Negative import list for defence: Govt’s landmark announcement to help the private sector

Updated: Aug 17, 2020 8:59 AM

The defence ministry has set a goal of a turnover of USD 25 billion (Rs 1.75 lakh crore) in defence manufacturing in the next, five years that included an export target of USD 5 billion (Rs 35,000 crore) worth of military hardware.

private sector, Defence sector, Make in India, Defence Sector manufacturing, Narendra Modi, rajnath singh, Bipin Rawat, domestic defence industry, OFBThe potential of the Indian industry along with the technological capabilities developed in-house is vital for achieving the objective of a strong and sustainable ecosystem in the Defence Sector manufacturing in the country. (Representational image)

By Raaj Nair

India has embarked on the drive of self-reliance and indigenisation in the Defence sector with the focus via Make in India. The potential of the Indian industry along with the technological capabilities developed in-house is vital for achieving the objective of a strong and sustainable ecosystem in the Defence Sector manufacturing in the country.

The defence ministry has set a goal of a turnover of USD 25 billion (Rs 1.75 lakh crore) in defence manufacturing in the next, five years that included an export target of USD 5 billion (Rs 35,000 crore) worth of military hardware. With this as the overarching objective and the vision of PM Narendra Modi for India, Defence Minister Rajnath Singh on Aug 9, 2020, announced that India will stop import of 101 military systems and weapons to begin with and subsequent additions to the list, year on year by the DMA under General Bipin Rawat in consultations with the Services and Ministry of Defence and External Affairs.

Besides aiming to produce key platforms and weapons in India, the government intends to focus on bringing down the percentage of imported components in indigenously developed weapon systems and defence equipment. The decision about the import list of weapons systems under a year-wise schedule was first announced by Finance Minister Nirmala Sitharaman in May 2020 while announcing reforms for the Private defence manufacturing sector that included increasing the FDI limit from 49 per cent to 74 per cent under the automatic route.74% (FDI) under the automatic route is a positive policy amendment, although perhaps a little late in coming, given the likely drop in overall defence capital spending especially post-breakout of the pandemic COVID19.

How this increase in FDI in the automatic route will affect existing preferred categories of defence procurement, like ‘Indian Indigenously Designed Developed and Manufactured’ or Indian-IDDM, remains to be seen and may require significant policy amendments to existing procurement procedures. In Indian-IDDM route, it is currently proposed that any order will require at least 50% indigenous content (IC) if the design is indigenous in addition to development and manufacture ( an increase from 40%from the DPP 2016).

The announcement by the government stating that in any government contract over Rs. 200 crore, no foreign company can participate in the tendering process. It will offer an opportunity to the Indian defence industry to manufacture the items in the negative list by using their own design and development capabilities or adopting the technologies designed and developed by the Defence Research and Development Organisation (DRDO) to meet the requirements of the Armed Forces.

The negative import list includes wheeled AFVs, with an indicative embargo date of December 2021. The Army is expected to contract almost 200 of these at an approx cost of over Rs 5,000 crore. Similarly, the Navy is likely to place demands for submarines. It expects to contract about six at an approximate cost of almost Rs 42,000 crore. For the Air Force, it is decided to enlist 123 of LCA MK 1A The IAF at an approximate cost of over Rs 85,000 crore.

By supporting its domestic manufacturers, India can become the centre of excellence in the small arms sector. It will also reduce the import dependence of arms and ammunition. Domestic manufacturing of arms will also create jobs for Indians.

Promotion of local manufacturing requires enhanced co-operation between the military and the domestic defence industry, which simply has not acquired the traits of a collaborative partnership that propels the defence industry in the western world and the US. Mutual trust is missing, with all concerned parties working at cross-purposes with one another.

Exports

If the domestic industry has to rely solely on local demand, the industry will have little incentive to invest in R&D and production facilities lack of economies of scale and under utilisation of manufacturing capacity. Hence, opening up of exports of defence products would give impetus to the enhanced participation by domestic Private sector. The SOP for grant of NOC for Defence Exports were issued by DDP on May 15, 2017 and have streamlined the procedure for grant of NOC to the private sector. Many countries in South America and the USA have a very large market potential for Small Arms and Ammunition in the private space besides the military and law enforcement agencies. A level playing field should be provided for the Private sector Arms and ammunition manufacturers especially ones made under IDDM category to export as compared to the automatic route usually to the PSU/DPSU/OFB.

As per the data available with the Ministry of Commerce & Industry, the item-wise export indicates that the list is topped by aircraft parts, followed by warships, naval crafts. The export of Arms and Ammunition has been comparatively low and needs greater focus. The details available in the annual reports published by the MoD for the past six years suggest that the value of exports by Defence Public sector Undertakings (PSUs), Ordnance Factory Boards (OFB) and Private Defence Industry (based on the NOCs issued) for the financial year 2016-17 was Rs. 1,495.27 crore, however, there has been a threefold year-on-year increase in the value of defence exports to Rs. 4,500 crore in 2017-18. The draft Defence Production Policy, 2018, has set a target of $ 5 billion in defence exports by 2025. The Government has initiated various measures to achieve this highly ambitious target.

The strategy for Defence exports is likely to have certain noteworthy advantages for the country:-

Enhanced Military Cooperation

Defence products exports will contribute to strengthening diplomatic and economic partnerships and simultaneously lead to enhanced military cooperation. Besides, such exports have the potential to open the doors for strategic partnerships that are of mutual benefit to the partners. Export financing by enhancing allotment of funds in defence “Line of Credit” for certain friendly countries may be considered to facilitate the purchase of critical defence equipment manufactured by the Indian defence industry. With the shift in the world order and polarisation happening in geopolitics, the first and foremost ripples would be felt in Trade and Security/Defence. In such times, military diplomacy between nations would be as important and strategic one if not more.

However, the proof of the pudding will clearly be in the implementation of these policies amendments and reforms and not merely in announcements.

(The author is an Indian Navy Veteran. The views expressed are personal)

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