Defence industry in India was started very early after independence by Jawaharlal Nehru in the early 1950s. Prior to 2001, defence Industry was entirely with the Defence Public Sector Undertakings (DPSUs). A good industrial base was created with 39 Ordnance Factories, eight DPSUs and approximately 50 Research and Development Laboratories. Aim of creating this structure was to achieve 70% indigenisation. However, only 30% indigenisation has been achieved so far. Lack of innovation and upgradation, poor quality control, export promotion, finance and human resources management were the reasons for the defence industry not coming up to expectations. As a result, India had to rely on imports and that cost her dearly. Reliance on imports resulted in heavy out flow of precious foreign exchange reserves, lack of improvement in technology levels and made India vulnerable due to reliance on external sources for critical components. During the period up to 2001, private sector was allowed to supply only the raw material, spares, components and semi-finished products.
Because of the reasons explained above, defence industry was opened to private sector in 2001. At that time 26% of foreign Direct Investment was permitted in the defence industry. Moreover, private sector could participate 100% with industrial licensing. Joint Ventures with Australia, Singapore, Israel and Russia were also started. In 2005, Vijay Kelkar committee recommended that important private sector companies be nominated as RakshaUdyogRatnas. However, it was scrapped in 2010 because smaller companies protested that arrangement will not give them a level playing field. State’s support to DPSUs continued.
Offset Policy was introducedin the Defence Procurement Policy (DPP)in 2006. In the offset policy, any contract worth more than Rs 300 Crores was to have 30% direct offsets. Offset policy was brought in with a view to enhance technological capability, transfer of technology, improve the R&D and licensed production. The latest DPP was issued on 28 March 2016 less the chapter on Strategic Partnership, Annexures, Appendices and Schedules. The piecemeal issuing of the DPP is an indication of the difficulties faced in formalising it. The Annexures, Appendices and Schedules and the chapter on Strategic Partnership were issued subsequently, in a phased manner.
In DPP 2016, five types of procurements have been mentioned. They are Buy Indian (IDDM). IDDM means Indian designed, developed and manufactured. IDDM products should have 40% Indigenous content of the contract value or 60% indigenous content of the contract value if not designed and developed indigenously. Buy Indian(Buying fully formed products from an Indian vendor whose product has a minimum of 40% indigenous content of the total contract value), Buy and Make Indian (purchasing fully formed equipment from an Indian vendor and making it in India on technology transfer), Buy and Make (purchasing fully formed equipment from a foreign vendor and making it in India on technology transfer and Buy Global (outright purchase of equipment from Indian or foreign vendor). There are a number of issues that needs to be addressed to make the Make in India a success story. For example, proof of indigenous content in the design rests with the industry.There is a committee system to assess the product. But the DRDO and Service headquarters who are part of the committee lack the technical expertise to assess the products. Authorities have the discretion to lay down higher percentage of indigenisation thereby placing the private sector at a disadvantage. Specified level of indigenisation is difficult to come by in the aircraft industry basically because it has achieved an indigenisation percentage of approximately 20% only.
To convert Make in India to Made in India a number of provisions have been incorporated in the DPP 2016. It gives out an annual acquisition plan and the services capital acquisition plan. A technology perspective and capability road map has been given in the DPP. It envisages creation of a Make in India project management unit. DPP 2016 provides for two types of Make in India projects. Make 1 enables industry to get 90% government funding with an advance payment of 20% and Micro, Small and Medium Enterprises (MSME) will get priority on projects up to Rs 10 Crores. Make 2 is Industry funded and MSME will get priority for projects up to Rs 3 Crores. It is intended to give a decisive say for the MSME.If any industry develops a successful product an assurance to issue Request for Proposal within two years has been specified. For performance enhancing parameters in a product a leverage of upto 10% has been provided for from the L1 by terming it L1T1. Threshold for offset provisions in contracts has been increased from Rs 300 Crores to Rs 2000 Crores.
A number of projects either have been undertaken by the private industry or in the process of entering into them. Heavy Mobility Vehicles, modernisation of air field infrastructure, self-propelled howitzer and integrated electronic warfare equipment for the mountains are a few of the projects worth mentioning in this regard. Key private industry names that are taking part in the defence industry are Bharat Forge, Larsen and Toubro, Mahindra, Reliance and Tata. 31 out of 34 joint ventures are to be with private industry and 60% of the defence exports are intended to be from the private players in this field.
Even though there has been positive developments for the make in India effort, the private industry has a number of concerns. They say they donot have a level playing field with the foreign vendors. For example, a LC provision is catered for the foreign vendors whereas the Indian companies cannot have one. Industrial licences are difficult to obtain. Tax and Duty structure favours the foreign vendors. Foreign Exchange Rate Variation (FERV) is catered for the foreign vendors whereas the same is not applicable to the Indian private sector companies. Indian private sector is also looking for some financial and fiscal incentives. They are looking for a special defence tax as given in Republic of Korea and 15% less price for local enterprises being given in Israel. Indian private industry will be very happy if orders are assured within an acceptable time frame, once they develop a successful product. The Indian Defence Industry feels that they do not have a level playing field with either the DPSUs or the foreign vendors. The time taken for the payments from the government is another concern, that they feel, should be addressed. Lack of adequate R&D capability, skill development and lack of representation in the defence ministry are other concerns that the private industry would like to see resolved.
The Government of India is seized of the issues that have been projected by the Indian Private Industry and it has taken a number of actions to remove their concerns. Most of the components have been removed from the list for industrial licensing to reduce the entry barriers for the private sector. To facilitate exports in the defence sector, the list of items that can be exported has been made public and the end user certificate has been rationalised. DPSUs had been brought on par with the private enterprises for FERV and Customs and Excise duty regimes. Custom duty exemptions for defence ministry purchases have been removed to encourage Make in India. Enhanced government funding and reservation of certain products for the MSME has been catered for. IDDM has been made the preferred category to give incentive to bring in more R&D into India.
FDI in defence sector has been increased to 49% with a provision for 100% FDI to be cleared on a case to case basis. Guidelines have been issued for DPSUs and Ordnance Factory Board for outsourcing and vendor development. Provisions have been made for the offset partners who were to be decided at the time of signing the contract to be prescribed later also.No objection certificate for exports and production can now be obtained online. A Make in India portal has been created for obtaining information and interaction with the government. Renewal of registration which was a tedious process has been made simple. It can now be renewed on self- certification basis.
Even with all the efforts by the government and the private industry Make in India is yet to become a success story. It needs a more interactive and accommodative process to be a success.