“In continuous pursuit of achieving self-reliance in defence manufacturing under ‘Aatmanirbhar Bharat Abhiyan’ and in sync with the announcement made in the Union Budget 2022-23 that allocated 25 per cent of the defence R&D budget for industry-led R&D, 18 major platforms have been identified and announced by the MoD for industry led D&D,” stated the MoD in a written response to a Parliamentary question.

Under Make-1 procedure of the Defence Acquisition Procedure of 2021, 14 items are listed as follows:

•             Hypersonic glide vehicles

•             Anti-jamming systems for varied platforms

•             Directed Energy Weapons (>300 KW)

•             Light-weight tank

•             Self-healing minefields

•             Unmanned autonomous AI-based land robot

•             127 mm naval gun

•             127 mm guided projectile

•             Autonomous AI-based land robot

•             Standoff air-borne jammer

•             Lithium-ion/ Lithium-sulphur cells

•             Communication systems: AFNET switches, routers, encryptors & VOIP phones

•             Electro-optical pod with high-res sensing

•             Plug and Play’ housing/ infrastructure for soldiers posted at extreme altitudes

Under Make-2 procedure, only Anti-jamming systems for varied platforms is listed.

Under Special Purpose Vehicle, Long-range unmanned aerial vehicles (UAVs) and Indian multi-role helicopter (IMRH) are listed.

Under iDEX scheme, single item – Low-orbit pseudo-satellites – is listed.

Starting from August 2020, the MoD has issued three lists of defence equipment, the import of which is embargoed. The August 2020 list incrementally bans the import of 101 items, with the embargo growing wider each year.

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“In continuous pursuit of achieving self-reliance in defence manufacturing under ‘Aatmanirbhar Bharat Abhiyan’ and in sync with the announcement made in the Union Budget 2022-23 that allocated 25 per cent of the defence R&D budget for industry-led R&D, 18 major platforms have been identified and announced by the MoD for industry led D&D,” stated the MoD in a written response to a Parliamentary question.

Under Make-1 procedure of the Defence Acquisition Procedure of 2021, 14 items are listed as follows:

• Hypersonic glide vehicles
• Anti-jamming systems for varied platforms
• Directed Energy Weapons (>300 KW)
• Light-weight tank
• Self-healing minefields
• Unmanned autonomous AI-based land robot
• 127 mm naval gun
• 127 mm guided projectile
• Autonomous AI-based land robot
• Standoff air-borne jammer
• Lithium-ion/ Lithium-sulphur cells
• Communication systems: AFNET switches, routers, encryptors & VOIP phones
• Electro-optical pod with high-res sensing
• ‘Plug and Play’ housing/ infrastructure for soldiers posted at extreme altitudes

Under Make-2 procedure, only Anti-jamming systems for varied platforms is listed.

Under Special Purpose Vehicle, Long-range unmanned aerial vehicles (UAVs) and Indian multi-role helicopter (IMRH) are listed.

Under iDEX scheme,  single item – Low-orbit pseudo-satellites – is listed.

Defence industry watchers point out that, starting from August 2020, the MoD has issued three lists of defence equipment, the import of which is embargoed. The August 2020 list incrementally bans the import of 101 items, with the embargo growing wider each year.

In June 2021, an additional list of 108 defence items was issued by the MoD, progressively banning their import. Invoking“Atmanirbhar Bharat” repeatedly, the second list – termed “Positive Indigenisation List” – took up to 209, the number of defence items that must be compulsorily procured from Indian companies, the number rising each year out to 2025.

On New Year’s Day, 2021, 69 items from the first list were embargoed for import. On January 01, 2022, another 60 items came under the ban. Another 25 will be embargoed for import at the end of 2022; 25 more at the end of 2023; another 21 at the end of 2024 and nine on the New Year of 2026.

It is unclear how this latest import embargo list dovetails with the previous two lists.

The defence industry is sceptical about whether these lists create any pressure to indigenise. The army is already procuring the K9 Vajra system that Larsen & Toubro (L&T) builds under a South Korean licence outside Pune, so banning the import of tracked guns is superfluous.

Meanwhile, the DRDO, along with private firms Kalyani Group and Tata Aerospace and Defence, is already developing towed artillery guns and Pinaka multi-barrelled rocket launchers. Similarly, the army’s entire requirement of tanks has long been built at Chennai and its infantry combat vehicles at Medak. Banning the import of platforms that are already being built in India serves little purpose.

Similarly, there is little purpose in embargoing the import of naval warships, when most of them are already being built in Indian shipyards. According to official navy figures, of 48 warships under construction, 46 are being built in India; only two frigates are being constructed in Russia.

Similarly, Hindustan Aeronautics Ltd (HAL) is already building the majority of the air force’s fighter and trainer aircraft in India, with the recent exception of the Rafale. Banning the import of aircraft such as the Tejas Mark 1A and the Light Combat Helicopter serve little purpose, since these are indigenously designed and manufactured aircraft, as is the HTT-40 basic trainer aircraft.

“These 18 platforms (announced on 22 July) have been distributed between four indigenous routes prescribed in the Defence Acquisition Procedure-2020, namely, Make-I, Make-II, Special Purpose Vehicle (SPV) and Innovations for Defence Excellence (iDEX),” said the MoD.

“These 18 platforms have been identified after extensive consultations between the services, DRDO and the defence industry,” said the MoD.

According to the Minister of State for Defence, “These major platforms… have been identified taking into consideration multiple factors like the capabilities of Indian industry, being cost effective, faster and scalable; current technological advancements; requirement of future warfare; operational challenges; need for import substitution etc.

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As the Russia-Ukraine conflict renewed focus on India’s dependence on the former Soviet Union nation for weapons and ammunition, the government has moved to further promote its “Make in India” programme in the defence sector by lessening imports from foreign companies. It amended the Defence Acquisition Procedure (DAP) 2020 to make it mandatory to meet all modernisation requirements of the Indian Army, Navy and Air Force as well as the Indian Coast Guard with indigenously manufactured equipment “irrespective of the nature of procurement”.

“Import of defence equipment and sourcing from foreign industry of capital acquisitions should only be an exception and undertaken with specific approval of Defence Acquisition Council (DAC) or the Defence Minister,” according to a press release issued by the government in New Delhi. Defence Minister Rajnath Singh, himself, heads the DAC.

The Ministry of Defence (MoD) had earmarked 64 per cent of its Capital Acquisition Budget for domestic industry in the financial year (FY) 2021-22. It, however, surpassed the target and utilised 65.50 per cent of Capital Acquisition Budget for procurement of defence equipment indigenously manufactured in India.

The DAC also approved other amendments in the DAP 2020, including the one to dispense with the requirement of the Integrity Pact Bank Guarantee (IPBG) for domestic defence companies participating in a government procurement process. According to the amended procedure, the Earnest Money Deposit (EMD) would be taken as a bid security for all acquisition cases with Acceptance of Necessity (AoN) cost more than Rs 100 crore. The EMD will be valid for the selected vendor up to signing of contracts and returned to remaining vendors post declaration of selection.

“Post contract, Integrity Pact will be covered through the Performance Cum Warranty Bank Guarantee (PWBG). Further, as per extant Government of India policy, EMD is not required from Micro and Small Enterprises (MSEs),” stated the MoD, after acting on an advice from the Ministry of Finance to reduce the financial burden on the country’s defence industry.

The DAC also approved amendments in the DAP 2020 to encourage wider participation and broad base indigenous defence manufacturing sector in the country. The total order quantities in acquisition cases would be split between short-listed vendors, wherever viable. Further, the other technically qualified bidders, who would not be awarded the contract, would be issued a certificate by the defence services, indicating that the product had already been successfully trial evaluated, to facilitate vendors to explore other markets.

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Towards this end to promote self-reliance, the ministry of defence has scrapped proposed foreign deals close to Rs 60,000 crore worth of ‘Buy-Global’ cases in the last four to five months, additional secretary (defence production) Sanjay Jaju said at a seminar organised by industry chamber PHDCCI. India is saddled with the strategically-vulnerable position of being the world’s largest arms importer. As long as foreign OEMs (original equipment manufacturers) are in India, and as long as they are designing and manufacturing within the country, the Indian government is completely equitable, said Jaju.

“I have friends from global OEMs like Lockheed Martin sitting right here. It is not a commentary on foreign OEMs because we are ownership agnostic now… India does not differentiate between foreign OEMs and L&Ts (domestic companies) of the world. For us, all of you are equal,” Jaju said.

“All our policies are designed in a manner in which all of you get equal opportunities. But one point that is now coming is that going forward, possibly we will not be importing anything. One can say that at the outset,” he said. “A little bit of a difficult situation for the Lockheeds (foreign OEMs) of the world but I think you can substitute it with a string of projects… To design and develop the systems within our country,” he added.

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The defence ministry on 28 March said it plans to procure military equipment worth Rs 5 lakh crore from the domestic industries in the next five to seven years in line with its policy of promoting indigenous defence manufacturing.

Minister of State for Defence Ajay Bhatt put out the projected figure of procurement from domestic sources while replying to a question in Rajya Sabha.

In August 2020, the ministry announced that India will stop the import of 101 weapons and military platforms like transport aircraft, light combat helicopters, conventional submarines, cruise missiles and sonar systems by 2024.

A second list, putting import restrictions on 108 military weapons and systems such as next-generation corvettes, airborne early warning systems, tank engines and radars, under a staggered timeline was issued in May last year.

In December, the ministry released a list containing 2,500 items, which have already been developed indigenously.

It also released a list of 351 equipment that will be developed within the country by December 2024.

The minister in his reply mentioned the lists and the government’s priorities.

“The positive indigenisation list comprises defence equipment which will be designed, developed and manufactured over a period from 2020 to 2025,” he said, adding that the it was not possible to assess at this juncture the actual on account of the decision to not import the items.

“However, as per available projections, it is estimated that over approximately Rs 5 lakh crore worth of equipment included in both the positive indigenisation lists will be procured from domestic industry over the next five to seven years,” he said.

In the last few years, the government has taken a series of measures to boost domestic defence manufacturing.

In May last year, the government announced increasing the FDI limit from 49 per cent to 74 per cent under the automatic route in the defence sector.

India is one of the largest importers of arms globally.

According to estimates, the Indian armed forces are projected to spend around USD 130 billion (one billion is equal to 100 crores) in capital procurement in the next five years.

The government now wants to reduce dependence on imported military platforms and has decided to support domestic defence manufacturing.

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.

The government on Monday said that a total of Rs 3,343 crore has been received as foreign direct investment (FDI) in the defence sector since 2014.

In response to a question in Rajya Sabha, Defence Minister Rajnath Singh said the defence sector needs continuous investment for capacity enhancements and the creation of state-of-the-art technologies.

“During the period from 2001-2014, a total FDI inflow of about Rs 1,382 crore was reported and from 2014 till date, a total FDI of about Rs 3,343 crore has been reported,” he said.

To a separate question, Minister of State for Defence Ajay Bhatt said the “term ‘Matryr’ is not used in Indian Armed Forces.”

He was asked about the definition of martyr and whether the government has stopped the use of the word for those who made supreme sacrifices in the line of duty.

Asked whether the government is considering a system of conferring letters of acknowledgement from the President and the Prime Minister’s Office on the families of armed forces personnel killed in action, Bhatt said no such proposal has been received for consideration.

To another question, Bhatt said the government created the Defence AI (Artificial Intelligence) Council (DAIC) in 2019 for providing necessary guidance to enable and effect the development of an operating framework for the adoption of the application of AI in the defence sector.

He said all the three services have established institutional mechanisms in the form of AI Sub Committee and Joint Working Group on AI.

“As part of the data management framework, the services have formulated data policy and appointed data management officers,” he said.

Bhatt also said that the budget allocated and utilised in the past three years for the research and development of indigenous defence aircraft was Rs 3,280 crore and Rs 2,835 crore respectively.

He said 100 per cent rate of success has been achieved for the various research carried out for the development of indigenous defence aircraft.

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Reiterating its commitment to promote indigenization, 68% of the capital procurement has been proposed to be earmarked for domestic industry in 2022-23, up from 58% in 2021-22.

Further, 25% of the R&D budget has been earmarked for industry, start-ups, and academia. Private industry will be encouraged to take up design and development of military platforms and equipment in collaboration with DRDO and other organizations through SPV model. This step should incentivize industry led research towards development of military platforms and encourage collaborative efforts in a PPP mode with DRDO and other research institutions in the country.

Prescribing sunset date of 31 March 2023 for existing exemption available on specific imports in relation to defence and internal security forces is a measure to promote the domestic industry and reduce reliance on imports.

Highlights

* 12.82% increase in capital outlay allocation.
* Nodal Body – testing and certification
* Continuing the focus on reduction of defence imports and increasing  private participation
* Encouraging private sector to collaborate with DRDO.

How does the budget impact  defence sector? 

* Defence allocation for FY 2022-23 is accounted under four demands for grants:
* Demand No 19 – Ministry of Defence (Civil)
* Demand No 20 – Defence Services (Revenue)
* Demand No 21 – Capital outlay on defence services
* Demand No 22 – Defence Pensions

The total defence budget (excluding defence pensions) for FY 2022-23 amounts to USD54.20 billion (INR4,05,470.15 crores). Budgetary allocation towards capital and revenue expenditure stands at USD20.36 billion (INR1,52,369.61 crores) and USD31.14 billion (INR2,33,000.54 crores), respectively.

Brief on Capital Expenditure

* Modernization of military forces is primarily driven by the capital outlay within each year’s budget. Budgetary allocation towards capital expenditure for this year is US$20.36 billion (INR 1,52,369.61 crores). 

* Current capital budget in INR terms is 12.82 % higher than that of 2021-22 (BE). 

* Indian Navy and Indian Air Force have witnessed an increase of ~43% and ~4% of their capital budget respectively over 2021-22 (BE), whereas Indian Army’s allocation has reduced by ~12%.

* Closer examination of capital expenditure budget in INR terms for Aircraft and Aeroengines shows almost ~50% reduction in case of Army, whereas there is an increase of ~21% and ~7% for Indian Air Force and Indian Navy respectively under this head. 

* At the RE (2021-22) stage, both Indian Navy and Indian Air Force utilized more than what was allocated at the BE (2021-22) stage. Indian Army had spent ~69% of its allocation at the RE (2021-22) stage. 

Brief on Revenue Expenditure

* Revenue budget estimates for 2022-23 have increased by 10% as compared to 2021-22 (RE).

* When measured in INR currency terms, Army has witnessed an increase of 10% in budget allocations compared to 2021-22 (RE). Navy has witnessed 8% increase and Air Force has witnessed a 7% increase of allocation during the same period. 

* Overall, the revenue budget has increased by 10% over 2021-22 (RE).

Key amendments

Customs 

* Several changes to duty rates aligned to ‘Make-in-India’ and ‘Atmanirbhar Bharat’ policy.

* Measures taken for simplification of Customs tariff structure for products including helicopters, parts of manned/ unmanned aircraft etc. The simplified Customs tariff structure to come into effect from 1 May 2022.

* Sunset date of 31 March 2023 specified for existing exemption available on specific imports in relation to Defence and internal security forces.

GST 

* Legislative changes proposed to introduce additional restrictions for availing Input Tax Credit (ITC).  

* Time limit for availing credit and issuance of credit note extended to 30 November.

Impact Analysis

This financial year builds up very strongly with the beginning of a new decade for an Atmanirbhar Bharat (Self-reliant India).  While a 12.82% increase over 2021-22 (BE) in the capital outlay continues to emphasize the importance of modernization of the Indian Armed Forces, there is a significant reduction as compared to a phenomenal 18.75% increase that was seen in the first year of the decade. However, a reservation of 68% of the capital budget for domestic procurement solidifies India’s resolve for an Atmanirbhar Bharat. This is an increase of 10% which was spent for domestic procurement in the current year. As we aim to achieve a US$5 trillion economy with US$25 billion (INR 1,75,000 crore) de-fence production by 2025, this allocation is a giant step towards that goal.

For the first time, a reservation has been made for R&D in defence. The dedicated allocation of 25% in R&D, while encouraging new capabilities in creating and sustaining technologies, shall aid in creating an IP culture. Thus, an increased focus on IP management, output-oriented Industry research in academic institutions and possible collaborations with foreign research labs and centers shall lead to create cutting edge technologies.

With Buy IDDM being the category of highest priority in defence acquisition, this allocation finds synergy with the other stated policies of the GoI, thereby encouraging domestic design to go hand in hand with domestic production.

Domestic demand shall increase with the aforementioned reservations, hence placing an enormous responsibility on domestic suppliers to meet the challenge placed by the Armed Forces. This will indirectly increase capacities, new production facilities, increased collaborative framework with Foreign OEMs, more JVs, and enhanced investments (FDI). FOEMs, of those, who can appreciate the increased focus on domestic spending, shall be lured to find Indian design and production houses for technology transfers, teaming arrangements and a favorable environment to establish production base in India. The spiraling effect shall also be felt in the exports and thus in the economy, with a vibrant industry ready to meet global demands.

Indian Navy’s allocation has witnessed the highest increase (~43%) of allocation of the capital budget amongst the three forces. The allocation under the naval fleet has almost doubled. This is attributed to the major platforms that are likely to be inducted in the near future. These include the Indian Aircraft Carrier, frigates under Project 15B, P 17A, Project 1135.6 and Scorpene Submarine amongst others. Increased 43% allocation suggests a renewed focus in the Indian Ocean Region (IOR). Increase in allocation for Aircraft and Aeroengines for Indian Navy could indicate procurement of fighter aircraft for the Indian Aircraft Carrier (IAC).

Indian Army’s allocation has reduced by 12% in comparison to 2021-22 (BE) with Aircraft and Aeroengines reducing by half. The major committed liabilities include MBT Arjun Mk1A, AK-203 rifles, ATGMs amongst others.

Indian Air Force has witnessed a marginal increase of 4% over 2021-22 (BE) indicating that leasing of BTA and MRTT could be progressed with majority of the budget being utilized for committed liabilities like the Rafales and S-400 Triumf systems.

After the corporatization of the Ordnance Factory Board (OFB) last year, no allocation has been made for the Defence Ordnance Factories (OFs). An allocation of INR13.1 b has been made for the 7 new DPSUs. As against an average of INR6 b each year to the OFs under capital budget, there is more than a 100% increase post corporatization.

Glossary

BE- Budgetary Estimate
IDDM- Indigenously designed, developed and manufactured
GoI – Government of India
RE- Revised Estimate
R&D – Research and Development
DRDO – Defence Research and Development Organisation
SPV – Special Purpose Vehicle
OEM – Original Equipment Manufacturer

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Singh said that over the 6-7 years the Indian defence industry will get contracts worth almost four lakh crore. The current contract of items that were taken by the tri-services between 2015 and 2020 from the embargo list cost Rs 3.5 lakh crore.

The union defence minister said that the decision to achieve self-reliance in the defence manufacturing sector and said the announcement was made early to allow time for the armed forces to acclimatise and also to provide time to domestic industries for preparation.

Rajnath Singh said that the decision to embargo 101 items will give a big boost to India’s self-reliant initiatives in the defence sector. Singh said that this presents an opportunity for the nation’s defence industry to manufacture the items in the embargoed list by using their own design or by adopting the technologies developed by the DRDO.

Rajnath Singh highlighted that the domestic defence industry can expect defence contracts worth Rs 4 lakh crores to be given to them within the next 6-7 years.

Union minister said that the list of embargoed items was made after holding discussions with several stakeholders which included public & private industry members along with the armed forces. The exercise was conducted to assess the current capability and ability to handle demand in the future.

The list of embargoed items include artillery guns, LCH, sonar weapons system, high-tech weapons systems, corvettes, assault rifles, transport aircrafts and armoured fighting vehicles.

The office of the defence minister said that the measures will be implemented within 2020 to 2024. The announcement was made early to apprise the Indian defence industry of the need and requirements for India’s armed forces.

The defence ministry also said that the Indian Navy and Air Force will receive items worth almost Rs 1,30,000 crore from the list of items and the Navy shall receive items worth almost Rs 1,40,000 crore. The Army is also expected to import wheeled 200 Armoured Fighting Vehicle worth Rs 5,000 crore each whose embargo date is December 2021.

The defence minister also said that the ministry will hand hold the defence industry and co-ordinate a mechanism to make sure that timelines are met for domestic production of the items which are on the embargoed list.

Singh said the identification of further items which could be added to the embargoed list shall continue.

Source

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