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BRIEF GUIDE TO THE DEFENCE INDUSTRY IN INDIA


HISTORY AND ORIGINS OF DEFENCE INDUSTRY IN INDIA

Before Independence

The defence industry in India has a long history dating back to the early 20th century. The first ordnance factory (a term used to refer to a government-owned facility in India that is responsible for the production of a range of defence-related products, such as weapons, ammunition, and other military equipment) was established in 1801, and the first shipyard (a facility that is used for the construction, repair, and maintenance of ships) was established in 1827.


During the early 1900s, and before independence, the country had begun manufacturing small arms and ammunition for its armed forces, however, the defence industry in India was relatively small and limited in scope. Most of the equipment used by the Indian military was imported from other countries, and there was little domestic production of defence-related products.


There were a few notable exceptions. For example, the Royal Indian Navy had a small shipbuilding industry, and the British Indian Army had a number of ordnance factories that produced a range of weapons and ammunition.


After Independence

After independence in 1947, the Indian government recognized the importance of building a strong domestic defence industry and began to invest in research and development in this area. This included the establishment of organizations such as the Defence Research and Development Organization (DRDO) and the Ordnance Factories Board (OFB), which were responsible for developing and producing a range of defence-related equipment.

In the decades that followed the defence industry in India expanded and India's defence industry underwent significant modernization and expansion. The country established several state-owned enterprises, such as Hindustan Aeronautics Limited (HAL), etc., to develop and produce advanced defence technologies and systems. India began developing and producing a range of advanced defence products, including aircraft, missiles, tanks, ships, and electronic systems.


Liberalisation

Until 2001, defence manufacturing in India was confined to the public sector. In 2001, the government of India announced significant changes to the defence sector, with the aim of promoting the participation of the private sector in the defence industry and reducing its reliance on public sector undertakings (PSUs). As a result of these changes, the defence sector was opened 100% for the private sector, and private sector companies were allowed to enter the defence sector on a more equal footing with PSUs.


Make In India Initiative

In recent years, the Indian government has made efforts to encourage the growth and development of the country's private-sector defence industry. This has included measures such as the "Make in India" initiative, which aims to boost domestic manufacturing and increase the participation of private sector firms in defence production. As a result, a number of private sector firms have emerged in the defence manufacturing sector, including companies such as Reliance Defence and Tata Power SED.


DEFENCE INDUSTRY IN INDIA

Demand and Supply

The defence industry in India is primarily focused on the production and procurement of military equipment for the Indian Armed Forces.

In India, the defence industry is primarily composed of public sector undertakings (PSUs) such as the Defence Public Sector Undertakings (DPSUs), Ordnance Factories, as well as, private sector companies that manufacture defence-related products under license from the government.


Public Sector

The main players in the defence industry include the Defence Public Sector Undertakings (DPSUs) such as HAL, Bharat Electronics (BEL), Bharat Dynamics Limited (BDL), which are responsible for the production of a range of weapons, including small arms, artillery, and missiles.


Private Sector

Private sector companies such as the Tata Group, Reliance Defence, Larsen and Toubro Group, Mahindra Group, etc. are also involved in the production of weapons in India, either through contracts with the government or through licensing arrangements with the government.


Startups

In recent years, there has been a growing trend towards the establishment of startups in the defence sector in India. These startups are typically focused on the development and production of innovative defence-related technologies, such as drones, cybersecurity products, and other advanced systems. Some of these startups have received funding from the government and other investors to support their research and development efforts. It is expected that the number of defence startups in India will continue to grow in the coming years, as the government looks to promote the development of new technologies and capabilities in the defence sector.


Promotion of Indigenous Products, Reduction of Reliance on Imports, and, Increased Exports

In recent years, the government of India has made efforts to reduce reliance on imports, commence and increase exports, and promote the development and localized utilization of the products and services from the domestic defence industry. It has implemented several policies and initiatives to encourage the growth of the domestic defence industry, including the Defence Production Policy of 2018 and the Defence Procurement Procedure of 2016.

The Defence Production & Export Promotion Policy (DPEPP) 2020 has now been announced by the Minister of Defence, Rajnath Singh, in a press release issued by the Ministry of Defence.


The DPEPP 2020 replaces the Defence Production Policy of 2018, which was previously in effect. The new policy is intended to serve as a comprehensive framework for the development of the Indian defence industry, and it is aimed at promoting production, export, self-reliance, and private sector participation within the sector.


The DPEPP 2020 sets out a number of initiatives and measures to support the growth and development of the Indian defence industry. This includes the promotion of indigenous design, development, and production of defence-related products, the encouragement of research and development within the sector, and the establishment of a new defence industry development fund. The policy also aims to simplify defence procurement procedures and create a level playing field for private sector companies operating in the sector.


APPLICABLE LAWS

The Constitution of India

Article 246 of the Constitution states that Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the “Union List”). The following are the relevant items from the Union List, applicable to the defence industry, and, the goods and services pertaining to the same:


Item 1. Defence of India and every part thereof including preparation for defence and all such acts as may be conducive in times of war to its prosecution and after its termination to effective demobilisation.

Item 2. Naval, military and air forces; any other armed forces of the Union.

Item 4. Naval, military and air force works.

Item 5. Arms, firearms, ammunition and explosives.

Item 7. Industries declared by Parliament by law to be necessary for the purpose of defence or for the prosecution of war.


Briefly, Article 246 of the Constitution assigns the defence of the country to the Union (central) government and gives it the exclusive power to make laws related to defence. This includes the power to regulate the production, supply, and distribution of defence-related equipment.


The laws and rules given herein below are applicable and relevant to know for the defence manufacturing industry in India. These applicable laws ensure that the production and supply of defence-related equipment are regulated and controlled by the government.

Some of the key laws, rules, and, policies which govern the defence sector and industry are given in the paragraphs below.


Industrial Development and Regulation Act (IDRA)

The IDRA, 1951 provides the framework for the development and regulation of industries in the country, including the defence industry, and has since undergone several amendments.

The Department of Industrial Policy and Promotion (DIPP) is the nodal agency responsible for the implementation of the IDRA. The DIPP is a department within the Ministry of Commerce and Industry of the Government of India.

Under the IDRA, the government has the authority to regulate the establishment, expansion, and closure of industrial enterprises in India. It also sets out the procedures for obtaining necessary approvals and licenses for setting up and operating an industrial enterprise.

Companies that want to manufacture defence-related equipment in India must follow the procedures outlined in the IDRA and obtain the necessary approvals and licenses.


Arms Act

The Arms Act regulates the possession, sale, and transfer of firearms and other weapons. The Arms Act applies to the manufacturing of firearms and other weapons in India and sets out the conditions under which individuals and organizations can obtain licenses to manufacture, sell, or possess these products.


Under the Arms Act, companies that want to manufacture firearms or other weapons in India must obtain a license from the relevant authorities. The Ministry of Home Affairs is the nodal agency with the power to issue licenses for the manufacture of arms and ammunition under the Arms Act.


The Ministry of Home Affairs has delegated certain licensing powers and functions in respect of the category of arms and ammunition and defence items specified in a schedule to the Ministry of Home Affairs Notification to the DIPP. The Ministry has analyzed the definitions of "manufacturing" and "parts and components" under the Arms Rules, 2016 to conclude that "manufacturing under the Arms Rules, 2016 is confined to manufacture of a complete firearm or pressure bearing part of a firearm only." The Ministry has also clarified that all other parts or components, being non-pressure bearing, are out of the ambit of the definition of manufacturing under the Arms Act and would therefore not require an Arms License.


The process for obtaining a license under the Arms Act involves the submission of an application and the payment of fees. The application must be accompanied by detailed information about the company and the products it intends to manufacture, as well as details of the manufacturing process and the intended use of the products.

The Arms Act also sets out the conditions under which firearms and other weapons can be imported into India. Companies that want to import firearms or other weapons into the country must obtain the necessary approvals and licenses from the relevant authorities.


FDI Policy

Foreign Direct Investment (FDI) in the defence sector in India is governed by the FDI policy, which is issued by the Department for Promotion of Industry and Internal Trade (DPIIT). The FDI policy sets out the rules and conditions for foreign investment in the defence sector, including the types of investments that are allowed and the approval requirements that must be met.


Under the FDI policy, foreign investment in the defence sector is subject to certain conditions and approval requirements. For example, foreign investors may be required to obtain approval from the DPIIT and/or the Ministry of Defence, depending on the nature of the investment and the level of technology transfer involved.

Foreign direct investment (FDI) in the defence sector in India has undergone significant changes over the years. In the early years after independence, foreign investment in the defence sector was generally not allowed in India. This was intended to protect the domestic defence industry and ensure that the country's security needs were met through domestic production.


In the 1990s and 2000s, the Indian government made a number of changes to its foreign direct investment (FDI) policy that had an impact on the defence sector.


In the 1990s, the government began to liberalize the defence sector and allow for some foreign investment. This was part of a broader liberalization of the Indian economy and was intended to promote the development of the domestic defence industry.


In the 2000s, the government made further changes to the FDI policy to encourage foreign investment in the defence sector. For example, in 2005, it raised the FDI limit in the defence sector from 26% to 49%. This meant foreign investors could own up to 49% of a defence enterprise in India, subject to certain conditions.


In the 2010s, the Indian government continued to liberalize the defence sector and allow for greater foreign direct investment (FDI). This was part of a broader effort to promote the development of the domestic defence industry and reduce the country's reliance on imported products.


In 2014, the government introduced a number of reforms to the FDI policy in the defence sector. Effectively, foreign investors could then own more than 49% of a defence enterprise in India, subject to the approval of the government.


In 2020, the government introduced further reforms to the FDI policy in the defence sector. Effectively now, foreign investors can now own more than 74% of a defence enterprise in India, subject to certain conditions.


In addition, the government introduced a number of measures to encourage the transfer of technology and promote indigenization (i.e., the use of domestic products) in the defence sector. These measures included the Defence Research and Development Scheme, which provided financial support for research and development in the defence sector, and the Offsets Policy, which required foreign defence contractors to reinvest a portion of their earnings in the domestic defence industry.


In 2016, the government launched the Foreign Investment Facilitation Portal (FIFP) to make it easier for foreign investors to invest in India, including in the defence sector. The FIFP is an online platform that allows foreign investors to submit FDI proposals online and track the progress of their applications.


Defence Procurement Procedure (DPP)

The DPP is a key policy document in India that governs the procurement of defence-related equipment. The DPP outlines the procedures for the acquisition of military equipment, including the selection of suppliers and the negotiation of contracts.


The DPP is issued by the Ministry of Defence and is reviewed and updated regularly to ensure that it remains relevant and effective. It applies to all procurement of defence-related equipment by the Indian armed forces, including the army, navy, and air force.


The Defence Procurement Procedure (DPP) is a comprehensive document that outlines the rules and procedures that must be followed when procuring defence and security-related products and services in India. The DPP consists of several chapters that outline the various stages of the procurement process, including the identification of requirements, the selection of suppliers, and the negotiation and award of contracts.


The DPP also includes provisions on the use of indigenous products and the role of the private sector in defence procurement. The DPP sets out the rules and procedures that must be followed when procuring defence-related products and services, including the types of procurement that are allowed, the eligibility criteria for bidders, the selection process for suppliers, and the terms and conditions of contracts.


The DPP also outlines the roles and responsibilities of different stakeholders involved in the procurement process, such as the Ministry of Defence (MoD), the procurement authorities, and the bidders. The MoD is responsible for issuing the DPP and for overseeing the procurement process. The procurement authorities are responsible for implementing the DPP and for managing the procurement process on behalf of the MoD. Bidders are companies or individuals who submit proposals to supply goods or services to the government.


The Defence Acquisition Procedure (DAP) is a sub-section of the DPP that specifically deals with the procurement of long-term strategic assets (classified as capital procurements). The DAP sets out the rules and procedures that must be followed when procuring these types of assets, including the types of procurement that are allowed, the eligibility criteria for bidders, the selection process for suppliers, and the terms and conditions of contracts.


The Defence Procurement Manual (DPM) is another sub-section of the DPP that specifically deals with the procurement of non-strategic and bulk goods and services (classified as revenue procurements). The DPM sets out the rules and procedures that must be followed when procuring these types of goods and services, including the types of procurement that are allowed, the eligibility criteria for bidders, the selection process for suppliers, and the terms and conditions of contracts.


The main objectives of the DPP are to ensure that the Indian armed forces receive the best possible value for money when procuring defence-related equipment and to promote the development of the domestic defence industry.


In India, notably, the procurement of defence and security-related products and services is not governed by a specific statute or law. Instead, procurements by the government and its agencies are broadly governed by the General Financial Rules (GFR) 2017, which provides the framework under which all government procurements are undertaken.


The GFR is a set of rules and procedures that apply to all government procurement activities, including the procurement of defence and security-related products and services. The GFR sets out the general principles that must be followed when procuring goods and services, including the need for transparency, fairness, and value for money. It also outlines the roles and responsibilities of different stakeholders involved in the procurement process, such as the procuring authorities, the bidders, and the vendors.


ADMINISTRATIVE FRAMEWORK

In exercise of its powers under Article 77(3) (Conduct of business of the Government of India) of the Constitution, the President has made The Government Of India (Allocation Of Business) Rules (“Rules”) for the allocation of the business of the Government of India. The purpose of these Rules is to ensure that the various functions of the government are carried out in a coordinated and efficient manner and that there is clarity about the roles and responsibilities of different departments and agencies. Rule 2 deals with the Allocation of Business i.e., allocation of responsibilities among different Ministries, Departments, Secretariats and Offices of the Indian government (specified in the First Schedule to these rules). Rule 3 deals with the subjects each of the Ministries and Departments shall have control over.


In the context of the defence sector, these Rules outline the responsibilities of different departments and agencies in relation to the procurement of defence-related equipment, the development of defence technologies, and the regulation of the defence industry.

The Rules may specify that the Ministry of Defence is responsible for the procurement of defence-related equipment, while the Department of Industrial Policy and Promotion (DIPP) is responsible for the regulation of the defence industry. The Rules may also outline the roles and responsibilities of other departments and agencies, such as the Ministry of Home Affairs, the Ministry of Finance and the Ministry of External Affairs, in relation to the defence sector.

Item 9 under the First Schedule, prescribes for a Ministry of Defence (Raksha Mantralaya), and, 4 (Four) Departments:

  • Department of Defence (Raksha Vibhag),

  • Department of Defence Production (Raksha Utpadan Vibhag),

  • Department of Defence Research and Development (Raksha Anusandhan aur Vikas Vibhag), and,

  • Department of Ex-Servicemen Welfare (Poorva Senani Kalyan Vibhag).

The Ministry of Defence is responsible for the defence of India and its interests. It is responsible for the management of the armed forces, the development and procurement of military equipment, and the administration of military justice. It is also responsible for the coordination of military policy with other agencies of the government, such as the Ministry of External Affairs, and for the formulation of defence-related policies and strategies.


The Department of Defence Production (“DDP”) is a department of the Ministry of Defence in the Government of India. DDP is responsible for the development, production, and maintenance of a range of defence-related equipment and supplies, including weapons, ammunition, vehicles, and other military hardware. The DDP is headed by the Secretary of Defence Production, who is responsible for the overall policy and administration of the department. It is divided into several organizations, including the Defence Public Sector Undertakings (DPSUs), which are responsible for the production and procurement of military equipment, and the Ordnance Factories, which manufacture a range of defence-related products. The DDP works closely with other agencies of the government, such as the Ministry of External Affairs and the Department of Defence Research and Development, to coordinate defence-related policies and strategies. It also works with various private sector companies in India to promote the development of the domestic defence industry.


The Department of Defence Research and Development (DDR&D) is a department of the Ministry of Defence in the Government of India. It is responsible for the development and procurement of military equipment, as well as the research and development of new technologies and systems for the defence of India. The DDR&D is headed by the Secretary of Defence Research and Development, who is responsible for the overall policy and administration of the department. It is divided into several organizations, including the Defence Research and Development Organisation (DRDO), which is responsible for the research and development of military technologies, and the Defence Public Sector Undertakings (DPSUs), which are responsible for the production and procurement of military equipment. The DDR&D works closely with other agencies of the government, such as the Ministry of External Affairs and the Ministry of Science and Technology, to coordinate defence-related policies and strategies. It also works with various academic and research institutions in India to foster collaboration and exchange of ideas in the field of defence research and development.


Summary of Licenses needed for Business Operations in the Defence Industry in India

In India (as stated above), the manufacturing of defence-related products and the export of these products are regulated by the government. To engage in the defence manufacturing industry in India, companies must obtain various licenses and approvals from the government.

Here are some of the key licenses and approvals that may be required for defence manufacturing in India:

  1. Industrial license: Industrial licenses are required for the manufacture of defence-related products in India. Industrial licenses are issued by the Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce and Industry. Companies must apply for industrial licenses through the Single Window Clearance System (SWCS) portal.

  2. Export license: Companies that want to export defence-related products from India must obtain an export license from the Directorate General of Foreign Trade (DGFT). Export licenses are required for all defence-related products, including both finished products and raw materials.

  3. Arms Act License: Companies that manufacture or deal in arms or ammunition in India must obtain an Arms Act License from the Ministry of Home Affairs. This license is required for the manufacture, sale, repair, testing, and storage of arms and ammunition.

  4. Technology Transfer Agreement (TTA): Companies that want to transfer technology to an Indian company for the purpose of defence manufacturing must obtain a Technology Transfer Agreement (TTA) from the Department of Defence Production (DDP). The TTA must be approved by the DDP before the technology transfer can take place.

  5. Defence Offset Guidelines (DOG): Companies that are awarded defence contracts by the government of India may be required to follow the Defence Offset Guidelines (DOG). The DOG sets out the rules and procedures for the discharge of offsets, which are defined as any investment, expenditure, or other economic activity that a company is required to undertake in India in connection with a defence contract.

In addition to the licenses and approvals specific to the defence manufacturing industry, companies engaged in defence manufacturing in India may also be required to obtain various environmental and land-related licenses and approvals.

Here are some of the key environmental and land-related licenses and approvals that may be required for defence manufacturing in India:

  1. Environmental clearance: Companies engaged in defence manufacturing in India may be required to obtain an environmental clearance from the Ministry of Environment, Forest, and Climate Change (MoEFCC). Environmental clearances are required for projects that have the potential to cause significant environmental impacts, such as the construction of new manufacturing facilities or the expansion of existing facilities.

  2. Land acquisition: Companies engaged in defence manufacturing in India may be required to acquire land in order to set up their facilities. Land acquisition in India is governed by the Land Acquisition, Rehabilitation, and Resettlement Act of 2013. This act sets out the procedures and compensation required for the acquisition of land by the government or private companies.

  3. Real estate tax: Companies engaged in defence manufacturing in India may be required to pay real estate tax on the land and buildings they own or occupy. Real estate tax is typically levied by local government authorities and is based on the value of the property.

Obtaining the necessary licenses and approvals is an important step for companies that want to engage in defence manufacturing in India. These licenses and approvals are required in order to ensure compliance with government regulations and to support the development of a strong and self-reliant defence industry in India.


It is important for companies engaged in defence manufacturing in India to be aware of the various licenses and approvals that may be required, and to ensure that they obtain these licenses and approvals in a timely manner. Failure to obtain the necessary licenses and approvals can result in delays, fines, and other consequences.


NOTE: This article is the first part of a series of articles and posts we are going to publish for the defence industry.


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