Defence Sector: Policy Measures to Attract Domestic Private Investments

Defence Sector is one of the most important segments under “Make in India” initiative of the government. Some of the major initiatives taken by the government to attract domestic private investments are as follows:

FDI Policy

The FDI policy in defence has been reviewed. As per current policy, foreign investment up to 49% is allowed through government route (FIPB) while beyond 49% is allowed through approval of Cabinet Committee on Security (CCE) on case to case basis. The government has also removed few restrictions such as 51% equity to be held by Indian shareholder; and complete restriction of FIIs.

Defence Procurement Policy, 2016

The new Defence Procurement Policy (DPP) is being referred to as a game changing policy for the sector. In this policy, the government has tried to shift focus on Make-in-India, small and medium scale industries while also stressing on time-bound procedures. In the new policy, government has vowed to open of testing facilities. The rationale behind opening of testing facilities is that defence products are very costly and cannot be procured unless successful testing is done. Thus, testing is a major criteria in defence procurement. So far, Indian private companies were NOT allowed testing causing much delay. Another notable feature of this policy is new category of Indigenously Designed, Developed and Manufactured (IDDM). It has reversed equipment local mix from 70:30 to 30:70.

Level playing Field

To establish a level playing field between Indian private sector and public sector, the government has removed anomalies in excise and custom duties. Currently, all industries whether public or private are subject to same duty levies.

Reforms in Licensing Regime

Under the IDR act, the defence products list for issuing Industrial Licenses (ILs) has been revised and many components, parts, equipments have been removed from it so that barriers to entry can be removed. The process of applying for Industrial Licenses has been made completely online. Government has also streamlines the processing of applications and Industrial License validity period has been raised from 3 to 7 years with further extension window for 3 years on case to case basis. Further, the licensee has been allowed to sell defense items to government entities under the control of MHA and other organizations and state governments. Government has also revised the Standard Operating Procedure (SOP) for the issue of No Objection Certificate (NOC) for export of military stores.

Defence Export Strategy

Government has formulated and put online a Defence Export Strategy which outlines specific initiatives to be taken by the Government for encouraging the export of defence items. It is aimed at making the domestic industry more sustainable in the long run as the industry cannot sustain purely on domestic demand.