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Transforming India into a Defence Manufacturing Hub Under Make in India Scheme

India has the third largest standing army in the world. According to the World Bank data India spends close to 2% of its GDP on defence.

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Transforming India into a Defence Manufacturing Hub Under Make in India Scheme

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  1. Transforming India into a Defence Manufacturing Hub Under Make in IndiaScheme Indiahasthethirdlargeststandingarmyintheworld.AccordingtotheWorldBankdataIndiaspends closeto2%ofitsGDPondefence.Withadefencebudgetof$55billionofwhich31.1%is allocatedto capital acquisitions and a population of highly skilled workers, India remains one of the most preferred destinations for defence manufacturing. 60% of the defence related requirements are met byimportswhichoffersahugeopportunityforimportsubstitution. Reasons toInvest Currently, most of India’s defence requirements are catered largely by imports. The opening up of defence sector for private sector participation under the government’s strategic partnership model will help the foreign original equipment manufacturers to enter into strategic partnerships with the Indian companies and leverage the domestic markets as well as aim at global markets. Besides helping in building domesticcapabilities,thiswillalsobolstertheexportsinlongterm.

  2. India’sdefenceprocurementproceduremandatestoOEMtoinvestminimum30%oftheamount back in India for procurement of defence equipment which cost more than USD 306.69 million because of which it is predicted that in the next 5-6 years there will be contractual offset obligation worth $4.53 billion. The new government policy promotes self-reliance, indigenization, technology upgradation and achievingeconomies ofscaleincludingthedevelopmentofcapabilitiesfor exportsinthedefencesector. The country under its new leadership has drawn up an extensive modernization plan with an increased focus on homeland security, which opens doors of opportunities for both Indian and global manufacturerstoreapthebenefitsofboth. Statistics Indiahasthethirdlargestarmedforceintheworld. Indiais oneofthelargestimportersofconventional defenceequipmentandsendsabout31.1%ofits total defence budget on capitalacquisitions. About60%ofitsdefencerequirementsaremetthroughimports. The allocation defence in the union budget 2017-18 is approximately USD 55billion. GrowthDrivers Defence Production Policy, 2011 has encouraged indigenous manufacturing of defence equipment. Defence Procurement Procedure (DPP) has been amended in 2016 and includes the following policies added toit: A new category of capital procurement – Buy Indian – IDDM (Indigenously Designed, Developed and Manufactured) which is introduced to encourage indigenous design, development and manufacturing of defenceequipment. Preferenceis tobegivento‘Buy(Indian-IDDM)’, ‘Buy(Indian)’and‘Buy andMakeinIndia’over‘Buy (Global)’ categories of capitalacquisition.

  3. Clear and unambiguous definition of indigenous content in the defence equipment purchased by the armedforces. ProvisionforMaintenanceTOT(TransferofTechnology)toIndianIndustrypartnerswhichaddstothe growthoftheeconomy anddevelopIndia’s defencemanufacturingandmaintenanceindustry. Provisions are provided for the foreign OEM (Original Equipment Manufacturer) toselect Indian Productionagency. Theminimumpercentageofindigenous contentin defenceequipmentsourced fromforeigncountries has beenenhanced/rationalized. ‘Services’ as an avenue for discharging offsets have been re-introduced which includes– Defence products list for industrial licensing has been articulated in June 2014, wherein large numbers ofparts/components, casting/forgingsetc.have been excludedfromthepurviewofindustriallicensing. The defence security manual for the private sector defence manufacturing units has been finalized and put in public domain by the Department of Defence Production. The manual clarifies the security architecturerequiredtobeputinplacebytheindustrywhileundertakingsensitivedefenceequipment. TheMAKEprocedure,whichaimstopromoteresearch&developmentintheindustrywithsupport from the government and the placement of orders, has been promulgated with provision for 90% fundingbyGovernmentandpreferencetoMSMEsin certaincategoryofprojects. FDIPolicy 100% Foreign Direct Investment (FDI) is allowed in the defence sector, where up to 49% is available underautomaticrouteandFDIabove49% isallowedafteracasetocasestudybytheGOI;whereitis likelytoresultinaccesstomoderntechnology. The defence industry is subject to industrial license under the Industries (Development and Regulation) Act, 1951 and manufacturing ofsmall arms ammunition under Arms Act, 1959. Thepolicyhas beenamendedtoremovethe clause whichmandates asinglelargestIndianownershipof 51% ofequity.

  4. Alock-inperiodofthreeyearsonequitytransferhasbeendoneaway withinFDIfor defence. FDI in the defence sector is subject toother security conditions. SectorPolicy ProcurementPolicy The defence procurement is governed by the Defence Procurement Procedure (DPP 2016). The latest revision of DPP was released in March2016. OffsetPolicy Thekey objectivesofthedefenceoffsetpolicyistoleveragecapitalacquisitiontodevelopthedomestic defence industry. Mandatory offset requirements of a minimum of 30% for procurement of defence equipment in excess of $ 307.69 millionhave been envisaged. Procedures for the Grant ofIndustrial Licenses have been streamlined: Theinitialvalidityperiodofan industrial licensehas been increasedfrom3yearsto15yearswitha provisiontograntanextensionforaperiodof3years. Guidelinesfortheextensionofvalidityofindustriallicenseshavebeenissued. Partialcommencementofproductionistreatedasthecommencementofproductionofalltheitems included in thelicense. Key Provisions of The 2016-17 UnionBudget Provisionof$52.2billionforthedefenceservicesintheFY 2016-17UnionBudget. CapitaloutlayforDefencein2016-17is keptat$12.09billion. Outofthis$10.75billionhas beenallocatedforCapitalAcquisitionofthedefenceservices.

  5. $1.33 billionhasbeenprovidedunder“OtherthanCapitalAcquisition” segmentforcapitalexpenditure to Army, Navy, Joint Staff and AirForce. Eitherofthefollowingtwodeductionscan beavailed: Investment allowance (additional depreciation) at the rate of 15% to manufacturing companies that investmorethanUSD15.38millioninplantsandmachineryacquiredandinstalledbetween1st ofApril 2013 to 31st of March 2015, provided the aggregate amount of investment in the new plants and machinery during the said period exceeds $15.37million. Inordertoprovideafurtherfilliptocompanies engagedinthemanufactureofanarticleorthing,the said benefit of additional deduction of 15% of the cost of new plants and machinery is applicable on machineries which exceeds the USD 3.84 cap and are acquired and installed during any previous year until 31st of March2017. Tax Incentives R&D Incentives - Industry/private sponsored research programs have been introduced. A weighted tax deduction is given under Section 35 (2AA) of theIncome Tax Act. Aweighteddeductionof200%isgrantedtoassessforanysumspaidtoanationallaboratory,university orinstituteoftechnology,or specified personswithaspecificdirectionthatthesaidsumwouldbeused for scientific research within a program approved by theprescribed authority. Forcompanies thatareengagedinthedevelopmentofanin-houseR&Dcentreand product,aweighted tax deduction of 200% under Section 35 (2AB) of the Income Tax Act for both capital and revenue expenditure incurred on scientific research and development. Expenditure on land and buildings are not eligible fordeduction. StateIncentives Apart from the above-mentioned incentives, each state in India offers additional incentives for industrial projects. Incentives are in the form of subsidised land cost, relaxation in stamp duty, exemption on sale/leaseofland, powertariffincentives,concessionalratesofinterestonloans,investment

  6. subsidies/tax incentives, backward areas subsidies and also special incentive packages for mega projects. ExportIncentives The export promotion capital goodsscheme, Duty remissionscheme, Focus product scheme, special focus product scheme, focus marketscheme, Incentives as per ‘merchandise Exports from India Scheme (MEIS)’ under new Foreign TradePolicy. Area-basedIncentives Incentives are available for unit’s set up in Special Economic Zones (SEZs) / National Investment & Manufacturing Zones (NIMZs) as specified in respective Acts or for those in special areas such as the North-east, Jammu & Kashmir, Himachal Pradesh andUttarakhand. InvestmentOpportunities Investment Opportunities are available in Defence products manufacturing and supply chain sourcing opportunity. ForeignInvestors Airbus(France), BAE India Systems(UK), Pilatus (Switzerland), Lockheed Martin(USA), Boeing India (USA), Raytheon(USA),

  7. Israel Aerospace Industries(Israel), Rafael Advanced Defence Systems Ltd.(Israel), Dassault Aviation SA(France). About Us THE MACHINE MAKER, an authentic magazine from the house of MART Info media Private Limited with 14 years of experience in Indian manufacturing sector, is all geared up to cover the growth of this new age manufacturing sector in India with special thrust on the makers who will make this happen. Read and Advertise with us to be part of thisgrowth. Contact Us THE MACHINEMAKER 2nd floor Ariana, Bhumkar Chowk, Marunji Road, Wakad Pune-411057 Phone no: +91-788-780-0015 Email Id:info@themachinemaker.com Website:https://www.themachinemaker.com

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