India has the third largest standing army in the world. According to the World Bank data India spends close to 2% of its GDP on defence.

1. Transforming India into a Defence Manufacturing Hub Under
Make in India Scheme
India has the third largest standing army in the world. According to the World Bank data India spends
close to 2% of its GDP on defence. With a defence budget of $55 billion of which 31.1% is allocated to
capital acquisitions and a population of highly skilled workers, India remains one of the most
preferred destinations for defence manufacturing. 60% of the defence related requirements are met
by imports which offers a huge opportunity for import substitution.
Reasons to Invest
Currently, most of India’s defence requirements are catered largely by imports. The opening up of
defence sector for private sector participation under the government’s strategic partnership model will
help the foreign original equipment manufacturers to enter into strategic partnerships with the Indian
companies and leverage the domestic markets as well as aim at global markets. Besides helping in
building domestic capabilities, this will also bolster the exports in long term.

2. India’s defence procurement procedure mandates to OEM to invest minimum 30% of the amount back
in India for procurement of defence equipment which cost more than USD 306.69 million because of
which it is predicted that in the next 5-6 years there will be contractual offset obligation worth $4.53
billion.
The new government policy promotes self-reliance, indigenization, technology upgradation and
achieving economies of scale including the development of capabilities for exports in the defence sector.
The country under its new leadership has drawn up an extensive modernization plan with an increased
focus on homeland security, which opens doors of opportunities for both Indian and global
manufacturers to reap the benefits of both.
Statistics
India has the third largest armed force in the world.
India is one of the largest importers of conventional defence equipment and sends about 31.1% of its
total defence budget on capital acquisitions.
About 60% of its defence requirements are met through imports.
The allocation defence in the union budget 2017-18 is approximately USD 55 billion.
Growth Drivers
Defence Production Policy, 2011 has encouraged indigenous manufacturing of defence equipment.
Defence Procurement Procedure (DPP) has been amended in 2016 and includes the following policies
added to it:
A new category of capital procurement – Buy Indian – IDDM (Indigenously Designed, Developed and
Manufactured) which is introduced to encourage indigenous design, development and manufacturing of
defence equipment.
Preference is to be given to ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’ and ‘Buy and Make in India’ over ‘Buy
(Global)’ categories of capital acquisition.

3. Clear and unambiguous definition of indigenous content in the defence equipment purchased by the
armed forces.
Provision for Maintenance TOT (Transfer of Technology) to Indian Industry partners which adds to the
growth of the economy and develop India’s defence manufacturing and maintenance industry.
Provisions are provided for the foreign OEM (Original Equipment Manufacturer) to select Indian
Production agency.
The minimum percentage of indigenous content in defence equipment sourced from foreign countries
has been enhanced/rationalized.
‘Services’ as an avenue for discharging offsets have been re-introduced which includes –
Defence products list for industrial licensing has been articulated in June 2014, wherein large numbers
of parts/components, casting/forgings etc. have been excluded from the purview of industrial licensing.
The defence security manual for the private sector defence manufacturing units has been finalized and
put in public domain by the Department of Defence Production. The manual clarifies the security
architecture required to be put in place by the industry while undertaking sensitive defence equipment.
The MAKE procedure, which aims to promote research & development in the industry with support
from the government and the placement of orders, has been promulgated with provision for 90%
funding by Government and preference to MSMEs in certain category of projects.
FDI Policy
100% Foreign Direct Investment (FDI) is allowed in the defence sector, where up to 49% is available
under automatic route and FDI above 49% is allowed after a case to case study by the GOI; where it is
likely to result in access to modern technology.
The defence industry is subject to industrial license under the Industries (Development and Regulation)
Act, 1951 and manufacturing of small arms ammunition under Arms Act, 1959.
The policy has been amended to remove the clause which mandates a single largest Indian ownership of
51% of equity.

4. A lock-in period of three years on equity transfer has been done away with in FDI for defence.
FDI in the defence sector is subject to other security conditions.
Sector Policy
Procurement Policy
The defence procurement is governed by the Defence Procurement Procedure (DPP 2016).
The latest revision of DPP was released in March 2016.
Offset Policy
The key objectives of the defence offset policy is to leverage capital acquisition to develop the domestic
defence industry. Mandatory offset requirements of a minimum of 30% for procurement of defence
equipment in excess of $ 307.69 million have been envisaged.
Procedures for the Grant of Industrial Licenses have been streamlined:
The initial validity period of an industrial license has been increased from 3 years to 15 years with a
provision to grant an extension for a period of 3 years.
Guidelines for the extension of validity of industrial licenses have been issued.
Partial commencement of production is treated as the commencement of production of all the items
included in the license.
Key Provisions of The 2016-17 Union Budget
Provision of $52.2 billion for the defence services in the FY 2016-17 Union Budget.
Capital outlay for Defence in 2016-17 is kept at $ 12.09 billion.
Out of this $ 10.75 billion has been allocated for Capital Acquisition of the defence services.

5. $ 1.33 billion has been provided under “Other than Capital Acquisition” segment for capital expenditure
to Army, Navy, Joint Staff and Air Force.
Either of the following two deductions can be availed:
Investment allowance (additional depreciation) at the rate of 15% to manufacturing companies that
invest more than USD 15.38 million in plants and machinery acquired and installed between 1st
of April
2013 to 31st
of March 2015, provided the aggregate amount of investment in the new plants and
machinery during the said period exceeds $15.37 million.
In order to provide a further fillip to companies engaged in the manufacture of an article or thing, the
said benefit of additional deduction of 15% of the cost of new plants and machinery is applicable on
machineries which exceeds the USD 3.84 cap and are acquired and installed during any previous year
until 31st
of March 2017.
Tax Incentives
R&D Incentives - Industry/private sponsored research programs have been introduced.
A weighted tax deduction is given under Section 35 (2AA) of the Income Tax Act.
A weighted deduction of 200% is granted to assess for any sums paid to a national laboratory, university
or institute of technology, or specified persons with a specific direction that the said sum would be used
for scientific research within a program approved by the prescribed authority.
For companies that are engaged in the development of an in-house R&D centre and product, a weighted
tax deduction of 200% under Section 35 (2AB) of the Income Tax Act for both capital and revenue
expenditure incurred on scientific research and development. Expenditure on land and buildings are not
eligible for deduction.
State Incentives
Apart from the above-mentioned incentives, each state in India offers additional incentives for industrial
projects. Incentives are in the form of subsidised land cost, relaxation in stamp duty, exemption on
sale/lease of land, power tariff incentives, concessional rates of interest on loans, investment

6. subsidies/tax incentives, backward areas subsidies and also special incentive packages for mega
projects.
Export Incentives
The export promotion capital goods scheme,
Duty remission scheme,
Focus product scheme, special focus product scheme, focus market scheme,
Incentives as per ‘merchandise Exports from India Scheme (MEIS)’ under new Foreign Trade Policy.
Area-based Incentives
Incentives are available for unit’s set up in Special Economic Zones (SEZs) / National Investment &
Manufacturing Zones (NIMZs) as specified in respective Acts or for those in special areas such as the
North-east, Jammu & Kashmir, Himachal Pradesh and Uttarakhand.
Investment Opportunities
Investment Opportunities are available in Defence products manufacturing and supply chain sourcing
opportunity.
Foreign Investors
Airbus (France),
BAE India Systems (UK),
Pilatus (Switzerland),
Lockheed Martin (USA),
Boeing India (USA),
Raytheon (USA),

7. Israel Aerospace Industries (Israel),
Rafael Advanced Defence Systems Ltd. (Israel),
Dassault Aviation SA (France).
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