“2025” India's Year of Reforms for Defence

In an announcement¹ never witnessed before, Ministry of Defence has announced 2025 as Year of Reforms. This is in backdrop of Indian defence production increasing by over 50 per cent from FY 21 to FY 24² and exports increasing 31-fold³ over the last decade, though on a small base. This has been achieved through policy measures like prioritizing indigenization, implementing multiple positive indigenization lists, and easing Foreign Direct Investment (FDI) policy.

Now with Aero India, Union Budget and revision of the Defence Acquisition Policy 2020 (DAP 2020) around the corner, there is a lot to look forward to. The dream of a ‘Viksit’ India in 2047, thus rests on the steps we take ahead.

These can be encapsulated in the acronym IMPACT Indigenous

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Innovation

To propel innovation, Research and Development (R&D) needs to be included within the ambit of Indigenous Content (IC). Further, while the Make Programs and Technology Development Fund (TDF) are promising at fostering innovation, however conditions such as “resident control” in Make India programs, restrict their application and thus need reconsideration.

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Maintenance, Repair and Overhaul (MRO)

India’s MRO market is set to grow to USD 4 Billion by 2031 as per Niti Aayog⁴. With low-cost, English speaking and diverse engineering talent, we have the potential not only to fill this demand gap but also to become a global MRO hotspot. Given the synergy of Civil Aerospace and Defence, this will yield both economic as well as strategic benefits in the coming years. While the Government has taken care of GST rate on MRO and reduced it to 5% from 18%, Government could make it exempt in order to make it competitive vis a vis other MRO hubs like Singapore.

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Procurement Overhaul

It’s no hidden secret that the entire weapons acquisitions process hasn’t kept pace with time, and the Indian Government has acknowledged that the acquisition procedures need to be made simpler and time sensitive. The industry thus looks forward to a procurement overhaul, with international best practices on procurement being adapted into the new one.

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Appropriate Incentives

India's success with concessional manufacturing tax rates and Production Linked Incentives (PLI) Schemes suggests it's time to expand PLI to defence and extend the 15% concessional corporate tax rate for defence manufacturers.

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Capital and Capability

Still in its nascent stages, the Indian defence sector, requires not only capital infusion but also capability to flow from advanced economies. This may be enabled by allowing Wholly Owned Subsidiaries of Foreign Original Equipment Manufacturers (OEM)s to be permitted as ‘Indian Vendors’ (i.e., without the restriction of control and ownership) in all acquisition categories under the DAP 2020, to help facilitate Intellectual Property Rights restricted for transfer (due to regulatory or strategic restrictions), which remains challenging in the existing 49%/ 74% cap under the DAP 2020.

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Tenable Budgets

With capital expenditures having a mere 6% increase last Year⁵ under fiscal pressures and India declaring 2025, as the year of defence reforms, there needs to be a significant increase in capital expenditure to match India’s strategic aspirations.

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Indigenous Content (IC)

DAP 2020 puts a requirement on OEMs to source 50-60% local content from India. In stark contrast to our ambitious IC thresholds, even major defence exporters such as the United States and China are among the world's 15 largest importers as per SIPRI⁶, indicating the practical difficulty in having a locally concentrated supply chain. Thus, with India lacking a large portion of raw materials required, it may be in best interest of India’s strategic aspiration to rationalise the threshold to circa 30% like the Offsets regime.

Further, the extant definition of IC in DAP 2020 emphasizes manufacturing but does not incentivize OEMs for crucial services like engineering support, after sales support and skill development; lack of incentives deters OEMs from contributing to India's defence manufacturing ecosystem, hindering its growth.

Additionally, absence of strategic multipliers for domestic sourcing/ investment in defence industrial corridor and MSMEs with missing clarity on computational and procedural aspects causes its own hardships.

What lies ahead: India’s Glorious Road to Indigenisation

It is therefore critical for a close engagement between the private industry and the Government to achieve a robust and innovative defence policy alongside adequate budgetary allocations. As we step into the year of defence reforms, we can only hope that it helps realise our Aatmanirbhar dream sooner than expected.

A version of this article was published by Financialexpress.com. The same can be read here