India is the world’s third largest armed forces and the country’s defence spending is expected to touch $620 billion by 2022 with currently capital expenditure (CAPEX) amounting to 48% of the budget. The Finance Minister Arun Jaitley in the Union Budget 2016-17 allocated $51 billion for the Ministry of Defence (MoD), which adds to 2.25% of the country’s GDP. This does not include pensions, border forces, and nuclear warhead/missile development.
At present, India’s domestic industry does not produce competitive designed weapons, which makes the country the world’s largest importer of Defence equipments with about 60% of the requirements met through imports. The ‘Make in India’ campaign is working towards transforming India from the world’s largest importer to a preferred destination for co-design, development and production of equipment, weapon systems and platforms required for Defence. The Ministry of Defence (MoD) aims at achieving 70% indigenous content by 2027 and India’s Defence Minister Manohar Parrikar expects annual military exports to touch $2 billion in a couple of years.
The order to ease doing business in India and the realization of the country’s reliability on foreign players to keep up with state-of-the-art technologies and modern manufacturing processes, led the government to recently revise the FDI to 100% from 49% through the government approval route in Defence Industry among other sectors like civil aviation and food processing. This move has made India the most open economy for FDI in the world and has certainly added a new dimension to the Defence sector. This change will attract more foreign companies while India’s private sector continues to explore new partnerships where foreign companies can now hold majority stake and also own up 100% of the local Defence ventures. It is expected to increase investment in manufacturing as well as R&D and in turn also increase employment opportunities and speeds up the Defence procurement process.
Apart from this radical liberalization of FDI, the Government has taken several policy measures to promote investment and local production of Defence requirements, like removing anomalies in taxation in Customs / Excise duty to level the playing field between public and private sectors, creation of a new category under the Defense Procurement Procedure called Buy India IDDM – Indigenously Designed Developed and Manufactured to encourage R&D and manufacturing, liberalization of Industrial Licensing Policy, etc.
The Aerospace sector in India has had a steady growth in both Defence and Civil Aviation sectors. Aerospace is predominant to bolster the Defence sector and contributes nearly 50% of the Value of Production of the sector. While Bangalore is one of India’s largest Aerospace hubs, states like Telangana, Haryana and Madhya Pradesh among others are also making reforms to promote manufacturing in the defence and aerospace sectors. Under the Government’s ‘National Employability Enhancement Mission’ (NEEM), Boeing, TATA and NTTF initiated a skills development program to train front-line workers in the Aerospace Industry. The governments’ efforts to promote Skill India will soon help curb the deficiency of skilled labor in these industries.
A recent KPMG survey also stated many global Aerospace and Defence companies are looking at India as a potential low-cost manufacturing destination and a high potential market. This does not imply a stop to armament imports in total as the country currently does not exhibit technology expertise in some areas – For e.g. avionic, propulsion and jet engine technologies in the Aerospace sector which will continue to be a major part in India’s Defence imports – opening opportunities for foreign vendors.
The developments and initiatives by the Indian Government are certain to bring huge opportunities for all, including global original equipment manufacturers (OEMs), defence public sector units (DPSUs), ordnance factory boards (OFBs) and domestic private sector.