New defence policy to give a leg-up to domestic production

Aiming to join the ranks of global leaders in arms production, India is to soon unveil the Defence Production Policy 2018. The policy, which aims to achieve a turnover of ₹1,70,000 crore in defence goods and services by 2025, and an export target of ₹35,000 crore, is expected to be tabled soon.

As India relies on imports to meet 70 per cent of its defence requirements, and has reportedly spent over $100 billion in the last decade to buy arms and weapons, the broad framework of the policy is set to promote domestic production by the public sector, private sector and MSMEs.

“The Ministry is looking to boost MSMEs and start-ups as well as enhance defence exports. Even the DPP 2016 granted micro, small and medium enterprises the first right to undertake projects, where prototype development in government funded defence projects was not in excess of ₹10 crore,” said a Ministry official.

The new policy also envisages enabling start-ups in strategic areas to monetise newly developed technologies, and will provide ‘right of first offer’ to the government to acquire the technology through appropriate market based acquisition process.

To make it easier to do business with innovators, SMEs and non-traditional defence suppliers, enabling provisions are to be brought in to allow these entities to participate in defence tenders, without having restrictions on turnover and prior experience — both of which have been major hindrances. Funding of private sector design and development projects with a special focus on the Medium and Small Manufacturing Enterprises (MSME) sector was an integral part of DPP 2016.

Offset obligations

The official added, DPP 2016 also specifies various multipliers for the discharge of offset obligations, inviting foreign OEMs to team up With MSMEs as offset partners.

“A multiplier of 1.5 will be allowed for MSMEs and a multiplier of up to 3 towards transfer of technology to DRDO. The new policy looks to link new investment avenues for the discharge of offset obligations and will enhance the role of MSMEs in the defence sector,” said the official.

The tax regime will also be rationalised in the new policy to make domestic manufacturing attractive, and to tackle ease of doing business in defence production. Looking to achieve self reliance in the development of weapon systems and platforms like fighter aircraft, helicopters, warships, land combat vehicles, autonomous weapon systems, as well as Electronic Warfare (EW) systems, and missile and gun systems, the policy aims to reduce dependence on imports.

“The policy looks at meeting all requirement of the forces with domestic manufacture. If we don't have the capability, enhanced FDI or transfer of technology would be considered. Imports are going to be resorted to only in exceptional circumstances,” said the official.

High imports have been costing the exchequer. According to SIPRI (Stockholm International Peace Research Institute) data, India was the world's largest importer of major arms over the last five years, single-handedly buying 12 per cent of the global total. Its imports increased by 24 per cent between 2008-12 and 2013-17, data showed.

Though Russia accounted for 62 per cent of India’s arms imports in 2013-17, according to SIPRI data, arms imports from the USA rose by 557 per cent between 2008-12 and 2013-17, making it India’s second largest arms supplier.

The policy also looks to bring in private defence majors on an elevated level as ‘system integrators’.

The official added the strength of the private sector is long recognised in defence, and “if their strengths are to be harnessed, they must be done under well-defined models depending upon the strategic needs, quality criticality and cost competitiveness. Certain platforms are of strategic importance and private sector partners would be identified to participate in government to government negotiations with foreign OEMs.”

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