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 main 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 allocation of Defence in the India's union budget is approximately US$34.53 billion and 31.1% of the defence budget is spent on capital acquisitions. 60% of defence related requirements are met by imports which offers a huge opportunity for import substitution and spends about 31.1% of its total defence budget on capital acquisitions.

In the next five years, the government wants to spend around US$130 billion on military modernization and pave way for strategic partnerships with foreign original equipment manufacturers. With a view to facilitating Defence Public Sector Undertakings (DPSU) and private defence industry in exploring business opportunities abroad, a Defence Export Strategy has been formulated. Approximately US$317 million worth of Made-in-India defence platforms, equipment and spares were exported to over 28 countries in the world between the years 2015-16.

The allocation for defence in Budget 2017-18 is nearly US$41 billion with US$13.3 billion allocation for capital expenditure, equivalent to 31.7% of the total budget. The total budget sanctioned for the Indian military for the financial year 2018 is US$62.8 billion. This accounts for 12.1% of the total central government expenditure for the year 2018-19. India contributed around 3.7% of global military expenditure in the year 2017.

This is the Service/Department-wise Allocation as percentage to Total Defence Estimates 2017-18 (BE):

  • Army: 55.9%
  • Navy: 14.6%
  • Air force: 22.5%DGOF (Directorate General of Ordnance Factories): 0.8%
  • DGQA (Director General of Quality Assurance): 0.5%
  • R&D: 5.7%

The value of exports by DPSUs, Ordinance Factory Boards (OFBs) and private defence industry (based on the NOCs issued) combined, for the financial year 2016-17 was Rs.1495.27 crores.

About 15-16 companies in the private sector have contributed to defence exports. 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

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. 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. FDI in the defence sector is subject to any other security conditions.

From April 2000-December 2017, FDI in defence production industries has been approximately US$5.1 million, out of US$ 532,552 million, which was the total FDI received during this period.

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. Contractual offset obligations worth approximately US$4.53 billion in the next 5-6 years, as reported in the ‘Make in India’ report.

The offset policy (which stipulates the mandatory offset requirement of a minimum 30% for procurement of defence equipment in excess of US$306.69 million) introduced in the capital purchase agreements with foreign defence players. 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 modernisation plans with an increased focus on homeland security will help to develop India’s growing attractiveness as a defence sourcing hub.


 

SELECT GOVERNMENT INCENTIVES

The Union Budget 2016-17 had certain key provisions for the defence manufacturing sector. Some of them are -

Some other government policies include –

  • Provision of US$34.53 billion for defence services in the FY 2016-17 Union Budget.
  • Capital outlay for Defence in 2016-17 is kept at US$12.09 billion.
  • Out of this, US$10.75 billion has been allocated for Capital Acquisition of the Defence Services.
  • US$1.33 billion has been provided under “Other than Capital Acquisition” segment for capital expenditure to Army, Navy, Joint staff and Air Force.
  • Either of the following two deductions can be availed :
    • Investment allowance (additional depreciation) at the rate of 15% to manufacturing companies that invest more than US$15.38 million in plants and machinery acquired and installed between 01.04.2013 to 31.03.2015 provided the aggregate amount of investment in the new plants and machinery during the said period exceeds US$15.38 million.
    • In order to provide a further fillip to companies engaged in the manufacture of an article or thing, the said benefit of additional deduction of 15% of the cost of new plants and machinery, exceeding US$3.84 million, acquired and installed during any previous year until 31.3.2017.
  • A weighted tax deduction is given under Section 35 (2AA) of the Income Tax Act.
  • For companies engaged in the manufacture of an in-house R&D centre, a weighted tax deduction of 200% under Section 35 (2AB) of the Income Tax Act for both capital and revenue expenditure incurred on scientific research and development. Expenditure on land and buildings are not eligible for deduction.
  • Incentives as per ‘Merchandise Exports from India Scheme (MEIS)' under new Foreign Trade Policy.

 

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