Current Affairs

Defence Sector Manufacturing and Make in India

Defence Sector Manufacturing and Make in India

India’s current requirements on defence are catered largely by imports. The opening of the strategic defence sector for private sector participation will help foreign original equipment manufacturers to enter into strategic partnerships with Indian companies and leverage the domestic markets and also aim at global business. Besides helping build domestic capabilities, this will bolster exports in the long term.

Scope for Make in India in Defence Sector because :

  • India has the third largest armed forces in the world.
  • India is one of the largest importers of conventional defence equipment and spends about 40% of its total defence budget on capital acquisitions.
  • About 60% of its defence requirements are met through imports.
  • The allocation for defence in the last budget was approximate USD 37.3 Billion.

Defence Procurement Procedure (DPP) has been amended to provide for the following :

  • Preference to ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ over ‘Buy (Global)’.
  • Simplification of the procedure for ‘Buy and Make (Indian)’.
  • Clear and unambiguous definition of indigenous content.
  • Provision for Maintenance TOT to Indian Industry partners.
  • Defence products list for industrial licensing, has been articulated in June 2014, wherein large numbers of parts/components, castings/forgings etc. have been excluded from the purview of industrial licensing.

Defence Offsets Policy(DOP)

  • The ultimate objective should be to strengthen futuristic combat capability requirements and the defence industrial base of the country.
  • As arms trade involves transfer of huge money outside the purchaser country, very often it raises the issue of outflow of resources and the need for indigenous development of domestic defence industry so that the  large scale drain of wealth is prevented.
  • Gradually, offset has become part of global arms trade as more than 130 countries receive offset.
  • Offset as the word suggests is considered a kind of compensation extended by the supplier to the recipient. Though the term is contested, yet defence offset suggests or refers to direct and indirect collaborations between the supplier and recipient resulting in engagement of activities such as   joint production / licensed production and transfer of technology.

OBJECTIVES OF DOP

To leverage capital acquisitions to develop Indian defence industry by

(i) fostering development of internationally competitive enterprises,

(ii) augmenting capacity for Research, Design and Development related to defence products and services

(iii) encouraging development of synergistic sectors like civil aerospace and internal security.

Offsets as Steppingstones

The Defence Offset Policy will

  • enable creation of local employment,
  • upgradation of technology levels
  • Substantial increase in both domestic production and export capability.
  • Offset also provides leverage to the domestic industry specifically the SMEs [Small and Medium Enterprises] to enter the sophisticated markets of defence products.

Yet, taking into account the dynamism of the technological world, it is advisable to keep reviewing the list of items for the offset. Indian private defence industry needs to be strengthened so that the criticism that it cannot absorb technology, especially futuristic high-tech is addressed

  1. The policy categorises Capital Acquisitions as ‘Buy (Global)’ means total purchase from foreign or / and Indian seller, and ‘Buy and Make with Transfer of Technology’ means acquisition from foreign seller followed by Licensed Production.
  2. In both the cases, the estimated cost of the acquisition proposal needs to be Rs 300 crore or more.
  3. The ‘compensation’ or offset has to be 30 per cent of the estimated cost of the acquisition in ’Buy (Global)’ category and 30 per cent of the foreign exchange component in ‘Buy and Make with ToT’.
  4. For  shipbuilding,  the total cost has to take into  account the basic cost of the vessel, cost of base and depot  spares and the modification cost.

How DOP is operationalized

  • Defence Offsets Management Wing (DOMW) is the nodal institutional framework for operationalising offset operations in India.
  • It operates under the Department of Defence Production.
  • The DOMW prepares Defence Offset Guidelines and is basically responsible for post contract management activities.
  • The post contract activities consist of
  1. monitoring of offset obligations,
  2. technical and commercial evaluation,
  3. implementation of Offset banking guidelines,
  4. imposing penalties,
  5. facilitating Indian industry-suppliers interface among other activities.

FDI POLICY

  • Up to 49% investment is allowed under the government route, above 49% on a case-to-case basis on approval by the Cabinet Committee on Security, wherever it is likely to result in access to modern and state-of-the-art technology.
  • Investments by foreign portfolio investors/FIIs (through portfolio investment) are permitted up to 24% under automatic route.
  • The defence industry is subject to industrial licenses under the Industries (Development and Regulation) Act, 1951.
  • The requirement of single largest Indian ownership of 51% of equity removed.
  • A lock-in period of 3 years on equity transfer has been done-away with in FDI for defence.

Make in India: Challenges Before Defence Manufacturing 

  • DRDO is grappling with bureaucratic delays in decision making and progress of critical defence research programmes
  • The acquisition of new defence items and critical military hardware has been slow and unresponsive to the need of the time.

Other major challenges for defence sector:

  • Obsolete defence equipment
  • Import of about 60% of its requirements
  • Prevailing corruption in weapon procurement and insufficient decision making process when such corruption cases are found.
  • Insufficient R&D fund allocation

Trust deficit in defence will be removed: Parrikar

  • The manufacturing for defence requirement is not moving at required pace because of the atmosphere of suspicion and it has to be removed to strengthen “trust”.
  • Measures had been taken to bring in necessary changes to the existing offset rules and regulations while some of which had been already modified.
  • Also, measures are being taken to tax reforms for defence manufacturing sector.
  • Issues related to existence of agents and black-marketing are also being addressed.
  • Already, the government has de-listed two-third items manufactured for defence department, thereby opening opportunities for the private sector.
Question:

Make in India can provide the much wanted boost to the defence sector which is grappling with many challenges. Discuss

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