- In the last five years, India has been the world’s top arms importer with a 15 per cent global share of imports.
- Nearly 50 per cent of the capital acquisition budget is spent on imports. This excludes many “indigenous” items assembled by Ordnance Factories (OFs) and Defence Public Sector Units (DPSUs) where a high percentage of raw materials and sub-systems are imported.
- India allocated 1.74 per cent of its GDP towards defence spending in FY16 and is among the top 10 countries in the world in terms of military expenditure.
- Approximately 40 per cent of the defence budget is allocated for capital acquisitions, which mainly goes towards imports from foreign suppliers.
Characteristics of our defense industry
- It is evolutionary in nature.
- Defence production is a capital and technology intensive sector and requires foreign capital and technology to develop a domestic industrial base.
- It demands continuous high levels of research and development (R&D) investment.
Focus of the Government
- To gain technology transfer
- To draw foreign defense manufacturers to India
- To achieve 70 per cent indigenisation in defence products by 2027.
How to do it?
- An enabling architecture that would guarantee the protection of their Intellectual Property Rights (IPR) and commercial interests should be made.
- The FDI ceiling in defence should be revised upwards
- Defence Procurement Procedure (DPP) has to be fine-tuned to integrate its various components with the liberalised investment regime.
- We have all the prerequisites for Military Industrial Complex: (a) Growing Defense Budget (b) A large base of engineering institutes (c) A diverse Private sector.
Strategies to achieve the objective
- Given the peculiarities of the sector, it would be pragmatic to permit even 100 per cent under the automatic route, subject to certain conditions.
- Use the mandatory offset (compensations that buyers obtain from sellers) to bolster the ‘Make in India’ programme.
- Complement the above strategy by employing multipliers (assigning higher value) where foreign companies manufacture defence wares identified to be of critical need for the services.
- Establish a separate Department of Overseas Acquisitions in the Ministry of Defence for establishing Special Purpose Vehicles with identified private sector entities to take over foreign companies.
- Finance and support R&D/production in the private sector as the U.S. does.
- Create a body in the Ministry of Deference consisting of civilian officers, defence personnel and industry leaders to evaluate FDI flows, steer these flows and offsets, identify foreign companies for acquisition, etc.
Key points of Defense Procurement Policy 2016
- Objective is to increase the participation of India’s private sector in military manufacturing.
- A new procurement class ‘Buy Indian-IDDM’ has been created to achieve the objective.
- It lays stress on micro, small and medium enterprises (MSMEs), and on “Make in India”.
Make in India
- Under ‘Make in India’, the government has to actively support the creation of a private defence industrial base.
- The government will have to fund research and development, provide a low-interest regime to reduce capital costs, provision specific tax benefits, assure consistent sectoral policies, place firm orders and encourage exports to achieve economies of scale.
- Development of the indigenous industry in the country would require multiple strategies, a synergic approach and unconventional thinking.With the present conducive political environment, it is a goal that is immensely achievable.
- For policies to create synergies rather than controls, it is essential that the government creates internal capacity for defence acquisition and manufacturing.
- Manufacturing within the country, through foreign capital, with full transfer of state-of-the-art technology is a far better option than importing the equipment from abroad.