Amid disruption caused by the global pandemic on the economy of India, cross-border tensions are also piling up. With multiple standoffs between Indian and Chinese armies and political tensions with Pakistan, the government is now pushing policies towards indigenous production, especially in the defence industry. The ‘Make in India’ and ‘Atmanirbhar Bharat’ programmes are now gaining pace through high budget allocations and bold policy measures.
The Hon’ble prime minister has highlighted his vision to convert India from a global market to an international producer. The policies outlined under Defence Acquisition Procedure (DAP) 2020 and draft Defence Production and Export Promotion Policy (DPEPP) 2020 are, thus, seen as bold concrete measures to boost the involvement of private players, making India a global manufacturing hub for the defence industry.
However, it is crucial to understand the past shortcomings which resulted in the sluggish growth of the Make in India program in the defence sector. Defence procurement has always been a tricky business for the Indian government — the complexity of heavy investment in the infrastructure and the production facilities. Defence technology demands constant funding in research and development to be continuously innovative, an investment too high for the Indian policy makers.
Furthermore, private players found it hard to penetrate the defence sector due to high risk and manufacturing costs. A particular military technology cannot achieve economies of scale due to a restricted marketplace. Due to this reason, the production costs increased with the need for more advanced technologies. Also, with a dynamic change in technologies, private firms ran a risk of receiving orders less than a reasonable quantity, posing an unattractive venture.
The problem got worse with low budget allocation for modernising the defence industry, leading to low aggregate demand for any private supplier or manufacturer. One of the parliamentary panels in March 2018 highlighted that 78 per cent of the Indian Army’s weaponry was vintage, showcasing the need for high capital budget allocation. Lastly, the Ordnance Factory Board scam, Tatra-BEML military vehicle procurement, VVIP choppers and the Rolls Royce-HAL kickback scandals created an increased shortage of supplies to sustain even ten days of the war.
Becoming ‘Atmanirbhar‘
Now, some bold decisions are taken to boost the speed and efficiency of the procurement cycle. The deal of Rafale is one such example of fast and efficient decision-making and procurement. Moreover, the government is now looking to involve the private sector more than ever before. In the union budget, the government has announced defence to be a strategic sector of divestment. The government now plans to minimise the role of Central Public Sector Enterprises (CPSE) through privatisation or mergers. This turns out to open the market for the private industry.
The policy makers also looking to boost the demand of new technologies by increasing the capital allocation for the defence industry. The capital budget allocation of 2021-22 stands at INR 135,060 crores which are 18.75% higher than last year’s budget estimate. The capital budget of the Army, Air Force, and Navy stands out to be 12.62%, 24.59%, and 22.94%, respectively, higher than last year’s budget estimate.
The intentions of the government are clearly to promote local, indigenous produced defence product over imports. The negative list of imports in the defence sector highlights the efforts to remove the import dependency. Another big step taken by the government is to clear a defence deal worth $6.5 billion to purchase LCA MK1A Tejas from HAL.
Hence, the decision of expansion of procurement categories encourages greater participation of the Indian industries and attract foreign companies to manufacture in India. In the defence budget, reservation of INR 52,000 crores of INR 1,12,000 crores for the domestic industry will open the defence sector for the private domestic players such as Bharat Forge, Mahindra defence, Adani defence etc.
For the foreign OEMs, the easing of FDI in Defence Acquisition Procedure 2020 serves as an invitation for such companies to set up their plants in India through manufacturing subsidiaries, joint ventures with the Indian companies, or technology agreements. These include companies such as Boeing, Lockheed Martin, Dassault Aviation etc. The policies outlined in the DAP 2020 also prioritise the local products in almost all the procurement categories. The guidelines also offer a maximum 10 per cent reward for the raw materials, which cost higher than imports to reduce import dependency.
Lastly, various policies encourage foreign OEMs to produce products listed in the Offset category in India by waiving certain offset thresholds for the companies. Overall, the government is now pushing to create a sustainable ecosystem to produce modern defence items and technologies locally.
Road ahead
What do all these advancements mean for the private foreign and Indian players? It indicates the willingness of the government to open the restricted sector of defence to private players in order to shift India from import driven economy to export driven mammoth in defence sector. Hence, the companies with the first-mover advantage in this industry will reap the benefits for the long term through long term contracts and higher budget allocations.
Furthermore, since 2014, India has jumped to 63rd rank from 134th rank in the World’s Ease of Doing Business Rating. Hence, with lower restrictions in the FDI and conducive business environment, the foreign companies can utilise India’s massive market by setting up their subsidiaries or entering into joint ventures with the Indian players.
In conclusion, India is now pacing its way to become one of the largest defence manufacturing hubs in the world in the future. The market conditions formed by proactive policies and extended support of the government will make India a vast market that private players can utilise to provide modernised defence equipment to the Indian Armed Forces through long term MoUs and contracts.
Hence, companies now have to move fast to gain the first-mover advantage to establish themselves as the incumbents of the Indian defence industry and reap the benefits out of it.
