The privatisation thrust and geopolitical situation transforming the indian Defence Market
The Indian Defence market represents accessible cumulative capital and revenue acquisition opportunities of $306.95 billion from 2021 to 2030.
India aims to increase its defence production output to $25 billion, including exports of $5 billion. Simultaneously, the FY 2021-2022 defence budget’s capital allocation was hiked by 18.7% to provide for modernisation.
The Indian defence market is at the cusp of a revolution, with the introduction of policy changes that promise to reduce program delays and speed up acquisition. Provisions such as allowing leasing of equipment and waiver of offset requirements in government-to-government deals also hold promise in the upcoming decade.
The Ministry of Defence (MoD) has also set a target of doubling defence production and increasing defence exports by 5 times by 2025. To ensure that these goals are achieved, the MoD is pushing for enhancing private-sector participation to create a level-playing field and is also taking other steps such as corporatisation of the Ordnance Factory Board. Successful implementation of the envisaged measures will have a long-lasting effect on the defence industry and the competitive landscape.
Defence Public Sector Undertakings (DPSUs) that have not delivered as per expectation have traditionally dominated the Indian defence market. As a result, India imports an estimated 70% of its defence needs. The acquisition cycle has also been long blamed for being inefficient resulting in delayed or cancelled contracts.
Consequently, the Indian defence forces suffer from an inventory shortfall and operate legacy equipment. While the call for defence reforms has been a long-stated need, the effect of the faceoff with China and the COVID-19 pandemic’s economic impact have now seen the government change its stance.
The Defence Acquisition Procedure 2020, along with Atmanirbhar reforms, aims to increase private sector participation with a view to hold DPSUs to greater accountability.
The Indian defence manufacturing sector is largely dominated by the Defence Public Sector Units (DPSUs) and Ordnance Factory Board (OFB), whereas the Research and Development (R&D) sector is solely controlled by the Defence Research and Development Organisation (DRDO). India’s defence industry is primarily controlled by the government and its agencies. Though the defence industry was opened up for private domestic players in 2001, so far there has been limited participation of the private sector in the overall defence procurement. India boasts of one of the largest defence industrial bases among the developing nations in the world.
Approximately two lakh people are employed in the various defence manufacturing units/laboratories of the government. The key components of India’s existing Defence Industrial Base (DIB) are the DPSUs, Ordnance Factories (Ord Fys), DRDO—all functioning under the overall control of the government’s Ministry of Defence (MoD)—and a few private sector companies comprising both large and Micro, Small and Medium Enterprises (MSMEs). It is a well-known fact that in spite of having its own vast defence industrial base, India depends heavily upon foreign imports to meet the requirements of its armed forces for weapon systems and platforms. Although India has achieved significant success in areas such as space technology, missile development, atomic sector, information technology, pharmaceuticals sector, and others, a similar achievement remains elusive in the defence sector. However, it is well-noted that India has the potential to be a major player in the field of defence manufacturing provided it plays its cards well. In doing so, the primary task lies in identifying a few potential areas of defence production, wherein it can expertise its capabilities.
In terms of functioning, in India, the MoD plays an all-encompassing role in the defence sector. It acts as the sole developer, manufacturer, seller and buyer of defence equipment and weapon systems within the country through its various agencies/organisations. Further, the formulation of a policy framework for various functions related to defence manufacturing and defence procurement is also orchestrated under the domain of the MoD. These aspects make it significant for the MoD to play an active role in driving the growth of the defence industrial base within the country. Various other ministries/departments such as the Ministry of Home Affairs (MHA), Ministry of Commerce, Trade and Corporate Affairs, Ministry of Finance, Ministry of and Industries, and Ministry of External Affairs, also contribute significantly towards the defence industry by way of issue of policies/guidelines, which directly or indirectly affect the functioning of the industry. However, the most significant is the role of the armed forces in the growth of the industrial base within the country. That is, being the ultimate users, the armed forces have a greater say in the selection and acquisition of defence equipment and weapon platforms by the government.
Significant Aspects of Indian Defence Sector
India’s defence sector can be understood from the following aspects, which are listed below:
- India has the third largest armed forces in the world.
- It is the world’s fifth largest spender on defence. India’s annual defence budget for Financial Year (FY) 2018-19 was about Rs 2,95,511 crore (at the BE stage). It spends approximately 35 per cent of its defence budget on capital acquisition.
- India imports nearly 60 per cent of its military hardware requirements from the global arms manufacturing countries. As per Stockholm International Peace Research Institute (SIPRI) data, the value of imports of defence equipment and weapon systems by India for the period 2013-16 was approximately Rs 82,496 crore. India accounts for 14 per cent of all global arms imports and has the dubious distinction of being the largest importer of arms in the world.
- Despite having a strong DIB, the long-cherished goal of achieving minimum 70 per cent self-sufficiency in defence procurement remain elusive. Currently, India’s self-reliance is hovering at around just 35- 40 per cent.
- India is mostly involved in licensed production or manufacturing of defence equipment based on the Transfer of Technologies (TOT) obtained through the purchase of main equipment/systems in the past from the Original Equipment Manufacturers (OEMs).
- There has been a very limited participation of the private sector (less than 5 per cent) in the overall defence acquisition.
- It is no surprise that the country has to bear the burden of a large import bill for purchasing military hardware, which puts further strain on its limited resources. Moreover, the genuine needs of the country’s large population for development and creation of civic facilities have to be compromised on account of the heavy expenditure on defence imports.
- Though the government has given some additional thrust to indigenisation and ‘Make in India’ in the recent past, tangible results are yet to become visible in the defence sector.
- The government in the recent past has announced the creation of two defence corridors in the country, which is a welcome step. However, there is a need for greater clarity on the matter and strong will to implement the plan in a time-bound manner.
- In the past, some selective restructuring of Ord Fys and DPSUs has been undertaken by the government, but it has not fructified into reduction in foreign imports.
- It is a well-known fact that procurement of defence equipment and systems ex-import is carried out by the government to meet the urgent and unavoidable needs of the armed forces, in order to maintain the minimum acceptable level of operational preparedness. However, this is largely due to the non-availability of modern, hi-tech and advanced weapon systems through the domestic industry (public and private).Though such imports serve the immediate needs of the country, in the larger perspective, they delay the process of indigenisation.
- Nearly US$ 14 billion worth of defence offset obligations are expected to be discharged in India by the foreign OEMs by the year 2028. As per an estimate, the Indian defence sector has the potential to add about one million direct and indirect jobs.
Defence Industrial Corridors in India
India is among the top 5 military spenders and one of the emerging defence manufacturing hubs in the world. To support the growth of the Defence sector and enhance manufacturing capacity in the sector, two Defence Industrial Corridors are being set up in India, one in Uttar Pradesh and another in Tamil Nadu.
Promoting Make in India, the Defence Industrial Corridors will catalyse indigenous production of defence and aerospace-related items. This will reduce our imports and promote the export of these items to other countries.
The combined efforts of the Government and private players will help achieve India’s goal of self-reliance in defence, generate direct and indirect employment opportunities and spur the growth of private domestic manufacturers, Micro Small and Medium Enterprises (MSMEs) and Star-ups.
Uttar Pradesh Defence Industrial Corridor
The Uttar Pradesh Defence Industrial Corridor is being set up by the Uttar Pradesh Expressways Industrial Development Authority (UPEIDA). It consists of the following six nodal points with the potential to develop defence industries in the corridor: Agra, Aligarh, Chitrakoot, Jhansi, Kanpur, Lucknow.
Plug and Play support will be provided to the industries in the corridor, which will consist of the following facilities:
Assured water supply and uninterrupted electricity (132 KVA) along with pelican wire fencing boundary wall at the site. Connectivity with 4-lane heavy-duty highway connected with Bundelkhand Expressway and Delhi-Jhansi. Single Window approvals and clearances to Defence and Aerospace (D&A) manufacturing units via Nivesh Mitra, the single window system of the state. Labour Permits for D&A industry towards flexible employment conditions. Simple Procedures and rationalised regulatory regime with easy reimbursement of incentives and subsidies
Tamil Nadu Defence Corridor
The Tamil Nadu Defence Corridor, being set up by the Government of Tamil Nadu, consists of the following five nodal points: Chennai, Coimbatore, Hosur, Salem, Tiruchirappalli. The State holds the following strategic advantages which makes it a suitable destination for a defence corridor: The large coastal line which has four large seaports (three government and one private) and 22 minor ports. The state has four international airports at Chennai, Coimbatore, Trichy, Madurai; and two domestic airports at Tuticorin and Salem. A power surplus state with a renewable energy capacity of 11,113 MW. Tamil Nadu’s capital city Chennai is connected to the world by three submarine cables providing a bandwidth of 14.8 Tbps. A destination of choice for Korean investors; the state is the largest Recipient of Korean Foreign Direct Investment (FDI) to India.