• Defence

    In the last two years, since the launch of “Make in India” initiative of the Government of India, Defence Sector in India has seen immense activity, evincing interest from Indian private industry as well Foreign OEMs. While the Indian industry has steadily moved towards capacity building, Foreign OEMs have shown never seen before enthusiasm to participate in ‘Make in India’ in Defence.

    Under the leadership of the Hon’ble Raksha Mantri, long pending and critical changes have been made to bring in ease of doing business in Defence procurements. Whether it is relaxation of norms for FDI in Defence or the new Defence Procurement Procedure (DPP 2016), Government of India has paved way for a robust defence manufacturing in the country. Indian defence industry has now developed the competence, capability and capacity to produce sub-systems which could be integrated into larger platforms. Indian industry offers very high level of engineering and technology skills in all areas of defence and aerospace.

    The Government of India promulgated a new version of Defence Procurement Procedure (DPP) in 2016. This procedure encourages co-development and co-production approach by FOEMs, with their Indian Partners. Further, the definition of Indian Vendor in DPP makes it possible for Joint Ventures between Indian Companies and Foreign OEMs to participate in the capital procurement schemes of Ministry of Defence. CII has welcomed the industry friendly changes. Article by Director General of CII, Mr Chandrajit Banerjee on ‘Make in India in Defence’ appeared in Indian express and is a testimony of CII’s commitment to Make in India. http://indianexpress.com/article/opinion/columns/make-in-india-in-defence-dpp-2016-defexpo-cii-reports/.

    Defence Procurement Manual (DPM 2009) which deals with revenue procurement is also under revision. CII has been at the forefront ever since the defence manufacturing was opened up for the private sector’s participation. Government of India has already accepted several requests of CII which are essential for creating a vibrant domestic defence industrial sector. Extension of validity of Industrial License, promulgation of Security Manual for Industrial Licensee companies, level playing field, increase in the FDI limit, availability of test facilities, to name a few.

    India is currently the fifth largest spender on defence and accounts for approx 5% of the global defence expenditure. The defence spending has been growing in recent years and is expected to grow at the rate of 7% to 8% annually over the next five years. The increase in spending also indicates the huge availability of opportunities for the domestic and global companies in the defence and aerospace sector. 56% of the total defence budget is being allocated to Indian Army, 22% to Indian Air Force and 14% to Indian Navy. 6% of the total defence budget is allocated for defence Research & Development, 1% to Ordnance Factory Board and remaining 1% for miscellaneous activities. Though most of the weapon systems / equipment are imported from foreign OEMs, the Government of India has taken several initiatives to create a domestic defence industrial base, paving way for the indigenous capabilities to cater for the needs of the Indian Armed Forces.

    Defence & Aerospace sector is at the core of ‘Make in India’ campaign of the Government of India. ‘Make in India’ should also target encouraging and incentivizing Micro, Small and Medium Enterprises’ (MSMEs) participation in the defence manufacturing. Defence offsets provide huge opportunities to Indian companies. With over USD 250 Bn worth of procurement over next 10 years, the Defence Sector is expected to lead the Make in India initiative of the Government. In last 30 months, setting an encouraging trend, MoD has approved 85 schemes worth Rs.1,60,362 Cr under “Buy and Make (Indian)” category.

    India's membership to MTCR club, and her designation as a Major Defence Partner by USA is a testimony to India's rising stature as a responsible global power.

    Leveraging India’s Defence requirements as a critical part of diplomacy, India has inked major G2G deals recently with France for 36 Rafale fighter jets with 50% offset liability, with US for 145 M777 ultra-light howitzers with US$ 200 Mn offset, with Russia for 5 S-400 Triumph Long Range Air Defence Missile Systems. Prime Minister’s most recent visit to Israel is expected to further deepen India’s defence cooperation with Israel.


    India is already a large commercial and defence aircraft market. With rising passenger traffic and increasing military and defence expenditures, the demand for aircrafts is expected to increase further. The Indian aerospace industry is one of the fastest growing sectors. India is expected to become the 3rd largest aerospace industry by 2020.

    The current government has brought in significant policy reforms over the last three years. The new Defence Procurement Procedure (DPP 2016) and National Civil Aviation Policy (NCAP 2016) highlight the intent of the government to alter the status quo and that’s a positive sign.

    There are several factors driving growth in manufacturing in Indian aerospace industry. These include both macro and micro factors - strong economic growth that has resulted in rapidly growing domestic aircraft demand, the liberalization of civil aviation policies, offset requirements, a strong domestic manufacturing base, cost advantages, a well-educated talent pool, the ability to leverage IT competitiveness and a liberal Special Economic Zones law that provides attractive fiscal benefits for developers and manufacturers.

    Regardless of the country’s air navigation policy, India has certainly become a major aerospace hub. India’s aerospace industry growth indicates that the country is rapidly building capabilities to emerge as a preferred destination to support the global A&D supply chain. With the Government opening up and providing enormous opportunities to the private sector, many global and domestic players are collaborating and having joint ventures for manufacturing of aero components, Maintenance, Repair and Overhaul (MRO) facilities for civil and military aviation sectors, besides overhaul and maintenance of aero engines. India’s MRO segment is estimated to grow at 10 percent and reach USD 2.6 billion by 2021.

    Global commercial aircraft fleet is expected to grow at a CAGR of around 4% during 2016-2035. Boeing has forecast a need for over 39,600 aircraft to be added during 2016-2035, with approximately 38 percent deliveries to airlines in the Asian region. Airbus has forecast a demand for 33,070 new aircraft deliveries during 2016-2035. On an average, around 42% of the demand will be for replacement of the existing aircrafts and 58% will be the incremental growth. Single-aisle airplanes will dominate the world’s fleet with around 71% share of new deliveries during 2016-2035. A majority of these deliveries will be around Asia-pacific region – with India, China, South East Asia and the Middle East being key markets for the global aircraft majors.

    The Indian defence expenditure has increased at a CAGR of 9.7% from 2008-2016, reaching current levels of USD 42.83 bn in 2017-18. The cumulative capital budget till the end of 12th to 14th five-year plan (2012- 2027) for the Indian Air Force (IAF) is projected to be approximately US $218 billion; out of which 69 percent is towards acquisition of aircrafts and aero engines. IAF will be spending about US $150 billion on aircraft and aero engine in the next 15 years, and is expected to grow by 10-15% every year. This indicates a large pipeline of orders in military aircraft segment, with a growing need for Indian sourcing partners.

    Foreign OEMs will have freedom to choose offset partners over course of contract along with ease of replacement of existing partners, bringing in more competition and efficiency. For contracts with foreign OEMs under Buy (Global) category, offsets are applicable for contracts above US$ 300 Mn (INR 2000 Cr). Existing Offset obligations of foreign OEMs are approximately USD 5 Bn. Offsets for another 10 to 12 Billion USD are in the pipeline, which will be required to be discharged over the next 8 to 10 years.

    The Big Picture

    • India has the third largest armed forces in the world
    • India is one of the largest importers of conventional defence equipment and spends about 31.1% of its total defence budget on capital acquisitions
    • About 60% of its defence requirements are met through imports.
    • The allocation for Defence in the Union Budget 2017-18 is approximate USD 42.83 billion.
    • India is expected to spend over USD 150—225 billion in the next decade to ramp its aerospace industry. This also suggests that a significant portion of business opportunity could accrue to India, due to the associated offsets. The total spending in the next 5 years is expected to be between USD25 billion (assuming uniform demand) for commercial aircrafts and USD100 billion as defence expenditure. Out of the defence expenditure, approximately 15-20 percent (USD15-20 billion) is expected to be spent on military aircrafts. Assuming an offset of 30 percent for the civil sector too, the total offset opportunity for the aerospace sector is valued to be at least USD10-15 billion. As Indian manufacturing capabilities mature over the years, it is expected to capture a large share of this opportunity.

    Growth Drivers

    The Defence Production Policy, 2011 has encouraged indigenous manufacturing of defence equipment. Defence Procurement Procedure (DPP) has been amended in 2016 to provide for the following:

    1. New category of capital procurement - Buy Indian —IDDM (Indigenously Designed, Developed and Manufactured) introduced to encourage indigenous design, development and manufacturing of defence equipment.
    2. Preference to ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ over ‘Buy (Global)’ categories of capital acquisition.
    3. Clear and unambiguous definition of indigenous content.
    4. Provision for Maintenance TOT (Transfer of Technology) to Indian Industry partners
    5. Provisions to allow foreign OEM (Original Equipment Manufacturer) to select Indian Production agency.
    6. Requirement of minimum indigenous content has been enhanced/rationalised.
    7. ‘Services’ as an avenue for discharging offsets have been re-introduced.
      • Defence products list for industrial licensing, has been articulated in June 2014, wherein large numbers of parts/components, castings/ forgings etc. have been excluded from the purview of industrial licensing.
      • The defence security manual for the private sector defence manufacturing units has been finalised and put in public domain by the Department of Defence Production. The manual clarifies the security architecture required to be put in place by the industry while undertaking sensitive defence equipment.
      • The MAKE procedure, which aims to promote research & development in the industry with support from the Government and the placement of orders, has been promulgated with provision for 90% funding by Government and preference to MSMEs in certain category of projects.

    FDI Policy

    1. 100% FDI in defence sector: Up to 49% under automatic route; FDI above 49%, through Government route where it is likely to result in access to modern technology.
    2. The defence industry is subject to industrial licenses under the Industries (Development and Regulation) Act, 1951 and manufacturing of small arms ammunition under Arms Act, 1959
    3. The requirement of single largest Indian ownership of 51% of equity removed.
    4. A lock-in period of three years on equity transfer has been done-away with in FDI for defence.
    5. FDI in the defence sector is subject to other security conditions.

    Sector Policies

    1. Procurement Policy:
      • The defence procurement is governed by the Defence Procurement Procedure (DPP 2016).
      • Latest revision of DPP was released in March 2016.
    2. Offset Policy:
      • The key objective of the defence offset policy is to leverage capital acquisitions to develop the domestic defence industry. Mandatory offset requirements of a minimum of 30% for procurement of defence equipment in excess of USD 307.69 million have been envisaged.
    3. Procedures for the Grant of Industrial Licenses have been streamlined:
      • The initial validity period of industrial licenses has been increased from 3 years to 15 years with a provision to grant extension for a period of 3 years.
      • Guidelines for the extension of validity of industrial licenses have been issued.
      • Partial commencement of production is treated as commencement of production of all the items included in the license.