Indian Defence Offset – Role of Make in India and its Impact on A&D SMEs

India has one of the largest defence infrastructure networks and is one of the largest importers of defence equipment in the world. The Indian Defence market is anticipated to record a CAGR of over 4% from 2020 through 2026 according to Mordor Intelligence. India has been constantly increasing its Defence expenditure over the years, allocating USD 64 billion in 2021, being its highest ever. The increase in the Defence budget is expected to positively impact the Aerospace and Defence market. This, in turn, will enormously benefit indigenous Defence SMEs, as the country is striving for self-sufficiency, by promoting ‘Defence Offset and Make in India’ programs.

The ever-increasing need for the modernisation of armed forces demands huge investments by the country year on year. Most of the major defence contracts are signed with foreign entities, increasing our dependency and divulging our investment, while not providing many benefits for the local defence suppliers. To tackle the situation and to serve the critical needs of the domestic defence industry and economic self-sufficiency, the government had introduced several measures including defence FDI and promotion of private sector participation. The first promising push by the Government in this direction was the introduction of defence offset policy in 2007, a solid plan to empower and encourage indigenous defence R&D and manufacturing.

Indian Defence Offset, a Gamechanger

Indian Defence Offset is an obligation by foreign suppliers; to invest in India and aid the domestic defence industry either through direct investment or by partnering with domestic defence players or by transfer of technology to an Indian defence enterprise. The offset policy is applicable only if the procurement value exceeds INR 300 crore. Currently, the offset obligation for a foreign agency is 30% of the total contract value.

Obligations of a Foreign Contractor under Defence Offset

There are multiple avenues to fulfil the obligations by a Foreign Company,

  • Foreign Direct Investment (FDI) or joint ventures with Indian defence companies to manufacture products locally in India
  • Investment in terms of transfer of technology through joint ventures for eligible products and services
  • Investment in Indian defence companies in terms of provision of equipment for manufacture and/or maintenance of products and services
  • Provision of equipment and/or TOT to government establishments engaged in the manufacture and/or maintenance of defence products,
  • Technology acquisition by DRDO in the areas of advanced defence and communication technologies

By transfer of technology and collaborating with internationally competitive enterprises the Defence offset Policy augments research, design and development capabilities of domestic defence companies.

Make in India Program – How it complements Defence Offset

The Make in India program is another Government of India initiative launched by the Hon. Prime Minister on September 25th, 2014. The program was launched to encourage and bring in global investments (Foreign Direct Investment) from large production houses around the world, with a special focus on electronics equipment. The program complements Indian Defence Offset by opening up a transparent and collaborative platform for technology exchange with foreign OEMs.

Make in India Defence Projects

The Make in India drive is expected to foster indigenous capabilities in the design & development of defence equipment and homeland security systems. The drive is also anticipated to create a better business environment for public-private partnership, thus enabling product realisation in a much faster time frame.

The defence R&D and Production sector is capital-intensive and demands a lot of skill. Foreign collaboration facilitated by Indian Defence Offset is already making an impact by bringing technological advancements, encouraging new technologies and garnering higher attention on improving the technical skillsets of people. Hence, with more investments from foreign companies and a strong push for the Make in India drive, higher participation of local sub-contractors (SMEs) can be ensured. This will not only increase employment opportunities but also help improve the technical skillsets of local R&D and production facilities.

The recent decision of the Defence Ministry to earmark around 64 per cent of its modernisation funds under the Capital Acquisition Budget for purchases from the domestic sector is certainly a big push for Make in India defence projects. This will positively impact increasing domestic procurement, highly enabling industries including Defence SMEs and start-ups.

Importance of SMEs in Defence Offset

The defence offset policy is encouraging Small and Medium Establishments in India to a great extent. The offset policy has opened up better opportunities for SMEs in the design, development, manufacture and supply of various electronics components and sub-systems to TIER-1 defence players – both private and government. SMEs in India hold a large talent pool, which play a humongous role in defence offset. Over the recent years, these SMEs have become a critical component in Indian Aerospace and Defence industry supply chain.

Conclusion

SMEs are considered the most important players in the Indian Manufacturing sector. The introduction of the Indian Defence Offset and Make in India Program, provided a much-needed breather for SMEs. However, they continue to face several challenges such as huge capital investments, limited facilities, and unhealthy competition. By reducing the burden of generating huge capital and regulating sudden technology obsolescence, the government can address the challenges to some extent. In addition, by improving basic infrastructure facilities, easing financing and credit facilities, and enabling access to modern affordable technology, the government can highly facilitate SMEs.

Mistral is an AS9100D and CEMILAC certified technology design company providing comprehensive solutions for the aerospace and Defence domain. Mistral has over two decades of experience in providing board and system-level electronics that meet the stringent requirements of rugged ground, airborne and naval applications. Mistral has been actively involved in key Make in India Defence Projects for Defence R&D organisations, space research organizations and Tier 1 Defence manufacturers in the country.

To know more about Mistral’s Defense Services, visit Defense Solutions Page