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Indian Aerospace & Defence Sector Recent Changes and their Impact - Part 1

Part 1 of our blog post in this series discussed the evolution of the Aerospace and Defence (A&D) sector in India over the years and certain recent policy changes introduced by the Government during the Covid era, focused on making the A&D sector one of the major pillars of the Atmanirbhar Bharat Abhiyan.  In this second part, we analyse how these policy changes will impact various players in the A&D sector in India going forward.  

Changing Role of the OEM

In 2019, India’s military expenditure grew by 6.8% to US$71.1 billion[1], stemming from rising tensions with both Pakistan and China. In 2020, India’s defence budget stood at INR 471,378 crores[2]. India is the third largest arms importer in the world and represents a very lucrative market for international OEMs to tap.

Until now, foreign OEMs participated in the Indian defence market through strategic procurements under the Government-to-Government route (where the relevant foreign Government assigns India’s procurement contract to vendors in its country) or Buy (Global) procurements, which signify an outright purchase of equipment from a foreign vendor.

With a view towards making these foreign OEMs participate in the Indian defence story, the Government imposed the offset policy in 2005. The stated goal of the offset policy is to leverage capital acquisitions to develop the Indian defence industry.[3] Under the policy, foreign sellers are required to invest back into India 30% of the price paid by the Government for defence imports. This can be done through a choice of avenues: purchase of A&D products from India, FDI for A&D manufacturing, technology transfer to India, etc., all aimed at fostering development of internationally competitive defence enterprises in India and augmenting defence R&D.  Till now, 54 offset contracts have been signed and the total offset obligations are estimated at approximately US$ 11.80 billion, to be discharged over a period from 2008-2024.[4]

However, with the policy being in force for over a decade now, offsets have not really served their purpose. Of the total offset obligations, only US$ 2.83 billion have actually been discharged by the vendors, only about half of which has actually been accepted post audit by the MoD. [5] To assess the impact of the offset policy on the Indian A&D industry, the MoD tasked the Institute for Defence Study and Analysis (IDSA) to undertake a study on offset implementation. The main findings of the study revealed that about 87% of offset discharge has been executed through only 15 Indian Offset Partners (IoPs), with the top five (5) and 10 IoPs receiving 51.76% and 76.11% offsets, respectively. Repeat orders on the same IoPs were common. Importantly, more than 90% of offset discharge was undertaken through purchase of products and services and there were very few takers for transfer of technology or FDI as avenues of offset discharge.

While the large quantum of offsets discharged through purchase of products and services augurs well for India’s export ambitions, in reality, these relate to small parts & component export and not to any achievement of actual sophistication. Clearly, the hope that over the years, offsets fulfilled by foreign OEMs would make India a strong industrial hub in the A&D sector have not borne fruit. In addition, international studies reveal that procurements containing offset elements are more expensive (with the OEM factoring in the offset cost into its price bid). Since offsets have only shown minimal results in improving the sophistication of the Indian A&D ecosystem, such increased procurement costs make little sense.

To fix these concerns, the Defence Acquisition Procedure-2020 (DAP-2020), which has been issued with effect from October 1, 2020, aims to strengthen the existing offset related provisions. It proposes higher multipliers for offsets discharged through FDI and technology transfer. Multipliers have also been used to incentivise purchase of complete defence equipment instead of parts & components.

But more importantly, the provisions of the DAP-2020 reflect a move away from reliance on offsets as development drivers. Under the DAP-2020, offsets will no longer be appliable to any ab-initio single vendor cases, such as Government-to-Government route procurements, which account for the bulk of India’s import deals. Instead, the Government has increased focus on choosing procurement avenues that require at least a certain percentage of the total order to be indigenously produced. The indigenously produced component is referred to as ‘indigenous content’ (IC) in a product, and is arrived at by reducing the value of imported components and fees/royalties paid in foreign exchange from the basic cost of the equipment. The DAP-2020 now specifies higher IC requirements for various procurement categories, as compared to previous iterations. Speaking on this new approach, the Raksha Mantri has said that “Till sometime back, for our defence procurement, we have been looking towards the best technologies available in the world. But now our outlook has changed. We are thinking on how to manufacture latest equipment ourselves or through Joint Ventures or transfer-of-technology.[6] It is expected that going forward, other than procurements undertaken through the Government-to-Government route, the bulk of defence procurements will require IC and technology transfer aspects.

Under the DAP-2020, procurement categories with a higher priority involve procurement from an ‘Indian vendor’. To add to this, on August 9, 2020, the Raksha Mantri (Defence Minister) announced that the defence capital acquisition budget of the Indian Governement will now on be split for domestic and international procurement, with the domestic budget for the current year being fixed at INR 520 billion. On the same day, the Raksha Mantri also released a list of 101 items which will be banned for import and can only be purchased from within India. The list is not limited to simple parts and components, but also includes sophisticated items such as light combat helicopters, armoured fighting vehicles and submarines. Government sources predict that the ban will result in orders worth INR 4000 billion being placed on ‘Indian vendors’ in the next 6-7 years.

As per the DAP-2020, an ‘Indian vendor’ is permitted to have FDI as per extant norms (other than for certain specified categories, which require the vendor to be Indian owned and controlled). Accordingly, for foreign OEMs to be able to participate in the bulk of Indian procurements going forward, they will have to invest in manufacturing facilities in India. While some technology/sub-assemblies for the equipment to be sold to the Government can still be imported, minimum IC requirements will have to be met by showing Indian manufacturing. The minimum IC stipulated by the DAP-2020 is 50%, and therefore, at least some sophisticated manufacturing will have to be transferred to India. With the Government increasing the automatic route FDI limit in the A&D sector to 74%[7], it is expected that OEMs should now feel comfortable transfering sophisticated technologies to their subsidiaries in India.

In introducing these changes, the Government has signaled that going forward, manufacturing in India is the only option. The Government has paved the way for foreign OEMs to show that they are dedicated to the ‘Make-in-India’ initiative, and that to be able to continue to actively participate in Indian defence sales, OEMs will have to become partners in the India growth story.

Changing Role of DRDO, OFB and DPSUs

The size of the A&D industry is currently estimated to be about INR 80,000 crore. Of this, the contribution of DPSUs is estimated to be INR 63,000 crore (which is almost 80%). However, recent parliamentary submissions made by the Government reflect that other than the OFBs, these entities are highly reliant on imports for their production lines. For instance, for HAL’s light combat aircraft, which is touted as India’s greatest indigenous achievement in the military aviation space, import content remains at 40%. Similarly, for the P75 submarines being produced by MDL, the expected import component is 70%.[8] This suggests that while the final assembly of such products might be taking place in India, large quantities of underlying technologies and components are still being imported.

To change this scenario, as a first step, the Government has taken measures to make the private industry aware of the imports currently undertaken by the MoD and DPSUs, as well as their future requirements over the coming couple of years, by unveiling the SRIJAN portal on August 14, 2020. The portal is meant to convey indiginisation opportunities to the private sector. It provides detailed information such as the name of the OEM from which the product is presently being imported, annual import value, product specifications and the ‘Make-in-India’ target year for the product. Indian vendors can scan the portal and indicate their interest in indigenising a particular product, and the MoD/relevant DPSU will then work with the vendor to formulate an indigenisation plan for the product. Since all procurement categories under the DPP allow a vendor to have at least 49% foreign investment, Indian industry could use the information available on the portal to establish tie-ups with foreign OEMs depending on their present capabilities and production lines.

In addition, the DRDO, which is the primary R&D wing of the MoD, has released a policy under which DRDO patents will be made available to the Indian industry at zero cost. The patent licensing policy covers all Indian patents granted to the DRDO. Licensing will be undertaken on a non-exclusive basis and the DRDO will retain ownership. The policy stipulates that such licenses will only be granted to manufacturing entities, and not to traders, ensuring that licensing will lead to actual growth of the Indian A&D manufacturing base.  In addition, the DRDO has also presented the MoD with a list of 108 systems and sub-systems that can be indigenously designed and developed going forward.[9]  To aid the process, the DRDO will provide support to the Indian industry on a requirement basis. Items on the list include bullet proof vehicles, marine rocket launchers and navigation radars. As the Indian industry steps in to take over production of these items, the DRDO can concentrate on development of more critical technologies.


All the recent steps taken by the Government further the cause of ‘Atmanirbhar Bharat’ in the A&D sector, planned to be achieved in a progressive fashion over the coming years, with targets set for indigenisation as well as exports. The Government has shown a  concerted effort to lay down enabling policies to achieve this goal. But the devil lies in the detail, i.e., implementation. A major factor that impedes interest in the sector is the long procurement cycle and uncertainties associated with the process. India’s large defence capital procurement budget may entice players but often, actual investments are only made once some level of order certainty is available. The implementation of the Strategic Partnership (SP) model, which was introduced under the DPP-2016, is a classic example. Meant to encourage private Indian industry participation in development of strategically important high-end systems (such as fighter aircraft and submarines), the SP model envisages Indian industry tying up with a foreign OEM to bring sophisticated technologies to India. However, so far, no order has been placed under the model, and the Government has done several flip-flops in issuances of RFPs and shortlisting of vendors. The next few years will be important from the context of seeing how these policy changes are implemented to achieve the desired results.

[1] As per data complied by Stockholm International Peace Research Institute (SIPRI)


[3] Para 1.1 of Appendix D to Chapter II of the DPP-2016

[4] Seventh Report of the Seventeenth Lok Sabha Standing Committee on Defence, titled the “Demand for Grants” (2020-2021)

[5] Seventh Report of the Seventeenth Lok Sabha Standing Committee on Defence, titled the “Demand for Grants” (2020-2021)

[6] Press Information Bureau, Government of India, August 24, 2020

[7] Press Note 4 of 2020 dated September 17, 2020, which will come into effect from the date of the FEMA notification (which has not yet been issued).  

[8] Seventh Report of the Seventeenth Lok Sabha Standing Committee on Defence, titled the “Demand for Grants” (2020-2021)

[9] Press Information Bureau, August 24, 2020