Draft Defence Production and Export Promotion Policy 2020

DPEPP 2020 Provides Fresh Impetus to Industry

The Ministry of Defence (MoD) has formulated a draft Defence Production and Export Promotion Policy 2020 (DPEPP 2020). DPEPP 2020 is envisaged as an overarching guiding document of MoD to provide a focused, structured and significant thrust to defence production capabilities of the country for self-reliance and exports.

Objectives

The policy has laid out following goals and objectives:

•             To achieve a turnover of Rs 1,75,000 crore (US$ 25 bn) including export of Rs 35,000 crore (US$ 5 bn) in aerospace and defence goods and services by 2025.

•             To develop a dynamic, robust and competitive defence industry, including aerospace and naval shipbuilding industry to cater to the needs of armed forces with quality products.

•             To reduce dependence on imports and take forward “Make in India” initiatives through domestic design and development.

•             To promote export of defence products and become part of the global defence value chains.

•             To create an environment that encourages R&D, rewards innovation, creates Indian intellectual property (IP) ownership and promotes a robust and self-reliant defence industry.

Focus Areas

The Policy brings out multiple strategies under the following focus areas:

•             Procurement reforms.

•             Indigenization and support to micro, small & medium enterprises (MSMEs)/startups.

•             Optimize resource allocation.

•             Investment Promotion, foreign direct investment (FDI) & ease of doing business.

•             Innovation and R&D

•             Defence public sector undertakings (DPSUs) and Ordnance Factory Board (OFB).

•             Quality assurance & testing infrastructure.

•             Export promotion.

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Highlights of the Draft

Procurement Reforms. Several reforms in the Defence Procurement Procedure have been proposed. A Project Management Unit (PMU), would be set up for the acquisition and facilitation process of the contracts, building military capabilities. It also aims to move away from licensed production to design, develop and produce indigenously. For this purpose, a Technology Assessment Cell (TAC) is made to assess the TRL levels in the country and to provide guidance for the initiation of acceptance of necessity (AON), in addition to the design, development and production. 

Indigenisation and support to MSMEs/ Start-ups. The indigenisation policy aims at establishing an industry ecosystem to facilitate the production of the imported components (including alloys and special materials) and sub-assemblies for defence equipment and platforms manufactured in India. 5,000 such items are proposed to be indigenised by 2025.

Optimise Resource Allocation. A target has been laid out by the Department of Defence Production to double the procurement from domestic industry, that is Rs. 70,000 crore to Rs. 1,40,000 crore by 2025. In addition to this, it aims to achieve a turnover of Rs.1,75,000 crores in Aerospace and Defence Goods & Services by 2025.

Investment Promotion and Ease of Doing Business. India is emerging as an attractive investment destination across the globe. Moreover, India has improved its ranking in the World Bank in its ‘Ease of Doing Business’ (EoDB) report. Investments in the aviation sector will be encouraged due to a large aerospace market with rising passenger traffic and increasing military expenditure. The Defence Corridors set up in Tamil Nadu and Uttar Pradesh will act as additional support and will also offer higher multipliers for offset discharge for investments flowing into the Defence Corridors.

Innovation and R&D. Innovations for Defence Excellence (iDEX) has been implemented to provide necessary incubation and infrastructure support to the start-ups in the defence area. More than 50 start-ups are currently developing new ‘fit-for-military-use’ technologies/products.Also, Mission Raksha Gyan Shakti was launched to promote innovation and technology development and to file patents in Defence PSUs and OFB. 

DPSUs and OFB. Department of Defence Production has set up production facilities over the years for defence equipment through the 15 Ordnance Factories and DPSUs. However, reforms are needed in this sector so that the productivity of these factories improve.

Quality Assurance & Testing Infrastructure. Competitiveness of the defence industry depends on quality assurance. Thus, an IT platform with an industry interface will be developed to ensure quality assurance of the products being manufactured.

Export Promotion. In order to achieve the target of Rs. 35,000 crore of defence exports by 2025, the following strategies are proposed by the Department of Defence Production: 

•             Defence Attachés have been mandated and are supported to promote export of indigenous defence equipment abroad.

•             Domestically manufactured defence products will be promoted through Govt to Govt agreements and Lines of Credit/funding, subjected to strategic considerations. 

•             Export Promotion Cell has been set up to promote defence exports through coordinated action to support the industry. 

•             DPSUs and OFB would be mandated to have at least 25% of their revenue from exports. 

•             DDP would facilitate onboarding of Indian Offset Partners (IOPs) in the discharge of offset obligations by OEMs.

•             Defence Expo and Aero India will be positioned as major global events to showcase India’s capabilities in defence manufacturing and also to encourage exports. 

•             The end-to-end export clearance process in the Department of Defence Production would be further upgraded to make the process seamless and time-bound.

Recommendations

To achieve the objectives envisaged in the policy, time delays have to be reduced by reducing the stages for approvals and also ensuring that whatever is produced in country is not imported. The Negative list of items should be regularly augmented. A lot will depend on the efficient functioning of the ‘Technical Management Cell’ by incorporating the strength of the private sector in the technology upgrades.

Indigenization of items to 5,000 by 2025 will amount to adding 1000 items every year because a list of only 101 items has been issued till now.

To achieve an export target of Rs 35,000 crore by 2025 means improving from the current level of Rs 10,000 crore to Rs 11,000 crore. It is a very tall order and cannot be achieved till we lay down clear objectives with focus areas on what we want to do over a period of lime. The implementation team will have lo first identify a number of technologies which will have to be developed through domestic R&D and for this, the corporatization of OFB and DPSUs must be carried out at the earliest.

Efforts will have to be made to enmesh private industry in the Innovation and R&D by the DPSUs and OFB. They will have to do vendor development with the help of private industry and thus, it requires a combined effort of DPSUs, OFB and the private industry. To achieve the same, DPSUs will have to adopt the role of system integrator to absorb private industry into the manufacturing system. All this is easier said than done. There will be a lot of resistance from the public sector and therefore, a ‘Top Down Approach” will have to be adopted by the MoD to make them accept these changes. Unless this is done, the DPEPP objectives will not see the light of day. Achieving a production target of Rs 1,75,000 crore by 2025 from the current level of Rs 85,000 crore amounts to a jump of Rs 90,000 crore in 5 years or an addition of Rs 18,000 crore every year. Unless attitudinal conditioning of public sector is thrust upon lo accommodate the private sector and accountably of those responsible to implement this policy is fixed and regularly checked for efficacy, the DPEPP will only remain a policy on paper.

Hence, the first and foremost requirement is lo evolve policies on implementing the DPEPP on ground. Private sector in India has made very recognizable progress in areas of Bullet Proof Gears, 155mm Guns (Vajra, ATAGS and K9 Guns), Aakash Missiles, 3D Surveillance radars, Electronics & Communication systems and so on. There are international demands for these products and, thus, the private sector has to be considered a comrade in arms. The Government will have to give much more incentives and accord a level playing field to the private sector. Also accountability of bureaucracy must be fixed in promoting the parallel development of the private sector by giving them equal opportunities.

Government must evolve an Institutional forum for a feedback for the MoD. DPSUs/OFB have to accept that private industry has arrived and will play a major role. Implementation will be the key word for the success of DPEPP 2020.

Direct Offsets as Exports. The practical usage of Direct Offsets to boost exports have not been brought out, probably because the benefits of Direct Offsets are not fully understood or appreciated. The advantages of Direct Offsets with respect to promotion of exports are as follows:

•             Direct Offsets provide export orders directly from OEMs to industries, particularly MSMEs. Hence export turnover increases significantly. This is not so with respect to TOT, establishment of test facilities, etc., which are envisaged in the new offset policy under consideration. The latter do not provide exports orders. Hence Direct Offsets should be encouraged.

•             Through establishment of production facilities due to Direct Offsets, the capabilities of private industries, particularly MSMEs including improved QA standards, manufacturing processes, test methods, skill levels of tradesmen will result and products become more “exportable”.

•             During Direct Offsets, technical co-operation between Offset Partner and OEMs are established and the OEMs abroad generally appreciate the capability of Indian private sector industries, particularly, MSMEs (due to results shown on ground by private industries/MSMEs) and this has resulted in continuous flow of additional export orders directly (additional to Offset Orders) from OEMs to private industries, particularly MSMEs. Hence this has increased Exports from OIPs considerably.

•             Since the OEMs recognise the benefits of procuring the same /similar items from their lOPs (in terms of costs, QA, timely deliveries), OEMs and lOPs jointly undertake development of Mark II /III products both for Indian and international markets. This again increases export potential (through Direct Offsets).

•             Quite a few of the Direct Offsets projects through lOPs have resulted in establishment of JVCs with OEMs abroad, which again brings in FDI to Government of India.

•             It is to be accepted that OEMs have a better knowledge/ experience in exports as compared to Indian industries as they have been operating globally from their inception, while Indian industries have been more “inward looking” so far towards Indian market only. Hence, through the route of Direct Offsets and establishment of one-to-one relations with OEMs, lOPs can obtain more Export Orders through OEMs rather than directly exploring Export Markets by themselves at least, in the beginning.

Measures to increase FDI. Government of India have recently announced enhancement of FDI through “Automatic Route” from 49% to 74%. However, the follow-up steps are yet to be clarified. For eg:-

•             The present FDI policy clearly specifies that for a JVC to be called an “Indian Company”, it should satisfy twin conditions of FDI to be not more than 49% and control of JVC’s Board of Director to be in Indian hands.

•             It is quite evident that no OEM will invest more than 49% in JVC, if such JVCs are not considered Indian companies and, hence, debarred from participating in Indian RFPs.

Hence above defeats the purpose of increasing FDI to 74% through automatic route.

In addition, even in JVCs with 49% FDI, MoD has specifically instructed in RFP that “Pyramiding effect” will be considered and such JVCs whose Indian promoter has Fll on its equity are debarred from taking part in RFPs.

Hence, unless these aspects are clarified and corrected, JVC in India may not be successful in bringing in expected increase in FDI.

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It is a known fact that the foreign OEMs will invest in Defence Corridors only when there are more incentives in the corridor. It is suggested to relook at para 5.8 of DAP 2020 and accord a higher multiplier of 3X in case IOP is in Defence Corridor. Else TOT acquisition will remain limited to regions like Bengaluru and Hyderabad, which already are advanced in aerospace & defence (as foreign OEMs will see no real incentive to provide TOT in Defence Corridors).

As per the aim of Draft DPP 2020 level playing field should be provided to private industry. However, Annex VII and Annex VIII to Appx D of DAP 2020 are restrictive in nature and putting private industry in disadvantageous position  vis-a-vis DRDO/ DPSUs/ OFB. It is recommended that TOT of technologies listed in Annex VII and VIII should be allowed to private industry with same multipliers. Moreover 5.13 and 5.14 should have higher multiplier of 4X and 5X respectively for Defence Corridor.

Negative List for DPSUs & OFB. There is a need to have a negative list for the DPSUs wherein low technology equipment or those which already have a reasonably large manufacturing base with the private industry should not be allowed to be manufactured by DPSUs/OFB.

Case in point is manufacturing of night  vision weapon sights  (thermal  imaging  &  image intensification based) wherein both BEL and OFB are manufacturing these. Manufacturing these by BEL/OFB was alright when the Indian industry was primarily trading and not manufacturing these devices. Now that manufacturing of these devices is being done by many Indian companies, BEL and OFB should start concentrating upon manufacturing the heat of these devices – the Image Intensification Tubes – which BEL is doing to an extent, the microbolometer and the DDC, all of which require much higher level of technology and a very large investment in infrastructure, plant and machinery, which is financially feasible to be done by a Government entity. Presently, all three of these component are being imported (by every company including BEL/DPSUs/OFB) and these form nearly 50% of the cost of the devices that they are fitted in. A scrutiny of all defence items being manufactured by these companies must be critically examined and compared against the current capabilities of the private sector which should lead to a negative list for the DPSUs/OFB.