India: An emerging defence manufacturing hub

Currently a major global defence buyer, Government of India has efforted to create an indigenous ecosystem of defence, naval and aerospace innovation, investment, manufacturing, modernisation and servicing by involving a variety of local and foreign stakeholders

May 10, 2018

The second most populated country is home to the world’s third largest military force; Additionally, responsibilities of securing the world’s fastest-growing major economy has called for new innovations

Currently a major defence importer, India aims to achieve technical capabilities and economies of scale for its indigenous industry to reach a turnover of over US$25 billion in military goods and services by 2025

The 10th edition of the Indian Defence Expo (DefExpo) held in April 2018 was themed around “Make in India” in the defence, aviation and security. The event saw participation by a total of 670 manufacturers

Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry, and with the Ministry of Defence, have simplified policies to encourage local defence manufacturing over import

India, the second biggest country in terms of population, is home to the third largest military force in the world. Additionally, responsibilities of protecting the world’s fastest-growing major economy has pushed up India’s defence budget every year, making the nation one of the top five spenders on defence and security. India is also one of the largest importers of conventional defence equipment and spends around 30 per cent of its annual defence budget on capital acquisitions. The Indian defence budget for financial year 2018-19 has been pegged at around US$44.5 billion – around 7.8 per cent higher than previous year – of which defence capital outlay is US$14.8 billion. Owing to the absence in the past of an adequate local defence manufacturing infrastructure, which can keep pace with India’s defence needs, around 60 per cent of defence related requirements have been traditionally met through imports. This has resulted in a steady increase in India’s import bills. To resolve this and to boost the economy, Government of India has efforted to create an local ecosystem of defence, naval and aerospace innovation, investment, manufacturing, modernisation and servicing in the country. This comes under the aegis of “Make in India”, which has sought to revolutionise production and manufacturing activities in the country.

DefExpo 2018 promotes Make in India

The 10th edition of the Indian Defence Expo (DefExpo) held on the outskirts of Chennai in April 2018 was themed around Make in India in the defence, aviation and security. The event saw participation by a total of 670 defence manufacturers, including 154 foreign companies and over 500 domestic companies. Major international companies included Lockheed Martin, Boeing (USA), Saab Group (Sweden), Airbus, Dassault Aviation (France), Rosoboron Exports, United Shipbuilding (Russia), BAE Systems (UK), Sibat (Israel), Wartsila (Finland), Rohde & Schwarz (Germany). Delegations from 47 countries attended the event. Among the many agreements signed, a few stand out: Boeing announced a partnership with Hindustan Aeronautics and Mahindra Defence Systems for production of FS/18 Super Hornet in India for its Air force.  Seven agreements were signed between India and Russia covering naval forces and future ready combat vehicles (FRCVs), opto-electronic sighting and navigation for Sukhoi Su-30MKI aircrafts and technical support in India for T-90 and T-72 tanks in the service of the army. Mahindra also signed an preliminary agreement with ShinMaywa Industries of Japan for manufacturing of amphibious aircraft US-2. On the eve of the Defence Expo, India also issued an initial tender for procurement of 110 single and twin seater fighter jets for Indian air force in the biggest such initiative in recent years globally.

In November 2017 the Indian Army has also put out a global bid for 1,170 FRCVs. Recent activities in the Indian defence sector includes the launch of Tata Lockheed Martin Aerostructures, a joint venture of Tata Advanced Systems (TASL) and Lockheed Martin. In April 2018, the entity opened a metal-to-metal bonding facility in Hyderabad, a first for the nation. The plant would add cutting-edge capability to the Indian aerospace industry and enable Tata to use this technology across manufacturing programmes for complex aerostructure productions and increased indigenisation. In June 2017, Lockheed Martin and TASL had entered an agreement to jointly produce the F-16 Block 70 fighter jets in India. In March 2018, Tata Boeing Aerospace Ltd, a joint venture of Boeing and TASL, had inaugurated a new production plant, also in Hyderabad. Employing 350 workers, the facility will be the sole global producer of fuselages for AH-64 Apache helicopter delivered by Boeing to its global customers, including the US Army. The new plant will also produce secondary structures and vertical spar boxes of the multi-role combat helicopter.

India aims to achieve technical capabilities and economies of scale for its defence industry to reach a turnover of over US$25 billion in military goods and services by 2025

 

Policies to promote defence manufacturing

India aims to achieve technical capabilities and economies of scale for its defence industry to reach a turnover of over US$25 billion in military goods and services by 2025. To aid this growth, the Government has extended 100 per cent foreign direct Investment (FDI) to the defence sector. While up to 49 per cent stake has been allowed under the automatic route, FDI above 49 per cent is permitted through Government route on a case to case basis, especially where it is likely to result in access to sensitive innovation and technology. To encourage investors, the Government is looking to further relax guidelines to allow FDI up to 74 per cent under the automatic route. Resultantly, top private defence, naval and aviation manufacturers from both India and abroad as well as those controlled by Indian and foreign governments have entered or expanded operation in the country in the recent past. These investments, both through acquisitions and joint ventures, are catering not just to India but to the global marketplace. Beyond the promise of income growth from India’s vast economy, these investments have been driven by the presence of a vast pool of skilled workforce and research and development (R&D) capacities, favourable market accesses and easy availability of other supporting infrastructure and resources.

This is, thus, an opportune time to invest in India’s defence, naval and aviation manufacturing sector. The Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry, along with the Ministry of Defence, has issued and amended a series of policies to encourage local defence manufacturing over import. These include discontinuation of preferential treatment towards India’s eight Defence Public Sector Undertakings (DPSUs) to create a level playing field for private rivals. Additionally, exchange rate protection has been extended to private sector at par with the DPSUs and import duty exemptions in defence have been removed to aid local manufacturing. Large number of parts and components as well as castings and forgings, among others, have been excluded from the purview of industrial licensing in defence products list to expand the scope of investment. To boost sales in the sector, an improved acquisition category was introduced as part of the Defence Procurement Procedure (DPP) of April 2016  – “Buy Indian IDMM” (indigenously designed , developed, and manufactured). To qualify under this category, a product is required to have at least 40 per cent indigenous content if it is designed in India, or at least 60 per cent indigenous content if the design is not indigenous.

Simplified Buy and Make structure in defence

The DPP has classified capital acquisitions broadly as “Buy”, “Buy and Make”, and “Make”. Under “Buy”, procurements have been categorised as “Buy (Indian IDMM)”, “Buy (Indian)”, and “Buy (Global)”. While “Buy” refer to an outright purchase of equipment, “Make” categorization aims to develop long- term defence capabilities. Procurement of defence equipment as per the DPP has therefore been prioritised as follows: 1) Buy Indian IDMM; 2) Buy Indian; 3) Buy and Make Indian; 4) Buy and Make; 5) Buy Global. Four segments have been selected in the initial phase – fighter aircraft, helicopters, submarines, and armoured vehicles as well as battle tanks, with more to be added later. A Defence Innovative Fund (DIF) to foster innovation and technology development has also been created. The Government’s offset policy in capital purchase contracts with foreign defence Original Equipment Manufacturers stipulates a mandatory offset requirement of a minimum of 30 per cent. The minimum contract value, for which offsets are mandatory, has now been revised from US$44.6 million crores to nearly US$300 million. In August 2015, services (R&D, maintenance, repair and overhaul (MRO) and technology transfer) were reinstated as an eligible avenue to offset discharge under the defence offset policy. A simplified mechanism to change offset partners, or components, has also been introduced to catalyze stalled offset investments.

Additionally, requirements of a single major Indian ownership of 51 per cent in an enterprise as well as that of a lock-in period of three year on equity transfer have been removed. Industrial licensing has been further simplified and can be applied online and a “Make in India” portal for defence production (www.makeinindiadefence.com) has been launched. It provides solutions to policy and procedural issues relevant for the defence manufacturing industry. The DIPP has also outlined the following: For investors, a weighted tax deduction of 200 per cent is available for in house R&D, sums paid to a national laboratory, university or scientific institution. States in India offer additional incentives for industrial projects. These measures have already seen improved foreign participation in the defence sector. Besides increasing activity at large-scale industrial levels, the Government’s measures have encouraged innovation and partnerships in small concentrated capacity and creation of new startups. Further reforms are on the anvil – foreign defence manufacturers may soon be allowed to help Indian companies set up manufacturing facilities. They may also be able to invest in a regulated fund that will promote startups to meet their offset obligations. Also on the anvil are major incentives to invest into defence manufacturing corridors – two have been declared in the states of Uttar Pradesh and Tamil Nadu. Going ahead, activities will only heat up in the sector asserting India as a major global defence supplier.

The Indian defence market is beckoning foreign investors. Department of Defence Production, Ministry of Defence, South Block, New Delhi 110011 www.ddpmod.gov.in and Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Udyog Bhavan, New Delhi 110011 http://www.dipp.nic.in are the nodal points for investors in this sector of great potential.