Context

Domestic defence production continues to lag.

Key-Highlights

• When it was first talked of Make-in-India, it seemed quite possible since a big component of this was to be equipment for the armed forces; so with the demand completely in the government’s control, it was just the supply side that needed to be fixed and, for that, the government was liberalising FDI rules to allow more strategic partnerships with top global suppliers.
• In reality, however, little changed and defence orders for private Indian firms have been few and far between.
• Manufacturer like L&T have   talked of shutting down a gun factory they had opened to meet a 100-field-gun order; L&T supplied the guns, but the order was curtailed as there was no more money. Part of this has to do with the economy slowing, and, within this, the share for capital expenditure has been dwindling.
• While defence expenditure rose from Rs 285,005 crore in FY15 to a budgeted Rs 471,378 crore in FY21, capex rose at a slower pace, from Rs 73,531 crore to Rs 113,602 crore in FY21.
• when the latest Defence Production and Export Promotion Policy talks of doubling the size of the domestic industry to Rs 175,000 crore in five years—of this, the export target is Rs 35,000 crore—it seems more than a bit of a stretch.
• While former defence Minister cleared several large-ticket purchases, but the actual placement of orders can take decades. So while there is talk, as there is now, of increasing FDI limits to make India a more friendly investment destination, this is missing the point.

Defence industry of India

• The Defence industry of India is a strategically important sector in India. With strength of over 1.44 million active personnel, it is the world's largest military force. India has the world's largest volunteer military of over 5.1 million personnel.
• The total budget sanctioned for the Indian military for the financial year 2019 is $60.9 billion. In 2020, India with third largest annual defence budget (US$70 b) behind USA (US$732 b) and China (US$261 b), and second largest defence imports behind Saudi Arabia.
• The military budget of India is about 1.49% for year 2018–19 of the total GDP. However, it spends nearly an equal amount in importing arms from other countries.

Arms Exports

• India's track record as an arms exporter has been modest due to export restrictions on the manufacturing organisations like Ordnance Factory Board (OFB).OFB exports Arms and Ammunition, Weapon Spares, Chemicals & Explosives, Parachutes, Leather and Clothing items to more than 30 countries worldwide.
• However, due to liberal policies adopted by the government in recent times, there has been a substantial increase in India's defence exports. According to the latest official data given in the upper house of Indian Parliament - the Rajya Sabha, India's defence export has jumped by 700% in just two years.

Indigenization of military hardware

• India has been pushing for greater indigenisation of military hardware as India imports around 70 percent (by value) of its high-tech defence hardware such as aircraft, ships, submarines, missiles etc. mainly from Russia, Japan, Israel and United States.
• FDI policy: Upto 100% FDI in the Defence industry: Up to 49% under the automatic route and FDI above 49%: through Government route, where it is likely to result in access to modern technology.

             Reasons to invest:

• India’s requirements on defence are catered largely by imports. The opening of the Defence sector for private sector participation will help foreign Original Equipment Manufacturers (OEMs) to enter into strategic partnerships with Indian companies. This will enable them to leverage the domestic markets as well as aim at global markets. Besides helping in building domestic capabilities, it will also bolster exports in the long term.
• Since 2014 the Ministry of Defence has signed more than 180 contracts with the Indian Industry, as of December 2019. These contracts were valued over USD 25.8 Bn approximately. 
• Favourable government policy which promotes self-reliance, indigenisation, and technology upgradation. The policies also aim at achieving economies of scale, including the development of capabilities, for exports in the defence sector. 
• India’s extensive modernisation plans with an increased focus on homeland security and growing attractiveness as a defence sourcing hub. 

Growth drivers in defense manufacturing:

Defence Procurement Procedure (DPP) has been revised in 2016 and special provisions for simulating growth of domestic defence industry have been introduced:

1. DPP focuses on institutionalising, streamlining and simplifying defence procurement procedure to give a boost to “Make in India” initiative. It aims to promote indigenous design, development and manufacturing of defence equipment, platforms, systems and sub-systems. It also aims to enhance the role of MSMEs in the Defence industry.
2. A new category of capital procurement: Buy Indian - Indigenously Designed, Developed and Manufactured (IDDM) has been introduced to encourage indigenous design, development and manufacturing of defence equipment.
3. Preference has been given to ‘Buy (Indian)’, ‘Buy and Make (Indian)’ and ‘Make’ categories over ‘Buy (Global)’ and ‘Buy and Make (Global)’ categories. A clear and unambiguous definition of indigenous content is provided.
4. The ‘Make’ Procedure has been simplified with provisions for funding of 90% of development cost by the Government to Indian industry.
5. Separate procedure for ‘Make-II’ category has been notified under DPP to encourage indigenous development and manufacture of defence equipment. Number of industry friendly provisions such as relaxation of eligibility criterion, minimal documentation, provision for considering proposals suggested by industry/individual etc. have been introduced in this procedure.

Challenges

• Major weapon platforms have a normal service life of about 40-50 years. Therefore, what we manufacture today must remain combat-relevant in the decades ahead. But with technology advancing at an exponential rate and warfare evolving, many major platforms run the risk of becoming obsolete in just 2-3 decades. 
• We still do not have an entire Military Industrial Complex ( MIC) ecosystem that combines government agencies, R&D, suppliers, component manufacturers, and technology adoption firms that integrate sub-systems into a working whole.
• China’s R&D expenditure (USD 275 billion in 2018) is about 2.2 percent of its GDP, that is, more than Japan, Germany and South Korea together. India's spending on R&D has been stagnant at 0.6-0.7 percent of its GDP.
• Insofar as foreign firms relocating to India is concerned, they will go where it makes economic sense. And currently, given the economic ravages wrought globally by the pandemic, cash-starved companies are unwilling to abandon existing supply chains and invest in new operations.
• Foreign firms from major defence hardware exporting countries find difficulty as there are literally no incentives, because of a lack of proper monitoring mechanism and issues related to intellectual property rights.

Conclusion:

Indigenisation is a potential game changing solution for India. It is, therefore, in GoI’s best interest to seriously invest in the strengthening of our indigenous defence industry, and to re-orient policy and research in a manner that stimulates growth in the sector.