Potential for the defence industry

24 Feb 2021

2020 was a tough year for the industry, filled with challenges and unprecedented circumstances not seen in nearly 100 years. The Covid-19 pandemic has been a great leveller, affecting everyone, regardless of organisational parameters including size, maturity, geographical locations or individual parameters including age, gender, race and country of residence. Thankfully, with the availability of vaccine, the new year has begun on a hopeful note.

Throughout the pandemic, the Indian industry has shown tremendous resilience, unwavering resolve and commitment towards collectively meeting the challenge on account of Covid-19. Even when several industries had to shut down their manufacturing plants, due to the lockdown restrictions, they were quick to offer their resources, when given the opportunity, for manufacturing of critical Covid-19 related medical items.

The pandemic also brought with it a ‘new normal’, especially the virtual interactions and events to stay in touch, discussions, firm up strategies and policy reforms. Not just the industry, but the Government also was quick to adapt to this mode of engagement. For example, during the first week of the lockdown, CII and SIDM were able to organise a direct interaction for the defence industry with the leadership in the Ministry of Defence, with Dr Ajay Kumar, Defence Secretary, as chair. The objective of this interaction was to highlight the potential challenges that the industry was likely to face and solutions needed to ease the situation.

I am happy to share that despite the pandemic, the Indian defence sector has progressed well, helped by the several mitigation measures such as release of payments that were due, granting Force Majeure benefits irrespective of contracts including / excluding specific clause, extension in dates of submission of industry responses to RFPs / RFIs / EOIs etc., deferment of interest payments on existing loans, extending credit lines to MSMEs, relaxation in application of Insolvency Law and multiple policy initiatives taken by the Ministry of Defence.

With proactive and industry-friendly policies including the Revised Public Procurement (Preference for Make in India) Order, 2017, visionary Defence Production and Export Promotion Policy (draft), Negative List for Imports, and Procedures – Defence Acquisition Procedure 2020, Defence Procurement manual 2020 (draft),tax incentivisation (lower tax rates for new manufacturing companies), labour reforms and reform in sizeably decriminalising the Company Law, in quick succession, the Government and MoD have provided the required support as well as impetus not only to sustain the domestic defence industry in the short term but also sustain it in the long run by facilitating exports and hand-holding for exploring external markets.

In September 2020, the MoD released the long awaited and updated version of DPP 2016, now referred to as the Defence Acquisition Procedure (DAP) 2020. DAP 2020 introduces comprehensive structural and organizational changes in the ecosystem to target and accelerate acquisition and delivery of projects.

The number of procurement categories has also been increased to encourage greater participation of the Indian industry and attract foreign companies to manufacture equipment in India.

In addition, the level of indigenous content has been increased by 10% across all categories, to promote the Indian industry. The most notable part of the DAP 2020 evolution was the total involvement of stakeholders including the industry in the consultative process as well as reviews of the draft documents to shape a policy assuring ease of doing business.

One of the most notable policy initiatives of the MoD in 2020 was the publication of a list of 101 defence items that were prohibited to be imported. This list comprised not just simple parts but also hi-tech weapon systems and platforms such as artillery guns, assault rifles, conventional submarines, corvettes, sonar systems, shipborne cruise missiles, light transport aircraft, LCHs, radars and many other major items to fulfil the needs of our Defence Services. This move shall provide great impetus for the growth of the Indian defence sector and is expected to garner orders worth about Rs 4 lakh crore for the domestic industry within the next six to seven years.

We are also very enthused with the MoD policy for carving out a share of the defence budget for the domestic industry. Hon’ble Raksha Mantri ji announced allocation of Rs 52,000 crores for domestic industry for FY 2020-21 out of Rs 1,12,000 crores of defence capital budget, i.e., nearly half. Recent announcements – such as Defence Acquisitions Council (DAC) having accorded approval for schemes worth Rs 38,000 crores with a major part for Indian industry, and also Cabinet Committee on Security (CCS) approval for signing a contract for indigenously designed LCA aircrafts – reflect the Government’s resolve for “Atmanirbhar Bharat” through creation of tierised Defence industry to develop a self-reliant Military- Industrial Complex with strategic choice of action, at will.

The MoD’s policy changes have been aimed at facilitating the ease of doing business in India and ensuring that we soon become a leading destination for defence manufacturing. To further foster the sustenance and growth of the domestic defence sector, the MoD has taken concrete actions to promote defence exports on multiple fronts. The export promotion webinar series is one such example wherein the Department of Defence Production encouraged 25 country-specific webinars to be organised so that the industry can understand the defence requirements of other countries and identify potential business opportunities.

The easing of FDI regulations and introduction of Buy (Global – Manufacture in India) in DAP 2020 are invitation for the global defence OEMs to participate in the Indian defence industry by setting up manufacturing facilities on their own or partnering with the Indian companies through JV or technology agreements and thus progress towards ‘Make in India for the World’.

These policy initiatives taken by the MoD over the past year are testimony that indigenisation and self-reliance are not just buzz words. The Government has taken conscious decisions to make them a reality.

Though there is still a long way to go, the Indian defence industry has proven its mettle. Despite the sector having opened up to the private industry only in 2001, the private sector has shown excellent growth. It has evolved from being component and subsystem manufacturers to designing and building complete Solutions, System of Systems and Platforms.

Indian private defence manufacturers have also done quite well in respect of defence exports. According to data published by the DDP, in April 2020, the vast majority of defence export approvals have been secured by India’s private sector. The data also show that the private sector’s exports have strongly grown in recent years. For instance, in FY 2019-20, India’s private sector was attributed with 93% of defence export approvals in terms of value, while the remainder was secured by DPSUs. Also, the export performance by India has been spectacular having grown 15-16 times over the past 6-7 years.

The Indian defence industry ecosystem is fast evolving. Before the pandemic hit, the DDP had set a target of Rs 90,000 crores for the defence sector for FY 2020-21. This was considered a very achievable target, when budgeted; however, as we all know, Covid-19 interrupted this momentum. Nevertheless, there have been clear indications that the industry is gradually bouncing back on its feet.

The defence industry has a lot to look forward to in the new year as we shall see the actual effects of the path-breaking policy changes. The MoD is also expected to soon publish the Defence Procurement Manual (DPM) 2020 which is a governing document for revenue procurement that is served by a very large spectrum of Defence industry, especially MSME.

Apart from this, Budget 2021-22 promises to be a gamechanger. We hope the Government shall make a significant increase to the defence budget and the indigenous industry allocations in order to ensure that the three Services have sufficient funds for procurement and upgradation of equipment.. Besides being favourable for the growth of the Indian defence industry, this will enhance our Armed Force’s trust on indigenous industry to provide differentiated products that serve as force multipliers in their hands.

The pandemic and the recent border skirmishes along our Northern frontiers have invariably demonstrated the need for indigenously designed and developed defence equipment to ensure national security.

With the collective effort of the Government, Armed Forces and the industry serving as the 6th arm of Defence, I am certain we shall create new history, not only for tiding over this pandemic but to march ahead on the path of self-reliance.

The article by Mr Jayant Patil, Chairman, CII Strategic Manufacturing Council and Whole Time Director (Defence and Smart Technologies) and Member of the Board, Larsen & Toubro Ltd, appeared in the January 2021 issue of CII Policy Watch. Click here to read the full issue.

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