Draft Defence Production Policy

A draft defence production policy put out by the government proposes to increase the foreign direct investment (FDI) cap in niche technology areas to 74% under the automatic route, in a bid to boost local manufacturing and catapult India into the league of countries housing top defence and aerospace industries.

At present, the FDI cap for the defence sector is 49% under the automatic route for all categories.

It aims to “facilitate faster absorption of technology and create a tiered defence industrial ecosystem in the country”, besides reducing the “dependence on imports” to “achieve self-reliance”.

India is currently the top importer of defence hardware in the world (according to the Stockholm International Peace Research Institute) and Prime Minister Narendra Modi has been running a campaign with the goal of increasing the share of local manufacturing in the defence sector to create more jobs.

According to the policy, India hopes to achieve a turnover of Rs1.7 trillion in defence goods and services by 2025. It has a goal of becoming an arms exporter to the tune of Rs35, 000 crore in defence goods and services by 2025

By giving a leg-up to defence manufacturing, Asia’s third largest economy also hopes to transform itself into a “global leader in cyberspace and AI (artificial intelligence) technologies”.

The government is targeting achieving self-reliance in the development and manufacture of fighter aircraft, medium-lift and utility helicopters, warships, land combat vehicles, autonomous weapon systems, missiles, guns, small arms, ammunition, explosives, surveillance, electronic warfare and communication systems and night fighting equipment.

To achieve all these goals and to make it easier to do business in the area of defence for innovators, small- and medium-sized enterprises, the policy proposes to bring in enabling provisions to ensure start-ups and small enterprises participate “without having restrictions of turnover” or “prior experience”.

The government will list its requirements in terms of platforms and weapon systems for the next decade to help private sector companies understand the opportunities.

It will also simplify procedures for private firms to enter defence production, i.e., liberalize the regime by issuing licences in 30 days and pruning no-go areas to a small ‘negative list’ for licensing.

The government will also do away with capacity assessment, except for critical projects. It will introduce earnest money deposits and performance guarantees as safeguards for others.

With regard to offsets, the government has proposed to set up an ombudsman for resolving all such claims. Offsets—investments through a local partner to set up an ecosystem of suppliers—would be investment-linked.

In the area of taxation, the government has proposed rationalization of taxes on import of capital goods for services and inputs for defence and aims to prevent inversion of taxes.

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