Industry risk review by Alea Consulting on Indian Defence Sector

ANI | Updated: Nov 28, 2017 17:09 IST

New Delhi [India], Nov 28 (ANI-NewsVoir): The Indian Army is amongst the top 4 largest armies in the world. In 2015-16 it imported USD 5.5 billion of defence equipment to meet approximately 70 percent of its requirements.

India is executing defence projects using indigenous technologies and skills, including Advanced Towed Artillery Gun System (artillery modernisation), Basic Trainer Aircraft HTT-40 developed by HAL, indigenous naval systems viz. ABHAY, HUMSA UG, NACS and AIDSS for underwater surveillance capability.

India is emerging as a global R&D hub for foreign entities, including for Rockwell Collins, Boeing, Textron GE and Honeywell.

In 2001 the defence sector was opened up to private investment, subject to licensing. Policy initiatives like Raksha Udyog Ratnas (for public/­­­­private companies with expertise), and defence offsets were introduced to promote a competitive eco-system and encourage private participation.

India aims to build a domestic industrial base for defence products and achieve more than 60 percent indigenisation, and is supporting strategic partnerships with foreign OEMs. Modern equipment has a greater emphasis on cyber security, and digital technology approaches to warfare, which provides an opportunity to collaborate with Government organisations like the Defence Research and Development Organisation (DRDO) and Defence Public Sector Undertakings like HAL, Bharat Electronics Ltd., Bharat Dynamics Ltd., Mishra Dhatu Ltd.

Key Statistics:

•In the 2017-18 budget, allocation for defence increased by 6 percent to Rs. 2,580 billion (USD 38 billion). India's Defence budget is about 1.9percent of its GDP.

•About 33percent of defence equipment is manufactured in India, mainly by DPSUs.

•In October 2017 Maharashtra Industrial Development Corporation cleared a plan to invest Rs. 3 billion (US$45 million) towards a VC fund of Rs. 5 billion (USD 75 million) for SMEs with strong growth potential in defence and aerospace manufacturing. India's first Defence Industrial Park will be setup at Ottappalam, Kerala to aid component manufacturers.

•Capital expenditure on procurement of equipment by the three defence services (Army, Air Force and Navy), from Indian vendors has increased from Rs. 315 billion (47percent of total procurement value) in 2013-14 to Rs. 418 billion (60.5percent of TPV) in 2016-17.

•Government has set plans of privatisation in motion with disinvestment of Bharat Earth Movers Ltd.

The Indian defence industry is mostly State-owned and susceptible tonon-competitiveness, delays in finalisation of orders, and sluggishness in improving acquired technologies.

Incentives offered by some States like interest subsidy on external borrowings; exemption on electricity duty; subsidy on construction cost of R&D centre; reimbursement of taxes, stamp duty and land registration charges.

For companies engaged in manufacturing and having an in-house R&D centre, a weighted tax deduction of 200 percent under Section 35(2AB) of the Income Tax Act for both capital and revenue expenditure incurred on scientific research and development is allowed.

Foreign vendors can select Indian Offset Partners and offset product details a year prior to intended discharge of offset obligations or can even undertake the activity and submit claims thereafter.

2016 Defence Procurement Procedure has brought about changes such as introduction of a new category named 'Buy-Indian IDDM' (Indigenously Designed, Developed and Manufactured), alteration in MAKE Procedures, notification of 'Strategic Partnership' model. This will help in speedy procurement, and technology transfers.

Licensing regime liberalised for defence items. Private players can apply to the Commerce Ministry for licences to manufacture defence equipment.

Companies can tie-up with a foreign OEM for Transfer of Technology under 'Buy and Make (Indian)' and 'Buy and Make' categories of capital acquisition to promote 'Make in India.'

A Defence Innovation Fund has been approved, with initial funding by Bharat Electronics Ltd. and HAL.

FDI in the sector is subject to security clearances. Investment up to 49 percent is permitted under the automatic route. Requirement of single largest Indian ownership of 51 percent of equity removed. Lock-in period of three years on FDI equity transfer removed. Contenders for deals include global players from Russia, Israel, Germany, Japan and France.

Under the new strategic partnership model private companies may bid for mega deals viz. submarines, single-engine fighter aircraft, helicopters and armoured vehicles. Entities likely to bid are Larsen & Toubro, Mahindra and Mahindra, Adani Group, Tata Advanced Systems Ltd., and Reliance Defence.

Some new entrants are: CRON Systems Pvt. Ltd.,Comint Systems and Solutions Pvt. Ltd., Ideaforge Technology Pvt. Ltd., Tonbo Imaging India Pvt. Ltd., Viz Experts India Pvt. Ltd.

Indian private companies and publicly funded research laboratories are seeking international partners to make good deficiencies in the sector. There is significant opportunity in the high quality component manufacturing such as resistors, capacitors, diodes; general supplies such as nuts, bolts, washers; special purpose gears; aero-engines, generators/alternators; and electronics such as components for radars, communication equipment. Policies are being synchronised with the changing reality, indicating assurance of orders and encouraging international collaboration. (ANI-NewsVoir)