INVESTMENT OPPORTUNITIES IN THE DEFENCE SECTOR

The defence industry is a strategically important sector in India. With a strength of over 1.44 million active personnel, it is the world's 2nd largest military force after People's Republic of China. India has the world's largest volunteer military of over 5.1 million personnel. The total budget sanctioned for the Indian military for the financial year 2019 is $60.9 billion.

"Defence Production Policy of 2018" (DPrP-2018) has a goal of becoming among the top 5 global producers of the aerospace and defence manufacturing with annual export target of US$5 billion by 2025. Despite having a modest internal defence industry, India is the largest arms importer in the world, with most of its high-tech, high-value equipment such as aircraft, ships, submarines, missiles, etc coming in from Russia. 12% of worldwide arms exports (by value) reach India. India domestically produces only 45% to 50% of defence products it uses, and the rest are imported. India's military–industrial complex has had little success and only recently private sector was allowed to enter the defence production. India's defence exports were INR 4,682 crore (US$0.66 billion) in 2017-2018 and INR10,500 crore (US$1.47 billion) in 2018-2019, of 2018-2019 exports India's 8 Defence Public Sector Undertakings (DPSU) and 41 Ordnance Factories (OF) contributed INR800 crore (7.6% of total defence exports).

India plans to spend $ 130 bn on military modernization in the next 5 years, as achieving self- reliance in defence production is a key target for the Government of India. The Government has opened up the Defence industry for private sector participation to provide impetus to indigenous manufacturing. The opening up of the industry also paves the way for foreign original equipment manufacturers to enter into strategic partnerships with Indian companies.

A Defence export strategy has been formulated with a view of facilitating Defence Public Sector Enterprises (DPSUs) and private defence players in exploring business opportunities abroad. Domestically produced defence platforms, equipment, and spares worth $ 317 mn were exported to over 28 countries in 2015-16.

100% FDI is allowed in defence industry;  Companies abroad will be able to invest up to a maximum 74 per cent in defence manufacturing in India, up from 49 per cent, Finance Minister Nirmala Sitharaman declared on 16th of May, 2020.  

India will also stop importing weapons that can be made at home, the Finance Minister said. "We will notify a list of weapons and platforms for ban on their imports and fix deadlines to do it," Ms Sitharaman said, adding this move will improve self-reliance on defence manufacturing. "…Every year this list will be increased," she said.

"Even the spares of these weapons have to be manufactured locally. This will help reduce a huge defence import bill," the Finance Minister said.

The Ordnance Factory Board or OFB that makes weapons for the country's military will be made more professional. "We will work to improve autonomy, accountability and efficiency of OFB by corporatisation and not privatisation," the former Defence Minister said. The government will make separate budgetary provisions for procuring only Indian made defence items and will generate a negative list of weapons that can be imported as part of larger reforms to boost the economy in the post Covid 19 world.

Announcing a series of reforms for defence production, Finance Minister Nirmala Sitharaman said that the idea is to bring down India’s large weapons import bill and while certain high technology systems will still be procured from abroad, emphasis will be on procuring locally made products.

SECTOR POLICY

DIPP vide Press Note No. 5 of 2016 Series dated 24/06/2016 notified review of Foreign Direct Investment (FDI)Policy on various sectors which includes conditions related to FDI in defence at Para 5 of the said Press Note. According to the revised guidelines, Foreign Direct Investment Cap is 100%. Foreign Direct Investment up to 49% is allowed through automatic route and above 49% under government route wherever it is likely to result in access to modern technology or for other reasons to be recorded. Defence Industry subject to Industrial License under the Industries (Development & Regulation) Act, 1951 and manufacture of small arms and ammunition under the Arms Act, 1959. The detailed guidelines in this regard may be seen under the Press Note available at DIPP website (www.dipp.nic.in followed by link Acts & Rules). 

The other conditions governing FDI Policy in defence manufacturing sector as notified in the Press Note 5 of 2016 Series dated 24/06/2016 are as under:

• Infusion of fresh foreign investment within the permitted automatic route level, in a company not seeking industrial licence, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require Government approval.
• License applications will be considered and licenses given by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, in consultation with Ministry of Defence and Ministry of External Affairs.
• Foreign investment in the sector is subject to security clearance and guidelines of the Ministry of Defence.
• Investee company should be structured to be self-sufficient in areas of product design and development. The investee/joint venture company along with manufacturing facility, should also have maintenance and life cycle support facility of the product being manufactured in India.

Further, subsequent to abolition of the Foreign Investment Promotion Board (FIPB) by the Government vide O.M No. 01/01/FC12017-FIPB dated 05.06.2017, the work of granting approval for foreign investment under the extant FDI Policy, has been entrusted to the concerned Administrative Ministries/Departments. The Department of Industrial Policy & Promotion, Ministry of Commerce & Industry has been given the responsibility of overseeing the applications filed on the Foreign Investment Promotion Portal (FIFP) and to forward the same to the concerned Administrative Ministry. DIPP has finalized a Standard Operating Procedure (SOP) for examination of foreign investment proposals by Administrative Ministries and placed on their website 

PROCUREMENT POLICY

• The defence procurement is governed by the Defence Procurement Procedure (DPP 2016).
• The latest revision of DPP was released in March 2016.
• DPP focuses on institutionalising, streamlining and simplifying defence procurement procedure to give a boost to “Make in India” initiative.

OFFSET POLICY

• The key objectives of the defence offset policy are to leverage capital acquisitions to develop the domestic Defence industry. The policy stipulates the mandatory offset requirement of a minimum of 30% for procurement of defence equipment by foreign defence players. It is applicable on categories of procurements where estimated cost of the acquisition proposal is $286.04 Mn or more.

PROCEDURES FOR THE GRANT OF INDUSTRIAL LICENSES HAVE BEEN STREAMLINED

• The initial validity period of industrial licenses has increased from 3 years to 15 years. It also has a provision to grant an extension for a period of 3 years.
• Guidelines for the extension of validity of industrial licenses have been issued. Partial commencement of production is treated as the commencement of production of all the items included in the licence. 

KEY ACHIEVEMENTS

• Indigenous defence products unveiled - Akash Surface to Air Missile System, Dhanush Artillery Gun system and Light Combat Aircraft
• The Defence Procurement Procedure (DPP) amended to introduce Buy Indian-IDDM (Indigenously Designed, Developed and Manufactured)
• The policy on Strategic Partnerships to encourage the participation of the private sector, in the manufacture of defence platforms and equipment such as aircraft, submarines, helicopters and armoured vehicles.
• ‘No Objection Certificate (NOC) for export: A web-based single window interface created to issue 'No Objection Certificate'. The process is transparent and time-bound, with the maximum processing time reduced to 25 days and 70% of the NOCs issued in 15 days.
• The 10th edition of 'DefExpo' was organised from April 11 to 14, 2018 in Chennai, Tamil Nadu.
• The Government of India has decided to set up two Defence Production corridors, one each in Uttar Pradesh (UP) and Tamil Nadu.
• A Defence Investor Cell is also functional in the Department of Defence Production.
• The maiden flight of indigenously developed Automatic Flight Control System (AFCS) integrated on LCH was conducted successfully by Hindustan Aeronautics Limited (HAL).

Innovations For Defence Excellence (iDEX)

The iDEX initiative was launched by the Hon’ble PM in April 2018. iDEX aims to achieve self - reliance and foster innovation and technology development in Defence and Aerospace by engaging Industries including MSMEs, start-ups, individual innovators, R&D institutes and academia. iDEX has partnered with leading incubators in the country to provide handholding, technical support and guidance to the winners of iDEX challenges.

Defence India Start-up Challenge (DISC) are launched with Problem Statements (PS) from Armed Forces and OFB/DPSUs for resolution by innovators. 

For more information visit: www.idex.gov.in

Strategy For Defence Exports

1. Self-reliance and indigenization in defence is important for both strategic and economic reasons and has, therefore, been an important guiding principle for the government. Government considers that the industrial and technological development in the sector have made it possible to achieve this objective by harnessing potential of Indian industry along with the technological capabilities developed by academic and research institutions. Though India has made rapid strides in defence technology and industrial base in recent past, it is yet to cover a significant ground in terms of new products development and scale of production. The domestic defence industry would have limited scope for investment in R&D and production if it relies only on the domestic demand.

2. There is a need to promote investment in the defence sector, both in R&D and production, thereby resulting in higher self-reliance and indigenization. While putting in place the policy framework and procedural mechanisms, the thrust would be on indigenous production and exploring possibilities of exports to other nations that may look forward to supplies from India. Since the defence technology needs long term investment, its obsolescence is high with low economies of scale. Hence, the policy of maximizing indigenous production without well supported R&D policy and export strategy may not bring desired results. Therefore, the defence industrial policy has to be supplemented by the strategy for defence exports without which the economic base of the defence industry would be difficult to sustain in the present economic competitive environment.

3. The Government has already announced a Defence Production Policy in 2011 with an objective to achieving substantive self-reliance in design, development and production of equipment/weapons systems/platforms required for defence in as early a time frame as possible; to create conditions conducive for the private industry to take an active role in this endeavour; to enhance potential of SMEs in indigenization to broaden the defence R&D base of the country. While the Defence Production Policy lays due emphasis on indigenous production of defence equipment with a greater role of private sector, SMEs and R&D institutions, the objective of Defence Production Policy will not be achievable without having a well thought out export strategy, so that the industry is assured of access to export markets in addition to domestic market for investing in the sector.

4. Ministry of Commerce & Industry already has an overall Export Policy in the form of Foreign Trade Policy (FTP), which, inter-alia, includes various export promotion schemes, duty/ tax exemptions and other facilitative measures. Therefore, there may not be a need for having a separate Defence Export Policy. Instead, there is a need to put in place a specific strategy for encouraging defence exports within the overall ambit of FTP. The strategy may include measures required for promotion/ facilitation of defence exports through institutional mechanisms and streamlining the process of issuing NOC/ clearance for export of military stores. Accordingly, following strategy would be adopted to encourage export of defence products.

5. A specific export promotion/ facilitation body would be set up with participation from industry representatives. The body could be in the form of a society or a not for profit company under the Companies Act. The role of the body would be to render advice to government on various export related issues, coordinate all export facilitation schemes of the government, increase awareness amongst the industry about various export facilitation measures and promotion of exports through specific marketing efforts in targeted countries. The body will identify the suitable export markets in consultation with Ministry of External Affairs and Department of Commerce, keeping in view our foreign policy and various international export control and arms control regimes. The body would be a nodal agency of Ministry of Defence for the purpose of organizing defence exhibitions in India and abroad. The body would also act as a nodal point of Ministry of Defence for participation in exhibitions abroad.

6. In the government, a body namely Defence Exports Steering Committee (DESC) under the Chairmanship of Secretary, Department of Defence Production would be constituted. The Committee will have representatives of Armed Forces, DRDO, PIC Wing, Acquisition Wing, MEA, DGFT. Wherever required, the views of industry representatives and other experts will be taken. The functions of this Committee would include consideration and taking decisions on cases of export permissions, which are outside the purview or scope of subordinate authorities/committees particularly export of indigenously developed sensitive defence equipment, monitor the progress in defence exports and suggest specific steps/ strategy to boost exports. 

7. Offset is an important mechanism available to the domestic industry to enhance export capability. The Offset Policy may be reviewed and aligned towards final integration of weapons/systems in India and promoting export of such systems from India. The Policy may also be reoriented towards acquisition of critical technologies required for high end weapons/platforms so that the same can be leveraged for export.

CLICK HERE FOR DEFENCE OFFSET GUIDELINES

Defence India Startup Challenge

Taking the iDEX initiative further, Defence India Startup Challenge "has been launched by Ministry in partnership with Atal Innovation Mission, aimed at supporting Startups/MSMEs/Innovators to create prototypes and/or commercialize products/solutions in the area of National Defence and Security. The vision of the Challenge is two-fold:

• Help create functional prototypes of products/technologies relevant for national security (prototyping), and spur fast-moving innovation in the India defencesector;
• Help new tech products/technologies find a market and early customer (commercialization) in the form of the Indian Defence Establishment.

FINANCIAL SUPPORT

KEY PROVISIONS OF UNION BUDGET: 2017-18, 2018-19 AND 2019-20 

• Development of 2 Defence-related industrial production corridors
• Announcement of an industry-friendly Defence Production Policy 2018 to promote domestic production by the public sector, private sector and MSMEs.
• Defence Budget has reached $45.61 Bn in 2019-20