Defence

Facts and Findings

1. According to the Stockholm International Peace Research Institute (SIPRI), India was the world’s second largest importer of major arms in 2014-18 and accounted for 9.5% of the global total.

2. According to the Stockholm International Peace Research Institute (SIPRI), India’s military expenditure rose by 3.1% during 2014-18.

3. In a 2011 report to the Parliament, the Comptroller and Auditor General of India (C&AG) highlighted the 90% import dependency of Hindustan Aeronautics Ltd (HAL) for ‘raw materials and bought out items’ for the production of indigenous .

4. India has been spending around 2.4% of its GDP on defence.

5. The Self-Reliance Index (SRI) which may be defined as the ratio of indigenous content of defence procurements to the total expenditure on defence procurements in a financial year is at an abysmal 0.3.

Historical Evolution of Procurement Policy Framework

1. The post-independence defence procurement in India was heavily influenced by an ideological preference for  public sector and high dependence on a single foreign exporter (the USSR).

2. after the end of the  cold war and economic liberalization in India, the expansion of diplomatic and military relations with multiple  countries led to complex multi-vendor negotiations with insistence on local capacity building for joint research and  development and co-production.

3. In line with the recommendations of the Public Accounts Committee of  Parliament in 1989, the Government had issued the Procedure for Defence Procurement in February 1992, to put in place robust processes for defence purchases.

4. After the Kargil War, a Group of Ministers recommended significant changes in the procedures and institutions for  defence acquisition in India.

5. A Defence Acquisition Council (DAC) chaired by the Defence Minister was formed to  consider and approve annual, medium term and long term plans prepared by an Integrated Defence Staff reporting  to the Chiefs of Staff Committee

6. A dedicated structure for defence acquisition was  created under the Director General of Defence Acquisition which included technical, finance and acquisition  managers with appropriate skill set.

7. A detailed procedural manual for “Buy” decisions was notified as the  Defence Procurement Procedure (DPP) 2002.

8. The scope of DPP 2002 was further revised in June 2003 to include ‘Buy and Make’ through imported Transfer of  Technology (ToT) decisions.

9. The document was further revisited in 2005 to include mandatory offsets for high  value projects and ‘Make’ category.

10. DPP 2006 added an in-built mechanism for review of the document every 2  years. The DPP was subsequently revised in 2008, 2009 and 2011; with each version expanding the scope,  streamlining processes and putting in safeguards based on experience and stakeholder input.

11. A Defence  Procurement Manual (DPM) was notified in 2009 to regulate procurement of goods and services under  revenue head by organizations under the Ministry of Defence (excluding DRDO, DPSUs and OFB). The DPM  2009 also applied to certain capital purchases like medical equipment.

12. A Defence Production Policy was also issued in 2011 which, inter alia, aimed at “substantive self reliance in the  design, development and production of equipment/ weapon systems/ platforms required for defence in as early a  time frame as possible”.

13. The Defence Procurement Procedures was again revised in 2013 to  prioritize domestic equipment over foreign sourced systems, in line with the Defence Production Policy  2011.

Government initiatives

Defence Procurement Procedure 2020 - It aims at further increasing indigenous manufacturing and reducing timelines for procurement of defence equipment.

Key highlights of DPP 2020

1. Indigenous Content (IC) stipulated in various categories of procurement has been increased by about 10% to support the ‘Make in India’ initiative.

2. Leasing has been introduced as a new category for acquisition in addition to existing ‘Buy’ & ‘Make’ categories to substitute huge initial capital outlays with periodical rental payments. Here, the lessor can be both Indian as well as global.

3. New Category Buy (Global – Manufacture in India) has been introduced with minimum 50% indigenous content on cost basis of total contract value.

4. There is also long-term product support — which would be three to five years after the warranty period is over.

5. A “price variation clause” has been introduced that will be applicable to all cases where the total cost of contract is more than Rs 1,000 crore and the delivery schedule exceeds 60 months.

Evolution of FDI Policy in Defence

1. 2001: Defence Industrial sector, which was earlier reserved for the public sector was opened up for Indian private sector participation as well. FDI up to 26% was also allowed.

2. 2016: FDI under automatic route up to 49%; Above 49% and up to 100% through government route.

3. May 2020:

- FDI limit in Defence Production has been raised to 74% from existing 49% under Automatic Route.

- the Government has inserted “National Security Clause” under which the Government reserves the right to review any foreign investment in the Defence Sector that affects or may affect national security.

- Hence, FDI in the defence sector may now fall in three categories: (a) through the automatic route up to 49 per cent; (b) with prior scrutiny from the national security angle between 50 and 74 per cent; and (c) above 74 per cent wherever it is likely to result in access to modern technology or for other reasons to be recorded, and subject to scrutiny from the national security angle

Sectors where FDI is prohibited:

1. Lottery Business including Government/private lottery, online lotteries, etc.

2. Gambling and Betting including casinos etc. Chit funds and Nidhi company

3. Trading in Transferable Development Rights (TDRs)

4. Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Activities/sectors not open to private sector investment such as Atomic Energy and Railway operations.

Few initiatives which will further support FDI in Defence sector are:

1. Governments continuous reform for ease of doing business.

2. India’s increasing Defence capital expenditure i.e. increasing domestic demand for Defence and Home Land Security market

3.   Ease facilitation of Defence exports through institutional mechanisms and streamlining the process of issuing NOC/ clearance for export of military store.

4. Through a series of reforms, the government has now confined the requirement of licenses to a notified list of Defence equipment, which it released in the public domain. The validity of an Industrial License for Defence production has been raised from 3 to 15 years, extendable up to 18 years considering the long gestation period of Defence contracts. The application process has been automated and simplified.

5. The government has created Level playing Field among Private and Public sectors and has done various policy reforms, for not to favour and provide equal opportunity.

6. In the last 2 years, India has signed Defence cooperation agreements and MoUs with over 20 countries such as Japan, Singapore, UAE, Oman, Canada, Kenya etc. to encourage Defence exports under Act East Policy, entered the Missile Technology Control Regime, and strengthened bilateral relationships with major suppliers. For instance, India signed a military logistics agreement with the United States and was recognized as a ‘Major Defence Partner,’ which will enable license-free access to a wide range of dual-use technologies. India strengthened its strategic partnerships with USA, Russia and EU nations to facilitate the transfer of technology for cutting-edge Defence equipment.

7. India and its various states are developing Special Economic Zones, Defence corridors and National Investment and Manufacturing Zones (NIMZ).  Such zones are to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. .

Areas of Concern For FDI In Defence

Although a lot of reforms initiated by the government for making the industry more lucrative and attractive for investors throughout the world, some areas of concerns are yet to be resolved. Such as –

1. Defence production and R&D involves highly skilled engineers and technicians. Availability of highly skilled workforce is required to meet the industry demand.

2. India to make a balance between its own motive of self-reliance in Defence and FDI through foreign technology and foreign ownership.

3. Major Defence companies are system integrator and highly depend on the supply chain, therefore the development of Defence cluster for tier 1, tier 2 and tier 3 suppliers are also required for the success of the industry. Otherwise, companies will import major subsystems, parts and components, which will lead to higher production cost and equals to almost near to the direct import cost of equipment.

4. To stop tier 2 and tier 3 supplier to import basic material and components, investment in indigenous R&D and commercialization of the same is required.

➤ E-Biz Portal: process of applying for Industrial License (IL) and Industrial Entrepreneur Memorandum (IEM) has been made completely online on ebiz portal.

➤ Restriction of annual capacity in the industrial license for defence sector has been removed.

➤ Outsourcing and Vendor Development Guidelines: for DPSUs (defence public sector undertaking) and OFB (ordnance factory board) to promote the participation of private sector, particularly SMEs (small manufacturing enterprises) for defence manufacturing.

➤ Uniform custom duty: In order to establish a level-playing field between Indian private sector and the public sector, all Indian industries (public and private) are subjected to the same kind of excise and custom duty levies.

➤ Preference to ‘Buy (Indian)’, ‘Buy & Make (Indian)’ & ‘Make’ categories of acquisition over ‘Buy (Global)’ category, thereby giving preference to Indian industry in procurement.

Way Forward

Some of the steps that can be taken in this direction are:

1. Permanent Arbitration Cell can be set up to deal with all objections and disputes.

2. Private Sector boost is necessary as it can infuse efficient and effective technology and human capital required for modernisation of indegenious defence industry.

3. The private sector must be allotted big ticket contracts in order to strengthen their confidence and reduce the trust deficit between private and government sector.

4. Ensure a level playing field for the private industry, DRDO, DPSUs and OFB.

5. Export capability: If the aim is to achieve export capability, then the weapon system must first be in service with our armed forces.

6. Software Industry and technologies like Artificial intelligence and cyber security should be used to develop and manufacture the “chip” indigenously.

7. Providing Financial and Administrative autonomy to DRDO in order to enhance its confidence and authority.

8. Training and Tenure: The staff at the Department of Defence Production need to be trained and given longer tenures to ensure continuity.

9. Investee Company should be structured to be self-sufficient in areas of product design and development. The investee/joint venture company along.