MAKING INDIA ‘ATMANIRBHAR’ IN DEFENCE PRODUCTION

August 1, 2020 8:48 pm

India’s aggressive push for ‘making its defence production‘ self-reliant’ is a welcome opportunity for industries across spectrum.
-Subhajit Roy, Executive Editor

India with its thrust on military modernisation, is acquiring defence equipment and technology for years from countries like Russia, the US, France and Israel. According to a report by Stockholm International Peace Research Institute (SIPRI), India remained the world’s second largest arms importer after Saudi Arabia during 2015-19.

To reduce its external dependence for defence procurement, the Indian government has taken the decision of making the country ‘Atmanirbhar’ (self-reliant) by encouraging local manufacturing. Of late, a slew of measures have been announced in this direction under ‘Make in India’ initiative, including raising the foreign direct investment (FDI) cap from 49 percent to 74 percent via the automatic route.

During April 2000 and March 2020, India’s defence industry has received FDI equity inflows of USD 9.52 million (Rs 56.88 crore), according to the data published by Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry. Though the current FDI policy allows 100 per cent overseas investments in the defence industry, upto 49 per cent investment is permitted under the automatic route, while beyond that the government approval is required. The proposed guideline of raising the FDI limit from 49 percent to 74 percent under automatic route is expected to further boost foreign investment in India.

Lockheed Martin, the manufacturer of world’s most lethal, survivable and connected fighter jet – the F-35, considers India as a ‘critical’ market. Explaining the company’s India specific strategies, William L. Blair, Vice President and Chief Executive, Lockheed Martin India said, “India is a critical market for Lockheed Martin, and we have an established defence and aerospace footprint in the country that spans over 30 years. The cornerstone of our strategy rests on building and nurturing partnerships with the Indian industry with whom we share technology and capability and co-produce and co-develop for India and from India. The joint ventures and partnerships we have established over the last decade have generated value that has flowed down to Indian Tier 1/2/3 large, micro, small & medium enterprises (MSMEs) and start-ups supporting a foundation for the defence and aerospace ecosystem in India.”

Highlighting Lockheed Martin’s commitment to the government’s Atmanirbhar Bharat Abhiyan (Self-reliant India Campaign), he said, “We are fully committed to support the Prime Minister’s vision of self-reliance through supporting the growth of an indigenous defence manufacturing ecosystem, advancing the aerospace and start-up ecosystem, and strengthening India’s strategic security and industrial capabilities.”

Lockheed Martin believes that “Atmanirbhar Bharat” or “Self-Reliant India” vision is perfect for the current situation and it will also hold good when the effects of COVID-19 finally recede. “We stand ready to support the country through our initiatives and programs. Our partnership with the Indian aerospace and defence ecosystem coupled with our understanding of user requirements also offers us the unique advantage of being able to rapidly and efficiently realise our blueprint for the F-21 offer,” Mr Blair said.

According to Nilesh Auti, Global Head – Manufacturing Industry Unit, Tech Mahindra, “The raised limit for FDI in the defence sector will help domestic companies realise their potential in production and manufacturing capabilities. This will also lead to increased budget allocation from government and will further encourage joint ventures and technology transfer to bring niche technology and innovations in the sector, thus opening an array of opportunities for domestic manufacturers in production of weapons and military hardware.”

The FDI will also help build original equipment manufacturers (OEMs) Tier 1-Tier 2 manufacturing and strengthen supply chain management (SCM) in India, he adds.

However, Rajesh Nath, Managing Director, VDMA India believes: “Though local manufacturers have welcomed this move, the path they need to follow to match international quality of arms is one that isn’t easy. With the revised norms, they will be able to procure funds to finance their R&D departments which are pivotal when it comes to arms manufacturing.”

Moreover, the government is looking at “corporatisation” of all local ordnance factories in order to streamline their operations and ensure that their shares can be publicly traded. According to Mr Nath, this is a big incentive as it opens another door for these organisations to raise funds domestically. He said, “These opportunities look very promising for local manufacturers as the Government of India is looking to alleviate the current scenario by providing a multifaceted decision to spur domestic arms production.”

V. Anbu, Director General & CEO, Indian Machine Tool Manufacturers’ Association (IMTMA) said: “FDI in defence is definitely going to create enthusiasm among global players for investment and they are expected to set up shops in India either directly or through collaborations. This will create demand for the machine tool sector. Global players are also expected to bring in technology with them as defence or strategic sector requirements are stringent.”

He adds, “As a part of FDI enhancement, the union government is also banning import of certain weapons which would probably give a fillip to indigenous manufacturing and ‘Make in India’. Modernisation of ordinance factories is expected to create demand for the machine tool sector. Aero defence opportunities like LCA and related developments may also enable bringing in funding and technology which will create demand and revitalise the manufacturing and machine tool sector.”

According to Mr Anbu, fund, technology and joint venture/joint production agreement with industries are expected to change the machine tool and manufacturing landscape in the country. IMTMA is the apex body of machine tool manufacturers in India.

Preparedness of Indian manufacturing sector
India remains one of the largest defence importers. The reliance of India on the global arms industry is very high for it to just switch over to domestic production. There are several factors to keep in mind, such as quality of arms, the quantity India requires and the cost of production domestically.

“The process of becoming ‘Atmanirbhar’ is gradual and not immediate,” said Mr Nath. “India accounts for 9.5 percent of the global imports of arms, whereas it accounts for only 0.2 percent of the global arms exports. In order for India to become Atmanirbhar in this sector, this divide needs to be bridged and India is a long way from it.”

This process will take a few years. In order to kick start this shift, the local manufacturers will need all the government support they can get. However, he said, the start has been made now and the domestic industry including the MSMEs should grasp this opportunity and build on their capabilities.

However, Mr Anbu informs, OEMs are building high precision and high technology machines like multi-tasking machine, finishing machines and machines required for strategic sectors. Manufacturers are also seriously working on developing and procuring technologies, in the domain of ultra-precision machine/machining, flow forming, super finishing and other. These machines are slated to be developed to meet the demands from defence as well as aerospace sectors in the coming future. This opportunity has the potential to develop quality products which may also enhance export potential, he adds.

With the higher FDI in defence sector, which is bound to attract many global companies and provide an impetus to the ‘Make in India’ program, the manufacturing sector readiness needs be boosted. According to Mr Auti of Tech Mahindra, “We will have to create an ecosystem where even local defence manufacturers get access to the market, niche technology, partners or government orders. In addition to large-scale defence OEMs coming to India, whose expertise in conceiving and manufacturing a product is tangible, the overall SCM ecosystem with Tier-1 and Tier-2 suppliers who produce components and aid in assembling them, should also to come in to the picture.”

Allied industries that will drive self-reliance movement and get benefitted
Defence production is a sector that depends on several other sectors to be successful. According to Mr Nath, “Without the high quality and quantity of the allied sectors, the defence industry as a whole cannot manufacture quality armaments that give the military industrial complexes of the world, a run for their money. Allied industries such as Information Technology, robotics & automation, electronics, steel &metallurgy, machine tool etc are essential for the success of the defence industry of India. These industries will definitely drive the movement to produce arms locally and in turn will benefit greatly.”

The defence industry of India has an advantage as industries such as IT and Robotics in India have been growing at a CAGR of 14.1 percent and 13.3 percent respectively. The increased focus will only drive this CAGR further and lead to organic growth of these allied industries, Nath comments. “Moreover, with the growth of the domestic defence manufacturing, these allied industries will be able to build depth in key technologies related to the defence sector, adding to their existing strengths.”

Further, India’s natural strength is in the services segment and Maintenance, Repair and Overhaul (MRO) has been an integral part of the service segment structure. Talking about the allied industries that will drive the self-reliance movement and get benefitted, Mr Auti said, “We will see an increased growth in the MRO segment as immense emphasis will be laid on indigenous procurement of materials.”

Technology services will be another segment, which can get benefitted. It will create larger technology capabilities, overall competitiveness in order to sell solutions not only in India but also for exports. The tech services will be a plus for the whole ecosystem, he added.

Steps to be taken by MSMEs to meet the future demand
The Government of India in recent years has taken several steps to provide MSMEs the right environment to thrive. Moreover, to help businesses get back on track post COVID-19 pandemic, the government announced a host of key reforms to support MSMEs including Rs. 3 lakh crore collateral-free loans, Rs. 20,000 crore subordinate debt, Rs. 50,000 crore equity infusion, revised MSME definition, global tenders disallowed up to Rs. 200 crore and e-linkage to the market for MSMEs.

According to Mr Auti, MSMEs are the backbone of our country and allowing them collateral free loans as a stimulus package will help them survive the impact of the pandemic. He adds: “It is time to boost precision manufacturing and electronics manufacturing skills in India to stay relevant in the future. Currently, around 50 percent of India’s manufacturing GDP is contributed by the automobile sector. While electronics accounts for 2.5 percent of Indian GDP and aero-defence contributes around 1.6 percent, these two sectors will get the most advantage of the FDI in bringing the technological advantage and precision manufacturing in India.”

Focus on manufacturing spares for defence equipment
Now the MSMEs need to focus on manufacturing spares for defence equipment, suggests Mr Nath. He observed: “When the announcement of the revised FDI norms were made, the Finance Minister also announced that there will be a focus on production of spares. Hence, MSMEs need to focus on achieving superiority in production and accredit their businesses with the necessary certifications to become suppliers to the government. Moreover, with the new schemes in the stimulus package, MSMEs can use this to undertake expansion projects to be able to meet the demand for the local defence production.”

Engage in disruptive innovation
MSMEs need to reinvent and engage themselves in disruptive innovation for developing machines and products of high quality and high precision which are definitely realisable in the medium term, observed Anbu. He further recommends: “MSMEs are expected to explore technology transfer and joint collaborative developments, joint ventures with global players to accelerate the process of innovation and product development. This will not only meet domestic requirements but also create a window of opportunity for exports.”

Mr Auti also believes that new inventions and innovations will enable industries to thrive in the future. He said, “Allowing good quality automotive MSMEs in the defence sector will further enable us to prepare ourselves for the future demand. The electronics manufacturing promotion by the government will also help build defence electronics MSMEs in India. Further, the development of sectors like auto, aero-defence and electronics will be a win-win combination for Tier-1 OEMs as well as for the MSME segment of India.”

Opportunities for machine tools and cutting tools industry The Indian machine tools industry is strategically important to the defence industry as this industry offers expertise in areas of post-sales support and its ability to bridge the technological gap every year. “The Indian machine and cutting tools industry was projected to grow at a CAGR of 12 percent couple of years ago, which is on similar levels with the allied industries. We can infer that all of the associated industries with defence production have the potential of growing at similar levels, which will provide stability to the local defence production,” opines Mr Nath.

He adds, “For the machine tool and cutting tool manufacturers, the defence sector can perhaps compensate to some extend the slowdown in the automotive sector. To reboot the economy, the government has placed thrust on infrastructure development. Due to this the core industries should benefit and this in turn will provide business for machine tool manufacturers.”

Mr Anbu believes that, the movement augurs well for the machine tool industry as it could over a period of time lead to Indian firms signing development contracts with Ministry of Defence and companies procuring machines for their production.”

In the past some contracts have been signed such as Tata Advanced System for surface surveillance radar project for Indian Navy and Larsen & Toubro for production of guns for Indian Army. Bharat Forge had last year bagged a $100 million contract from Israel’s Rafael Advanced Defence Systems for manufacturing 1,000 BARAK-8 MRSAM missiles’ kits for the Indian Army and Air Force. Electropneumatics & Hydraulics is also in defence related production – from concept design to execution is undertaken for various naval, defence and allied applications.

Lockheed Martin’s achievements in Indian defence space
“We have been committed to building trust, technology development and strategic collaboration with India. Our JV with Tata Advanced Systems Ltd. in Hyderabad for 10 years produces major aero-structure components for the C-130J Super Hercules transport aircraft. This is the sole supplier of these components to Lockheed Martin and is an integral part of our global supply chain,” Mr Blair said.

Their other JV between Tata and Sikorsky Aircraft Corporation, established over 10 years ago, manufactures aerospace components for commercial helicopters and aircraft and has expanded to include aircraft engine components for aerospace companies as well. It is also fully integrated into the global supply chain.

Our partnership with the Indian aerospace and defence ecosystem coupled with our understanding of user requirements also offers us the unique advantage of being able to rapidly and efficiently realise our blueprint for the F-21 offer.
William L. Blair, Vice President and Chief Executive, Lockheed Martin India

We will see an increased growth in the MRO segment as immense emphasis will be laid on indigenous procurement of materials.
Nilesh Auti, Global Head – Manufacturing Industry Unit, Tech Mahindra

Fund, technology and joint venture/joint production agreement with industries are expected to change the machine tool and manufacturing landscape in the country.
V. Anbu, Director General & CEO, IMTMA

The start has been made now and the domestic industry including the MSMEs should grasp this opportunity and build on their capabilities.
Rajesh Nath, Managing Director, VDMA India