Indian Government’s policy initiatives in indigenous production of defence equipment

New Delhi. 21 September 2020. The Government has taken the following policy initiatives to promote ‘Make in India’ in defence sector: –

• A new category of capital procurement ‘Buy {Indian-IDDM (Indigenously Designed, Developed and Manufactured)}’ has been introduced in Defence Procurement Procedure (DPP)-2016 to promote indigenous design and development of defence equipment. It has been accorded top most priority for procurement of capital equipment.
• The ‘Make’ Procedure of capital procurement has been simplified. There is a provision for funding of 90% of development cost by the Government to Indian industry under Make-I category. In addition, there are specific reservations for MSMEs under the ‘Make’ procedure.
• Separate procedure for ‘Make-II’ category (Industry funded) has been notified under DPP to encourage indigenous development and manufacture of defence equipment. Number of industry friendly provisions such as relaxation of eligibility criterion, minimal documentation, provision for considering proposals suggested by industry/individual etc. have been introduced in this procedure. So far, 49 projects relating to Army, Navy & Air Force, have been accorded ‘Approval in Principle’, out of which 9 projects have already been issued Project Sanction Order for prototype development.
• Under ‘Atmanirbhar Bharat’ campaign of Govt of India, Ministry of Defence (MoD) has prepared a list of 101 items for which there would be an embargo on the import beyond the timeline indicated against them. This would offer a great opportunity to the Indian defence industry to manufacture these items using their own design and development capabilities to meet the requirements of the Armed Forces in the coming years. This list includes some high technology weapon systems like artillery guns, assault rifles, corvettes, sonar systems, transport aircrafts, light combat helicopters (LCHs), radars and many other items to fulfill the needs of our Defence Services.
• An innovation ecosystem for Defence titled Innovations for Defence Excellence (iDEX) has been launched in April, 2018. iDEX is aimed at creation of an ecosystem to foster innovation and technology development in Defence and Aerospace by engaging Industries including MSMEs, Start-ups, Individual Innovators, R&D institutes and Academia and provide them grants/funding and other support to carry out R&D  which has  potential for future  adoption for Indian defence and aerospace needs. Under the iDEX scheme, a maximum of Rs 1.5 crore funding is available to a participant for development of a prototype. More than 700 start-ups participated in 18 problem statements pertaining to National Defence requirements, launched under 3 rounds of Defence India Start-up Challenges (DISC). 58 winners were announced after rigorous evaluation of applications by the High-Powered Selection Committees. Contracts have already been signed with several winners followed by release of tranches for several cases for prototype/ technology development.
• Government has notified the ‘Strategic Partnership (SP)’ Model in May, 2017, which envisages establishment of long-term strategic partnerships with Indian entities through a transparent and competitive process, wherein they would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains.
• Government has notified a ‘Policy for indigenisation of components and spares used in Defence Platforms’ in March, 2019 with the objective to create an industry ecosystem which is able to indigenize the imported components (including alloys & special materials) and sub-assemblies for defence equipment and platform manufactured in India.
• An Inter-Governmental Agreement (IGA) on “Mutual Cooperation in Joint Manufacturing of Spares, Components, Aggregates and other material related to Russian/Soviet Origin Arms and Defence Equipment” was signed during the 20th India-Russia Bilateral Summit in September, 2019. The objective of the IGA is to enhance the After Sales Support and operational availability of Russian origin equipment currently in service in Indian Armed Forces by organizing production of spares and components in the territory of India by Indian Industry by way of creation of Joint Ventures/Partnership with Russian Original Equipment Manufacturers (OEMs) under the framework of the “Make in India” initiative.
• In February, 2018, Government decided to establish two defence industrial corridors to serve as an engine of economic development and growth of defence industrial base in the country. They span across Chennai, Hosur, Coimbatore, Salem and Tiruchirappalli in Tamil Nadu and across Aligarh, Agra, Jhansi, Kanpur, Chitrakoot and Lucknow in Uttar Pradesh (UP).
• Offset guidelines have been made flexible by allowing change of Indian Offset Partners (IOPs) and offset components, even in signed contracts.  Foreign Original Equipment Manufacturers (OEMs) are now allowed to provide the details of IOPs and products after signing of contracts. In order to bring more transparency and efficiency into the Offset discharge process, “Offset portal” has been created in May, 2019.
• Defence Investor Cell has been created in February, 2018 in the Ministry to provide all necessary information including addressing queries related to investment opportunities, procedures and regulatory requirements for investment in the sector.
• Defence Products list requiring Industrial Licences has been rationalised and manufacture of most of parts or components does not require Industrial License. The initial validity of the Industrial Licence granted under the IDR Act has been increased from 03 years to 15 years with a provision to further extend it by 03 years on a case-to-case basis.
• Under the latest Public Procurement Order 2017, Department of Defence Production has notified list of 24 items for which there is local capacity and competition and procurement of these items shall be done from local suppliers only irrespective of the purchase value.
• An indigenization portal namely SRIJAN has been launched on 14.08.2020 for DPSUs/OFB/Services with an industry interface to provide development support to MSMEs/Startups/Industry for import substitution

Following steps are taken to make a transparent Foreign Direct Investment in designing, development and manufacturing sectors of defence equipment:

• In May, 2001, the Defence Industry sector, which was hitherto reserved for the public sector, was opened up to 100% for Indian private sector participation, with Foreign Direct Investment (FDI) up to 26% both subject to licensing. Further,  Department for Policy of Industry and Internal Trade, Ministry of Commerce & Industry vide Press Note No. 5 (2016 Series), has allowed FDI under automatic route upto 49% and above 49% through government route wherever it is likely to result in access to modern technology or for other reasons to be recorded. Further, 44 FDI proposals/Joint Ventures have been approved for manufacture of various defence equipment, both in public and private sector.
• Government has brought in significant reforms to promote FDI in Defence sector in the country, to complement and supplement the domestic investment. Through FDI, domestic companies are benefited by way of enhanced access to supplementary capital and state-of-art-technologies, and also exposure to global managerial practices resulting in employment generation and accelerated growth of the sector. Review of FDI policy is an ongoing process and changes are made in the FDI policy regime, from time to time, to ensure that India remains an attractive investment destination. FDI in Defence Sector has been enhanced up to 74% through the Automatic Route for companies seeking new defence industrial license and up to 100% by Government Route wherever it is likely to result in access to modern technology or  for other reasons to  be recorded.  The obligatory government approval for existing FDI approval holders / current defence licensees for change in equity / shareholding pattern up to 49%  FDI has been proposed to be replaced with mandatory declaration for the same within 30 days of change of equity / shareholding pattern. The proposals for raising FDI beyond 49% from such companies could also be considered with Government approval.

Enabling MSMEs in expanding their base in defence production

The initiatives taken to make MSMEs competent in defence production are as under:

• The ‘Make’ Procedure has been simplified with provisions for funding of 90% of development cost by the Government to Indian industry and reserving Government funded Make-I projects not exceeding development cost of Rs. 10 Crore and procurement cost Rs. 50 Crore per year for MSMEs.  The industry funded Make-II Projects not exceeding development cost of Rs. 3 Crore and procurement cost Rs. 50 Crore per year have also been reserved for MSMEs.  iDEX is also aimed at supporting MSMEs, Start-ups, Individual Innovators etc provide them grants/ funding and other support to carry out R&D. Besides, approx 11,000 MSMEs as vendors are engaged in supplying various items to OFB and Defence PSUs.
• To bring MSMEs into the defence supply chain  and thereby boost the self-reliance of the country in defence and also contribute towards defence exports market, DDP has made a scheme of promotion of MSMEs in defence. Under this scheme funds are provided to industry associations to organize seminars in different parts of the country.
• MSMEs are partnering in DRDO projects and also DRDO developed technologies are also being transferred to them. They are important partners in industry ecosystem for the production of DRDO developed products.
• Various initiatives have been taken to address issues of timely payments like implementation of TReDS in DPSUs. Regular interactions are taking place to settle the grievance of vendors at OFB. Defence Investor Cell has been opened in DDP to address the issues being faced by vendors especially MSME vendors. Non-Core items of OFB have been uploaded on GeM which would enable them to supply the items hitherto reserved for Ordnance Factories to the Armed forces.
• Ministry of Micro, Small and Medium Enterprises implements various schemes and programmes for promotion and development of Micro, Small and Medium Enterprises (MSMEs) including defence sector MSMEs across the country. These include Prime Minister’s Employment Generation Programme (PMEGP), Scheme of Fund for Regeneration of Traditional Industries(SFURTI), A scheme for Promoting    Innovation,   Rural   Industry  and   Entrepreneurship  (ASPIRE),  Credit Guarantee Scheme, Credit Linked Capital Subsidy and Technology Upgradation Scheme (CLCS-TUS), Technology Centre Systems Programme (TCSP), Micro and Small Enterprises-Cluster Development Programme (MSE-CDP), Procurement and Marketing Support Scheme etc. and also reviews and monitors the progress of the implementation of the Public Procurement Policy for MSEs Order, 2012.
• The Defence Offset guidelines have further paved the way for proactive participation of Micro, Small & Medium enterprises (MSME) of India by incorporating a scheme of multipliers of 1.5 for engaging MSME as Indian Offset Partners (IOP).

There is no prescribed allocation/proportion between DPSUs and private sector. Efforts are, however, being made to create a level playing field between DPSUs and the private sector.