Defence Manufacturing Sector


 

OVERVIEW

India has the third largest armed forces in the world and is one of the largest importers of conventional defence equipment. It is the Government’s prime target to modernize defence production, and make India self-reliant. This sector is also being opened up to private manufacturers, which is leading way to more foreign direct investments.

The Defence Ministry in Interim Union Budget 2019-20 has envisaged a total of Rs. 3,81,931.22 crores for Defence (excluding defence pension of Rs. 112079.57) which is 13.7 % of the total budget outlay of Rs. 27,81,200 crores. Defence sector is expected to receive Rs. 431010.79 which is 15.48% of the Central Government expenditure of 2019-20. Out of these Rs. 2,10,682.42 crores are allotted for revenue expenditure and 108248.80 crores are allotted for capital expenditure for the Defence Services and the Organizations/ Departments under the Ministry of Defence. The Defence Production in the last four years are have touched Rs. 58759 crores by 2017-18.

Value of Production of OFB& DPSUs are as follows:

(Rs. In Crores)
Production Unit 2014-15 2015-16 2016-17 2017-18
Ordinance Factory Board (OFB) 11364 13047 14825 14829
Defence Public Sector Undertaking(DPSUs) 35016 39345 40532 43930
Total 46380 52392 55375 58759
Source: Ministry of Defence

Import substitution and Make in India initiative has gradually reduced the imports under Defence Ministry in the last four years from 29.07% in 2014-15 to 23.50% (as % of value of production) in 2017-18 which is 19.3% decline in the value of defence imports. Apart from this, all Naval ships and Submarines are constructed in India on order. The Private Defence Industry witnessed growth in terms of the number of industrial licenses issued from 49 in 2014-15 to 139 in 2017-18. The cumulative licenses issued on the other hand rose from 107 in 2014-15 to 348 in 2017-18.

The Export Performance of the Defence Sector has gradually increased from Rs. 1940 Crores in 2014-15 to Rs. 4682 crores in 2017-18.

Some of the major export destinations for defence products have been Italy, Maldives, Sri Lanka, Russia, France, Nepal, Mauritius, Sri Lanka, Israel, Egypt, UAE, Bhutan, Ethiopia, Saudi Arabia, Philippines, Poland, Spain and Chile etc. The major defence items being exported are Personal Protective items, Offshore Patrol Vessels, ALH Helicopter, SU Avionics, Bharati Radio, Coastal Surveillance Systems, Kavach Mod II Launcher and FCS, Spares for Radar, Electronic System and Light Engineering Mechanical Parts etc.

Defence Acquisition-The total number of contracts signed during the last four years are given below:

Defence Cell 2014-15 2015-16 2016-17 2017-18
Army 21 22 11 25
Air Force 7 13 11 05
Navy 19 26 24 20
Total 47 61 46 50
Source: Ministry of Defence

Total 204 contracts with total value of Rs. 2,47,987.31 crores were procured in total (Foreign and Domestic) by the ministry during 2014-2018. Out of these, 76 contracts worth Rs. 128918.22 crores were procured by foreign vendors alone.

100% FDI in defence sector is allowed through Government route where it is likely to result in access to modern technology. Upto 49% is allowed under the automatic route. However, the Government is planning on FDI up to 74% under automatic route in niche technology areas. The defence industry is subject to industrial licenses under the Industries (Development and Regulation) Act, 1951 and manufacturing of small arms ammunition under Arms Act, 1959. A lock-in period of three years on equity transfer has been done-away with in FDI for defence.

From April 2000-March 2018, defence industry attracted FDI worth US$ 5.13 million.

India’s current requirements on defence are catered largely by imports. The opening of the defence sector for private sector participation will help foreign original equipment manufacturers to enter into strategic partnerships with Indian companies and leverage the domestic markets as well as aim at global markets. Besides helping in building domestic capabilities, this will also bolster exports in the long term. The Government has set to achieve a turnover of Rs 1,70,000 Crores (USD 26 bn approx.) in defence goods and services by 2025 involving additional investment of nearly Rs 70,000 Crores (USD 10 bn approx.) creating employment for nearly 2 to 3 Million people. In addition to this, defence goods and services exports are expected to target touch Rs 35,000 Crores (USD 5 bn approx.) by 2025.

The defence offset policy has been objectivized to leverage capital acquisitions to develop the domestic defence industry. Mandatory offset requirements of a minimum of 30% for procurement of defence equipment in excess of USD 307.69 million have been envisaged. It would also ensure that an eco-system of suppliers is built domestically. Favorable government policy which promotes self-reliance, indigenization, technology upgradation and achieving economies of scale including development of capabilities for exports in the defence sector. The country’s extensive modernization plans with an increased focus on homeland security will help to develop India as a defence sourcing hub.


 

SELECT GOVERNMENT INCENTIVES

  • Government of India has decided to set up two Defence Production corridors, one each in Uttar Pradesh (UP) and Tamil Nadu. For setting up of the proposed Corridor in UP, six nodal points have been identified viz. Aligarh, Agra, Chitrakoot, Jhansi, Kanpur and Lucknow. The proposed corridors in Tamil Nadu are: Chennai, Coimbatore, Hosur, Salem and Tiruchirappalli. The scheme envisages support to 06 to 08 Defence Testing Infrastructure (DTI), depending upon the requirement of the lab, to be set up with a total assistance grant of Rs 400 crore. The assistance for individual DTI set up under the scheme shall be 75 per cent of the approved project cost. The implementation of the scheme will be through a Special Purpose Vehicle (SPV), which will carry out the business of setting up, operating and maintaining the DTI or through a Government agency.
  • Innovations for Defence Excellence (iDEX), a scheme of Department of Defence Production (DDP), formulated in collaboration with Start Up India and Atal Innovation Mission, with the objective of bringing Start-ups to solve problems of defence production, innovate new technologies required by defence forces and reduce dependence on imported technology was launched by the PM during Defence Expo 2018 on 12th April 2018.
  • A Defence Investor Cell has been made functional in Department of Defence Production (DDP). It will play an important role in acting as one-step solution for all types of defence production related queries. Nodal Officers have been designated subject-wise to respond to the queries. Nearly, 100 investors were facilitated in 100 days of inception.
  • Validity of Industrial License has been extended to 15 years with a provision of further 3 years of extension. The requirement of End User Certificate by Foreign Governments for export of parts/ components have been removed.
  • DDP has declared 236 items as Non-core in two phases which are being produced by Ordnance Factory Board (OFB). In continuation to the same, 39 more item shave been added to the list on 16.01.2018. Therefore, 275 items in total, which have been declared as Non-core, can be procured by the Indian Defence Forces directly from the trade without seeking No Objection Certificate (NOC) from OFB.
  • All the DPSUs have migrated their website from .(dot)com to .(dot)in. An Intellectual Property Rights Facilitation Cell has been created in DGQA with members drawn from OFB and DPSUs to facilitate innovations from the Ordnance Factories and DPSUs. It was established to create a structured mechanism and to boost IP culture which would enhance the intellectual capital i.e., vital for encouraging in house R&D in these organizations. Some of the role and responsibilities of the IPF Cell are to provide general advisory about IPRs, such as patents, trademarks, designs and copyrights etc. For initiating, the IPR training and lectures are being conducted.
  • In order to simplify Defence Exports, DDP has further amended the Standard Operating Procedure (SOP) on 01.11.2018. This is third such amendment which has significantly enhanced ease-of-doing business in defence exports. A new software for submission of application by the Industry and for processing the application in the Department has also been launched in the month of October, 2018. The digitally signed export authorization is accessible to the exporters. The new online system also provides for online consultation with the stakeholders including MEA, DRDO, Indian Army, Air Force and Navy.
  • As a major boost to Defence export, the Department of Defence Production notified a Scheme for Promotion of Defence Exports on 4th October 2018. The Scheme provides two options:
    • Ministry of Defence will certify products "Fit for Indian Military Use" if technically qualified during procurement process but not eventually selected for procurement.
    • Potential Defence Exporters can get certification of products by Ministry of Defence (against a given set of specifications) even if product is not required by Indian Defence Forces. The scheme is expected to address a long-standing demand of defence and aerospace industry.
  • Facilitation to MSMEs- Trade Receivables Electronic Discount System is implemented in Defence PSUs to help MSMEs covert Trade receivables into Liquid funds at short notice.50% of the space at DefExpo 2018 is reserved for MSMEs at 50% discounted cost to showcase their potential.

 

SELECT EXPORT MARKET REGULATIONS

The Directorate of Defense Trade Controls (DDTC) is responsible for the export and temporary import of defense articles and services governed by 22 U.SC. 2778 of the Arms Export Control Act (AECA) and Executive Order 13637. The International Traffic in Arms Regulations ("ITAR," 22 CFR 120-130) implements the AECA.

For further details, refer to this link: https://www.pmddtc.state.gov/?id=ddtc_public_portal_compliance_landing

The government of UK has prescribed certain international trade regulations for the defence sector. The regulations, charges and restrictions on importing or exporting military goods and how to apply for the correct licenses can be found on this link:

https://www.gov.uk/guidance/aerospace-and-defence-import-and-export-regulations#duty-reliefs-for-imports-of-aerospace-and-defence-products