India meets its defence requirements through both domestic as well as foreign sources. While most indigenous sourcing has traditionally been through the Ordnance Factory Board (OFB) or a few Defence Public Sector Units (DPSUs), the Indian Private Sector has just started realising the opportunity.
India has a strength of over 1.44 million active personnel and a volunteer military of 5.1 million, making it is the world's largest military force. With a total budget of US$70 billion for 2020, it has the third largest annual defence budget.
It is also the world’s second largest defence importer behind Saudi Arabia making up 9.2% of global arms import. The present domestic defence industry consists mainly (80%) of government owned public sector which includes Defence Research and Development Organisation (DRDO) with 50 labs, 4 defence shipyards, 5 defence PSUs and 41 Ordnance Factories.
India domestically produces only 45% to 50% of defence products it uses, and the rest are imported. India has had little success with high technology and quality military products and it is only recently that the private sector was allowed to enter defence production.
India's defence exports were US$1.47 billion in 2018–19, of these exports the DPSUs and Ordnance Factories (OF) contributed only 7.6%. "Defence Production Policy of 2018" (DPrP) has a goal of making India be among the top 5 global producers of the aerospace and defence goods with an annual export target of US$5 billion by 2025. This can only be achieved by a robust private industry.
On procurement side the rough ratio in financial terms is 30% domestic vs 70% foreign. The aim of the Indian Government is to invite private players to reverse this trend with a dual strategy, to find capital for increase in domestic production and open up external markets for Indian Defence Products.
In recent past the Indian Government has taken a lot of initiatives that not only benefit the Private Industry but makes working in India conducive for Global Companies with an eye on India Market.
Next few paras try to bring out the relevance of these initiatives in brief.
So What Has Changed?
With structural changes in policy the government seeks to encourage greater participation of the private defence industry. The message to global manufacturers being ‘Come Make in India’.
FDI limit in Defence Sector raised to 74%
The increase in foreign direct investment (FDI) in defence sector from 49% to 74% was announced on 16 May 2020 as part of other Economic reforms to kick start the Indian Economy. This is to encourage global manufacturers to set up manufacturing bases in India or acquire local companies for orders that are over $100 Billion of an year. Some important aspects which come out are
With better technology, Global Companies are at an advantage in bagging contracts in India.
Global Companies who want to set up base in India, may acquire local firms.
Will ensure foreign investors have majority stake in Indian JV company.
Foreign Investors will have more control over technology, IPs and manufacturing quality.
New Defence Acquisition Procedure 2020
DPP 2016 will be replaced with DAP (Defence Acquisition Procedure) 2020. Acquisition Categories are specified in page 3 to 6 of the new DAP, of the nine categories only one is Buy Global and in that too Indian Vendors can participate with only 30% Indigenous Content.
Indigenous Content (IC) for each Category.
Buy(Indian-IDDM) Indigenous design and ≥ 50%
Buy (Indian) In case of indigenous design ≥ 50%, otherwise ≥ 60%
Buy and Make (Indian) ≥ 50% of the ‘Make’ portion
Buy and Make ≥ 50%
Buy (Global - Manufacture in India) ≥ 50%
Buy (Global) Foreign Vendor Nil Indian Vendor ≥ 30%
Other Important Aspects of DAP 2020.
Vendors who did not reply to RFI may express interest for RFP based on AoN details published on MoD and Service HQ websites. Page 32 para 35.
Single Vendor Cases will go through Page 40 Para 55 and page 42 Para 63. Also, confirmatory trials in case of SVC after trials. Page 46 Para 82 (a). This will ensure single vendor cases going through.
Simulation Based Trials, using Computer Simulation or Documented Historical Data. Page 43 para 43.
Joint Trials for Single Foreign OEM being fielded by Multiple Indian Vendors. Page 44 Para 74. Interestingly it means that a Foreign OEM can have more than one Indian Vendor.
Import Embargo List (101 Items)
Some 260 items were contracted by the Indian Defence Forces between April 2015 and August 2020. Defence ministry prepared a list 101 items on which there would be an embargo on import. These 101 items cannot be bought from a foreign vendor, the Defence Forces will be able to buy only from Indian Vendors. This embargo will start over a period of years, i.e., some items will come into the embargo in Dec 2020, some in 2021 so on so forth. Some aspects of this embargo list are
This list will be upgraded (items added or removed) based on requirement and indigenous procurement progress.
Indian industry will have to take on the production of these 101 items.
Includes getting technology.
Establishing production facilities etc.
Bidding as per the new DAP
It also means that the MoD and Indian Industry have talked about these items and the feasibility of producing them economically.
All other items not mentioned in the list will be available for global players to bid on, directly or through an Indian Company.
It is estimated that contracts worth almost Euro 4 hundred thousand million will be placed upon the domestic industry within the next 6 to 7 years
The following rates are applicable to the domestic companies for AY 2020-21 based on turnover:
Section 115BA, Companies with turnover upto Rs 400 crore Tax 25%, Surcharge 7% / 12%.
Section 115BAA Tax 22% Surcharge 10%
Section 115BAB Tax 15% Surcharge 10% (Effective Tax Rate is 17.16%, and should be off interest).
Any other case Tax 30% Surcharge 7% / 12%
Section 115BAB – Corporate tax rate for New Manufacturing Companies.
The Taxation Laws (Amendment) Ordinance, 2019 passed on 20 September 2019 has inserted Section 115BAB offering a low tax rate of 15% (plus surcharge and cess) to new manufacturing companies.
Companies Covered by Section 115BAB.
The company has been set up and registered on or after 1 October 2019 and has commenced manufacturing on or before 31 March 2023.
It should not be formed by the splitting up and reconstruction of a business already in existence except in case of a business re-established under section 33B.
Does not use any plant or machinery previously used for any purpose. However, the company can use plant and machinery used outside India and used in India for the first time. Also, the company can use old plant and machinery, the value of which does not exceed 20% of the total value of the plant and machinery used by the company.
Does not use a building previously used as a hotel or a convention centre. ‘Hotel’ means a hotel of two-star, three-star or four-star category as classified by the Central Government. ‘Convention centre’ means a building of a prescribed area comprising of convention halls to be used for the purpose of holding conferences and seminars, being of such size and number and having such other facilities and amenities, as may be prescribed.
The company should be engaged in the business of manufacture or production of any article or thing, and research in relation to such article or thing. The company can also be engaged in the distribution of such article or thing manufactured or produced by it.
Analysis of these Four Aspects
Both Indian and Foreign firms will be getting orders.
Only Indian Firms will be approached for items in Embargo List.
An Indian firm can bid for all categories off acquisition including Buy Global.
Foreign Firms can only bid for Buy Global category.
A foreign firm can have an absolute control over its Indian Partner due to 74 % FDI in Defence Industry.
A new Indian Firm can take Tax advantages however the manufacturing will need to start before 31 Mar 2023.
In Buy Global cases an Indian Company can bid with only 30% Indigenous Content.
Advantage Foreign Firm with an Indian Identity. Such a firm will have advantages over any stand-alone Foreign or Indian Company.
It will be able to bid for all orders, either as a Foreign Firm or as an Indian One for items in the Embargo List and those not in it too.
It will be able to take take advantage of the New Tax laws Section 115BAB paying only 17.16% taxes provided it meets the criteria.
Also, in Buy Global cases, bid as an Indian Company with only 30% Indigenous Content.
Use of Indian platform for exporting products from India.
Additional Measures by the Government
No Global Tenders for value less than USD 27.3 Million. The government has notified that no global tender will be floated for official procurement of up to USD 27.3 Million, under the Atmanirbhar package, to ensure encourage local industry.
In a notification, the Department for Promotion of Industry and Internal Trade (DPIIT) has said only suppliers with local value addition of a minimum of 20% will be allowed to bid. Class-I local suppliers (those that ensure value addition in excess of 50%) will get preference.
What it all means?
The strategy of the Indian Government looks at encouraging private, domestic as well as foreign investments into the Indian Defence Sector. Despite the rough roads ahead, there is optimism when we look at all the measures taken in the recent past to promote this sector in India. Fears regarding the private industry’s ability to deliver is opposed by Indian industrialists who have much faith in this highly demanding and technology intensive Industry. The Best Model is neither an Indian Company competing alone nor a Foreign Company doing so, but a Foreign Company with an Indian Presence.
How do we go about it?
The Indian market is a vast maze of agencies, and organizations fraught with pitfalls, where market entry timing and position are critical. Long before actually beginning your marketing and sales effort you must develop an effective strategy or marketing plan to penetrate your identified police, military and or security market segment.
Global Manufacturers must apply the four principles "P's" of marketing [Product, Placement, Position, & Price] to their targeted markets. Utilizing the “4-P’s” manufacturers must further exploit their products identified and proven advantages quickly, in order to dominate the competition, and secure a “valued” position with the customer in India. The development of a cohesive marketing strategy is critical to your overall success and ultimate acceptance of your product in the India marketplace.
Fundamental market intelligence is critical to the success of any new business venture, especially one launched several thousand miles and a few oceans away. Take the time to conduct an in-depth market survey to determine which companies pose the greatest potential competitive threat to your product, and which if any of those firms can be cultivated as potential allies and strategic business partners. This includes the strength and market position of your domestic and other foreign competitors, size of their market share, emerging technologies, end user requirements and relationships your competitor may have with the customer.
Much like working in any developing nation or newly industrialised country, manufacturers need trusted “in-country” agents, representatives and or teaming partners. Make sure your representatives have adequate market and product knowledge. The strength of the relationships you develop with these essential “in-country assets” will portend your success in India.
Choose Your Representative Wisely
Agents and representatives in India are plentiful, but good ones are hard to find. Select an appropriate representative for your company, one who reflects your business interests, dedication to quality, work ethic, and most of all professionalism. It would be wise to consider someone who has been in uniform.
Also read - Selling on the GeM (Government e Marketplace)