Budget 2021: The Budget Must Fortify The Defence Industry: Deloitte India

It’s important to rationalise import duties and GST on components and spares to fight price escalation.

This year’s Union budget is unique in the sense that it’s the first budget in known history to be held amid a pandemic. The measures taken would be unique to address the prevailing economic damage the Covid-19 pandemic is caused.  

Pandemic ravaged macro-economic fundamentals, unprecedented geopolitical backdrop and growing inwardness among large economies have all but set the stage.

“Recent developments at neighbouring borders will weigh in on the government’s broader decision making for the short to medium term,” Deloitte India said in a research note. “It is this reason why India’s defence industry finds its stakes high in the run up to budget day.”

It is to be noted that the defence sector has had a rather busy build-up given a set of policy roll outs over the last year. Defence Acquisition Procedure (DAP) 2020, released and made effective since October 2020, could well be described as a comprehensive overhaul of existing procurement policy framework, the notes adds.

“DAP 2020 ushered in new procurement categories including ‘Lease’ as a potentially viable alternative in catering to short-term limited needs of the Indian military. A significantly improvised offsets programme (including withdrawal of offsets in G2G procurements) can be expected to bring about a lot more transparency and ease in administration, even as the list of eligible offsets avenues appears truncated and offset banking is omitted in the new policy. Strategic Partnership (SP) model has had a modest beginning thus far; one can hope, the improvisation carried out to extant guidelines will help spur indigenisation of defence manufacturing capabilities under this procurement category. A more recent embargo on import of 100+ equipment/platforms has underlined the ‘Atmanirbhar’ goal of the government as the cornerstone of defence procurement policy,” the Deloitte India note adds.

In yet another development, foreign direct investment (FDI) in defence manufacturing was enhanced to 74 per cent (from extant 49 per cent) under automatic route; proposal for higher FDI continues to require government approval. However, the press note (PN 4/20) does raise a set of concerns as to the intended outcome as the language of the dispensation leaves itself open to varied interpretations, especially for brownfield investments and those not subject to the requirement of industrial licensing. “Simultaneously, reduction in corporate tax rate to 15 per cent makes India a highly competitive destination for defence manufacturing in the region. Additionally, government’s intent to develop India into a maintenance, repair and operations (MRO) hub will need comprehensive policy thinking to make this high growth sector viable,” the Deloitte India note says.

Sumit Singhania, Partner, Deloitte India, said, “The budget should firmly set out aspirational targets for defence manufacturing and export growth. Given the busy build up this sector has seen in last 12 months with the roll out of Defence Acquisition Policy, new guidelines for offsets management and strategic partnership model, it’s time for the indigenisation programme to begin taking deep roots and deliver. Certain tax and duty rationalization can be expected in regard to imported components and spares. Overall, I would like to see the budget set the course of travel for next three to four years for the sector.”

Budget 2021-22 is just the right opportunity for the government to roll out a comprehensive programme of fiscal and non-fiscal support to promote investments in domestic R&D that can prop up the ‘Atmanirbhar’ goal of the defence manufacturing industry. Besides, reducing the corporate tax rate to 15 per cent for MRO business — both Defence and Civil — will definitely make Indian MRO sector a lot more competitive in long run.”

While the defence industry will hope for a bigger piece of the pie when it comes to budgetary allocation for capital outlays (significantly higher than Rs 1.13 trillion allocated for FY21), especially given the geopolitical scenario the nation finds itself in, prudence is likely to prevail in the present rather difficult fiscal circumstances the government would be faced with.