Taking Flight- A decade of Make in India

Juhi Mehta and Natasha Rao

At his maiden Independence Day address in 2014, Prime Minister Narendra Modi heralded the coming into force of the “Make In India” campaign with the intention of reviving the lagging manufacturing sector, bolstering India’s manufacturing capabilities and making India a global hub for manufacturing, design and innovation. The government identified 25 thrust sectors in which the Make In India campaign could make a significant change, and one of these sectors was aerospace and defence.

Within a decade of the launch of the “Make in India” initiative, the Indian defence sector has gone from being excessively reliant on imports for its defence needs to not only increasing its domestic production to almost 65% but also emerging as a substantial exporter of defence products. As of FY 2023-24, India has achieved a dramatic increase of 174% percent in indigenous defence production as compared to the figures in FY 2014-2015 and is looking to achieve a target of INR 3 lakh crore in domestic defence production by 2029.

In this article, we take a look at the evolution of the Make In India initiative in the aerospace and defence sectors, its achievements and shortcomings, and the challenges ahead.

Laying the foundation:

Indigenization of defence production through a broader industry collaboration has been the cornerstone for a number of policy reforms in the defence sector aimed at attracting foreign investment, enhancing domestic manufacturing, encouraging private participation and participation of MSMEs, as well as streamlining procurement processes.

To further this, the procurement categories under DAP 2020 were refined and upgraded to provide a floor of 50% IC across all procurement categories, and a new category of Buy (Global) was introduced to encourage foreign contractors to not only manufacture in India but to also promote setting up of MRO facilities. As it stands under the DAP 2020, in decreasing order priority, the priority of procurement categories, eligible vendors under each category and minimum prescribed IC is as follows:

S. No.	Procurement Category (in order of procurement priority)	Minimum IC under DAP 2020	IPR Ownership/ TOT
1.	Buy (Indian– Indigenously Designed Developed and Manufactured (“IDDM”)): Procurement from an Indian vendor where products are designed, developed and manufactured in India. Indian vendor should be owned and controlled by resident Indian citizens	50%	Equipment should be indigenously designed and developed.
2.	Buy (Indian): Procurement from an Indian vendor where the products may not have been designed and developed indigenously but are manufactured in India.	60%	Equipment may not have been indigenously designed and developed.
3.	Buy & Make (Indian): Initial outright purchase from an Indian vendor engaged in a tie-up with a foreign contractor, followed by indigenous production in a phased manner involving transfer of technology (“ToT”).	50% (on the “Make” portion)	Envisages planned ToT by foreign OEM of critical technologies.
4.	Buy (Global – Manufacture in India): Initial outright purchase from a foreign contractor followed by indigenous manufacture of equipment through its Indian subsidiary / joint venture / production agency (involving ToT).	50%	Envisages planned ToT by foreign vendor of critical technologies.
5.	Buy (Global): Outright purchase of equipment from foreign or Indian vendor.	30% for Indian vendors Nil for foreign vendors	-

In addition to the prioritized categories of procurement, with a view to promote indigenous design and development of prototypes of military equipment, the DAP 2020 also envisages the ‘Make’, ‘Innovation’, and ‘Design and Development’ categories.

The ‘Make’ category has further been divided into Make I, Make II and Make III. The table below provides a bird’s eye view of the three ‘Make’ categories.

	Make I	Make II	Make III
Overview	Envisages government funding of up to 70% of prototype development cost subject to a maximum of Rs. 250 crores, in a phased manner for indigenous design and development of products. Targeted at design and development of equipment, systems, major platforms or their upgrades.	No government funding is envisaged The Indian entity owns the IPR or the design of the main equipment. Aimed primarily at import substitution of equipment, system, platform or their upgrades or their sub-systems, sub-assemblies, assemblies, components, materials, ammunition, software	Products must be manufactured in India by Indian firms either in collaboration with, or via ToT from, the foreign OEM. Indigenous design and development is not mandated. Aimed primarily at import substitution of equipment, system, platform or their upgrades or their sub- systems, sub-assemblies, assemblies, components, materials, ammunition, software
Vendor eligibility	Indian vendor owned and controlled resident Indian citizens.	Indian vendor owned and controlled resident Indian citizens.	Indian vendors. No restriction on foreign ownership or control of Indian entity.
Procurement Category Minimum IC requirement	Buy (Indian-IDDM) category minimum 50% IC.	Buy (Indian-IDDM) category minimum 50% IC.	Buy (Indian) The products must have 60% IC.

Challenges and the road ahead:

While the increased participation by the private sector in defence manufacturing both by established powerhouses like the Tatas, Mahindra, Reliance, Bharat Forge, L&T, etc. as well as by start-ups and MSMEs, the increased inflow of foreign investment, the exponential growth of India’s defence exports, success stories under the ‘Make’ category all point to a successful implementation of “Make in India”, Indian defence’s indigenisation journey is far from nearing its end and the road ahead is by no means without challenges.

• A major criticism of the Make in India scheme is India’s failure to leverage its innovation and design capabilities to be completely autonomous and independent in respect of its defence manufacturing. While the Buy (Indian-IDDM) category, requiring not only that the Indian vendor be Indian owned and controlled but also that design, and IP in relation to the design, of a product be owned by the Indian vendor, remains the highest prioritised procurement category, critical technology ownership remains elusive, with India continuing to rely on foreign partners when it comes to building critical components. Foreign partners are understandably wary of parting with IPR or technology ownership as not only are these valuable commercial assets, but also because their unfettered use by a third party, sovereign or otherwise, may have serious legal and political consequences for them. Grant of ambiguous “Government Purpose Rights” and “Unlimited Rights” to the Indian government under Make I category procurement further adds to the discomfort of the foreign partners. It is therefore important to reconcile, till such time that India can develop self-sufficiency in such areas, the requirements for access to critical technology with the terms on which they may be available.

• Transfer of technology or IPR also raises the risk of foreign partners looking at potential breach of trade sanctions, especially in light of India’s growing defence exports. It is therefore very likely any such transfer of technology, especially for critical components, will come with restrictions imposed to safeguard the foreign partners from liabilities arising from breach of sanctions. India will have to take a hard look at the nature and acceptability of such restrictions while at the same time balancing them with its need for importing critical technology and its export ambitions.

  
  

• Meanwhile, it is important to heavily invest in R&D in the public and private defence sectors in India (ISRO’s example shows that this is possible) on a sustained and long term basis to enable the next generation of defence platforms to be developed indigenously. The government must consider defence sector bonds to raise capital from the nation to further financial participation in the defence sector.

  
  

• While the DAP 2020 did streamline the procurement process to some extent, as the Defence Secretary has himself noted, the procedures continue to remain laborious and cumbersome, involving multiple departments / agencies. The processes and timelines under the DAP 2020 are proposed to be overhauled in this year to ensure further efficiencies and transparency.

  
  

• Although foreign direct investment in the sector has been liberalised with up to 74% investment being allowed under the automatic route, the requirement for Indian vendors to be Indian owned and controlled automatically limits foreign ownership in Indian vendors bidding under Buy (Indian- IDDM) category to 49%. This dissuades foreign participation and further complicates issues that relate to the transfer of technology. The regulations should focus on allowing foreign control on the basis of ToT and very carefully thought out “step in” rights for a narrow set of circumstances, which will achieve both objectives and which frankly, a number of countries around the world already have in less publicised formats in their regulations.

  
  

• Despite incremental efforts by the government over the years to simplify the process of doing business in India, India continues to remain a compliance heavy jurisdiction. The extent of paperwork and documentation that is involved in entering the Indian market is daunting, and may dissuade potential investors. These concerns are further exacerbated while dealing with complicated procurement where a high level of technical and bureaucratic discretion will have to be exercised at the armed forces and ministry level to enable closure of the deal. While ensuring that anti-bribery regulations are strictly enforced, the government should provide immunity to officials taking good faith decisions for the betterment of the country. India’s continued commitment to increase the ease of doing business in India could go a long way in addressing these concerns.

Conclusion:

In conclusion, it is fairly obvious that the Make In India initiative has put India on the global map as a defence hub. It is important for the Indian aerospace and defence sector to continuously evolve and progress not just the Make in India initiative, but also through capability and infrastructure enhancements to address the imminent challenges and capitalise on present opportunities so as to continue to fortify its position in the global aerospace and defence sector and achieve innovation autonomy.