India’s Aerospace & Defence (A&D) has always been put at the forefront of development, given its linkage with national security, as well as the heap of domestic activity involved. As per SIPRI, India is the 5th largest spender in Defense goods (constituting an outlay of USD 55.9 billion in 2016). It is also expected to become the 3rd largest aviation market by 2025, requiring over 1,500 new commercial aircraft by 2030 to cater towards the high-traffic demand.
However, the framework followed so far here has not been very efficient – relying heavily on imports and being tagged as the world’s largest procurer for arms & ammunition. Aircrafts constitute nearly 57% of the Defense import bill that itself has leaped by 43% between 2007-2011 and 2012-2016. Self-reliance is very much needed in sustaining a robust A&D industry, which has been brought into light with the “Make-in-India” campaign. Nevertheless, there are key factors to consider in order to bring this vision into complete fruition.
Channeling the Right Funding in the Right Direction
The meagre rise of 5% in the Defense Budget for 2017-18 has been disappointing, with the Ministry of Defense (MoD) being allocated INR 3,59,854 crore (including pensions). However, what is even more crucial is channeling the funds in the right direction. Currently, much of the budget is used towards rising manpower costs, pensions, and operational expenses. Even the limited portion allocated for revenue stores and modernization is not efficiently spent; a whopping INR 7,393 crore of the modernization budget was under-utilized in 2016-17. Meanwhile, the Army only spends 45-50% of its capital funds. Though it is certain that Defense requires much more funding in order to actualize indigenization, this can only happen if the utilization of the current budget is commensurate with the actual need. There should be clear structures and processes towards streamlining funds that lead to vigorous capital expenditure, creating grounds for the Union Budget to increase allocation.
Driving Domestic Value
Self-reliance rests itself upon the notion of how much value, not merely product, is derived in-house. This means shifting the domestic engineering market from traditional back-office services to high-end technological work. The Defense Procurement Procedure (DPP) 2016 emphasizes upon indigenization in its Acceptance of
Necessity (AoN) categories for procurement. The new “Buy (Indian – IDDM)” category creates strong impetus for R&D, as there must be an indigenous content (IC) of at-least 60% for products that are not natively designed and developed, while 40% for those that are. Mantra is to limit outright purchases from foreign
vendors, without effective transfer technology (ToT). The Offset Policy, requiring foreign manufacturers in contract with the government to plow back a minimum 30% of the contract value domestically, also surfaces opportunities for local niche firms. While the threshold has been raised from INR 300 crore to INR 2,000 crore in 2008, greater footing is placed on the quality of the offset discharge, not just quantity. This thrust has to be maintained, focusing on the type of skills and technology dispersed, as well as the product support given to local players for effectively gaining knowledge.
Such in-house model needs complete participation of both - the public and private spheres. Hence, the government has liberated much of the previously-conservative defence space, simplifying the licensing process and extending its lifespan. Foreign contributions have increased post the modified FDI policy of having 49% investment through the automatic route, while the institutional scrutiny layer of the FIPB (Foreign Investment Promotion Board) has been removed, easing out the process.
Building strategic alliances in this knowledge & capital-intensive field is pivotal. The key driver here is the 2017 policy reform, leading to the Strategic Partnership Model. This fuels the Make-in-India campaign by encouraging domestic companies to join hands with multinational Original Equipment Manufacturers (OEMs), building technologically-advanced joint ventures (JVs) that upgrade the ecosystem. FICCI & Centrum expect the annual market opportunity to cross USD 41 billion by 2022, as the government shortlists local firms to partner with foreign counterparts, producing helicopters, fighter jets, submarines etc.
This development plays well for Indian companies with existing defense businesses such as Tata, Mahindra, Reliance, Larsen & Toubro, Punj Lloyd, and many more to extend their local industrial bases, with orders being streamlined across state-owned and private players.
Translating Vision into Action
Undeniably, the factors and initiatives set forth are showing results, with a string of foreign - domestic
collaborations mapped out over the last few years and many more in conception. These includes JVs between BAE Systems & Mahindra Defense for manufacturing ultra-light Howitzer battlefield guns, Israel Weapon Industries & Punj Lloyd for manufacturing a range of small arms in the Madhya Pradesh plant, and Rafael Advanced Systems & Kalyani Strategic Systems in making anti-tank guided missile systems.
There is also significant activity in the public domain. India has recently launched the largest Make-in-India Defense Program of USD 8 Billion to buy a fleet of 83 single-engine fighters. Hindustan Aeronautics Limited will be stepping up to produce the light combat aircraft – the LCA Mark-1A. Meanwhile, the MoD has approved production of 8 selected types of ammunition for the Indian Army, awarding the indigenous manufacturer a 10-year contract for establishing a viable commercial model. India’s entry in the MTCR (Mission Technology Control Regime) has opened up its space program, giving way to source high-end missile systems and surveillance drones.
Meanwhile, the Wassenaar membership drives up its standing as a responsible player in dual-use goods and technology, including the transfer of conventional arms. However, there are still crucial issues the country has to address for propelling A&D forward. This includes building a sound infrastructure that is friendly for SMEs (through clusters and SEZs) and creating the right talent base to productively engage in capability-building.
Ultimately, a positive competitive environment that drives upon quality & innovation, as opposed to monopoly & targets, can lead this industry into radical domestic growth.
This article first appeared in the La Lettre April 2018, to read the whole article, please click on this link