As part of the Indian government’s initiatives to revitalize the Indian economy, particularly defense manufacturing, it recently announced new initiatives aimed at foreign defense contractors and investment.
The Indian government is amending its procurement policy and increasing foreign direct investment in the defense sector, both developments which we believe will be of interest to many of our government contracts clients. India is the second largest arms importer in the world and spends close to two percent of its GDP on defense. In addition, recent border skirmishes with China and Pakistan have heightened the urgency for India to shore up its defense arsenal.
The Government of India recently announced a new Defense Acquisition Procedure 2020 (DAP 2020) in effect from October 1, 2020, which introduced policy flexibility to encourage procurement from foreign manufacturers. DAP 2020 includes a new category, “Buy (Global) – Manufacture in India,” allowing direct purchases from foreign vendors as long as the procured item contains a minimum of 50 percent domestic content. The domestic content requirement can be achieved by using an Indian subsidiary to manufacture the item, spares or subassemblies, or to provide maintenance, repair and overhaul for the procured item. Further, the “Buy (Global)” category, which allows direct purchases of equipment from foreign vendors through existing Direct Commercial or Foreign Military Sales (FMS) processes, has been liberalized by eliminating offset requirements for such purchases. The recent escalation of tensions between India and its neighbors indicates that the FMS process may be the preferred route of procurement in the short term.
Additionally, on September 17, 2020, the Indian government announced increased foreign direct investment limits in Indian defense companies, albeit with some restrictions. Previously, foreign ownership in Indian defense companies could not exceed 49 percent without prior governmental approval. The new rules, however, allow for up to 74 percent foreign investment without government approval, but the relaxation is limited to companies seeking new industrial licenses. While the new rules appear favorable to foreign companies, other import restrictions currently maintained by the Indian government may undercut efforts to increase foreign participation in the Indian defense market. In August 2020, the Indian government announced an import ban on roughly 100 weapons, platforms and other defense articles. The import ban is aimed at promoting India’s defense industrial base. The ban is planned to be progressively implemented between December 2020 and 2024. Nevertheless, defense contractors and investors should monitor these continuing developments, as they represent a rare opportunity to engage India’s defense industry.