A Brief Note on India's Defense Manufacturing Sector

IndraStra Global

A Brief Note on India's Defense Manufacturing Sector

By IndraStra Global Editorial Team

A Brief Note on India's Defense Manufacturing Sector

Image Attribute: HAL Tejas on tarmac / Source: DRDO

On June 12, 2018, India’s Minister of State for Defence Subhash Bhamre announced the launch of second defense innovation center to be based at the city of Nashik, strategically situated within the vicinity of Mumbai and Pune. Both the cities have vibrant industrial manufacturing zones, with a capability to become integrated into the current supply chains of major original equipment manufacturers (OEMs) present in these zones.

Earlier in January 2018, India's Union Defence Minister Nirmala Sitharaman announced the establishment of first defense innovation center in the city of Coimbatore.  She issued a directive for the release of ₹20 crore (approx. US$ 3 Million) to the Coimbatore District Small Industries Association (CODISSIA) for the same.

The Indian defense industry's import-export ratio is inferior to countries with a much smaller defense industrial base. The ambitious 'Make in India' policy for the defense sector aims to reverse the current imbalance between the import of defense equipment and indigenous manufacture of defense equipment without adversely affecting the requirements, capability, and preparedness of the end-user, which happens to Indian armed forces. Therefore, the creation of such defense innovation hubs is a way to achieve self-reliance and reducing dependence on foreign countries in defense-related procurements, which is a necessity today for India rather than a choice, both for strategic and economic reasons.

The Defence Procurement Procedure 2016 (DPP-2016) had introduced specific provisions in order to promote indigenous design and development of defense equipment, such as, "Buy-IDDM (Indigenously Designed, Developed and Manufactured)" category of acquisition which has been accorded the topmost priority. At the same time, the country envisions domestic defense industry gets integrated with the global defense equipment supply chain.

During the last three financial years and current year (up to November 30, 2017), 119 contracts involving ₹1,16,523 crore have been signed with Indian vendors and 68 contracts involving ₹1,24,291 crore have been signed with foreign vendors for capital procurement of Defence equipment for Armed forces including rockets, simulator and component level repair facility for Tanks from Russia, Laser Designation Pods, radars, Pods for aircraft Radios, Weapons for Garud Commando Force and Missiles from Israel, Aircraft, Helicopters, Missiles, Artillery Guns and Simulators from USA and Aircraft, Ammunition, High Zone Modules of Bi-Modular Charges from 155mm Guns from France.  

According to the minister, this new "second" innovation center at Nashik will provide a platform to various Micro, Small & Medium Enterprises (MSMEs), start-ups and innovators in the field of defense innovation, which, in turn, will boost the manufacturing of products and components for the defense-end users like Army, Indian Air Force, and Indian Navy.

Also, he added "The government will give them orders if their prototype is selected by them. The government will also bear expenses even though the prototype of defence products is not selected by the end users"

OFFSET BONUS

It is important to note that the Government of India actually pays for the offsets as no OEM can or will be able to bear the programme cost. The policy exists to build a defense industrial base in the country. Given the massive acquisition programs India has embarked upon, the "offset policy" is intended to act as catalytic element towards the building robust defense manufacturing bases in the country.

However, it is mandatory for foreign OEMs to collaborate with an Indian Offset Partner (IOP) in the form of joint ventures or through the non-equity route — to plan sourcing, co-production arrangements, technical collaborations, etc. The OEM/vendor/Tier-I sub-vendor will be free to select the IOP for implementing the offset obligation provided the IOP has not been barred from doing business by India's Ministry of Defence (MoD).

The offset obligation from a large contract is split up into an annual program, where if the value for a given year is not satisfied a penalty of 5% is applied to the shortfall for that year, without changing the total obligation of 30%.
Chart Attribute: The Defence Offset Policy, Page No: 6, Defence Procurement Procedure 2016 (DPP-2016), Ministry of Defence, India / IndraStra Global AIDN00407020180004/C1

Chart Attribute: The Defence Offset Policy, Page No: 6, Defence Procurement Procedure 2016 (DPP-2016), Ministry of Defence, India / IndraStra Global AIDN00407020180004/C1

The Indian offset rules require the free transfer of both technology and machines to the IOP. The IOP must therefore also be assisted to attain the required levels of production and quality. Insisting that the IOP pay royalties for your technology are not allowed, nor can a foreign OEM forbid its IOP from selling to foreign OEM's competitors, either in India or abroad, or from copying your machines to create a second factory in India. In compensation for this transfer of technology (ToT), India's MoD grants an "offset bonus" of 10% against the IOP’s Indian added value. This is famously known as  — "1:1 multiplier".

FOREIGN DIRECT INVESTMENT (FDI)

There have been multiple revision in DPP 2016 to introduce "Make-I" and "Make-II" processes, the introduction of Strategic Partnership Model, increase in FDI through automatic route to 49%, restricting licensing requirements for critical items, denotifying several items previously produced only by Ordnance Factory Boards (OFBs) for production by industry etc.

The current administration aims to increase the foreign direct investment (FDI) cap from the current 49 percent to 74 percent in such technologies, according to a draft Defence Production Policy 2018 released by the MoD in March 2018. As of now, anything over the existing limit is allowed on a case-to-case basis on approval by the Cabinet Committee on Security (CCS). The Foreign Investment Promotion Board (FIPB) approval and license are granted in consultation with the MoD.

THE FUTURE

The draft policy comes at a time when India has been ranked the world’s largest importer of weapons for the 10th straight year by Stockholm International Peace Research Institute (SIPRI). The imports have increased by 24 percent over the last 10 years.

Focused Weapons Platforms

Under, draft DPP 2018, India aims to boost indigenous defense production - as per the policy, by 2025, the country has to be self-reliant in 13 weapons platforms. It includes fighter aircraft, warships, tanks, missiles, and artillery, which constitute the bulk of India’s imports. Also, the policy plans on setting up Defence Export Organisation in partnership with the industry. This will facilitate for overseas marketing of domestically produced defense products and components.

Streamlining the Defense Offset Policy

As far as "offset bonus" is concerned, draft DPP 2018 mentions about the necessary stimulus for IOPs, so that they can take up the export of defense products and components developed as part of offset process. Also, new investment-linked avenues for the discharge of offset obligations will be made available which will also enable certainty and quick discharge of offsets. Besides that, an "Offsets Ombudsman" will be set up to resolve issues arising from claims of offset in a fair, speedy and transparent manner.

Exploring the applications of Artificial Intelligence (AI)

In February 2018, The Artificial Intelligence (AI) Task Force of the MoD was constituted to study the strategic implications of AI in national security perspective and in a global context. The same was emphasized in draft DPP 2018 - "(AI & Robotics) are arguably the most important determinants of defensive and offensive capabilities for any defence force in the future."  

This particular task force is a multi-stakeholder group led by Tata Sons Chairman N. Chandrasekaran and comprises members from government, services, academia, industry, and start-ups.

In the last meeting (which was held on April 28, 2018), it was discussed that one of the key approaches for the use of AI is to work on building a profile that mimics normal behavior by learning from the data generated from a given use case. Then using machine learning/ deep learning techniques, one can draw correlations among various parameters in an automated way (from the huge dataset) and can flag pattern and anomalous behavior for further analysis and insights. This essentially forms the basis for AI-based applications.

On June 2, 2018, The task force handed over the final report to MoD, to accept it and to implement its recommendations

Cite this Article:

Editorial Team, IG., "A Brief Note on India's Defense Manufacturing Sector" IndraStra Global, Vol. 04 (Issue No: 07) 2018, 0004, https://www.indrastra.com/2018/07/Brief-Note-on-India-s-Defense-Manufacturing-Sector-004-07-2018-0004.html | ISSN 2381-3652