Budget 2023: Prioritising Defence and Innovation

Globally, countries are reeling with economic shocks.  Comparatively, India has fared well with World Bank stating that the country is better positioned to manage global headwinds. In the defence and strategic sector, the increases in defence budget from last year has hopes up. And with continuing tensions at the border and uncertainty due to Ukraine Russia War, a focus on defence sector is expected. As the defence and aerospace sector continue to take flight, the industry will anticipate PM Modi’s last full budget of the term to give a final push to self-reliance, innovation, and defence exports.

Emboldening Atmanirbharta in Defense

The Atmanirbhar Bharat or self-reliance agenda in defence is likely to continue through expenditure and domestic procurement. The last budget saw the largest allocation amongst ministries towards the Ministry of Defence (MoD), with 13.3 percent of the expenditure of the central government earmarked for the MoD. The last budget also included an increase of almost 10 percent over its predecessor for defence allocations. Increase in capital allocation for the defence budget is likely to continue, though the quantum may not be as large as last time. Much of these allocations may be utilised to propel indigenisation efforts and procure from the domestic industry. Also, those following the defence sector will be on the lookout for any announcements related to further positive indigenisation plans. Till now, the Modi government has released four positive indigenisation lists covering over 400 defence items for procurement exclusively from the domestic industry.

Boosting Exports

India’s defence exports can get an added boost through rationalisation of duties, and the goods and services tax (GST). India’s defense exports have increased eight-fold from 1,521 million in 2016-17 to 12,815 million in 2021-22. Importantly, whereas previously exports were driven mostly by the defence public sector enterprises, today most of the exports are led by the private sector. Rationalisation of duties and GST can give a fillip to the industry. To promote transfer of technology (ToT) in the defence sector, along with the existing higher multiples for ToT, the government should also seriously consider GST exemptions for strategic components and technologies that are used in platforms for domestic use and outbound exports. With the notification of the fund management guidelines at GIFT City, a public-private alternative investment fund for acquiring niche and emerging technologies from abroad should also be considered.

Fostering Defence Innovation and Manufacturing

Defence innovation and manufacturing should be strengthened through expansion of production linked incentives (PLI), research and development, continuing old incentives, and offering new sops. The Modi government has announced 14 PLI schemes, with PLI most recently extended to the drone sector. Industry hopes that the PLI will be expanded to other strategic sectors within defense manufacturing. The lower corporate tax rate of 15 percent for new manufacturing units is due to expire in March 2024, an extension in the same is also expected which will benefit manufacturing units including those related to defence and aerospace. Additionally, new sops to incentivise defence and aerospace manufacturing are likely for these sunrise sectors. The Modi government opened the space sector to private players in 2020. Industry hopes for further reforms and liberalisation with regulatory clarity on issues surrounding insurance and liability, intellectual property rights, certifications, and standardisations. The government’s budget often includes reforms to decriminalise small offences and ease licensing requirements – a trend one hopes continues in the 2023 budget and which will benefit the defence industry at large.

The innovations for Defence Excellence or iDEX innovation challenge program of the MoD has shown much success and recently announced challenges in the space sector. It is hoped that allocations for iDEX are increased so more startups can benefit.

R&D to be Key

 The defence budget will be amiss without addressing research and development (R&D). Although the previous budget allocated 25 percent for private R&D, R&D through DRDO and the MoD will continue to be critical. With recent successes in the drone industry, sonars, radars, and fourth generation aircraft, the MoD can prioritize R&D on critical and strategic technology areas like hypersonic, electronic warfare, edge computing, cybersecurity, and more. A sharp focus on R&D will yield most benefits for modernisation and indigenisation.

The Modi government’s last budget of the term arrives at a time when global headwinds are pushing it towards fiscal consolidation, and the upcoming state and central elections are making populist and welfare measures attractive. Notwithstanding the pressures, how Modi government prioritizes the needs of national security and stakeholders in this sunrise industry will be worth watching.