A nation’s military strength is determined by its economic might. Industry provides the military with the wherewithal to fight the nation’s wars. Since independence the policy relating to Strategic Defence Production has been evolving. The first phase, was characterized by the State led industrialization. Since the era of liberalization, which began in 1991, the role of private sector and also that of competition, both domestic and international is playing a much greater role in the national economy. Naturally, this also meant changes in policy for Defence production.
Production of defence equipment has been under the purview of Government right from its inception. The Industrial Policy of the country had kept defence production in the public sector since First Industrial Policy outlined in the Industry Policy Resolution of 1948. The Industries (Development & Regulation) Act, 1951 gave statutory base to the Industrial Policy. Under this policy, the Defence Industry, which required heavy investments, strong R&D backing and on which there could be total reliance because of its criticality, remained under Government Control at all times. The control over defence industry was exercised under the Industries (Development & Regulation) Act, 1951, which made licensing compulsory. As a consequence of the then industrial policy, a large infrastructure for Defence production consisting of 39 Ordnance Factories, 8 Defence PSUs and 50 Research & Development laboratories was created in the country.
However, contrary to the common perception, the Private Sector has been playing significant role in the Defence industry sector as sub contractors and ancillary industry. The private sector mainly has been involved in supply of raw materials, semi-finished products, parts and components to Defence PSUs and Ordnance Factories to a great extent and also to Base Workshops of Army and Base Repair Depots of Air Force and the Dockyards of the Navy. Defence PSUs and Ordnance Factories are outsourcing their requirements from private sector (mainly SMEs) in the range of 20-25%. Out of this outsourcing, about 25% requirement is met through small-scale sector.
Several hi-tech equipments have also been successfully produced by the private sector. In the quest for self-reliance in the crucial sector of defence, the Government has been continuing its efforts to indigenize defence equipment wherever technologically feasible and economically viable. It has been a part of indigenization efforts to locate and develop broad-based indigenous supply source-both in the public sector and in the civil trade for many complicated and intricate equipments.
The economic liberalization in 1991 resulted in the high degree of deregulation and allowed the private industry to progress more rapidly. With the initial difficulties encountered by the Indian Industry today one has witnessed positive impact of this liberalization. There has been tremendous growth in the private sector and today many Indian companies are global players.
After considering the capital intensive nature of defence industry sector as also the need to infuse foreign technology and additional capital including FDI, Govt. decided in May, 2001 to open Defence industry for private sector participation up to 100% with FDI permissible up to 26% – both subject to licensing. Now with this policy change all defence related items have been removed from Reserved Category and transferred to the licensed category, as a result of which private sector can manufacture all types of defence equipment after getting a licence. Consequent to the Government’s announcement about the policy change, Department of Industrial Policy & Promotion (DIPP) in consultation with Ministry of Defence, issued detailed guidelines regarding the modalities for consideration of applications for grant of Industrial Licence. After the announcement of policy changes, there has been a paradigm shift in the role of private sector in the field of indigenisation, i.e., from the role of supplier of raw materials, components, sub-systems, they have now become partners in the manufacture of complete advanced equipment/system. The basic objective of allowing private sector participation is to harness available expertise in the private sector towards the total defence efforts and search for self-reliance. In-built advantages of the private sector are its reservoir of management, scientific and technological skills coupled with its ability to raise resources. The involvement of private sector with its world-class expertise and high technology would not only augment India’s indigenous defence production capability but also lead to creation of employment and infrastructure in the country, giving a strong impetus to the economy. It must be acknowledged that the policy change of May 2001 for allowing private industry to produce any defence item under licence was a logical outcome of liberalization initiated in India in 1991. The private sector industry in India is now just beginning to become significant partner in production and development of Defence items.
After opening up of defence production for the private sector, the industry has shown keen interest in this field. Many large industries have shown definite inclination to invest both in R&D and infrastructure to develop capabilities in defence production to assume the role of system integrators.
Defence Expenditure – Trend
In the union budget 2007-2008, Rs. 96,000 crore (US$ 23.42 Bn) has been earmarked for national Defence. Out of this sum, Rs 41,922 crore (US$ 10.22 Bn) is under the capital head and would be spent on “acquisitions”, which means buying new weapons, systems and equipment. Of the remaining Rs. 54,078 crores (US$ 13.19 Bn) which is earmarked under the revenue head, a proportion would be spent on “purchases”, which relate to buying of spares, general stores, fuel, clothing, food and medical stores etc. According to CII estimates total defence spending over acquisition and purchases for the next five years would be approximately Rs 1,88,000 crores (US$ 45.85 Bn) and has the potential to contribute to the economy.