The prime minister recently highlighted the many challenges attached to defence import as he exhorted Indian industry to work towards atmanirbharta in defence production. Although the soundness of complete self-reliance, especially in a technology-heavy sector such as defence equipment, is debatable, even the staunchest critics of such an approach wouldn’t deny the importance of domestic capacity. This is more so in a context like India’s dependence on supply from Russia forcing its hand in not taking a more forceful stand on the war against Ukraine. The clubby overtures Russia and China have made at each other recently should cause India some discomfiture.
The Centre, without doubt, has made certain bold moves towards encouraging domestic manufacturing. It has worked to reduce the defence import bill—between 2011-15 and 2016-20, the bill came down by a third. The Defence Acquisition Policy (DAP) 2020 and the draft Defence Production and Export Policy (DDEP) 2020 were designed to enthuse industry. DAP 2020 pushed up the indigenous content requirement for various procurement categories while the DDEP aims to grow procurement from domestic players, public sector and private, from Rs 80,000 crore in FY20 to Rs 140,000 crore by 2025. Indeed, the announcement of nine projects for domestic industry under the Make I and II categories under the DAP last week is further endorsement of atmanirbharta by the government. In the last seven years, domestic manufacturers have got roughly 350 new licences compared to 200 issued between 2001 and 2014. Nearly 200 items are on a negative list for imports, while a positive indigenisation list is expected soon. The government is committing 68% of capital allocation for domestic procurement in FY23, against 58% targetted in FY22, while 25% of the defence R&D budget is earmarked for engaging private industry, start-ups and academia. The share of capital outlay within the defence budget also seems to be on the mend; it is still a shade lower than FY12’s 30%, but shows a healthy recovery from FY19’s 22%.
The big question is whether the sincerity of intentions will have on-ground fruition. Budget numbers can be taken as some manner of litmus—defence capital allocation has fallen, even if marginally, as a share of overall government spending and as a share of the GDP (respectively, from 13.8% in FY21 to 13.3% in FY23 BE and from 2.4% to just over 2%). Given the engagement of the private sector will depend on how the Defence Research and Development Organization is planning its spending calendar, the impact reserving a quarter of the defence R&D budget for private participation will have is not easy to foretell. In any case, the budgetary bump here is a small one; the overall R&D budget for FY23 stands at Rs 11,981 crore versus Rs 11,375 crore budgeted for FY22 and a revised estimate of just Rs 9,875 crore for that year.
A few pain points need addressing. Domestic procurement has to be robust and long-running. The government has been maladroit here, best illustrated by the case of L&T’s gun manufacturing concern flagging order-book issues last year—this looks to have been somewhat resolved. Bear in mind, the government is the only client if there are no export orders. Procurement is beset by systemic and external delays, something that DDEP acknowledges and talks about tackling. However, whether these can be resolved soon remains to be seen. Indeed, the roadblocks may be the reason why FDI in defence manufacturing hasn’t really taken off despite the cap being hiked in September 2020, from 49% to 74% under the automatic route (more, under the approval route, if there is meaningful tech transfer). After all, since the raising of the cap, a mere $2.4 million had come in by December 2021.