NEW DELHI — India is preparing a new list of additional banned foreign-made defense materiel, according to the Society of Indian Defence Manufacturers, with the industry association providing its own input to the government.

The effort follows three other lists released by the Defence Ministry, which have banned a total of 310 foreign-made weapons and platforms. The import embargoes are part of an effort to bolster the domestic defense industry under the economic initiative Make in India.

But analysts and industry experts tell Defense News the private sector — which has long faced adverse conditions competing against foreign and state-run companies — is yet to see a significant change, with few exceptions. Neither SIDM nor the ministry would provide specifics about the forthcoming list, and it’s unclear when it will be released to the public.

Government action

It’s also unclear exactly how the embargo lists have affected the bottom line of Indian defense contractors. Certainly, there are cases where orders of banned items were made with local companies, but those were related to deals already in the works before the respective embargo.

For its part, the Ministry of Defence announced April 9 that 25% of the $12 billion budget meant for the procurement of new weapons and associated equipment would go toward private sector orders during fiscal 2022-2023.

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The ministry also announced it reserved $214.28 million for buying products developed through the iDEX initiative — or Innovations For Defence Excellence, a government effort meant to foster innovation and technological development in the defense and aerospace sectors by engaging startups, individual innovators, academia, research and development institutes, and micro, small and medium enterprises.

Additionally, the government is encouraging private sector participation by simplifying the procurement process, raising companies’ hopes that they’ll see more contract awards in shorter time frames. Under the new changes, acquisition tenders that fall under the Make-II procurement project and involve domestic private companies will now progress to contract awards within four months after successful prototype testing. Previously, the decision-making process for awarding contracts took about two years following the completion of prototype trials.

Make-II is an industry-funded procurement initiative that receives no government funding and through which the prototype development cost must be borne by private companies.

The government also reserved 25% of its $800 million defense research and development budget for new R&D proposals by private industry, startups and academia for the FY22-23 time period.

The ministry issued new rules — which took effect April 6 — requiring any imported defense materiel, irrespective of value, to receive the approval of the Defence Acquisitions Council before entering the country. In other words, weapons systems that cannot be locally made may be procured from foreign firms only under exceptional circumstances.

However, the ministry noted, the military “will be encouraged to explore the procurement of these through indigenous sources.”

The MoD also said, going forward, the military must receive approval from the defense minister if an armed service wants to import defense equipment under capital procurements, which also can only take place if the materiel is unavailable domestically.

MoD officials said these efforts of the ruling National Democratic Alliance government are meant to enhance the role of private companies, small businesses and startups in manufacturing defense products and building a robust supply chain to reduce the country’s dependence on arms imports.

Embargo impact

Last year, the Indian military purchased $3.5 billion in weapons from overseas through emergency and fast-track procurement authorities. India spent $10.73 billion of its $16.41 billion capital procurement fund last year on weapons from domestic defense companies.

“To promote indigenization, the Defence Ministry has brought out three positive indigenization lists. With the first and second list, we have been able to award [defense] contracts worth $7.1 billion ... to Indian companies,” Defence Minister Rajnath Singh said at a May 9 industry event. “We hope that over the next five [to] seven years, the indigenous acquisition will provide $64.28 billion worth of orders for the industry.”

The ministry refers to the three arms embargo lists as positive indigenization lists.

But Vivek Rae, a former chief of acquisitions for the MoD, told Defense News India must adopt more nuanced strategies if the key objective is to bolster the private sector. He suggested the ministry reserve some competitions for contract awards solely for the private sector, as both state-run and private companies are allowed to participate in Make-II competitions.

The chief executive of a small private defense enterprise agreed. “While deciding the production order, the Indian government has to look away from state-run companies; otherwise there will be no confidence instilled in the private sector,” the executive told Defense News, speaking on the condition of anonymity out of fear of economic reprisal. The executive added that a significant number of new procurement projects fall under Make-II.

“What the [private] industry has developed — and has capabilities for — is only partially included in the lists released as yet and await inclusion in subsequent lists,” Jayant Patil, senior executive vice president of defense contractor Larsen & Toubro, told Defense News. The government, he argued, needs to make fair and quick decisions on contract awards and avoid bureaucratic red tape to lessen the cost of acquisition.

Patil, a former president of SIDM, also called for new economic models and processes that would benefit India’s defense export market.

The government opened defense business to private companies in May 2001. Since then, about 333 private companies were issued a total of 539 industrial licenses, according to an MoD news release in July 2021. Out of those companies, 110 supply arms to the Indian military, the release stated.

India’s private sector has supplied to the military over the last 15 years guns, rocket systems, ships, underwater platforms, sonars, drones, vehicles, radar systems, electro-optical systems, naval weapon systems, bridging systems, integrated platform management systems, and air defense missiles and launchers. The sector has also upgraded multiple types of weapon systems.

However, with the government continuing to prioritize state-run defense companies and its own Defence Research and Development Organisation, private sector contribution to overall defense production suffers. A few major orders have been placed with a handful of large private firms, but the private sector mostly serves as a supplier to state-run defense companies.

The Central Vigilance Commission, which serves as the government’s anti-corruption watchdog, released a memo in April 2021 calling for additional transparency in how contracts are awarded, particularly when they’re done so on a nomination basis — or where contracts are awarded to a state-run company without a competition, similar to sole-source contracts in the United States.

“The award of contracts/projects/procurements on nomination basis without adequate justification amounts to restrictive practice eliminating competition, fairness and equity,” the document read. “Hence, award of contracts through open competitive bids should remain the most preferred mode of tendering.”

And if an award is made on a nomination basis, the commission stated, details of the contract and justification for the decision should be posted online in the public domain.

But Rae said this should go further.

“The only way private manufacturing companies can grow is through the steady flow of orders,” he said. “To establish a level playing field, orders on a nomination basis to state-run companies should be stopped completely, especially where the private sector has the infrastructure and capability to compete.”

Ashok Baweja, who leads a defense unit at Quest Global Engineering and previously served as chairman of the state-run company Hindustan Aeronautics Limited, took a more positive view of the arms embargoes, saying they have provided opportunities to both the private and public defense sectors. (HAL ranked 42 in this year’s Top 100 list, alongside one other Indian company, Bharat Electronics Limited, which ranked 56.)

Still, Baweja added, India’s private sector lacks access to defense projects that are based on realistic technical parameters, backed by government funding for prototype development and the support of manufacturing facilities, and involve timely orders.

But it’s not all bad. Private companies have access to several technologies — gyros, gimbals, image intensifiers, sensors, metallurgy techniques — through their relationships with foreign businesses, who are more reluctant to share with state-run organizations than private entities.

Additionally, the private sector has built up its capabilities in the design and development of defense electronics, software and artificial intelligence in recent years.

The head of SIDM, Satya Prakash Shukla, said India’s defense industry has welcomed the embargo lists.

Shukla, who also leads Mahindra Group’s defense, aerospace and agriculture unit, said creating these lists is complicated, as the Defence Ministry wants to focus on items it might need going forward but can also be locally produced.

Vivek Raghuvanshi is the India correspondent for Defense News.

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