Indian rupee.

Employment Generation: A robust defence manufacturing sector will generate livelihood opportunities and reduce the burden of unemployment. The Center for Monitoring Indian Economy (CMIE) data shows that the unemployment rate was 7.9% in December 2021. This will also help in structural transition of employment from primary sectors like agriculture to the secondary sector boosting overall labor productivity of the economy. 

Security Concerns: Defense Equipment imported from abroad are susceptible to espionage and sensitive information can be leaked. Domestically manufactured equipment reduces the vulnerability.

Outdated Technology: On multiple occasions, the imported equipment and technology are outdated e.g., the aircraft carrier INS Vikramaditya inducted into the Indian Navy in 2014, was originally commissioned by the Soviet Navy in 1987 and de-commissioned in 1996 (as Admiral Gorshkov). India had bought it in 2004, but was inducted into the Indian Navy 10 years later.

Moreover, India remains dependent on the supplier countries for maintenance, servicing and spare parts of defense equipment which also contribute forex outflow.

Aatmanirbhar India: The vision of Aatmanirbhar India can’t be truly achieved unless robust domestic defense manufacturing capability is developed.

What factors are favourable to domestic defense production?

Technological Prowess: India is often referred as an Information Technology giant with a huge pool of IT professionals who can develop state of art products for the defense forces. Cyber Security has become a ‘weapon of war’ and a matter of national security’ which warrants advanced technological solutions for the armed forces and India has the talent pool to meet the needs. 

Government Support: The Government has changed its stance on maintaining a monopoly in defense production. It is now welcoming private sector participation in the sector and showing a preference towards domestic procurements.

Growing Demand: The recent Russia-Ukraine crisis is a testimony of the growing demand for defense products in the future for every nation. Further the lingering issues like the Kashmir dispute, Left wing insurgency, Terrorism and an increasingly aggressive neighbour etc. create more demand for defense products.

India’s Friendly image: India is one of the few countries that enjoys friendly relations with many countries including Russia and the U.S. This would allow the private Indian defense manufacturers to collaborate with and access state-of-the-art technology and allow them to export in many countries.

Culture of Entrepreneurship: A wave of new startups is flowing across the nation and India is now host to the 3rd highest number of unicorns in the world. This shows the vigor and potential of Indian masses to create new age defense start-ups.

What steps have been taken by the Government for the sector?

Innovations for Defense Excellence (iDEX):  It is an initiative by the Government of India to modernize the nation’s Defense industry. It will empower a culture of technology co-creation and co-innovation in the sector and boost innovation among the start-ups and encourage them to be a part of the ecosystem.

Defense Corridors: The UP Industrial Defense corridor and Tamil Nadu Defense corridor would evolve as the  hub for private industries, subcontractors, skilled manpower and R&D for manufacturing  military systems and technologies.

Budget 2022-23: It has set aside nearly 70% of the capital allocation for the domestic industry. 25% of the defense R&D budget has been earmarked for the private sector, including the industry, start-ups and academia. 

A Special Purpose Vehicle model (SPV) has also been arranged in the budget. It will “establish the role of the private industry as a partner beyond just a vendor or supplier”.

Positive Indigenization List: The 3rd positive indigenisation list of sub-system/assemblies /sub-assemblies /components has been notified by the Department of Defence Production, Ministry of Defense in December 2021.

The list is part of the efforts to achieve self-reliance in defense manufacturing and minimize imports by Defense Public Sector Undertakings (DPSUs). It contains 2,500 imported items which have already been indigenised and 351 imported items which will be indigenised in the next three years.

SRIJAN portal: It is a one stop shop online portal that provides access to the vendors to take up items for indigenization.

FDI relaxation: In May 2020, the limit was increased to 74% under the automatic route. Currently, 100% FDI is allowed through the Government route.

Defence Production and Export Promotion Policy, 2020: The Government formulated the policy to provide impetus to self-reliance in defence manufacturing under the ‘Aatmanirbhar Bharat’ scheme. The Ministry aims to achieve a turnover of Rs. 1 lakh 75 thousand crore (US$ 25 billion), including an export of Rs. 35 thousand crore (US$ 5 billion) in the aerospace and defence goods and services by 2025.

Corporatization of Ordnance Factory Boards: Seven defense public sector undertakings (PSUs) were created through the restructuring of the Ordnance Factory Board (OFB). This would improve functional autonomy, efficiency, growth potential and innovation in the defense sector.

What are the challenges faced by the Sector?

Procedural Requirements and Red Tapism: Despite constantly promoting ease of doing business in India; the time requirement and number of clearances required to start a defense manufacturing unit is below the global standards.

Lack of Technology Transfer: All the defense goods imported don’t involve an element of technology transfer. This sustains reliance on imported goods and impedes domestic manufacturing. 

Improper Quality: The goods produced by some manufacturers fail to meet the international standards as quality is sometimes compromised for cost reduction. This reduces their export potential and jeopardizes the image of Indian goods at global level.

Poor Implementation: The budgetary allocation often remains unspent due to delay in disbursal or lesser zeal amongst the bureaucrats. This creates barriers for optimum utilization of the allocated funds for the development of the defense industry. 

What more should be done?

First, the Government should gradually expand the positive indigenization list so that greater support is provided to domestic manufacturers.

Second, the proposed SPV in budget 2022-23 should be duly established to enable better private sector participation in defense manufacturing.

Third, the success of the Made in India brand necessitates rigorous testing and trials of Indian products as per international standards. For this, an independent nodal umbrella body should be created for meeting “the wide-ranging requirements of trial, testing and certification.

Fourth, a monitoring mechanism under DG-Acquisition should be created to monitor the budget earmarked, specifically for private industry and start-ups. It should have representatives from all the three services. 

Fifth, the quality assurance process should be reformed and made non-intrusive, prevention based and “free from inspector-Raj”.

Sixth, joint projects with a commitment of technology transfer should be encouraged as done in case of Brahmos Missile with Russia. This would augment independent and indigenous production in future.

Conclusion

A strong developed domestic defense manufacturing sector is becoming a strategic necessity in the context of increasing geopolitical risks and an unstable neighbourhood. Moreover it will have added benefits of providing jobs to growing young population and lead the structural transformation of the labor market. The Government must take all necessary steps to support the defense manufacturing sector and realize the dream of an Atmanirbhar Bharat.

Source: Indian Express, Financial Express