Defence reforms: Indian manufacturers looking to ride the opportunity

FM Nirmala Sitharaman had announced a series of measures to boost investments in India's defence and aerospace sector last week as part of the tranche 4 of the Rs 20 trillion economic stimulus

The recent reforms announced in the defence sector are set to give clarity on the procurement strategy. This, in turn, will give Indian companies an opportunity to plan their investment and capacity, said officials at the Mahindra group and Larsen & Toubro (L&T).

Be it a separate budget for domestic capital procurement, stopping phase-wise import of equipment or sourcing the spares locally, all these measures will boost Make in India, they said. S P Shukla, group president — aerospace, defence, agri & steel sectors — at the Mahindra group, said, “What has been announced is a wholesome package with short, medium and long term elements. It will take the local procurement of parts and equipment upwards of 40 per cent.”

Mahindra Group, which has presence in all the three segments of the defence sector, will be investing in creating capacities for manufacturing once the government announces the list of items that can be sourced locally. “Many of these items will be of interest to us,” said Shukla.

Finance Minister Nirmala Sitharaman had announced a series of measures to boost investments in India’s defence and aerospace sector last week as part of the tranche 4 of the Rs 20 trillion economic stimulus.

Sitharman, who held the defence portfolio in the first Narendra Modi-led government, announced increase in foreign direct investment (FDI) limit in defence from the existing 49 per cent to 74 per cent.

Apart from the creation of a negative import list, the FM also made a separate budget allocation for acquiring indigenous capital goods.

“Separate budgets for domestic purchase and imported goods are a welcome move and will allow Indian companies to plan capacity and production accordingly. Otherwise, one didn’t know how much will be available for domestic procurement,” said Shukla.

He added that local procurement of spares will be yet another important step in creating strategic independence and reducing downtime and costs. It will benefit small and medium enterprises (SMEs) and also open avenues for exports for manufacturers, he said. As of now, there are no restrictions with regard to import of spares.

Agreed J D Patil, whole-time director (defence & smart technologies) and senior executive vice-president, L&T. He said, “This will bring in renewed focus on indigenous defence production as well as build confidence of Indian private sector companies to invest and build capability. It also provides assurance to the supply chain ecosystem of continued utilisation of built-up capacity. It is hoped that this part of the budget will grow in percentage share, year on year.”

It will protect the indigenous programmes that have seen repeated deferment, given the budget constraints caused by big-ticket government-to-government contracts that have been entered into as urgent requirements.
 

Patil said the local procurement of spares will open up significant opportunities, especially for ministry of micro, small & medium enterprises (MSMEs). The move would maximise indigenisation of imported spares with tie-ups with original equipment manufacturers (OEMs) instead of importing them.

He added that the government should notify the list of banned weapons and platforms with well-defined phase and year-wise timelines in advance. This will provide a clear road map to the industry to build capacity and capability as well as foster indigenous research and development and innovation.
 

India gives orders worth $100 billion a year for defence procurement, making it one of the world’s most lucrative markets. Net foreign direct investment (FDI) inflows grew 14.2 per cent in 2018-19. The top sectors attracting FDI equity inflows are services, automobiles and chemicals.
 

The increase in FDI limit from 49 per cent to 74 per cent will also cover strategic projects. These large projects could also be awarded to foreign companies. Therefore, Indian firms will have to compete and this could be an area of concern, he said.

“While the reforms are positive, the FDI increase could be a concern for local companies,” said Laxman Kumar Behera, research fellow at Manohar Parrikar Institute for Defence Studies and Analyses.