Millennium Post

Indian defence policy: A new phase?

The book with 21 chapters, by a wide range of analysts, consists of a compilation of different perspectives of the primary stakeholders – the Indian government, global original equipment manufacturers (OEM) and Indian industrialists; and to understand the evolution as well as to trace the possible future trajectories, of Defence procurement and offset policies in India. The volume opens with a bird’s eye-view of these perspectives, followed by three sections containing chapters by individual stakeholders and concludes with a section emphasising on the importance of Indian manufacturing and provides a comprehensive overview of India’s complex offset policies in a reader-friendly language.

Formulated as late as in 2005 with the aim of developing India’s domestic Defence industry, the Defence offset policy was incorporated in the Defence Procurement Procedure (DPP) 2005. The policy introduced a 30 per cent offset in contracts valued above Rs 3 billion under ‘buy’ and ‘buy and make’ categories. However, the feedback from Indian and foreign Defence manufacturers, who this writer interacted with in Defexpos from 2006 to 2014, all lamented that the policy lacked clarity in many aspects and that the bureaucratic process related to the policy and DPP was a frustrating quagmire. A paper by the Institute for Defence Studies and Analyses stated that the policy suffered from the absence of any designated agency in the Ministry of Defence (MoD) for guiding, overseeing, executing and monitoring the implementation of the policy. As such, confusion reigned both in the corridors of South Block and in the minds of the vendors on how to implement the offset obligations. The absence of any offset benefit to the Indian Defence industry led to MoD making significant changes in DPP 2006 and again in 2008, which despite repeated assurances by the then Defence Minister A K Antony, failed to produce the desired results. 

In July 2015, Minister of State for Defence, Rao Inderjit Singh, informed the Parliament about the steps taken by the government to promote indigenous manufacturing capabilities of Defence equipment in the country.

FDI policy in Defence sector has been reviewed and as per the revised policy, composite foreign investment upto 49 per cent is allowed through government route (FIPB) and beyond 49 per cent, with the approval of Cabinet Committee on Security (CCS) on case to case basis, wherever it is likely to result in access to modern and state-of-the-art technology in the country. Besides, the restrictions such as single largest Indian shareholder to hold at least 51 per cent equity and complete restriction on Foreign Institutional Investor (FII) existing in the earlier policy, have also been removed to facilitate investments in the sector.

To promote the participation of private sector, particularly SMEs for Defence manufacturing, Outsourcing and Vendor Development Guidelines for DPSUs and Ordnance Factory Board (OFB) have been formulated. The guidelines mandate that each DPSU and OFB to have a short-term and long-term outsourcing and vendor development plan to ‘gradually increase the outsourcing from private sector including SMEs. The guidelines also include vendor development for import substitution. To establish a level-playing field between Indian private sector and the public sector, the anomalies in excise duty/custom duty have been removed.  As per the revised policy, uniform custom and excise duties shall be levied on all companies in the public and private sector.

The Defence Products List for the purpose of issuing Industrial Licences (ILs) under Industries Development and Regulation Act of India (IDR) Act, has been revised and most of the components, parts, sub-systems, testing equipment, production equipment have been removed from the list, so as to reduce the entry barriers for the industry, particularly small and medium segment.

The initial validity of the Industrial Licence granted under the IDR Act has been increased from three years to seven years with a provision to further extend it by three years on a case-to-case basis.

During Defexpo 2016, the largest Land, Naval and Internal Homeland Security systems exhibition of India, held in Goa and aimed at promoting exports in the Defence sector in the country, Defence Minister Manohar Parrikar announced that the Defence Procurement Procedure-2016 (DPP-2016) will provide a push to the ‘Make in India’ campaign.  

Considering that despite a huge chunk of ordnance factories and Defence public sector undertakings for decades of threats and wars, Indian Armed Forces remained dependent on former USSR for upto 70 per cent of major weapon systems and Defence equipment, this book is a fairly comprehensive reference piece on India’s motives of becoming self reliant in Defence requirements but also of becoming an exporter.  
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