India needs to transform from large importer to major defence manufacturing country and a net exporter

By Arun T Ramchandani

There is huge headroom for growth in the defence manufacturing sector in India, as the country aims to be self-reliant under the ‘Atmanirbhar Bharat’ or ‘Vocal for Local’ campaign. What’s the way forward? How India is aiming to achieve the goal?

Modern high technology defence equipment forms the backbone of any nation’s security. India was the world’s largest importer of defence equipment for many years and is currently the 2^nd largest. Since independence, this over-dependence on foreign sources for defence equipment has neither helped us build security self-reliance nor develop a scientific & technological ecosystem, which has not helped the domestic defence manufacturing industry grow.

The defence budget for FY22 has a Capex outlay of Rs 1.35 lakh Crore, a 19% increase over the FY21’s Rs 1.13 lakh Cr allocation.

In the aftermath of the Covid-19 pandemic, the Prime Minister’s drive for ‘Atmanirbhar Bharat’ (Self-reliant India) has picked up steam more than ever. The defence budget for FY 2021-22 has a capital expenditure budget outlay for the year at Rs 1.35 lakh Crore, a 19% increase over the previous year’s Rs 1.13 lakh Cr allocation. Out of the budgeted Rs 1.35 lakh Cr, the Ministry of Defence (MoD) has planned to invest 63% of the outlay, i.e., Rs 70,221 Cr only for domestic defence procurement. The Government has accepted the Finance Commissions recommendation to set up a non-lapsable fund that will create a corpus of about 2 lakh Cr over a 5-year period to fund budgetary gaps in addressing defence spending needs.

With 18% of India’s industrial output and 53% of the total FDI in 2020, Gujarat CM Vijay Rupani aims to make the state country’s defence manufacturing hub.

In the current financial year, FY21, 87% of the Acceptance of Necessity (AON) announced for new capital acquisition cases worth Rs 86,000 Cr have been earmarked for the domestic defence industry. These directions are accentuated by the threat of a two-front war, the perceived risk of being dependent on an internationally and geopolitically controlled technology & manufacturing base that can be throttled at will along with the opportunity to create a global manufacturing hub and supply chain outside China.

In August 2020, the MoD announced an embargo on the import of 101 defence equipment and platforms to promote local defence manufacturing.

In August 2020, the MoD had also announced an embargo on the import of 101 defence equipment and platforms that can be manufactured by Indian defence manufacturers. This will provide a boost to the domestic industry. In addition, the MoD has also drawn up a Defence Production & Export Promotion Policy in 2020 that targets scaling up defence production to Rs 1.75 lakh Crore defence exports to Rs 35,000 Cr by 2025, at a compounded annual growth rate (CAGR) of 21% and 36% respectively. These policy directions, vision and actions clearly indicate a huge headroom for growth in Defence Manufacturing in India.

What are we doing?

The new Defence Acquisition Procedure (DAP), 2020 released by MoD prioritises indigenous programs and defines higher indigenous content in domestic defence manufacturing. The DAP-2020 also emphasises the importance for Indian Industry to Indigenously Design Develop and Manufacture (IDDM) equipment. The DAP-2020 has introduced a new category that permits equipment and platforms procured under the Global Buy category to be now manufactured in India.

MoD is encouraging industry players to develop defence testing infrastructure through the PPP model with up to 75% funding.

MoD is encouraging industry to develop defence testing infrastructure through Public-Private Partnership (PPP) by providing funding up to 75%; opening DRDO & Service Labs for industry use; and allowing the industry to test defence equipment in military ranges. The MoD has also set up new defence corridors in UP and Tamil Nadu for companies to set-up greenfield units, thus enabling an entire defence manufacturing ecosystem in the country, with announcements of investments of about Rs 3,500 Cr in each of these corridors.

Major defence manufacturing orders to Indian companies:

Domestic defence manufacturing will receive a major impetus on account of the recently announced major orders on Indian domestic industry, albeit in the Government Sector: Tejas Aircrafts worth Rs 48,000 Cr on Hindustan Aeronautics Limited (HAL); and the Arjun MBT worth Rs 8,500 Cr on Heavy Vehicles Factory (HVF). These production orders will not only benefit large Tier-1 companies but also help develop a domestic defence MSME base.

Going ahead, to create a defence manufacturing ecosystem in the country where private and public sector companies can grow synergistically, the government needs to ensure a level playing field where contracts are not awarded on a nomination basis to OFB and DPSUs. In a recent webinar post the announcement of the Defence Budget, the Defence Minister accepted an Industry Chamber proposal of awarding 15% of domestic defence orders from the allocated budgets to Indian Private Industry with a quick ramp-up to 25%. The RM also concurred with a suggestion to issue RFPs for at least 10 acquisition cases valued at Rs 500-2000 Cr to the domestic defence industry in the next financial year.

To support investments in defence manufacturing infrastructure by MSMEs and others, the Government needs to set up a fund of funds of about Rs 10,000 Cr.

To support investments in manufacturing infrastructure by MSMEs and others as well as support large working capital requirements for defence programs, the Government also needs to set up a fund of funds of about Rs 10,000 Cr to make low-cost capital available to create and sustain a competitive defence manufacturing base. Another enabling factor in nurturing the defence manufacturing industry will be developing the requisite skill sets in precision manufacturing, energetics material processing, electronic manufacturing, and system integration. This can only be done through long term investments in Skilling and Vocational Training Centres by government and industry, especially in the new corridors.

No industrial segment can be self-reliant and competitive without design and IP creation capabilities. In line with this imperative, the MoD has also come up with an IDEX (Innovations for Defence Excellence) platform to support new ideas and start-ups. The MOD had announced earmarking a fund of a minimum of Rs 500 Cr for the IDEX initiative. Supporting and providing funding to start-ups can help nurture path-breaking innovations and technologies for our defence forces. MoD’s focus on nurturing and procurement of next-gen technologies such as Anti-Drone Systems, Adaptive materials, Edge computing in network systems is a positive step in enabling India to develop capabilities to participate in the emerging battlefield of the future. 

Industrial R&D and academia need to be integrated into the defence manufacturing ecosystem.

While DRDO Programs receive funding based on the priorities outlined in the Services Technology Perspective & Capability Roadmap (TPCR), Industrial R&D and academia need to be integrated into this ecosystem. Tax incentives for DSIR recognised industrial R&D centres needs to be reintroduced to support expensive defence R&D. The Make1 acquisition process, where the Government funds two identified development agencies up to 70% of the costs to develop contemporary products to address user needs with product & system level IP ownership, should be encouraged, and scaled up. The Defence Minister did commit to realising Acceptance in Principle for five Make 1 programs in the next financial year.

The Strategic Partnership (SP) model to build Indian platforms like submarines, fighter aircrafts, helicopters, main battle tanks & such advanced weapon systems using Private Industry and Foreign OEM structured SPVs can give a great impetus to Atmanirbharta in national security. We need to accelerate the implementation of this model to trigger higher investments and better infrastructure in building complex technology platforms with a large multiplier and trickledown effect on the economy.

The private sector defence manufacturing industries in the USA, Russia, UK, and France have grown successfully owing to the strategic partnerships with their Government establishments.

The private sector defence industries in the USA, Russia, UK, and France have grown successfully owing to this type of strategic partnerships with their Government establishments. A critical element of the domestic defence industrial base is a reliable and diverse supply chain. The SP Model programs have the muscle to build a multi-tiered self-sustaining domestic supply chain with less dependence on foreign original equipment manufacturers (OEMs).

India needs to transform from a large importer of defence equipment to a net exporter. Can India evolve into a defence supplier for Africa, Central & South East Asia and the Middle East in the near term as domestic Industry capability in defence design and manufacturing matures? This also calls for integrated efforts between the Government, DPSUs and Private Industry to offer attractive solutions for these markets. Further opening-up of the Line of Credit for defence exports could provide a major boost to defence manufacturing in India.

Ease of doing business and simple regulations is a key enabler for industry growth.

Ease of doing business and simple regulations is a key enabler for industry growth. The DAP calls for a long procurement process that starts with Request for Information (RFI) and culminates with the contract deliveries and through life support. The process from RFI to Contract signing itself takes 5-10 years in today’s environment. This tedious process involves no cost no commitment (NCNC) trial process for any equipment to be inducted. Due to the current 3-5 years churn rate of newer technology, the majority of equipment is also at risk of technology obsolescence. The DAP should explore simplified processes, enable funding gaps, and include procurement commitments.

The vision for Atmanirbharta in National Security has been clearly defined. The policy and the enabling platform have been created for the growth of the domestic defence industry. What is now required is the bold and swift implementation of the vision as well as the policies and enabling measures outlined herein.

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(Arun T Ramchandani is Co-Chair, FICCI Defence & Aerospace Committee and EVP, Guns Missiles & Armoured Systems (GMA) BU, L&T Defence.)

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