The Indian government's goal to achieve self-reliance is on track, writes a senior adviser in the defence sector. India's defence budget has grown manifold over the last seven decades to $39 billion in 2017-18, which is around 1.6 per cent of the country's gross domestic product (GDP). Overall, India contributes nearly 3 per cent to the world's defence and aerospace spending of about $1.7 trillion and ranks among the top five countries in the world in terms of military expenditure and is the largest importer in the world, as over 65 per cent of its requirements are bought from foreign Original Equipment Manufacturers (OEMs). Obsolescence and depletion have created a significant demand for wide ranging equipment in all the three arms of the Indian armed forces. Accordingly, the Indian government has undertaken a major defence acquisition programme for the armed forces to upgrade and replace existing equipment in a planned and phased manner whilst also filling in the capability gaps. During the next 10-15 years, it is envisaged that India would need to replace all its major weapon systems.
The government recognises the financial and operational advantages of continuing with legacy Russian armaments. However, a number of factors have led to India broad-basing defence acquisition. These include difficulties faced in sourcing spares and components after dissolution of the USSR, improved relations with the US and a widespread realisation that it is in India's strategic interest to diversify our sources of supply. India has started buying defence equipment from a number of new suppliers - the US, Israel, France and UK. In the current Budget for FY 2017-18, the government has allocated about 33 per cent ($12.9 billion) of the total defence budget for purchase of capital equipment. Faced with the high level of imports, the government has made achieving self-reliance a key national priority and has introduced a series of reforms to the Indian defence procurement policies and procedures. One of the key elements of the reform has been to allow private sector participation in defence production with the objective of developing a domestic defence industry and to build sustainable defence design, development and manufacturing capability within India. The introduction of defence offsets as a part of Defence Procurement Procedures (DPP) in 2005 was a step in this direction. The DPP was last amended in 2016 to introduce a hierarchy of acquisition categories with “Make in India” at the highest level. The reforms are also aimed at increasing transparency and ensuring accountability in the defence acquisition and procurement process. Self-reliance is the ability to develop the eventual capability to design, develop, and produce major armaments systems as well as their spare parts and components. However, the domestic industry is still at a nascent stage. Recognising this, in the past two years, the government has taken several policy initiatives to lower entry barriers, to improve the ease of doing business in defence manufacturing, and to provide a level playing field for domestic manufacturing. Indian government is also encouraging foreign investments in this sector by liberalising the FDI policy. Defence budget allocation and y o-y growth (INR '000 crore)
A major pending policy is to identify/select Indian private sector defence manufacturers as strategic partners for foreign OEMs. The strategic partnership policy is likely to be notified in 2017 and will become an integral part of DPP. These efforts have begun to bear fruit as we see increasing participation of the private sector with key companies moving up the value chain by partnering with leading global A&D companies. Clearly, the government is totally committed to promote manufacturing through launch of the 'Make in India' campaign and improving ease-of-doing-business. Aerospace (both civilian and defence) and defence are key sectors of the Make in India campaign and will continue to be so. The government is leveraging the new DPP 2016 to push domestic companies and foreign OEMs to collaborate in defence production. Consequently, OEMs will have to review their India strategy since the new DPP will compel TOT and investment in domestic manufacturing and training. So far, OEMs have tended to have a “reactive” India strategy; they would start planning and get active only after issue of a RFI. This will have to change to a highly proactive stance if they want to participate in future programmes, the majority of which are likely to be in one of the make in India categories. A strong local presence in design, development and manufacture will enable them to have greater interaction with their customers, customise their product and be cost competitive. They, therefore, need to develop a focused India strategy that would include making her part of their global supply chain, enhance local presence and formulate an industry partnership strategy. There are a large number of good companies - SMEs and mid-sized available and multiple options for partnering: co-production, technical collaboration, sub-contracting, joint ventures. They must plan to leverage India's abundant supply of low cost skilled labour and capitalise on manufacturing incentives provided by both the federal and state governments. The M-SIPS programme of the Ministry of Electronics and Information Technology is an excellent scheme that incentivises domestic manufacture of almost the entire range of electronics equipment, including for defense, by providing a 25 per cent cash subsidy for eligible CAPEX for both greenfield and brownfield projects. Finally, some words of caution: it is very important to conduct a comprehensive due diligence on potential partners to ensure that they are aligned to global corporate policies, particularly in ethics. Second, laws and regulations in India are complex and it is important to have a good understanding of them to ensure compliance. And finally, you need to be patient in India! Things can get delayed but they do finally happen. But to succeed here, you need to be here, to enjoy our food and our traffic jams, the beautiful countryside and the rapidly developing smart cities. And, there is indeed a big pot of gold at the end of the rainbow! Dhiraj Mathur is Partner, Regulatory Services Leader - Aerospace & Defence, at PricewaterhouseCoopers India. He has been the lead advisor to many corporations on their India entry plans and joint ventures. *Information Source: 'World Military Balance 2016', International Institute for Strategic Studies (IISS)