GS Paper III

News Excerpt:

The report from Axis Capital Research focuses on India's defense production and indigenization program amid increasing defense spending in East European and West Asian countries.

Brief about the Report:

• The report predicts a 12% Compound Annual Growth Rate (CAGR) in India's defense outlay, reaching $147 billion over FY2025-29.
• Data sources for the report include India's annual Budget, Ministry of Defence releases, the World Bank, and international bodies like SIPRI.
• 16 defense public sector undertakings (DPSUs), with seven listed, contribute over 70% to India's defense production.
• Nifty Defence Index's 13 stocks show a 19% CAGR in revenue and a 25% Profit-After-Tax (PAT) CAGR from FY21-23.
• Geopolitical equations and GDP are identified as key growth drivers for military spending, with global defense spending averaging 2.3% of global GDP over 25 years.
• Asia's economic growth, territorial disputes, and political tensions increased its share in global defense spending from 24% to 34% in the past decade.

Meaning of Defense indigenization

• Defence indigenisation means defence equipment and weapons conceptualised, designed, made, or manufactured in India.
• It aims to enhance national security by fostering self-sufficiency in defense capabilities, promoting innovation, and strengthening the domestic defense industry.
• Indigenization efforts often involve research, development, and collaboration between government, military, and private sectors.

Fact on defence indigenization in India

• State-of-the-art products like the 155 mm Artillery Gun system 'Dhanush,' Light Combat Aircraft 'Tejas,' Surface to Air Missile system 'Akash,' Main Battle Tank 'Arjun,' and others have been successfully produced in India.
• The share of domestic procurement in the total defence procurement has seen a consistent uptrend, increasing from 54% in 2018-19 to 68% in the current year (2022-23 up to September 2022), with 25% of the budget earmarked for procurement from the private industry.
• SIPRI data shows India's annual military spending at $77 billion, ranking third globally in 2021, following the US ($801 billion) and China ($293 billion).
• SIPRI’s data reveals India’s arms imports declined 11% between 2013-2017 and 2018-2022, attributing it to complexities inherent in India’s procurement and acquisition process.

Challenges to defence indigenization in India

• Lack of strategic direction and coordination- since various ministries are working together, lack of coordination leads to delays in decision-making.
• Technological disparities: The country faces challenges in bridging technological disparities, as cutting-edge defense technologies may be lacking or require substantial research and development.
• Cumbersome bureaucratic processes: Lengthy procurement procedures and cumbersome bureaucratic processes can delay indigenization projects.
• Shortage of skilled manpower: Skilled manpower shortages in areas like research, development, and manufacturing pose a challenge to the effective indigenization of defense technologies.
• Global Technology Denial: International restrictions on the transfer of sensitive technologies can limit India's access to critical components, hindering the indigenization process.
• Our premium institutes, like IITs and NITs, do not separate streams specializing in defence technology.

Steps taken

• Make in India: The "Make in India" campaign to encourage the production of defense equipment within the country.
• Offset Policy: It mandates that a certain percentage of the value of defense contracts is invested back into India.
• Buy Indian (IDDM) Category Priority: The government prioritizes the procurement of capital items falling under the Buy Indian (IDDM) category from domestic sources under the Defence Acquisition Procedure (DAP).
• Liberalization of FDI Policy: The Foreign Direct Investment (FDI) policy has been liberalized, allowing 74% FDI under the automatic route to attract foreign investment in the defence sector.
• Defence Industrial Corridors: Two Defence Industrial Corridors have been established in Uttar Pradesh and Tamil Nadu, aiming to attract investments in the aerospace and defence sector and create a comprehensive defence manufacturing ecosystem.
• Mission DefSpace and iDEX Scheme: The launch of Mission DefSpace and the Innovations for Defence Excellence (iDEX) scheme involves collaboration with startups, MSMEs, and other entities to foster innovation and technology development in the defence and aerospace sectors.

Way forward:

• Focus on Critical Technologies: Concentrate efforts on indigenising critical defence technologies, emphasizing larger complex systems like drones, fighter jets, ship-building, and critical sensors.
• Transfer of technology:  Identify priority areas for transfer of technology, and ways to assess transfers of technology from foreign OEMs to public and private Indian entities.
• Skill development: Invest in skill development programs to address the shortage of qualified personnel in critical areas.
• Start-ups and Innovation Hubs promotion: Support defense-related start-ups and establish innovation hubs to harness entrepreneurial talent.
• Enhance Support for Private Companies: Provide additional financial and industrial support to private companies entering the defence sector, particularly for research and development initiatives.
• Methodology for price indexing: Create a methodology for price indexing technology to ensure objective assessments of the costs of technology.

Conclusion:

Thus, India's ambitious defense indigenization program, backed by a projected 12% CAGR in defense spending, reflects a commitment to self-sufficiency. Overcoming challenges through innovation, strategic partnerships, and skill development will be pivotal in strengthening national security and bolstering economic growth.

Mains PYQ

Q. Foreign Direct Investment (FDI) in the defence sector is now set to be liberalized: What influence this is expected to have on Indian defence and economy in the short and long run?

(UPSC 2014)