How can the defence sector help realise the vision of $5 trillion economy- opportunities and challenges for private sector investment and foreign collaboration
1) Ladies & Gentlemen, I am delighted to be here at the sixth edition of the Global Business Summit.
2) My compliments to the Times Group for this initiative that seeks to bring together thought leaders, heads of state, policymakers, academicians and corporate heads so that we can together chart a course for inclusive economic growth that sets India on a path to a 5 Trillion Dollar economy.
3) Today, on the back of solid structural reforms and macro-economic stability, India’s growth story has just begun. We are currently a USD 2.8 trillion economy, ambitiously aiming to be USD 5 trillion economies by 2024.
4) India’s FDI equity inflows have been increasing consistently, standing at US$ 44.37 billion in 2018-19 on the back of relaxing FDI norms and improving performance in the World Bank’s ease of doing business (EODB), where India currently stands at 63rd rank, becoming the top-ranked country in South Asia for the first time.
5) As the fifth-largest economy in the world, India is aiming to increase the share of the manufacturing sector to 25% of GDP by 2022. The manufacturing sector of India has the potential to reach US$ 1 trillion by 2025 and the Government of India is responding to needs of the manufacturing sector in Industry 4.0 by (a) implementing key flagship programs such as Make in India, (b) building policies relevant to the digital-economy and (c) fostering human-capital.
6) Ladies and Gentlemen, it is in this backdrop, the Defence sector has been identified as one of the key sectors that will help us in achieving the stated objectives. In our envisaged Defence Production Policy, we have clearly spelt out our goal to achieve a turnover of US$ 26 billion in aerospace and defence goods and services by 2025, involving an additional investment of nearly US$ 10 billion and creating employment for nearly 2-3 million people.
7) This will have huge implications for India’s endeavours to promote R & D, innovation and its efforts to secure a place in global supply chains. Of particular relevance is the fact that whatever we achieve together in the defence sector has enormous spin-off benefits for the economy in general.
8) India has a huge defence industrial base. It comprises nine giant Defence Public Sector Undertakings (DPSUs), 41 Ordnance Factories (OFs) and 50 dedicated R&D labs and other establishments under the umbrella of the Defence Research and Development Organisation (DRDO). Along with this, we also have a thriving private sector, which can be gauged by the fact that the total number of Defence licences issued to private sector till now is more than 450 covering a total of 275 companies.
The DPSUs, OFB and the DRDO together have a dedicated workforce of nearly one lakh, seventy thousand (1,70,000). This combined industrial base of ours has been able to domestically manufacture various defence platforms like fighter jets, helicopters, tanks, missiles and so on.
9) While our defence infrastructure provided us with the basic thrust towards indigenous defence production, there is a lot to be desired in terms of Indian defence industry performing to its full potential. There are several reasons for this underperformance. One of the main reasons for this was to retain the field of defence production within the confines of governmental control and ownership. Though it was the necessity of the times and it did help provide a much-needed foundation to an industry that was not commercially competitive, to begin with. However, the necessity of becoming internationally competitive, globally innovative and structurally efficient, demands that the private sector plays its long-awaited role in the defence industrial production.
10) We do realise that investment in the defence sector is different from other sectors as the stakes here are higher, the gestation period is long and technologies are cutting-edge. Besides, the defence sector demands major investment in research, development and creation of intellectual capital that becomes the foundation for production. While some major industrial houses may have the necessary capital for the same, small and medium enterprises could face challenges in this regard. The initial support of the government in terms of providing resources and enabling environment becomes a critical factor in promoting private sector investments.
11) Any country, irrespective of its domestic consumption can only have a limited opportunity domestically. To overcome this challenge, there is a need to look for new markets and compete with global companies. This is also where we have to raise our competence level.
Opportunities for Private Sector
12) Friends, being aware of the challenges of private investment in defence, our government has tried to overcome them by bringing a slew of structural reforms in the sector and at the same time playing the role of an incubator, catalyst, facilitator and consumer, without becoming an impediment in the maturing of the Indian private sector defence industry.
13) Under the clarion call of our government’s ‘Make in India’ initiative, several important steps have been taken to change the status quo and to create a climate in which the private sector and the public sector together contribute on the basis of their respective strengths and experience. These include greater scope for the domestic industry in defence tenders, simplification of the industrial licensing process, and hike in the FDI cap. Our government has also brought in measures to make defence export less stringent, streamlined the defence offset policy, opened the government-owned trial and testing facilities for use by the private sector. We have also launched two defence industrial corridors, and announced schemes to promote innovation through the participation of start-ups and small and medium enterprises, to name just a few.
14) Friends, as I mentioned at the outset that the intention of the government is not just limited to bringing reforms but to act as an incubator, catalyst and facilitator for promoting investment. Having identified the intellectual property and capital constraints of the small and medium enterprises, we have been assisting the private industry in kick-starting their manufacturing process with assistance from government labs. We understand that private-sector defence research and development will take time to establish itself. In order to give a boost to this process, we have opened opportunities through DRDO with a zero fee for Transfer of Technology (TOT), free access to over 450 patents, access to test facilities and an upfront funding of up to 10 crores. More than 900 licensing agreements for ToT have been signed with industries. This is a major step towards self-reliance in the defence manufacturing sector.
Role as a Catalyst
15) Similarly, the government by acting as a catalyst for promoting private investment is addressing the challenge of commencing major projects which are complex and require experience. We are providing a suitable growth environment for the private sector. Accordingly, we have opened opportunities for the manufacture of mega defence programmes including fighter aircraft, helicopters, tanks, and submarines through our Strategic Partnership Model that will allow our private companies to grow in stature and become global giants in the coming years.
16) Ladies and gentlemen, as we all know, India is a major consumer of defence goods. We are attempting to increasingly enhance the share of the private sector in this process.
17) The Defence Procurement Procedure (DPP) which was revised in 2016 for stimulating the growth of the domestic defence industry, categorises Buy (Indian–IDDM) [Indigenously Designed Developed and Manufactured], Buy (Indian), and Buy and Make (Indian), as the three most preferred categories for procurement by the MoD. By prioritising these categories over direct import, we want to provide greater scope to the local industry, including the private sector, to participate in defence contracts and contribute to the self-reliance and employment generation. In fact, I am happy to share with you that during the last 5 years, Government has accorded approval to more than 200 (exact-218) proposals worth Rs. 4 Lakh Crore in which Indian Industry would be engaged in defence manufacturing either directly or in collaboration with foreign OEMs (Original Equipment Manufacturers).
18) The MSMEs (Micro, Small and Medium Enterprises) are those silent performers who carry our ambition of achieving five trillion economies on their shoulders. Their role is being expanded under the “Make” categories by reserving “development of prototypes” below a particular threshold. More than 8000 MSMEs are currently engaged in Defence Production. Efforts are being made for doubling the active MSME base in Defence and Aerospace from 8000 to 16,000.
19) As a facilitator for defence production, a number of policy initiatives have been undertaken. There is a substantial investment opportunity that has emerged in the two Defence Industrial Corridors announced by the government, in Uttar Pradesh and Tamil Nadu. These Corridors will act as growth drivers for our defence industry, and I urge the defence industry to make the best use of these emerging opportunities.
20) In today’s fast-moving world, manufacturing can thrive only if we are able to establish a symbiotic relationship between innovation and enterprise. In order to foster innovation and technology development in defence, Innovations for Defence Excellence (iDEX) was formulated with the objective to bring Start‐ups to innovate, develop technologies and solve problems related to Defence and Aerospace. iDEX over the next five years is being scaled up and would also contribute to the defence manufacturing ecosystem and add significantly to these numbers. In addition to this, the activities of iDEX are planned to be scaled up to reach 100 Military Problems; 200 defence startups and 50 new technologies/products.
21) Given India’s strong IT industry, we have prepared a road map for Artificial Intelligence (AI) in national security for making India a significant power of Artificial Intelligence in Defence. We plan to develop at least 25 Defence specific Artificial Intelligence products by 2024.
22) Accessing foreign technology has remained a key challenge in the past. We have enhanced the foreign equity cap from earlier 26 per cent to 49 per cent under the automatic route and beyond 49 per cent to up to 100 per cent under the government approval route. This simplification allows the Indian private companies to tie up with their foreign counterparts for ToT and closer collaboration. I am happy to inform you that the increase in the FDI cap has begun to show results. Till December 2019, the defence and aerospace sector has received inflows of over Rs 3155 crores. Of this, Rs 1834 crore have received since 2014. I am sure that the volume of investment will increase many-fold when some of the major programmes, which are in the pipeline, move into the execution phase.
23) While the primary aim of Defence production is to cater to the needs of the armed forces, a thrust has also been now given for enhancing exports. The process of granting ‘No Objection Certificate’ for export of defence stores has been simplified. Simplification of procedures has resulted in the increased of defence exports to 7 folds from 2016-17. Defence Public Sector Undertakings have been encouraged to increase their export portfolio to 25% of their turnover. We would also be willing to extend Lines of Credit and grants for Friendly Foreign Countries over the next five years. The government aims to achieve exports of defence goods & services to the tune of USD 5 Bn in next 5 years. All possible support would be extended to the private sector so that they can contribute significantly to enable us to achieve the said target.
24) A Portal has been developed for online submission and processing of the offset claims. All offset claims are being received and processed electronically in MoD.
25) We have set in motion a review of both our Defence Procurement Procedure and Defence Procurement Manual. The revised documents are likely to be released soon, and will further facilitate participation by the Industry, in both revenue and capital procurement. The Offsets Policy is also being revamped with the objective of facilitating greater participation of Indian Industry and developing robust domestic Defence Industrial Base and eco‐system through technology infusion and investment in defence, manufacturing, with emphasis on developing MSMEs and Start‐Ups in defence manufacturing.
26) Friends, I find this a great platform to share with you our aim to double the size of Aeronautics Industry from Rs. 30,000 Cr to 60,000 Cr by 2024 and provide increased opportunities to the global aerospace industry to become a supplier of Aero‐components. A number of major platforms are envisaged in defence Aerospace sector including India’s 90-seater civil aircraft, developing civil helicopter industry of USD 5 Bn in PPP model, and New Aero Engine Complex in Defence Corridor with industry participation. The development of these platforms cannot be envisaged without a major contribution of private players in our defence aerospace sector.
27) The results of past initiatives and policy changes are increasingly visible in the growth of the private sector. In just a matter of a few years, the private sector’s share as part of defence production has increased to over 21 per cent. Even in the production activities of defence public sector and OFB, 40% of their production activities are being outsourced to the private sector.
28) Ladies and Gentlemen, I am happy to note that the Indian private companies have come of age since the time they were first allowed to manufacture defence items in 2001. The private sector is now manufacturing a number of state-of-the-art defence equipment that includes artillery guns, electronic warfare system and warships. Besides, the private sector is also modernising our defence airfields.
29) I have full confidence that the private sector has the required drive, energy, ambition and expertise to contribute even more substantially to our efforts in indigenisation of defence production to very high standards.
30) Ladies and gentlemen, before I conclude, I would like to reiterate that it is not only sharing that will become the new buzz word for defence manufacture but also collaboration. And this collaboration will be evident through Indian Public and Private sectors, as also foreign and Indian manufacturers. The Honourable Prime Minister’s vision and its purposeful implementation were evident in the recently concluded Defexpo 2020 at Lucknow. We are determined to carry the same spirit and energy in all our future endeavours.
31) Friends, let me now conclude my address by reassuring all of you that this government is open to new ideas and is committed to fully harness the energies, entrepreneurship spirit and enterprise of the private sector in the area of defence. The government is ready to act as a friend, philosopher and guide with whom you can freely discuss the issues and problems.
32) My best wishes for a successful Summit for all participants. I am sure that this summit will not only prove to be a platform for sharing ideas but also for their successful implementation in the near future.