India’s Plan To Boost Local Defence Production Has Left Industry Confused
India has released two draft plans over the past few months on acquisition and production of defence equipment to boost domestic manufacturing. Yet, the local industry is confused.
The draft acquisition policy released in May and the draft policy on local production released over the previous weekend are aimed at making India a defence manufacturing and export hub. But the government also raised foreign direct investment cap to 74% earlier this year, making it easier for overseas firms to set up local subsidiaries. That sent conflicting signals to the industry.
The government has been proactively pursuing the cause of indigenisation in defence and the latest draft production and export policy does attempt to address this, said Karishma Maniar, associate director at Economic Laws Practice, adding that there is no clarity on the long-term plan.
While India’s private defence manufacturers publicly hail the initiative, they privately voice concerns about lack of clarity. Multiple laws, regulations and policies are creating confusion for Indian companies, a senior executive at a defence manufacturing firm said on the condition of anonymity out of business concerns. There needs to be clarity on what the country wants its defence industry to achieve, he said.
Prime Minister Narendra Modi has been pushing for local manufacturing of defence equipment to cut reliance on imports as India is one of the biggest buyers in the global defence market. Yet, in the last five years, his administration hasn’t placed a single large order for local production. Instead, India chose to buy Rafale jets in fly-away condition in an inter-government agreement with France, junking an earlier arrangement that called for manufacturing in India. India is now buying S-400 missile system from Russia in a similar deal amid border tensions with China.
The three key policies governing India’s defence procurement are — acquisition, production and foreign direct investment.
The government released two drafts of the production policy. The first one in 2018. The latest one, Draft Defence Production and Export Promotion Policy, was released last week.
The new draft production policy calls for embargo on import of 101 items to be progressively implemented between 2020 and 2025, Defence Minister Rajnath Singh tweeted. Of the 101 items, 69 items enter embargo after December 2020 and others by December 2025.
But most of the items were under the ‘buy-Indian’ category—with 90% indigenisation—and were already being made in India by public sector units, according to Rahul Chaudhry, former managing director of Tata Power Strategic Engineering Division and principal, chairman and managing director of GTM Consulting Pvt.
Moreover, Chaudhry views the embargo timelines as a dilution of the ‘Make in India’. It legally opens up acquisition of these items from global markets until the beginning of the embargo, he said.
Maniar, however, said the embargo removes discretion from the system which is often a concern for the industry while making investment decisions.
The industry executive quoted earlier said the import embargo provides industry the time to indigenise and gives the ministry the opportunity to acquire things in case of emergency. Even fast-tracked orders take a minimum of 12-18 months to execute, he said.
The draft production policy also envisages a near threefold jump in defence production by 2025. Key targets include:
- Annual aerospace and defence goods turnover from domestic companies to reach Rs 1,75,000 crore, including exports at Rs 35,000 crore by 2025.
- The government targets exports worth Rs 35,000 crore by 2025.
- The procurement from the domestic companies is expected to double to Rs 1,40,000 crore by 2025.
- Items worth almost Rs 1,30,000 crore each are anticipated for the Army and the Air Force, while items worth almost Rs 1,40,000 crore are anticipated by the Navy over the next six to seven years due to clear timelines for embargo of these products.
- The armed forces will further make addition to the list as they go forward.
The senior executive quoted earlier called it improvised. It collates all existing policies into one and the targets are the same, he said.
The annual revenue target of Rs 1,40,000 crore by 2025 assumes 15% annualised growth from the current Rs 70,000 crore turnover, he said, adding that it would require at least 8-10% growth in capital budget every year. Public sector companies have not grown more than 5-7% annually and this would leave a void that can be filled by the private sector, he said.
And while nearly Rs 4.3 lakh crore worth of orders at the stage of acceptance of necessity, he said the government would need capital budget to place the orders.
The Defence Procurement Policy 2011 has seen several amendments till a new draft was released in May. It has been renamed as Defence Acquisition Policy-2020.
The policy, among other things, aims:
- Self-reliance in defence equipment production and acquisition to develop India as a global defence manufacturing hub.
- Procurement of goods and services will be, in the order of preference, categorised as Buy Indian Designed, Developed and Manufactured; Buy Indian; Buy and Make (Indian); Buy and Make; Buy Global, Manufacture in India; and Buy Global.
One of the key elements of the existing acquisition norms are offsets, or investments to build domestic ecosystem of suppliers and ultimately technology transfer to Indian companies. But this is slowly being done away with.
The latest draft acquisition policy removes the condition of offsets in inter-government agreements. So while the acquisition of Rafale jets included the offset programme, a similar deal in the future won’t have this requirement. In fact, India’s decision to buy missiles from Russia amid a standoff with China has no such requirement.
If offsets are not required, foreign companies bidding for Indian defence equipment won’t be required to build a local ecosystem.
FDI Dilutes Definition Of Indian Company
There is a lack of clarity on the definition of Indian company as given in the draft acquisition policy, when read together with the finance minister’s announcement to increase foreign direct investment up to 74% under automatic route, said Maniar. If one strictly goes by the definition, a foreign company with an Indian subsidiary can also bid for Indian programmes (including 101 items on the negative list) if they can achieve at least 50% indigenous content.
Indian company has no meaning, said Chaudhry. Anyone can set up a company in India with capital and all that matters is whether it’s able to provide manufacturing and value-addition based out of India, he said.
Even for the 101 items under the embargo, any global original equipment maker with an Indian subsidiary can bid, indigenise and assemble the parts to meet the requirement. That’s a backdoor entry for foreign companies, Chaudhary said.
While the draft production policy envisages India to be a design-to-production hub in the world, the draft acquisition policy needs clarity on how this vision will be achieved if foreign companies can participate in the Indian programmes, especially on the design and Indian IP ownership aspect, said Maniar.
Maniar suggested devising a clear road map with outcomes. “If the road map with timelines for achieving the ultimate goal of having an Indian defence Industry which is globally recognised through exports is made part of the DPEPP, that should put most of these concerns to rest."
According to the industry executive quoted earlier, the FDI policy is unlikely to see any response despite its intentions. Any foreign company will have to seek licenses from the Ministry of Defence, which has tightened the norms during the current geopolitical climate. Citing past experience, he said while so may licences were granted, not many got the orders.