New MoD Policy Aims To Make India Among Top 5 Aerospace & Defence Producers

On Thursday, Nirmala Sitharaman’s defence ministry released a draft “Defence Production Policy 2018” (hereafter DProP 2018), with the ambitious vision of catapulting India into the world’s top five defence producers.

With unusual boldness and clarity, DProP 2018 stipulates 13 areas where India must achieve self-reliance by 2025: in manufacturing fighter aircraft, medium lift and utility helicopters, warships, land combat vehicles, automonous weapon systems, missile systems, gun systems, small arms, ammunition and explosives, surveillance systems, electronic warfare (EW) systems, communication systems and night fighting enablers.

The policy intends to capitalise on India’s IT strengths to “Make India as a global leader in Cyberspace and AI (artificial intelligence) technologies (sic).”

And, somewhat incongruously, the new policy commits to building an 80-100 seater civilian aircraft within the next seven years.

The policy is silent, however, on the fate of ongoing global procurements of the platforms to be indigenised, including single-engine and carrier-borne fighters, infantry small arms, maritime surveillance systems and others.

Stakeholders have until March 31 to submit suggestions to modify DProP 2018. Thereafter, say ministry sources, the policy will be placed before the Union Cabinet since implementing it would require a high degree of inter-ministerial coordination.

In January 2011, then defence minister AK Antony had unveiled the first production policy, DProP 2011. At the release function, referring to India’s import of 70% of its defence needs, he stated: “This large-scale dependence on foreign sources is unacceptable for a country like India.”

Seven years later, India remains the world’s largest defence buyer, importing 60-65% of its defence needs. DProP 2018 says India’s defence production has only gone up from Rs 437.46 billion in 2013-14 to Rs 558.94 billion in 2016-17.

In February 2015, Prime Minister Narendra Modi had stated in Bengaluru: “Even a 20-25% reduction in imports could directly create an additional 100,000 to 120,000 highly skilled jobs in India.”

Sitharaman is being far more ambitious. DProP 2018 aims to “achieve a turnover of Rs 1.7 trillion ($26 billion approx) in defence goods and services by 2025 involving additional investment of nearly Rs 700 billion (%10 Bn approx) creating employment for nearly 2 to 3 Million people (sic).”

In 2016, one of Sitharaman’s predecessors, Manohar Parrikar, was considered unrealistic when he proposed raising India’s defence exports from the current level of about $330 million to $2 billion – a target still nowhere in sight.

Now Sitharaman’s DProP 2018 is setting a target of Rs 350 billion (about $5 billion) by 2025.

DProP 2018 seeks to achieve this by exhibiting Indian capabilities in Defence Expo (in Chennai next month) and Aero India (on alternate years), promoting exports through government-to-government agreements and offering lines of credit to buyer countries, setting up export offices in buyer countries, setting up a Defence Export Organisation jointly with industry, and hastening end-to-end export clearances.

It remains unclear what products India will export to meet these targets. There are already indigenous platforms like the Arjun tank and Tejas fighter. But the reluctance of the army and air force to accept them into service causes foreign buyers to lose interest. Where there is foreign interest, as in the case of naval patrol vessels and utility helicopters, Indian industry is short of production capacity.

In order to boost foreign direct investment (FDI) into defence production, DProP 2018 proposes allowing 74% FDI under the automatic route for “niche technology areas.”

Since June 2016, FDI up to 49% has been permitted automatically, with up to 100% “permitted through Government approval, wherever it is likely to result in access to modern technology or for other reasons to be recorded.”
Industry experts point out that the problem, even currently, lies not in low FDI caps, but in identifying the technologies that would be eligible for higher FDI. DProP 2018 does not shed light on this.

DProP 2018 elaborates on the two “defence industry corridors” –in Tamil Nadu and Uttar Pradesh — that were announced in the Budget, and which Sitharaman has been pursuing vigorously in her home state, Tamil Nadu. The policy stipulates that, each corridor would have “one major cluster of defence production units around an anchor unit”.

A special purpose vehicle (SPV) in each corridor would develop an eco-system for defence production, with testing and certification facilities, export facilitation centres and technology transfer facilitation, for which the central government would contribute 50% of the cost, subject to a ceiling of Rs 30 billion.

In addition, DProP 2018 throws up several apparently random ideas: encouraging automotive component manufacturers to upgrade skills to transition to aerospace design and manufacture; conducting “hackathons” to resolve specific problem areas, for which Rs 10 billion would be earmarked for 2018-2022; the setting up of Defence Innovation Hubs for encouraging start-ups; and a clear and well founded emphasis on bringing micro, small and medium enterprises into defence manufacture.

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