India has the third largest standing army in the world. According to the World Bank data India spends close to 2% of its GDP on defense. With a defense budget of $55 billion of which 31.1% is allocated to capital acquisitions and a population of highly skilled workers, India remains one of the most preferred destinations for defense manufacturing. 60% of the defense-related requirements are met by imports which offers a huge opportunity for import substitution.
Reasons to Invest
Currently, most of India’s defense requirements are catered largely by imports. The opening up of defense sector for private sector participation under the government’s strategic partnership model will help the foreign original equipment manufacturers to enter into strategic partnerships with the Indian companies and leverage the domestic markets as well as aim at global markets. Besides helping in building domestic capabilities, this will also bolster the exports in long term.
India’s defense procurement procedure mandates to OEM to invest minimum 30% of the amount back in India for procurement of defense equipment which cost more than USD 306.69 million because of which it is predicted that in the next 5-6 years there will be contractual offset obligation worth $4.53 billion.
The new government policy promotes self-reliance, indigenization, technology upgradation and achieving economies of scale including the development of capabilities for exports in the defense sector.
The country under its new leadership has drawn up an extensive modernization plan with an increased focus on homeland security, which opens doors of opportunities for both Indian and global manufacturers to reap the benefits of both.
India has the third largest armed force in the world.
India is one of the largest importers of conventional defense equipment and sends about 31.1% of its total defense budget on capital acquisitions.
About 60% of its defense requirements are met through imports.
The allocation defense in the union budget 2017-18 is approximately USD 55 billion.
Defense Production Policy, 2011 has encouraged indigenous manufacturing of defense equipment. Defense Procurement Procedure (DPP) has been amended in 2016 and includes the following policies added to it:
A new category of capital procurement – Buy Indian – IDDM (Indigenously Designed, Developed and Manufactured) which is introduced to encourage indigenous design, development, and manufacturing of defense equipment.
Preference is to be given to ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’ and ‘Buy and Make in India’ over ‘Buy (Global)’ categories of capital acquisition.
Clear and unambiguous definition of indigenous content in the defense equipment purchased by the armed forces.
Provision for Maintenance TOT (Transfer of Technology) to Indian Industry partners which adds to the growth of the economy and develop India’s defense manufacturing and maintenance industry.
Provisions are provided for the foreign OEM (Original Equipment Manufacturer) to select Indian Production agency.
The minimum percentage of indigenous content in defense equipment sourced from foreign countries has been enhanced/rationalized.
‘Services’ as an avenue for discharging offsets have been re-introduced which includes –
Defense products list for industrial licensing has been articulated in June 2014, wherein large numbers of parts/components, casting/forgings etc. have been excluded from the purview of industrial licensing.
The defense security manual for the private sector defense manufacturing units has been finalized and put in public domain by the Department of Defence Production. The manual clarifies the security architecture required to be put in place by the industry while undertaking sensitive defense equipment.
The MAKE procedure, which aims to promote research & development in the industry with support from the government and the placement of orders, has been promulgated with provision for 90% funding by Government and preference to MSMEs in a certain category of projects.
100% Foreign Direct Investment (FDI) is allowed in the defense sector, where up to 49% is available under automatic route and FDI above 49% is allowed after a case to the case study by the GOI; where it is likely to result in access to modern technology.
The defense industry is subject to industrial license under the Industries (Development and Regulation) Act, 1951 and manufacturing of small arms ammunition under Arms Act, 1959.
The policy has been amended to remove the clause which mandates a single largest Indian ownership of 51% of equity.
A lock-in period of three years on equity transfer has been done away with in FDI for defense.
FDI in the defense sector is subject to other security conditions.
The defense procurement is governed by the Defence Procurement Procedure (DPP 2016).
The latest revision of DPP was released in March 2016.
The key objectives of the defense offset policy are to leverage capital acquisition to develop the domestic defense industry. Mandatory offset requirements of a minimum of 30% for procurement of defense equipment in excess of $ 307.69 million have been envisaged.
Procedures for the Grant of Industrial Licenses have been streamlined:
The initial validity period of an industrial license has been increased from 3 years to 15 years with a provision to grant an extension for a period of 3 years.
Guidelines for the extension of validity of industrial licenses have been issued.
Partial commencement of production is treated as the commencement of production of all the items included in the license.
Key Provisions of The 2016-17 Union Budget
Provision of $52.2 billion for the defense services in the FY 2016-17 Union Budget.
Capital outlay for Defence in 2016-17 is kept at $ 12.09 billion.
Out of this $ 10.75 billion has been allocated for Capital Acquisition of the defense services.
$ 1.33 billion has been provided under “Other than Capital Acquisition” segment for capital expenditure to Army, Navy, Joint Staff and Air Force.
Either of the following two deductions can be availed:
Investment allowance (additional depreciation) at the rate of 15% to manufacturing companies that invest more than USD 15.38 million in plants and machinery acquired and installed between 1st of April 2013 to 31st of March 2015, provided the aggregate amount of investment in the new plants and machinery during the said period exceeds $15.37 million.
In order to provide a further fillip to companies engaged in the manufacture of an article or thing, the said benefit of additional deduction of 15% of the cost of new plants and machinery is applicable on machineries which exceeds the USD 3.84 cap and are acquired and installed during any previous year until 31st of March 2017.
R&D Incentives – Industry/private sponsored research programs have been introduced.
A weighted tax deduction is given under Section 35 (2AA) of the Income Tax Act.
A weighted deduction of 200% is granted to assess for any sums paid to a national laboratory, university or institute of technology, or specified persons with a specific direction that the said sum would be used for scientific research within a program approved by the prescribed authority.
For companies that are engaged in the development of an in-house R&D centre and product, a weighted tax deduction of 200% under Section 35 (2AB) of the Income Tax Act for both capital and revenue expenditure incurred on scientific research and development. Expenditure on land and buildings are not eligible for deduction.
Apart from the above-mentioned incentives, each state in India offers additional incentives for industrial projects. Incentives are in the form of subsidized land cost, relaxation in stamp duty, exemption on sale/lease of land, power tariff incentives, concessional rates of interest on loans, investment subsidies/tax incentives, backward areas subsidies and also special incentive packages for mega projects.
The export promotion capital goods scheme,
Duty remission scheme,
Focus product scheme, special focus product scheme, focus market scheme,
Incentives as per ‘merchandise Exports from India Scheme (MEIS)’ under new Foreign Trade Policy.
Incentives are available for unit’s set up in Special Economic Zones (SEZs) / National Investment & Manufacturing Zones (NIMZs) as specified in respective Acts or for those in special areas such as the North-east, Jammu & Kashmir, Himachal Pradesh, and Uttarakhand.
Investment Opportunities are available in Defence products manufacturing and supply chain sourcing opportunity.
BAE India Systems (UK),
Lockheed Martin (USA),
Boeing India (USA),
Israel Aerospace Industries (Israel),
Rafael Advanced Defence Systems Ltd. (Israel),
Dassault Aviation SA (France).
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