Despite defence being a critical sector for the government, Research and Development (R&D) and technology development for defence manufacturing in India is not where it is intended to be. The Indian defence R&D budget for 2020-21 was US$ 2.3 billion and if industry research is to be believed defence R&D budget for the US (for FY 2020) stood at US$ 59 billion. 

Further, adequate R&D required to develop specific grades of products/components is cost-prohibitive and hence companies are reluctant to invest. Instead, industry often looks to license the technology, which has end-use restrictions and thus cannot be accessed without government interventions. This is one of the key challenges being faced by the Original Equipment Manufacturer (OEM) community.

What has been done till now

As a way of addressing the existing state of affairs, Government of India (GOI) has taken considerable steps to identify the Aerospace and Defence (A&D) sector as a focus area for the ‘Make in India’ (i.e. ‘Aatmanirbhar Bharat’) program and push forth the induction of indigenous manufacturing infrastructure, supported by essential R&D ecosystem. This is evident in the substantial changes introduced in the defence policy framework in 2020. 

New categories under Defence Acquisition Procedure, 2020 (DAP 2020) focus on indigenization, transfer of technology and encouraging private sector participation. 

This will be impossible without a strong and deep R&D eco-system whose key components are equipment and physical infrastructure, skilled technicians, qualified researchers, a robust intellectual property (IP) regime, access to long term, low-cost capital and comfort on getting orders. 

Under the recently modified 'Make-I' category of acquisition, the government will also provide up to 70% financial support to the industry for prototype development cost, subject to certain conditions. 

In an effort to expedite technology development, the government has set up a Technology Development Fund (TDF) which is being executed by the Defence Research and Development Organisation (DRDO). The fund shall be focused on promotion of self-reliance and creation of a conducive ecosystem for Micro, Small & Medium Enterprises (MSMEs). It will be used to provide financial assistance for technological development of defence applications.  

An initiative for promoting ‘Innovations for Defence Excellence (iDEX)’ was also launched in 2018, wherein grants/ funding was provided to individual innovators, institutes as well as start-ups to undertake R&D activities which can be adopted for Indian A&D applications in the future. The initiative invited participation from over 700 start-ups and led to three rounds of Defence India Start-up challenges.

What more can be done

The Indian Income-tax Act provided weighted deductions of 150-200% for capital and revenue expenditure incurred by companies for the purpose of undertaking scientific research in India, which have been phased out. As R&D in the A&D sector is still in its nascent stages and requires complete handholding and support from the government, weighted deductions may be introduced specifically for the A&D sector for undertaking R&D activities / setting up in house research centers. Further, in the past, in order to develop the Indian telecom and the solar energy sector, the Indian Income-tax Act introduced the concept of tax holidays with the applicability of a sunset clause. To promote R&D initiatives in the A&D sector, introduction of similar tax holidays is strongly desirable.

Further, as per the Defence Offset policy under DAP, 2020, an enhanced multiplier of 2 is applicable on Transfer of Technology (ToT) to Indian enterprises. This makes ToT a lucrative option but currently the same is applicable prospectively. Since there are pending Offset obligations of the earlier defence policies as well, if the applicability of the multiplier on ToT is made retrospective, it may bolster technology capabilities and further enhance Indian R&D in defence manufacturing.   

The TDF Scheme executed by DRDO, extends financial support and expertise to upgrade existing products/ systems, processes and its applications and the development of futuristic technologies with defence applications. Government could come up with additional funds/ grants in defence manufacturing to augment India’s R&D capabilities and indigenization efforts.

With technological developments changing the defence landscape at an exceptional pace, national security as well as commercial interests of a country can be protected only if it is adept in defence innovation and has forward looking policies in place to foster the same. 

A globally competitive Indian defence industry can be created only if we invest extensively in R&D. While the GOI has undertaken certain policy level interventions, a lot more needs to be done in this capital-intensive sector, which affects the standing of a nation globally. 

Gaurav Mehndiratta is Partner and Head, Aerospace and Defence, KPMG in India. 

With inputs from Manan Asri, Chartered Accountant