Aerospace & Defence: 2020 Reforms
Before talking about what the Budget means for the Defence sector, it’s worth panning out and seeing the context of the last 12 months. In August 2020, the Department of Military Affairs in the Indian Ministry of Defence published a list of equipment which, in a phased manner, from 2020 onwards, cannot be imported into India; namely, the Negative Import List.
Part of the Government of India’s Atmanirbhar Bharat, or ‘Self-Reliant India’, response to the Covid-19 Pandemic, the embargo’s purpose is to increase local manufacturing, enhance India’s design and development capabilities, create more jobs and reduce the country’s reliance on expensive imports.
The list runs from rudimentary parts through to extremely complex future platforms: for example, the Light Combat Aircraft (LCA) Mark II (an order worth $11.5Bn) for the Indian Air Force and six submarines (worth $5.7Bn) for the Indian Navy.
At first glance, especially from the perspective of a foreign manufacturer, the NI List looks like a protectionist step. But we believe that rather than being ‘negative’ this reform will eventually present a significant opportunity for the UK defence sector.
Additionally, the Government of India has recently announced two additional reforms related to India’s defence market.
Firstly, as part of its pandemic response stimulus efforts, the Department of Commerce announced that foreign firms can now invest up to 74% of the equity in an Indian joint-venture or subsidiary in the Defence industry through the ‘automatic route’. While we would rather have seen this rise to 100%, it is nevertheless a welcome step; UK firms (and other foreign firms) have traditionally been wary about IP and technology transfer to India, and this reform provides more (if not complete) comfort to do so.
Secondly, in September India, released its new Defence Acquisition Procedure (DAP) 2020, which governs the country’s capital acquisitions for the next 5 years. The procedure introduces some new procurement options and innovations into India’s defence procurement system. For example, a new procurement category – Buy Global and Manufacture in India – requires the transfer of technology and a minimum of 50% indigenous content. There is also a new leasing option, which will enable the services to operate equipment not used in warfare – such as trainers and simulators.
All these reforms point in the same direction: in the future, India is highly unlikely to buy its major platforms off-the-shelf. We cannot see the procurement of fighters or submarines, to give two major impending examples, proceeding without a large majority of their content being indigenous.