India’s ambitious plans to move defence manufacturing to India

Summary

  • Going forward, emphasis on promoting domestic manufacturing and reducing imports
  • For tenders up to Rs. 200 crores (USD 30 million approx.) value, only domestic manufacturers would be eligible to bid – not clear if this applies to defence tenders
  • An annual negative list of weapons/platforms which cannot be imported at all
  • Separate budget provision for domestic capital procurement
  • Proposal to increase Foreign Direct Investment (FDI) in defence production through automatic route from 49% to 74%
  • All the above proposals are in line with the “Make in India” and “Self-Reliant India” flagship programs

    • Introduction

    With the change of times and disarray that COVID- 19 spectrum has put the country into, the Finance Minister recently tried to boost the morale by announcing several changes vis-a-vis various economic packages and structural reform announcements. Certain reforms have been proposed for the defence sector also. The aim of such proposals is to mainly promote domestic defence manufacturing. In fact, just before such announcements, the Chief of Defence Staff of India General Bipin Rawat made a statement on May 17, 2020 emphasizing on the need to promote domestic defence manufacturing and reducing imports.

    General - change in tender process

    It is proposed that for tenders for supply up to a value of Rs. 200 crores (USD 30 million approx.), global players would not be eligible and only domestic manufacturers would be allowed. This may well apply to defence tenders, although not specified as of now.

    Primarily, the requirements of the armed forces are often formulated based on weapon systems available with the United States, Russia and others. The domestic defence industry such as the Defence Research and Development Organisation (DRDO) and Ordinance Factory Board (OFB) do not have the same capability and technology to start manufacturing the standard quality of weapons or ammunition. Although, some major arms and artillery like aircraft, missiles etc. may be procured through government agreements or through international procurement, certain short and small tendering requirements would prove to be a major boost to domestic manufactures.

    However, clarification with regard to this would only be available once detailed regulations regarding procurement are released and to what extent defence tenders are included in the same.

    Proposed direct changes in the defence sector

    The Government proposes to notify a list of weapons/platforms which cannot be imported at all, i.e. there will be a complete ban on their imports. The said list will be finalized in consultation with the Department of Military Affairs. This list will be revised every year by recognizing the annual capacity increase.

    The Government also proposes large scale indigenization of imported spares by local manufacturing.

    Another important proposal is to have a separate budget provision for domestic capital procurement to help reduce the defence import bill and promote domestic manufacturing.

    The most important proposal is to increase FDI in defence production through automatic route from forty-nine per cent (49%) to seventy-four percent (74%). Once, approved, the said change may bring in a slew of foreign companies to invest in various defence production activities in India, which has primarily remained elusive for a long time to foreign entities.

    The Finance Minister also announced the long-pending measure to corporatize the OFB to give it autonomy and also improve performance and eventually listing on the stock market to improve their autonomy, efficiency and accountability, emphasizing, however, that they would not be privatized.

    AJC comments

    The thrust behind these structural reform proposals appears to be two-fold – one, to enhance domestic production and second, reduce the large defence import bill. However, it is important to understand that any immediate swift move to shift production of hi-tech arms and ammunition for the defence sector locally may not be immediately practical because of the technology and standards involved.

    Restrictions in tendering process may also act as a disincentive to foreign investors in the event they feel that by not being able to take part in certain tenders, their business options in India gets limited. The Government could make certain exceptions with regard to important defence products at the time of finalizing this proposal. Defence goods are also technologically advanced and to find a sectoral hub in India with adequate logistical support including adept manpower could also be difficult. Hence, certain exemptions may be afforded to foreign defence manufacturers to import and sell their products in India provided they establish a production unit later on, after having a trained workforce.

    Government should also look to liberalize the defence market where freedom could be afforded to foreign defence manufacturers to produce defence products in India and sell to third countries. Certain barriers with regard to selling to conflicting nations like Pakistan and China may be introduced.

    This update is by Rohitaashv Sinha, Advocate & Associate Partner at Agarwal Jetley & Co., Advocates & Solicitors. Contact: Email: rohitaashv.sinha@agarwaljetley.com or Mob: (+91) - 9999565393