Hurdles in the Growth of the Indian Defence Ecosystem
Hurdles in the Growth of the Indian Defence Ecosystem
Hurdles in the Growth of the Indian Defence Ecosystem

Anuj Prasad, Anandita Kaushik

Touted as one of the biggest defence spenders in the world, the Indian market represents lucrative opportunities for global defence original equipment manufacturers (OEMs). Successive iterations of the Indian government’s procurement policies have shown a bent towards using Indian defence purchases as anincentive to make OEMs participate in the growth and development of the indigenous defence and aerospace ecosystem. First reflections of this approach appeared in the form of the offset policy introduced in 2005. Under the policy, foreign OEMs selling to India were required to reinvest a part of the sale proceeds back into India through avenues such as transfer of technology (ToT), investment in Indian defence companies or purchase of Indian defence goods. More recently, the government has moved away from the offsets approach and is more focused on incentivising ToT through means such as import bans and purchase preference to Indian manufactured products. Showing a deep understanding of role foreign OEMs need to fulfil for rapid growth of domestic capabilities in the sector, the government has even increased in the automatic route foreign investment limits in defence to allow foreign control over Indian defence companies.

The regulatory regime is now well defined, and contains several incentives to encourage global players’ manufacturing in India. It is expected that recent changes will pave the way for heightened activity in the sector, leading to proliferation of domestic capabilities through OEM support. In recent times, the authors have even witnessed OEMs showing keen interest in exploring these new opportunities. However, the ground truth remains that any actual investment or ToT to India would only be made on the back of an expected procurement opportunity. As seen in the case of several large scale procurements, while many OEMs have made detailed public statements committing to move manufacturing to India through transfer of high-end, sophisticated technologies, since the procurements have been stalled, no actual investment/ ToT has taken place. The endless time gap between announcement of an Indian procurement and its actual completion has become somewhat of an expectation within the OEM community and has led to a sharp decline in OEM enthusiasm. The authors submit that the response to the Indian government’s well-intentioned policy initiatives will remain luke-warm until the government follows through on its procurement announcements and commits to some level of order certainty by adhering to defined timelines.

Fighter Aircraft Procurement

India’s fighter aircraft procurement, widely touted as the largest aerospace open tender in the world with an estimated value of almost USD 20 billion, generated a lot of interest from the biggest names in the business. The selection process, which was initiated in mid-2007, took over 5 years for completion of the technical and commercial evaluation. After years of back and forth in a highly pursued competitive bidding process, the Indian government finally selected a winner in 2012. In mid-2015, with the contract for the procurement still pending, the government decided to finally withdraw the tender. India’s next attempt for purchasing fighter aircraft came in 2016, with a fast-track outright purchase of only 36 fighters directly from the French government. Deliveries under the contract began in October, 2019, more than a decade after the air force first set out to replace the aging MIG fleet.

In 2018, the Indian government again announced a project to buy the remaining 114 fighter jets, where the first 18 jets were required to be delivered in flyaway condition within the period of 3-5 years after the signing of contract and the rest were to be produced in India under the new Strategic Partnership (SP) model. Questions raised regarding the wisdom of again starting a protracted competitive bidding process which may result in the IAF fleet comprising multiple types of fighter aircraft, leading to increased maintenance and training costs, and other operational inefficiencies, remained unanswered. Many OEMs again announced intentions to move manufacturing to India with ToT in an attempt to make their bids more compelling, but lack of movement on the procurement since 2018 has resulted in these announcements remaining mere indicators of intent with no action on the ground.

Naval Utility Helicopters

Approved in October 2017, the Indian Navy’s 111 Naval Utility Helicopter (NUH) program presented an opportunity of USD 3.5 billion. The procurement was expected to occur under the SP model, and contemplated direct purchase of 16 helicopters from an OEM,with the remaining 95 being manufactured locally through ToT from the foreign OEM.

Aimed at promoting growth of indigenous defence capabilities, the SP model caters to private Indian enterprises tying up with foreign OEMs and presenting a competitive bid to the government. The biggest OEMs in the business expressed interest in the procurement and commenced the process of forming alliances with Indian partners. But with Hindustan Aeronautics (HAL) keen to enter the fray of bidders, the government faced the dilemma – allowing HAL to participate would mean amending the newly introduced SP policy which could be seen as unfairly benefitting a state run organization; alternatively, not allowing HAL to participate would mean reducing the competitiveness of the process. The tender process was stalled and no decisions were taken.

And again, at the losing end are India’s armed forced. Earlier this year, to fulfil immediate and critical needs of the Navy, the government has commenced the process of leasing 24 helicopters directly from foreign OEMs. How the requirement for the remaining 85 helicopters will be fulfilled is yet to be seen.


The new Defence Acquisition Procedure (DAP-2020), released by the Indian Ministry of Defence in September 2020, aims to address some of the legacy issues that have resulted in longer procurement time frames. To address two of the biggest hurdles in expeditious procurements, the DAP-2020 amends provisions relating to formulation of service quality requirements (SQRs) and conduct of user trials. To ensure that the SQRs demanded by the armed forces are more realistic, the process of formulation of SQRs under the DAP-2020 has been streamlined, with greater emphasis on identifying verifiable parameters based on existing comparative equipment. Additionally, the DAP-2020 speaks of changing the trials philosophy from one of eliminating bidders to one of nurturing competition. These changes should aid in bringing much needed certainty to the process.

For cases upto INR 5 billion, the DAP-2020 allows for single stage accord of acceptance of necessity, and powers have been delegated for undertaking various procurements under the fast-track procedure. A mandatory project management unit (PMU) to support contract management is also contemplated, and it is expected that the PMU will facilitate streamlining of the acquisition process by providing advisory and consultancy support.

All of these are welcome changes, and are reflective of the Indian Government’s awareness of the role procurement delays play in upsetting OEM sentiment. The recently announced P-75 submarine procurement, proposed to be undertaken under the SP model, is the first big ticket procurement announced under the DAP-2020. This is not the first time the government would set out to acquire submarine manufacture technology through ToT by a foreign OEM. After years of back and forth, the USD 5 billion opportunity announced now is an ideal candidate for the government to display its intent on actually reducing procurement timelines, and ensuring continued foreign OEM participation in the growth and development of India’s indigenous defence capabilities.

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