Discussion about the Defense Indigenization and World Trade Organisation

Defense Indigenization

Why in news?

According to the recent study by Stockholm International Peace Research Institute (SIPRI), India ranked as the second-largest purchaser of major arms between 2014 and 2018, contributing to 9.5% of the global total. During this period, India’s military expenditure experienced a 3.1% increase.

Why Défense Indigenization:

Indigenization refers to the capability to independently develop and produce defence equipment within the country, aiming for self-reliance and reducing dependency on imports. It encompasses the establishment of an ecosystem for the indigenous design, development, and manufacturing of various types of equipment.

For a country like India, endowed with significant potential and a strategic location, the pursuit of indigenization is crucial for several reasons:

1. Self-defence: Given the presence of hostile neighbours such as China and Pakistan, enhancing self-defence and preparedness becomes imperative for India.
2. Strategic advantage: Achieving self-reliance contributes to India’s geopolitical strength, positioning it as a net security provider.
3. Technological advancement: Progress in the defence technology sector has a cascading effect on other industries, propelling the overall economic growth.
4. Economic efficiency: With approximately 3% of the GDP allocated to defence, and 60% of that spent on imports, achieving self-reliance helps curtail significant economic drainage.
5. Employment generation: The development of the defence manufacturing sector necessitates collaboration with numerous other industries, creating substantial employment opportunities.

Milestones Achieved:

• In the last three years, from 2018–19 to 2020–21, the government’s initiatives have lowered the expenditure on defence purchase from foreign sources from 46% to 36%, therefore reducing the import load.
• Additionally, over the past two years—2019–2020 and 2020–21—the Value of Production of Public and Private Sector Defence Companies has increased from Rs. 79,071 crores to Rs. 84,643 crores.
• According to India Brand Equity Foundation (IBEF), till October 2022, in total 595 industrial Licenses were issued to 366 companies operating in the defence sector.
• Defence Sector of India has grown by 334% in the last 5 years and is now exporting to 75+ countries with the help of collaborative efforts.
• India has the World’s third- largest defence expenditure after China and US and expects to export equipment worth US$ 15 Billion by 2026.
• As per Union Budget 2022-2023, 25% of the defence Budget has been embarked for private entities and start-ups to pave the way for new innovation in the defence technology

Initiatives that Promote Defense Indigenization:

• Make in India Policy:
  • Launched in 2014, “Make in India” policy, aims to support domestic production, R&D, and technological advancement in the realm of defence.
• Atmanirbhar Bharat Abhiyan:
  • The Self-Reliant India Campaign, which was introduced in 2020, places a strong emphasis on self-reliance in all spheres, including defence.
  • To minimise reliance on foreign defence imports, it promotes indigenisation of defence industry, research and development, and innovation.
• IGMDP:
  • In 1983, When the government approved the Integrated Guided Missile Development Programme (IGMDP) to create five missile systems, it marked an important milestone in defence indigenization.
  • Prithvi (from surface-to-surface Akash (Air-to-Surface) Trishul (Prithvi’s equivalent in the navy) Nag (Anti-tank) Agni (1,2,3,4,5) is one of several ballistic missiles with various ranges.
• Defence Procurement Policy:
  • In accordance with the Dhirendra Singh committee’s recommendations, the Defence Procurement Procedure 2016 (which replaced the DPP 2013) added the additional category “Buy (Indian-IDDM)” — Indigenously Designed, Developed, and Manufactured — as the most preferred process for acquiring defence goods.
  • A “fast-track” acquisition process for weapons was previously exclusively available to the military forces, but DPP now permits the Defence Acquisition Council to use it.
• Outsourcing and Vendor Development Guidelines:
  • For DPSUs (defence public sector undertakings) and OFB (ordnance factory board) to encourage private sector engagement, especially SMEs (small manufacturing businesses) for defence production.
  • According to the guidelines that each DPSU and OFB must have a short- and long-term vendor growth plan in order to gradually boost outsourcing from the private sector, especially SMEs. The standards also cover vendor creation for import replacement.
• FDI policy:
  • It states that up to 49% of a company’s total foreign investment may be made through the government route (FIPB), and any amount above 49% requires the Cabinet Committee on Security’s (CCS) individual case-by-case clearance.
  • To ease investment in the industry, restrictions including the requirement that the single largest Indian shareholder hold at least 51% of the shares and the whole ban on Foreign Institutional Investors (FII) have been lifted.
• SRIJAN:
  • Launched in 2020. in an effort to encourage industrial indigenization, the Ministry of Defence has also developed an SRIJAN portal.
  • 19509 defence products that were previously imported have been submitted to the site for indigenization as of 2023.
  • The Indian military industry has so far expressed interest in indigenizing 4006 of them

 

New Defense Acquisition Procedure of 2020

The aim of the Defense Acquisition Procedure (DAP), erstwhile Defense Procurement Procedure (DPP), is to ensure timely acquisition of military equipment, systems and platforms as required by the Armed Forces in terms of performance, capabilities and quality standards, through optimum utilization of allocated budgetary resources. While enabling the same, DAP will provide for the highest degree of probity, public accountability, transparency, fair competition and level-playing field.

 Highlights of the new policy:

1) Reservations for Indigenous firms:

The policy reserves several procurement categories for indigenous firms. DAP 2020 defines an “Indian vendor” as a company that is owned and controlled by resident Indian citizens, with foreign direct investment (FDI) not more than 49 percent.

2) New Buy (Global–Manufacture in India) category:

This stipulates indigenization of at least 50 per cent of the overall contract value of a foreign purchase bought with the intention of subsequently building it in India with technology transfer.

 

3) Greater indigenous content:

It promotes greater indigenous content in arms and equipment of the military procures, including equipment manufactured in India under license. In most acquisition categories, DAP-2020 stipulates 10 per cent higher indigenization than DPP 2016.

 

4) Import embargo list:

The “import embargo list” of 101 items that the government promulgated last month has been specifically incorporated into DAP 2020. (An embargo is a government order that restricts commerce with a specified country or the exchange of specific goods.)

 

5) Offset liability:

The government has decided not to have an offset clause in procurement of defense equipment if the deal is done through inter-government agreement (IGA), government-to-government or an ab initio single vendor. The offset clause requires a foreign vendor to invest a part of the contract value in India.

 

6) In decreasing order of priority, the priority of categories will be as follows: –

(a) Buy (Indian – Indigenously Designed Developed and Manufactured) i.e. Buy (Indian-IDDM).

(b) Buy (Indian).

(c) Buy and Make (Indian).

(d) Buy (Global – Manufacture in India).

(e) Buy (Global).

7)Allows leasing of military platforms

 

Challenges:

• Lack of institutional competence:
  • The development and manufacture of cutting-edge defence systems nationally requires an extensive amount of professional knowledge and skills.
  • Implementing indigenization strategies can be challenging if the institutions involved in defence manufacturing lack the essential expertise, such as scientific and technological expertise or trained employees.
• Planning for defence is inadequate:
  • Effective indigenization of the defence industry requires extensive planning to identify the prerequisites, create goals, allocate resources, and determine plans.
  • Lack of effective planning can result in inefficiencies, delays, and the failure to accomplish the anticipated results. Institutional shortcomings prevent timely policymaking.
• Lack of Logistical support:
  • Defence indigenization frequently entails intricate supply chains and logistical demands.
  • The timely manufacturing and delivery of defence equipment might be hampered by a lack of suitable infrastructure, transportation options, or trustworthy supply chains, which can result in delays and price overruns.
• Lack of a forum for conflict resolution:
  • Multiple parties may be involved in indigenization policies, including defence organisations, governmental organisations, private businesses, and research institutions.
  • Disagreements or conflicts among various stakeholders may develop in the absence of a designated forum or platform for decision-making, delaying and impeding development.
• Lack of infrastructure for expanding output:
  • It takes significant investments in facilities, testing labs, and specialised equipment to build a strong defence manufacturing infrastructure.
  • The scope and pace of domestic defence manufacturing may be hampered by inadequate infrastructure, particularly in the private sector as a whole.

 

What can be the way Forward:

1. Strategic planning:

• Create a detailed, long-term plan for defense indigenization that defines specific goals, deadlines, and action steps.
• This strategy should be reviewed on a regular basis and take into account things like resource allocation, national security concerns, and technological changes.

2. Infrastructure development:

• To aid indigenization initiatives, make investments in the creation of logistics facilities, such as transit systems, laboratories, and manufacturing centers.
• Defense system production, delivery, and maintenance will all be efficient.

3. Boosting Private Sector:

• In order to modernize the inventive defense industry, a boost to the private sector is required since it can provide the efficient and effective technology and human resources needed.
• To increase the private sector’s confidence and close the trust gap between the private and public sectors, large contracts must be given to them.
• Make that the private sector, DRDO, DPSUs, and OFB are all treated equally.

4. In-house Development:

• The Navy has advanced successfully on the path of indigenization primarily because of the in-house design capabilities, the Naval Design Bureau.
• In-house design competence should be enhanced among the three services.
• So, instead of relying on the DRDO to design and create the entire ship, they can outsource the development of the ship’s individual subsystems.

5. Technological Advancement:

• Chip industry should be developed and produced domestically using the software industry and technologies like artificial intelligence and cyber security.
• By developing and manufacturing their own cutting-edge defense equipment, nations can lessen their dependency on foreign suppliers as a result of technological innovation.
• It improves national security by guaranteeing that cutting-edge defense technology are accessible and available even during periods of geopolitical unpredictability or weapons embargos.

 

Conclusion:

• One of the key focus areas of the DAP 2020 was to implement ‘Ease of Doing Business’ with emphasis on simplification, delegation and making the procurement process industry friendly.
• The Indian Government has also announced plans to spend USD 130 billion on military modernization in the next 5 years. Changes to the FDI Policy and the DAP 2020 will provide the necessary impetus to the Foreign OEMs to include Indian companies into their global supply chain which is expected to further boost exports

 

World Trade Organisation

Context

India appealed against a ruling by the dispute settlement body at the World Trade Organization (WTO) that India violated its zero-tariff commitment under Information Technology Agreement (ITA).

 

WTO

It is an intergovernmental organisation that regulates and facilitates international trade. Marrakesh Agreement (1994) replaced General Agreement on Tariffs and Trade (GATT) that was established in 1948. WTO began operations on 1st January, 1995.

GATT was established for substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis. Its history can be traced to Bretton Woods Conference.

Ministerial Conference is the highest authority of WTO. Representatives of all WTO members together form the Ministerial Conference. MC must meet at least every two years.

General Council has representatives (usually ambassadors or equivalent) from all member governments and has the authority to act on behalf of the ministerial conference which only meets about every two years.

Dispute Settlement Body: To oversee the dispute settlement procedures.

Trade Policy Review Body: To conduct regular reviews of the trade policies of individual WTO members.

 

Dispute settlement Mechanism in WTO

The Dispute Settlement Body consists of a Chairman and representatives of all WTO members (usually government representatives). When the parties are not satisfied with the decision of the panel report, then either of the parties may appeal to the Appellate Body. The Appellate body consists of seven persons. But only three of them shall serve in one case.

The United States (US) has blocked all appointments to the WTO Appellate Body (AB) since 2017, citing certain procedural and substantive issues that need resolution. Currently, the AB is dysfunctional.

 

Information Technology Agreement

It is a plurilateral agreement enforced by WTO. It entered into force in 1997. The aim of the treaty is to lower all taxes and tariffs on information technology products by signatories to zero. The ITA covers many high technology products, including computers, telecommunication equipment, semiconductors, software etc.

 

India’s Stand on ITA

Dispute settlement body of WTO ruled against India’s imposition of tariffs on mobile phones and electronic components. India argued that at the time of signing the ITA, products such as smartphones did not exist, and hence, it was not bound to eliminate tariffs on such items.

Issues with the WTO

• Negotiation Deadlocks: Consensus-based decision-making process has often resulted in negotiation deadlocks, making it difficult to reach meaningful agreements on critical issues, such as agricultural subsidies, intellectual property rights, and market access.
• Developing Country Concerns: Developing countries argue that developed countries tend to dominate negotiations and have an advantage in shaping the rules to their benefit. Developing countries often struggle to fully participate in the negotiation process and face challenges in implementing and complying with complex trade rules and standards.
• Rising Protectionism and Bilateralism: In recent years, there has been a rise in protectionist measures and a shift towards bilateral or regional trade agreements, which bypass the multilateral framework of the WTO.
• Emerging issues: There are concerns that WTO has not kept pace with 21st-century trade, which requires new/updated provisions in multilateral agreements. Several new issues have emerged since 1995, such as the linkages between trade and climate change, SDGs, gender issues and human rights.
• Members’ Development Status: Concerns have been raised regarding ability of certain members to self-designate as developing countries and thereby to benefit from the special and differential treatment provisions. There is a problem in WTO negotiations as there is no agreed definition of what constitutes a developed or developing country at the WTO.
• Dispute settlement crisis: The WTO dispute settlement is in crisis as the US blocked appointments to the Appellate Body. Members face challenges enforcing WTO obligations without a functioning appeals mechanism.
• Inadequate monitoring mechanism: Experts raise concerns that WTO is unable to identify and address violations of its multilateral agreements in an effective and timely manner.

India – WTO: Recent issues

• Ban of Chinese Mobile Apps
  • According to China, India’s move to continue with a ban imposed last year on 59 Chinese apps is in violation of the principles of the World Trade Organisation and norms of market economy,
    • India’s measure selectively and discriminatorily aims at certain Chinese apps on ambiguous and far-fetched grounds, runs against fair and transparent procedure requirements, abuses national security exceptions, and [is suspected] of violating the WTO rules.
    • It also goes against the general trend of international trade and e-commerce, and is not conducive to consumer interests and the market competition in India
  • But, India’s Ministry of Information Technology has defended by stating that the apps were blocked under section 69A of the Information Technology Act after learning that the apps are engaged in activities which are prejudicial to sovereignty and integrity of India.
• Issues related to the Peace Clause
  • Under the Peace Clause, WTO members refrain from challenging any breach in prescribed subsidy ceiling given by a developing nation at the dispute settlement forum of the Geneva-based organisation.
  • Accordingly, India invokes peace clause as rice subsidies exceed 10% cap
  • The peace clause was invoked by India, as it protects its food procurement programmes against action from WTO members as its rules were breached.
    • In this particular case, the subsidy ceilings which stands at 10 per cent of the value of food production in the case of India and other developing countries was breached as India granted subsidies amounting to 13.7% of food production
  • In response, US, EU, Canada, Brazil, Japan and Paraguay registered a total of 25 questions in relation to India’s additional notification obligations, reporting methodologies and the trade impact of the support
• Fisheries subsidies
  • Recently, India has rejected the latest draft for an agreement to lower fisheries subsidy at the World Trade Organization (WTO), arguing that it did not take on board the suggestions to make the regime equitable and was biased in favour of countries such as Norway, China and Japan, which were exploiting international waters.
  • India is demanding common but differentiated responsibilities
    • A key proposal from India is to seek a standstill for 25 years from countries in Europe, as well as other countries for fishing in international waters

Reviving WTO for a multilateral trading regime

• Appellate body reform
  • The appellate body is the lynchpin of the dispute settlement mechanism
  • Issues and solution
    • To the complaint that appellate body members who have finished their term should not sit in judgment of cases, the proposal states that the selection process to replace appellate body members begin six months before the expiry of the term
    • On the criticism that the body takes too long to issue reports, the draft decision states that 90 days should be the norm
    • The most substantive criticism levelled against the appellate body by the US was one of ‘judicial overreach.’ On this, the body will be reminded that it cannot add or diminish the rights and obligations of WTO members under the covered agreements
  • Special and differential treatment
    • This entitlement to the S&DT is a hard fought one for developing countries and therefore they view with anger and angst the attempts by developed countries to dismantle it
    • Contention by developed countries: if a country belongs to the G20 grouping it loses its developing country status is absurd
    • Hence approach should be taken to resolve the issue of the S&DT definition
  • Towards a Sustainable Development Goal-oriented trade negotiation
    • Achieving consensus in the WTO is difficult given its members’ economic diversity. Many studies have proposed alternative negotiating modes to adopt rules for new disciplines
    • Despite limitations, plurilateral negotiations can bring progress in many policy areas, if standalone multilateral agreements cannot be finalized.
      • They can be useful in diverse areas such as domestic regulation of services, e-commerce, investment facilitation, SMEs, digital trade, subsidies, environmental goods, regulatory cooperation, etc.
    • Along with these options, it is essential to maintain multilateral dialogue open, to preserve the sustainability and centricity of a functioning and effective WTO system