DEFENCE PRODUCTION ANDEXPORT PROMOTION POLICY 2020

1. WHY IN THE NEWS

NEWS: • The Ministry of Defence (MoD) has formulated a draft Defence Production and Export Promotion Policy 2020 (DPEPP-2020).

• The DPEPP 2020 is drafted as an overarching guiding document to provide a significant thrust to the defence production ofIndia.

• This is a step towards the 'Atmanirbhar Bharat Package'.

• The policy aims to achieve a turnover of Rs 1,75,000 Crores (US$ 25Bn) including export of Rs 35,000 Crore (US$ 5 Bn) inAerospace and Defence goods and services by 2025.

• It is envisioned to reduce dependence on imports, to promote export of defence products and to take forward "Make in India" initiatives through domestic design and development.

2. HOW MUCH INDIA SPENDS IN DEFENCE AS COMPARED TO OTHER SECTORSThe ministries with the 13 highest allocations account for 53% of the estimated total expenditure in 2020-21. theMinistry of Defence has the highest allocation in 2020-21, at Rs 4,71,378 crore. It accounts for 15% of the total budgetedexpenditure of the central government. Other Ministries with high allocation include: (i) Home Affairs, (ii) Agriculture andFarmers’ Welfare, (iii) Consumer Affairs, Food and Public Distribution, and (iv) Rural Development.

Source: Union Budget 2020-21

3. WHAT IS BUDGET FOR DEFENCE IMPORTS• The expenditure on defence constitutes 15.5% of the central government’s budget and 2.1% of India’s estimated GDP

for 2020-21.

• The budget of Ministry of Defence is estimated to grow by 5% in 2020-21 over revised estimates of 2019-20. • The increase is highest for defence pensions, which is expected to grow at 13.6%. • Allocations on salaries have increased by 5.6% and allocation for the capital outlay component of the budget has

increased by 1.4% over the revised estimates of 2019-20.Note: Capital outlay includes expenditure on construction work, machinery, and equipment such as tanks, naval vessels,

etc.

• In 2020, India with third largest annual defence budget (US$70 b) behind USA (US$732 b) and China (US$261 b), andsecond largest defence imports behind Saudi Arabia making up 9.2% of global arms import, also has IN80,000 domesticdefence industry out of which 80 percent of which is government owned public sector including DRDO and its 50 labs, 4 defence shipyards, 5 defence PSUs and 41 ordnance factories.

The total procurement from foreign and Indian vendors during 2014-15 to 2018-19 is as follows:

• According to Stockholm International Peace Research Institute (SIPRI) identified 160 states as importers of major arms in

2015–20.

• The five largest arms importers were Saudi Arabia, India, Egypt, Australia and China, which together accounted for 36

per cent of total arms imports.

• Over the last 10 years (2010-11 to 2020-21), the budget of the Ministry of Defence has grown at an annual average rate

of 9%. The year-wise budget of the Ministry is shown below in Figure 1.

Figure 1: Budget of Ministry of Defence (2010-11 to 2020-21) (in Rs crore)

Figure 2: International comparison of defence expenditure (2018) (in USD Billion)

3. WHAT IS MAKE IN INDIA POLICY OF DEFENCE AND HOW IT CAN BOOST EXPORTS

➢ What is ‘Make in India Policy of Defence’?The ‘Make in India’ initiative is focusing on increasing indigenous defence manufacturing and becoming self-reliant.

➢ How it can boost exports?• The idea is to bring down India’s large weapons import bill and while certain high technology systems will still be

procured from abroad, emphasis will be on procuring locally made products.

• The long pending corporatisation of the Ordnance Factory Board (OFB) has been approved that will enable them to cutcosts and overheads for more efficient operations.

• The opening up of the defence sector for private sector participation is helping foreign original equipment manufacturers(OEMs) enter into strategic partnerships with Indian companies and leverage opportunities in the domestic market as wellas global markets.

• DPP2020 relies on the emerging dynamism of the Indian industry to build domestic capabilities for designing, developingand manufacturing defence equipment.

• A negative list of weapons/platforms would be notified with year-wise timelines for placing an embargo on import of suchitems from those dates. This list would be updated periodically, without compromising on the operational requirementsof the Services, to allow lead-time to industry to prepare itself for any such procurement which is likely to come up,subsequent to the indicated embargo date.

• A Technology Assessment Cell (TAC) would be created. It would assess the industrial capability for design, developmentand production, including re-engineering for production of major systems such as armoured vehicles, submarines, fighteraircraft, helicopters and radars with the major industries in the country, the policy states.

• A Project Management Unit (PMU) will be set up with representation from the Services for estimation of development andproduction lead times specifications and technologies involved, life cycle costs and maintenance requirements of platforms,equipment and weapon systems.

• India’s focus on indigenous manufacturing in the defence space is paying off as India unveiled several productsmanufactured indigenously like the HAL Tejas Light Combat Aircraft, the composites Sonar dome, a Portable TelemedicineSystem (PDF) for Armed Forces, Penetration-cum-Blast (PCB) and Thermobaric (TB) ammunition specifically designed forArjun tanks, a heavyweight torpedo called Varunastra manufactured with 95% locally sourced parts and medium rangesurface to air missiles (MSRAM).

4. WHY EXPORTS OF DEFENCE PRODUCTS ARE LIMITED TO FEW COUNTRIES LIKE VIETNAM AND THAT TOO ON A MINUSCULE

India’s defence exports have been encouraging and have doubled to nearly Rs 11,000 crores since 2001. There has been asteady annual increase: it exported arms worth Rs 1500cr in 2016-17, Rs 4500cr in 2017-18 and Rs 10,700cr in 2018-19.While such progressive numbers have been much-awaited, almost 50% of India’s exports reach only one nation: The UnitedStates of America.

The USA accounts for nearly Rs 5000cr exports, with the European Union not far behind. In comparison, India has accordedmuch less attention to its own neighbourhood.

Statistics and Reason: • In the region, Vietnam has been the recipient of a $500 million line of credit (LoC) for four patrol vessels for its navy. There

have been several back-and-forth negotiations on the possible sale of the supersonic cruise missile, BrahMos, and theVarunastra torpedoes. Regardless, the relationship with Vietnam has been a slow moving one.

• The Vietnamese case makes it clear that India cannot solely rely on diplomatic marketing and soft-skill development.Industrial partnerships are essential, for which India must push its private sector to the fore. There must not be complacencyin executing encouraging reforms such as the Open General Export Licence (OGEL) scheme that would help private companiesattain government permissions for defence exports much faster.

What should be done? • To emerge as a chief defence exporter in Asia, India needs to adopt a dual focus: bring more countries under its radar and

transform its reputation from a ‘component-only’ supplier to that of a wholesale exporter.

• India must make Research and Development (R&D) a larger recipient of its annual defence budget to improve itsmanufacturing capabilities.

• Along with this, there must be a proper identification of the defence import needs of target countries.

• Indian defence attaches sent abroad should report data on the defence goods needed globally, which can then be producedby the Indian public and private manufacturing units.

• By producing what is actually needed, India can become a viable exporter to all kinds of countries.

• With Chinese debt-traps soaring in the region, thanks to its Belt and Road Initiative (BRI), it is an opportune time for India totake bolder leaps to rise as a competent alternative.

5. WHAT IS THE CONCEPT OF DEFENCE PRODUCTION CORRIDOR

• A defence corridor refers to a route or a path along which domestic productions of defence equipment by public sector,private sector and MSMEs are lined up to enhance the operational capability of the defence forces.

• Defence industry is not only one of the 25 identified sectors under the Make in India programme, but it is also part ofthe 10 ‘Champion Sectors’ that have been identified for focused attention because of their “potential to become globalchampions, drive double digit growth in manufacturing, and generate significant employment opportunities.”

India’s defence industry constitutes• 8 defence public sector undertakings (DPSUs)• 41 Ordnance Factories (OFs)• 49 Defence Research and Development Organisations (DRDO)

Where?• North: In Aligarh; the corridor would pass through six districts — Aligarh, Agra, Jhansi, Kanpur, Lucknow and Chitrakoot.• South: Starting from Tamil Nadu, linking Chennai and Bengaluru.• The locations of these corridors are strategically decided by the Defence Ministry while taking into account a natural

ecosystem that could be utilised for enhancing the existing defence network.

6. INDIA CAN RECALIBRATE NOT REDUCE THE DEFENCE EXPENDITURE.

• The size of India’s defence expenditure varies depending on which definition one follows. Traditionally, a part of the MoD’sbudget, which is reflected in the Defence Services Estimates (DSE) – an annual publication of the MoD that primarily dealswith the expense of the armed forces and the MoD-owned research and production agencies – was treated as India’sdefence budget.

• In recent years, however, the MoD has taken a broader approach to the defence expenditure. the recent definition coversthe entire budget of the MoD, which includes, besides the allocations provided for in the DSE, the expenditures on accountof defence pension and MoD (Civil).

• It is important to note that even the recent definition does not capture some of the defence-related expenditures whichare incurred outside the MoD’s budget.

• Among all the expenditures incurred outside the MoD, there is no publicly available information on India’s strategicprogrammes carried out by other government agencies.

• The tax forgone by the government on account of items sold through the Canteen Stores Department (CSD), and incometax exemptions on some allowances and certain retirement benefits are not in the public domain.

In short, India’s • actual defence expenditure is not what it looks from a narrow prism of the DSE or the MoD’s overall budget.

• Any discussion about the adequacy of resources or lack of it, therefore, needs to take cognisance of this hard fact.

• In recent years, India’s defence expenditure has been characterised by the manpower cost-driven growth. ✓ The share of Pay and Allowances (P&A) and Pension together has increased by 12 percentage points from 49 per cent to

61 per cent in a matter of a decade, with the share of pension alone jumping the most from 18 per cent to 28 per cent. ✓ The rise in the pension’s share has mostly come at the cost of capital acquisition and Stores. The latter mostly caters to

the operational and maintenance expenditure of the armed forces.

STEPS TAKEN BY THE GOI: • To address the bulging manpower cost, Chief of Defence Staff (CDS) General Bipin Rawat has put forth the idea of increasing

the retirement age of some categories of armed forces personnel to 58 years, so as to save on the pension cost.

• The Indian Army, which accounts for over 85 per cent of the total uniformed personnel of the three forces, is apparentlytoying with ‘Tour of Duty’ concept to reduce its pay and pensionary cost.

• The MoD has also taken certain concrete steps in recent years to reduce its salary budget.

• Following the recommendations of the Shekatkar Committee, it has decided to abolish 9,304 civilian posts in the MES.

• Besides, it has also taken a bold decision to corporatise the Ordnance Factory Board (OFB), which is likely to improve,among others, its labour productivity.

CONCLUSION:

• Considering that defence preparedness is of the highest priority, there is a need to augment defence spending in the shortto medium term. This could be done either through the additional mobilisation of resources (preferably the tax revenue)or through higher deficit financing and/or squeezing resources meant for development.

• Any substantial increase in the budget in the long-term, however, needs to be fiscally prudent, so as to avoid ramificationson the wider economy.

• India’s tax-to-GDP ratio, an indicator of the soundness of public finance and a key determinant as to how much thegovernment could spend, is about 17 per cent, whereas the average ratio is over 21 per cent for the Emerging MarketEconomies (EMEs) and as high as 34 per cent for the Organisation of Economic Co-operation and Development (OECD)countries.

• To put the ratio in perspective, one per cent of India’s estimated GDP for 2020-21 amounts to nearly Rs 2,25,000 crore,which is more than twice the current year’s shortages facing the MoD.

• Given the limited resource base and various competing demands, particularly from the socio-economic sectors, the MoDneeds to work on a plan to optimise its allocated resources, rather than hoping to bridge its entire resource gap throughadditional funding from the Ministry of Finance.

MCQ: Q. Consider the following statements with respect to Defence Procurement Procedure (DPP) 2020:1. It aims to increase indigenous manufacturing and expedite procurement of defence equipment.2. For the first time it allows for lease of defence equipment and brings in after-sales support under the contract of capital

acquisition.3. It aims at making the country’s defence production self-sufficient and a global manufacturing hub.

Which of the statements given above is/are correct?1 and 2 only1 and 3 only2 and 3 only1,2 and 3

Answer: AExplanation:• Defence Ministry released a draft of its new procurement policy, which, for the first time, allows for lease of defence

equipment, pushes for more indigenous content and brings in after-sales support under the contract of capital acquisition.

• The draft Defence Procurement Procedure (DPP) 2020 aims to increase indigenous manufacturing and expedite procurementof defence equipment

• The aim is to make India self-reliant (not self-sufficient) and a global manufacturing hub.

• The Draft Defence Procurement Procedure 2020 will increase the indigenous content for various categories of equipment by 10 per cent.

• It has also introduced a new category of Buy Global-Manufacture in India, under which a minimum of 50 per cent indigenous content oncost basis of total contract value will be necessary.

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