How small tweaks in policy are drawing domestic and global firms to defence manufacturing
It is not headline-grabbing moves such as designating the private sector as 'strategic partners' but tiny fixes in government policy that are firing up India's defence equipment making industry. These tweaks, or the "untying of knots" as defence minister Manohar Parrikar calls them, have gone largely unnoticed in the blare of new procurement policy and big-ticket Make in India projects.
In July 2015, the defence ministry eased export regulations and stopped demanding multiple assurances on end-use from foreign governments even for sale of components by Indian entities. Global manufacturers source components from across the world, finally integrating the systems at a central facility. A small part exported by an Indian entity to, say, Germany could well find its way into a component that is then exported to the UK before finally making its way into an American fighter aircraft. Earlier rules required Indian firms to get certificates of assurance from all governments in the 'chain'.
Often small-and-medium enterprises lost out on international orders for parts and spares as foreign buyers rarely agree to such cumbersome procedures. The change in the rule opened up several sectors, including armoured equipment, weapon control systems, countermeasure equipment, engines, underwater detection devices and military software, for exporters. The results were immediate.
Private companies exported military stores worth Rs 441 crore in the first six months of the current financial year; a four-fold increase over the last year when Rs 132 crore worth of exports were done in the entire financial year. Analysts say this will rise further by the end of this financial year as several projects are in the pipeline. For instance, an order for bullet proof jackets worth Rs 200 crore to a South East Asian nation is at an advanced stage of negotiation.
Untangling Offsets
The United Progressive Alliance government had introduced an 'offsets policy' that required overseas companies winning Indian military contracts to invest at least 30 per cent of the contract value in the local defence or aerospace industry. However, most projects were hobbled by cumbersome permissions and monitoring processes.
In August last year, the government made sweeping changes to the policy allowing foreign companies more flexibility in choosing local partners and allocating work. The changes helped unlock $3.5 billion in foreign investments that were stuck due to the tough offset policy clauses. Now, foreign companies can select partners and give out contracts at the 'execution stage' instead of several years before.
They can change partners easily and the execution of offsets is less restrictive with minimal government control.
The amendments are likely to revive over $4.5 billion of work orders that have been signed under the offsets policy since 2008. Only about a fourth of the orders have been executed so far. The ministry also restored 'services' as eligible offsets for military contracts. The reinstatement of services, which were kept out of the offsets policy after allegations of corruption clouded a $530 million, 12-chopper deal that involved some service providers, came as a booster to the maintenance, repair and overhaul industry and companies involved in modernisation of military systems and lifeextension projects.
Even offsets in software development were restored. The new policy also encourages global manufacturers to set up joint ventures in India. Joint ventures now also enjoy conditional exemption from the offsets rule for capital acquisitions, creating a level-playing field with purely Indian firms.
Push for Indigenous R&D
In early January, defence minister Parikkar revealed some parts of a new Defence Procurement Procedure (DPP) that is in the works. DPP-2016, as the new framework would be called, raises the contract threshold for offsets from Rs 300 crore to Rs 2,000 crore. That means companies signing contracts up to Rs 2,000 crore would not have to bear the offset obligation.
"We currently have signed offsets worth $5 billion and another $8 billion is in pipeline. We may not be able to absorb all of this. Moreover, offsets also increase the cost of the product by 14-18 per cent," Parikkar had explained.
The minister had stated that upcoming changes could include defining strategic partners from the private sector for major manufacturing projects and promoting locally designed weapon systems. A new indigenously designed, developed and manufactured (IDDM) category could be introduced in procurement.
Indian companies, especially debutants in the defence industry, are most happy with the licensing process. In June 2015, the government issued a record 56 licences, permitting players such as the Mahindras, Tatas and Pipavav to set up production units. In comparison, the previous government cleared just 47 projects in three years.
Indian firms are now also protected from currency fluctuations. Earlier, companies participating in military tenders under the 'Buy Indian' and 'Buy and Make Indian' route had to freeze rates at the time of bidding. That put them at a disadvantage because of the currency risk. The amended procurement rules protect them from variations in foreign exchange rates.
The best, officials involved in the process say, is yet to come. The government may favour plans like funding 90 per cent of the developmental cost of select new weapon systems by the private sector. It may also provide private companies a 20 per cent 'mobilisation advance', an upfront payment to start developmental work for new military systems sought by the armed forces. The industry is hoping that defence minister would deliver on his statement at the ET Global Business Summit.
"I believe that the less the government is in any manufacturing sector, the faster it will progress," he had said. The nuts and bolts are now in place and the wait is on for the government to sign off orders. Soon, Indian forces may be firing artillery guns made by L&T or flying transport aircraft built by a Tata-Airbus combine.
Make in India: How small tweaks in policy are drawing domestic and global firms to defence manufacturing - The Economic Times
It is not headline-grabbing moves such as designating the private sector as 'strategic partners' but tiny fixes in government policy that are firing up India's defence equipment making industry. These tweaks, or the "untying of knots" as defence minister Manohar Parrikar calls them, have gone largely unnoticed in the blare of new procurement policy and big-ticket Make in India projects.
In July 2015, the defence ministry eased export regulations and stopped demanding multiple assurances on end-use from foreign governments even for sale of components by Indian entities. Global manufacturers source components from across the world, finally integrating the systems at a central facility. A small part exported by an Indian entity to, say, Germany could well find its way into a component that is then exported to the UK before finally making its way into an American fighter aircraft. Earlier rules required Indian firms to get certificates of assurance from all governments in the 'chain'.
Often small-and-medium enterprises lost out on international orders for parts and spares as foreign buyers rarely agree to such cumbersome procedures. The change in the rule opened up several sectors, including armoured equipment, weapon control systems, countermeasure equipment, engines, underwater detection devices and military software, for exporters. The results were immediate.
Private companies exported military stores worth Rs 441 crore in the first six months of the current financial year; a four-fold increase over the last year when Rs 132 crore worth of exports were done in the entire financial year. Analysts say this will rise further by the end of this financial year as several projects are in the pipeline. For instance, an order for bullet proof jackets worth Rs 200 crore to a South East Asian nation is at an advanced stage of negotiation.
Untangling Offsets
The United Progressive Alliance government had introduced an 'offsets policy' that required overseas companies winning Indian military contracts to invest at least 30 per cent of the contract value in the local defence or aerospace industry. However, most projects were hobbled by cumbersome permissions and monitoring processes.
In August last year, the government made sweeping changes to the policy allowing foreign companies more flexibility in choosing local partners and allocating work. The changes helped unlock $3.5 billion in foreign investments that were stuck due to the tough offset policy clauses. Now, foreign companies can select partners and give out contracts at the 'execution stage' instead of several years before.
They can change partners easily and the execution of offsets is less restrictive with minimal government control.
The amendments are likely to revive over $4.5 billion of work orders that have been signed under the offsets policy since 2008. Only about a fourth of the orders have been executed so far. The ministry also restored 'services' as eligible offsets for military contracts. The reinstatement of services, which were kept out of the offsets policy after allegations of corruption clouded a $530 million, 12-chopper deal that involved some service providers, came as a booster to the maintenance, repair and overhaul industry and companies involved in modernisation of military systems and lifeextension projects.
Even offsets in software development were restored. The new policy also encourages global manufacturers to set up joint ventures in India. Joint ventures now also enjoy conditional exemption from the offsets rule for capital acquisitions, creating a level-playing field with purely Indian firms.
Push for Indigenous R&D
In early January, defence minister Parikkar revealed some parts of a new Defence Procurement Procedure (DPP) that is in the works. DPP-2016, as the new framework would be called, raises the contract threshold for offsets from Rs 300 crore to Rs 2,000 crore. That means companies signing contracts up to Rs 2,000 crore would not have to bear the offset obligation.
"We currently have signed offsets worth $5 billion and another $8 billion is in pipeline. We may not be able to absorb all of this. Moreover, offsets also increase the cost of the product by 14-18 per cent," Parikkar had explained.
The minister had stated that upcoming changes could include defining strategic partners from the private sector for major manufacturing projects and promoting locally designed weapon systems. A new indigenously designed, developed and manufactured (IDDM) category could be introduced in procurement.
Indian companies, especially debutants in the defence industry, are most happy with the licensing process. In June 2015, the government issued a record 56 licences, permitting players such as the Mahindras, Tatas and Pipavav to set up production units. In comparison, the previous government cleared just 47 projects in three years.
Indian firms are now also protected from currency fluctuations. Earlier, companies participating in military tenders under the 'Buy Indian' and 'Buy and Make Indian' route had to freeze rates at the time of bidding. That put them at a disadvantage because of the currency risk. The amended procurement rules protect them from variations in foreign exchange rates.
The best, officials involved in the process say, is yet to come. The government may favour plans like funding 90 per cent of the developmental cost of select new weapon systems by the private sector. It may also provide private companies a 20 per cent 'mobilisation advance', an upfront payment to start developmental work for new military systems sought by the armed forces. The industry is hoping that defence minister would deliver on his statement at the ET Global Business Summit.
"I believe that the less the government is in any manufacturing sector, the faster it will progress," he had said. The nuts and bolts are now in place and the wait is on for the government to sign off orders. Soon, Indian forces may be firing artillery guns made by L&T or flying transport aircraft built by a Tata-Airbus combine.
Make in India: How small tweaks in policy are drawing domestic and global firms to defence manufacturing - The Economic Times
Last edited:
