This is a best prospect industry sector for this country. Includes a market overview and trade data.
Last Published: 7/27/2017
Overview

India has the third largest armed forces in the world and plans to spend billions in defense acquisitions over the next several years. According to IHS Jane’s latest annual Defense Budgets report, India is the fourth largest defense spender.  Due to an underdeveloped defense manufacturing sector, India is one of the largest importers of conventional defense equipment in the world.  According to the GoI, India imports approximately 60% of its defense requirements.  This makes India’s defense sector one of the most attractive markets globally for both domestic and foreign defense manufacturers. 

The defense sector continues to be one of the government’s high priority focus areas.  This year’s capital expenditure budget of $12.72 billion has increased slightly from last year.  We anticipate significant opportunities for U.S. exporters in the defense sub-sectors.

The Indian defense sector has historically been dominated by state-owned enterprises, known as Defense Public Sector Undertakings (DPSUs) and Ordinance Factory Boards (OFBs). According to RSP Advocates & Solicitors, these DPSUs and OFs contribute 90 percent of the total domestic defense manufacturing output.  The GoI began allowing private sector participation in defense manufacturing only in 2001. While the Indian DPSUs and private sector suppliers produce combat aircraft, naval vessels, heavy trucks, and other military equipment, they invest little in research and development, resulting in slow development of new generation technologies. As a result, India’s Defense Industrial base is underdeveloped.

With its advanced technology, U.S. OEMs have had increasing success penetrating the market over the past ten years selling over $14 billion in major systems, including Boeing’s Apache and Chinook helicopters and Lockheed Martin’s C-130 aircraft. The United States has become one of India’s top three suppliers with Russia and Israel. While U.S. second and third tier suppliers have not had as much success, other non-Indian suppliers do sell parts and components to Indian OEMs.

Although India has become one of the world’s top defense importers, the Government of India has made it a priority to create a robust defense industrial base under its ‘Make in India’ initiative.  For national security reasons, to create jobs in India, and to further develop its overall manufacturing capabilities, Prime Minister Modi announced the “Make in India” initiative in September 2014. Under this initiative and with continuing privatization efforts, additional large Indian business conglomerates are entering the defense sector. In June 2015, India announced that the DPSUs would no longer receive preferential customs and duties treatment, further encouraging more private sector investment.

In March 2016, the Ministry of Defense released chapters one to five of its Defense Procurement Procedure 2016 (DPP-2016) announcing several modifications to institutionalize, streamline, and simplify the procurement procedure in order to promote India’s defense sector. Other important chapters and various appendices and annexes were released in June 2016. The final chapter, which describes the rules and processes for the “Strategic Partnership” model, was released in May 2017.  This chapter describes how Indian industry and foreign industry will be selected by the Ministry of Defense to partner with each other in defense subsectors such as fighter aircraft, submarines, helicopters, and armored fighting vehicles.

DPP-2016 has made the promotion of indigenously designed, developed and manufactured defense equipment a priority.  It is actively encouraging increased participation of Indian industry, particularly MSME, in the defense sector. 
Under the “Make in India” program, there are broadly five procurement categories with the Indigenously Designed Developed and

Manufactured category being the most “preferred” acquisition option. The five categories are: 
  • Buy (Indian – Indigenously Designed Developed and Manufactured): Direct purchase from an Indian vendor whose products meet Indigenous Content requirements.
  • Buy & Make (Indian): Purchase from an Indian vendor (including an Indian company forming joint venture/establishing production arrangement with OEM), followed by licensed production/indigenous manufacture in the country.
  • Buy (Indian): Direct purchase from Indian vendors whose products meet a minimum indigenous content. 
  • Buy & Make: Purchase from a foreign vendor followed by licensed production/indigenous manufacture in the country. 
  • Buy (Global): Purchase from foreign or Indian vendors. There is also a “Make” category that can be pursued separately, in sequence or in tandem with any of the five above categories.  Acquisitions in the ‘Make’ category must be designed, developed and manufactured by an Indian vendor.  Candidates for this category are selected early in the planning, and are therefore prepositioned ahead of all of the other categories.
With the Government of India’s strong preference for products designed and manufactured in India, it is important that U.S. companies develop a strategy to transition from being an exporter to forming partnerships and strengthening their supply chains in India in order to meet the new tendering requirements.  Future access to the Indian market will be based on meaningful partnerships with local players and strong supply chains with local companies.

Tata and Mahindra already have entered into joint ventures with U.S. defense firms. Reliance Group, Adani, Larsen and Toubro, and Kalyani Group are also major players in the sector. Several major Indian OEMs and tier two companies seek U.S. suppliers and partners.

The Government of India has announced several positive changes in DPP-2016 in order to encourage participation of foreign OEMs in the Indian market.  The new policy has made the process for obtaining industrial licenses substantially easier.  DPP-2016 has also introduced enhanced performance parameters, moving from a standard L1 model to a L1-T1 model with up to 10% credit.

In order to simplify the regulations governing FDI and to make India an attractive destination for foreign investors, the government raised FDI limits from 26% to 49% in the defense sector, with up to 100% FDI possible if there is “modern technology” transfer and government approval.  In addition, it has made its FDI defense policy applicable to the manufacturing of small arms and ammunitions covered under the Arms Act of 1959.

The Government of India also recently modified its offset policy.  Offsets are now only applicable to procurements above INR 2000 crores (approximately $300 million). The Government of India has also reinstated services as an avenue for offset discharge.  OEMs have been given additional flexibility in modifying their offset plans and partners.   In June of 2016, the Ministry of Civil Aviation announced that it would work with the Ministry of Defense to ensure that commercial aero-manufacturing is covered under defense offset requirements.

While the Indian defense sales market offers great potential for defense suppliers, U.S. businesses desiring to make defense related sales to India should be aware that India is still a challenging market and requires patience. Defense procurement timeframes are measured in years, there can be poor transparency in the procurement process, and offset regulations can be challenging to navigate. Poor infrastructure and skills gaps pose manufacturing challenges. There can also be substantial payment delays.

In May of 2017, the Government of India released its “Strategic Partnership” model (SPM) in order to increase India’s defense manufacturing capacity.  This SPM strives to create long-term capacity in various defense subsectors of strategic importance. Under the SPM, Indian firms owned and controlled by resident India citizens will be selected to be Strategic Partners in the key defense subsectors of fighter aircraft, helicopters, submarines, and armored fighting vehicles/main battle tanks. Under the SPM, the GoI will shortlist OEMS to work with the selected Strategic Partner to manufacture the platform in India, transfer of
technology, provide life-cycle support, and develop an eco-system of domestic manufacturers. 


Leading Sub-Sectors

Land systems:
The Future Infantry Combat Vehicle (FICV) program must meet a requirement for over 2,100 vehicles. There will be additional opportunities in field artillery modernization (self-propelled howitzers and fire control systems) and in various munitions, to include surface to air missiles.

Maritime systems:
We expect to see more demand for fast patrol craft, while the Indian Navy is also planning to build more submarines and also begin construction of a second indigenous aircraft carrier. The Navy also has expanding requirements for fixed and rotary wing aircraft.

Aero systems:
There is demand under “Make in India” for co-production of more aircraft. There is also demand for unmanned aerial systems of all sizes and capabilities, along with missiles of various ranges. The Ministry of Defense also hopes to expand and further develop their rotary wing fleets.

Maintenance, Repair, and Operations (MRO):
With aging systems in all services and the purchase of more advanced systems, the requirement for more robust MRO capabilities is increasing.

Defense Electronics:
India Infrastructure estimates the defense electronics sector will be an estimated $70 billion market in the next decade and a half.

Opportunities
DEFEXPO will be held in February 2018.  Please see the website for updates.
New RFI and RFP opportunities are listed on the tenders of the India and Central Public Procurement Portal listed below under “Web Resources.”  Defence ProAc Biz News also lists future projects.

Web Resources

Government of India
Ministry of Defense
Department of Defense Production 
Indian Army  
Indian Navy  
Indian Air Force  
Border Security Force (Ministry of Home Affairs) 
Central Industrial Security Force (Ministry of Home Affairs) 
Tenders India  
Central Public Procurement Portal 
Defense Procurement Procedures 2016 Capital Procurement Manual

Media and Think Tanks
Institute for Defense Studies and Analyses  
Vivekananda International Foundation  
Defense ProAc Biz News  
Defense Now

For more information about opportunities in this sector contact U.S. Commercial Service Industry Specialist: Nisha Wadhawan at Nisha.Wadhawan@trade.gov
 

Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.



India Aerospace and Defense Trade Development and Promotion