Make in India Defence: Review of Key Initiatives

India can proudly boast about having the world's third-largest military along with being
the sixth biggest investor on defense. Indian defense industry is dominated by defense
public sector undertakings (DPSUs) and ordnance factories (OFs) which contribute about
90% of the total domestic defense manufacturing output.

Need for Make in India in Defence

1.8% of India's GDP is assigned to be spent on defense purposes with 40% of it getting
assigned for capital purchases. A meager 30% of Indias equipment gets manufactured
locally, mainly by public sectors. 60% of defense-related requirements are currently
fulfilled through imports. Even though India is one of the largest importers of Defense
equipment, it still has its eyes focused on the Make in India initiative as it will give it an
added advantage of having the manufacturing base in the country itself and receive the
much-required capital from foreign exchange. The Make in India initiative includes a
policy for the defense sector which aims to rectify the persisting imbalance between the
defense equipment imports and their indigenous manufacture, and the initiative seeks
to do so without affecting the requirements.

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Steps taken by government to promote make in India in Defence:

Government measures pertaining to Defence sector done to promote Make in India are:
1. Increasing FDI in Defence sector

2. Revising Defence procurement Policy as per the needs of Make in India

3. Amended Indias Defence offset policy

4. Strategic Partnership policy-Private sectors

5. Fiscal incentives to defence sector

Liberalizing FDI Policy

Automatic route allows foreign investment up to 49%, beyond 49% and upto 100% is permitted
only after Government approval, especially in cases where a modern technology can be acquired.

Defence Procurement Procedure

Ministry of Defense established a new Defence Procurement Procedure (DPP) solely for
encouraging Make in India initiative by promoting indigenous design, development, and
defense equipment manufacture, platforms, systems, and subsystems. Primary
provisions included in DPP 2016 for boosting Make in India are:

New category of procurement Buy Indian-IDDM (Indigenously Designed,

Developed and manufactured) was introduced in Defence Procurement
Procedure-2016, and has been granted top priority for acquisition of capital
equipment.
Categories of capital acquisition, namely Buy (Indian) and Buy and Make
(Indian),' have been given preference over Buy (Global) & Buy & Make (Global)
categories.
The requirement of Indigenous content has been enhanced/rationalized for
various categories of capital acquisition.

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 The Make Procedure has become more well-defined and structured after the
introduction of a few provisions regarding funding which will include 90% of
development cost being taken care of by the government and holding projects
whose development cost exceed Rs. Ten crores, also government funded, and Rs.
Three crores financed by the industry for MSMEs.
Indian companies can collaborate with a foreign Original Equipment
Manufacturer (OEM) for Transfer of Technology (ToT) under Buy & Make
(Indian) category.
Under Buy & Make Category of Capital Acquisition, the foreign vendor is
required to transfer the Technology to Indian Production agency for the
indigenous production of the items.
Defence Offset Policy
A buyer gets specific benefits in the form of offsets from a seller which can be a piece of
technology or capability of Indian industry to persuade a foreign vendor to sell
equipment to India. Capital purchase's offset policy covenants with foreign defense
OEMs which elaborates on a mandatory offset requirement of at least a minimum of
30% for defense contracts. The minimum contract value for which offsets are necessary
has been changed from INR 300 crore to INR 2,000 crore.

Strategic Partnership Policy

The strategic partnership policy was introduced in the Make in India initiative to draw a
favorable response and aid from the private sector and foreign investment. The
government wishes to establish a robust defense-industrial base in the country with the
help of this policy. Its key features are:

Under the strategic partnership policy, selected Indian private sector companies
will get to collaborate with foreign original equipment manufacturers (OEMs) to

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 cooperatively manufacture fighter jets, helicopters, submarines and armored
vehicles like tanks under the Make in India framework.
The policy lays downs certain ground rules based on which the Indian companies
will be selected to be strategic partners, which will be fair, reasonable, non-
arbitrary, transparent and rational, and based upon the broad parameters of
financial strength, technical capability and capacity/infrastructure.
The foreign OEMs will be chosen by conducting a separate yet parallel process,
based on the criteria of range, depth, and scope of the transfer of technology
offered in identified areas.

Ease of Doing Business

Department of Defense has initiated a process of Green Channel status to firms

having predefined financial and quality credentials. This mechanism has been
adopted to promote feasibility of doing business to make Make in India initiative
a success.
The IDR accorded Industrial Licence's validity was raised from 7 years to 15 years,
with three years as variable depending solely on the nature of cases. Renewable
of registration can be carried out on self-certification basis.
A Make in India portal for Defence Production has been launched. It provides
policy and procedural issues relevant to defense manufacturing industry. Test
facilities of DPSUs/OFB/DGQA/DGAQA/DRDO/Forces are displayed on it for
private sector's use. Investors can also look for clarifications related to defense
production.
A large number of parts/components, castings/ forgings, etc. did not make it to
the purview of industrial licensing under defense products list for industrial
licensing that was announced in June 2014.

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Fiscal Incentives

In budget 2017-18, the budget allocated to defense has increased by 6.2% when
compared with previous year's budget.
Defence Public Sector Undertakings (DPSUs) was always prioritized over others in
matters like excise duty/customs duty. This advantage has been taken away to
create a level playing field. As per the policy revised in April 2015, all Indian
industries (public and private) will face the same excise and custom duty levies.
In August 2015, Exchange Rate Variation protection became equal for Indian
private sector and Public Sector Undertakings for all categories of capital
acquisitions.
The customs duty exemption on import of defense equipment was removed to
encourage imports and incentivize domestic manufacturing.

Achievements and Constraints

Madhya Pradesh marked the beginning for India by establishing it's first private sector
small arms manufacturing plant to provide top-notch weapons to the armed forces as
per the countrys defense indigenization programme. There are several products that
are manufactured in India like the HAL Tejas Light Combat Aircraft, the composites
Sonar dome, a Portable Telemedicine System (PDF) for Armed Forces, Penetration-cum-
Blast (PCB) and Thermobaric (TB) ammunition designed explicitly for Arjun tanks, a
heavyweight torpedo called Varunastra manufactured with 95% locally sourced parts
and medium range surface to air missiles (MSRAM). Recently, Indian companies have
started collaborating with Airbus (France),BAE Systems (UK),Pilatus,
(Switzerland),Lockheed Martin (USA),Boeing (USA),Raytheon (USA),Israel Aerospace
Industries (Israel),Rafael Advanced Defence Systems Ltd. (Israel),Dassault Aviation SA

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(France) to realize the Make in India initiative especially in defense manufacturing.
Constraints for Make in India in defense include:

Defence is not necessarily the most attractive when it comes to foreign

investment.
Manufacturing weapons under Make in India initiative does not meet the
requirements of Army. For example, Assault rifles are manufactured in India to
replace INSAS rifles as it failed in initial stages of testing.
Even after liberalizing norms, delay in policy clearance for private sectors remains
the biggest hurdle and is the main reason behind a poor number of private
sectors participating in defense.
Lack of adequate and skilled human capital in research organizations like DRDO.

Steps to be taken

There can be a few reforms made like developing human resources as per requirements
of Make in India; spending more funds in Research & development that resolve Make in
India's needs in defense; promoting collaborations with technically advanced countries;
focusing more on technology transfers rather than procuring; start-ups should be
encouraged in Defense sector and develop infrastructure related to Defense.

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