Defence Procurement: 15% Slice For Private Industry

June 9, 2021

By: Aeromag Asia

In a landmark decision, 15% of the capital procurement budget of India’s Ministry of Defence has been earmarked for direct procurement from private defence industry during 2021-22. According to Ajay Kumar, Defence Secretary of India, the decision would boost the Defence Industry ecosystem, MSMEs and startups in the defence sector in India. In a major stimulus for Indian private industries engaged in the defence sector, the Ministry of Defence under the Government of India has approved earmarking a part of its capital procurement budget for private industry. Making the landmark announcement, Ajay Kumar, Defence Secretary of India, said: “During financial year 2021-22, 15% of the capital procurement budget is targeted for direct procurement from Private Defence Industry.”

Explaining the advantages of the decision, he said: “This is the first time such a target has been given. It will give assurance to private industry of certain quantum of orders, thereby providing a boost to the Defence Industry ecosystem, MSMEs and startups in the defence sector in the country.”

According to Ajay Kumar, “the big decision is aimed at promoting the Defence Industry ecosystem in India under the #Atma Nirbhar Bharat programme.”

The earmarking of 15% of the capital procurement budget for private industry will be in addition to procurements made by Defence PSUs and Ordnance Factory Board (OFB) from private defence industry as part of their needs, the Defence Secretary added.

Earlier, in October 2020, India adopted a new regime for defence systems production and acquisition with focus on self-reliance in defence manufacturing. This policy gave much stress to involving the private industries for achieving crucial production targets, including an annual turnover of Rs 1,75,000 crore and exports of Rs 35,000 crore in the aerospace and defence sector by 2025. In 2018-19, India’s total defence production was Rs 80,558 crore and exports Rs 8,320 crore.

The new initiatives are expected to make India depend less on imports to meet its defence requirements. At present, India is far from being self-reliant in this sector. Data from the Stockholm International Peace Research Institute says even though India’s arms imports declined by 32% in the five-year period from 2015-19, as compared to 2010-14, the country remained the second-largest arms importer in the world. In exports, India ranks 23rd in the global market, having a mere 0.2% share. Not surprisingly, to achieve the targets set for 2025, India’s private sector would have to play an enhanced role along with the defence public sector undertakings and ordnance factories.

The Government of India is already promoting the private sector under the ‘Make in India’ initiative. Till now, most of these projects belonged to the category of ammunition, including rockets and bombs; and surveillance and tracking systems. However, as a majority of India’s defence imports are items built utilizing much advanced technologies such as fighter aircraft, helicopters, naval guns and anti-submarine missiles, the country is facing a huge challenge in reducing imports. Involving the private sector would be a solution to the issue.

In fact, data shows that since 2016-17, there has been a gradual shift away from the public sector to the private sector in the country’s total defence production. The share of the private sector has risen from 19% in 2016-17 to 22% in 2018-19. In the same period, the share of the public sector has decreased from 75% to 72%.

In India, defence production remained in the public sector for long. It was only in May 2001 that the defence sector was opened up to 100% for Indian private sector participation, with foreign direct investment (FDI) up to 26%, but both were subject to licensing. In 2016, FDI under automatic route was allowed up to 49%. For above 49%, a condition of access to modern technology was in place. In 2020, the government relaxed the FDI limit under the automatic route to 74%, but it also inserted a ‘national security’ clause, retaining the right to review any deal.

The Defence Procurement Procedure (DPP)-2016 introduced several reforms that benefited the private sector, among which the Strategic Partnership Policy (SPP) was significant. This allowed Indian private sector companies to partner with foreign original equipment manufacturers (OEMs) to jointly manufacture fighter jets, helicopters, submarines and armoured vehicles.

Meanwhile, the policy of 2020 introduced a new category termed ‘Buy (Global-Manufacture in India)’ to encourage foreign OEMs to setup ‘manufacturing or maintenance entities through its subsidiary in India.’ This policy encouraged the manufacture of the entire equipment rather than just components and spares.

Earlier, in 2004, the Government of India had constituted a committee headed by Vijay Kelkar to recommend changes needed in defence acquisition procedures and in its report, released in 2005, the panel encouraged the involvement of the country’s best private firms in defence manufacturing.

The earmarking of 15% of the Defence Ministry’s capital procurement budget for private industry is the latest initiative in this direction.