September 26, 2017 | Dr.RK Pattnaik (Professor at SPJIMR, Mumbai)
Aerospace is the human effort in science, engineering and business to fly in the atmosphere of Earth (aeronautics) and surrounding space (astronautics). Aerospace industry is by and large engaged in research, design, manufacture, operation, and maintain once of aircraft and/or spacecraft. Aerospace activity is very diverse, with a multitude of commercial, industrial and military applications.India has not been able to create a world-class globally-competitive defence industry.Traditionally, Indian armaments production has been entirely embedded within a government-run military industrial complex — eight Defence Public Sector Undertakings (DPSUs), 41 Ordinance factories and the powerful Defence Research and Development Organisation (DRDO). It is, also important to note that India surprised the world by putting a satellite in Mars orbit in its very first attempt. However,it isstill dependent on the western world and Russia for 70% of its military hardware.
The ‘Make in India’ campaign has added a new dimension to defence production by making India the preferred designation for co-designing development and production in India
Against the above backdrop the present article has focused on the emerging issues in the aerospace industryin India. The organization of the article is thus. Section 1 covers the existing policies and regulations. The initiatives under the Make in India campaign are discussed in section 2.Section 3 presents challenges facing the industry and future prospects representing emerging issues. Section 4 concludes.
Regulations and Government Policies
The government has the primary responsibility of designing and enforcing the regulatory frameworks around the aerospace sector. Due to the complexities of the regulations around it, there are several layers to the decision making for the manufacturing, and hence the growth, of the industry.
1.1 Tax structure
India has a federal tax structure whereby both the Central and the State Governments impose a range of taxes. The complex and multi-tiered tax structure in India makes domestic manufacturing uncompetitive in a range of situations. This is equally true of the defence sector where imported supplies of defence goods to Ministry of Defence (MoD) are subject to a lower incidence of taxes than locally supplied goods. The civil aerospace industry is similarly disadvantaged. There are tax incentives available for R&D and for economic activity in Special Economic Zones (SEZs) but these are limited and not broad-based enough to provide meaningful relief.
1.2 Foreign Direct Investment
On the whole, the Government encourages private investment in both the civil and defence aerospace sector with the goal of encouraging technology transfers and achieving indigenization. The Indian Government has significantly liberalized the civil aviation sector. It welcomes domestic private participation in manufacturing and R&D in the aerospace sector with 100 percent Foreign Direct Investment (FDI) allowed by the automatic route in most areas, the exceptions being air traffic services. The defence sector has more restrictions: while 100 percent domestic private investment is allowed, subject to licensing, in the manufacture of defence equipment, there is a cap of 26 percent on FDI.
2. Make in India
The government’s ‘Make In India’ policy and increase in the FDI cap in the revised defence FDI policy (from 26% to 49%), announced with a lot of fanfare during the Aero India show in February 2015, was seen as a major step to revitalise the aerospace industry and awaken it from its long slumber. This government action was expected to infuse a refreshingly new attitudinal change in India’s policy-making processes, foster a trust between the government and the industry, and usher in major reforms to improve India’s standing in World Bank rankings.
As the ‘Make in India’ aviation achievement report says, “India is the ninth-largest civil aviation market in the world and presently has a market size of USD 16 billion. The industry is poised to become the third-largest aviation market by 2020 and the largest by 2030. It is among the five fastest- growing aviation markets globally, growing at over 20% year over year.”
Currently, the following policies are in place:
The extant FDI policy on airports permits 100% FDI under automatic route in greenfield projects(not following up prior projects) and 74% FDI in brownfield projects(upgrading and modifying existing projects) under automatic route. FDI beyond 74% for brownfield projects is under government route.
As per the present FDI policy, foreign investment up to 49% is allowed under automatic route in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service. FDI beyond 49% is allowed through Government approval. For Non-Resident Indians (NRIs), 100% FDI will continue to be allowed under automatic route. However, foreign airlines would continue to be allowed to invest in capital of Indian companies operating scheduled and non-scheduled air-transport services up to the limit of 49% of their paid up capital and subject to the laid down conditions in the existing policy.
Up to 100% FDI is permitted in Non-scheduled air transport services under the automatic route.
Up to 100% FDI is permitted in MRO for maintenance, repair, and operations; flying training institutes; and technical training institutes under the automatic route.
Up to 100% FDI is permitted in Ground Handling Services subject to sectoral regulations & security clearance under automatic route.
An integrated Civil Aviation Policy is developed for the first time in India-according to Make in India, “To further encourage the civil aviation sector in India, the MoCA (Ministry of Civil Aviation) released the National Civil Aviation Policy 2016 (NCAP) in June 2016. The major focus of this policy is to make flying affordable to the masses and to strengthen the regional air connectivity. The comprehensive policy which was finalised after receiving feedback and consultation by public and sector experts will create an integrated ecosystem for the growth of the industry by addressing 22 areas of the Civil Aviation sector.”
MRO sector gets a boost as provision for adequate land for MRO service providers to be provided in all future airport/heliport projects where potential for such MRO services exists.
The subject of privatisation of the Indian aerospace has always been a controversial topic. It has been tried, tested and tried again to inconclusive results.. In fact, HAL started as a private limited company in 1940. Our political leadership at the time of gaining independence reposed faith in the public sector model for all heavy and investment intensive industries and hence the present state of HAL. Afflicted by internal inefficiencies and process frailties, its brand of indigenous manufacturing has kept genuine indigenous capability in aerospace out of our reach. Meanwhile, the patronage HAL enjoyed at government behest and at the cost of the private sector being kept out, has led to a situation which will take a long time to be undone. 
The private industry could not really blossom until 2001, before which regulation prevented private rivals to defence-oriented state firms such as HAL, although small suppliers had been permitted. But since then companies such as Dynamatic Technologies-an Indian company involved in precision engineering- have grown. One of the latest to emerge is Mahindra Aerospace, offering complete aircraft, aerospace structural components and aircraft development services. The company is steadily developing a metallic aero structures manufacturing capability through a combination of rented operational facilities and development of greenfield manufacturing plants. 
The entry of the private sector into the defence sector is a game changer. This revered holy cow no longer remains the preserve of the State. The private industry can play a crucial and positive role to help overcome these challenges. While the government has displayed the necessary political will for indigenisation and establishment of an advanced manufacturing base in the country, the challenge lies in its comprehensive implementation — an enabling policy framework, focus and commitment, including addressing the related fiscal and taxation issues.
The aviation sector could still be considered to be in a nascent stage of development. But it is, after all, a young industry, facing the same types of problems that others have at a similar stage of development. More than anything else, technological expertise and achieving zero-defect targets are the most critical challenges faced by Indian companies, say consultants PwC. “India needs to keep pace with the increasingly high use of technology across the design life cycle,” PwC says. High capital costs and low production volumes are also a problem, and it can hardly help that technology is continually advancing.
One of the root problems of the aerospace industry is the lack of skill to grow in the world market. The reason for large imports is the superior quality of and expertise that goes into manufacturing. ”Shortage of skill-based workforce was posing a challenge to the growth of the Indian aerospace industry in the absence of synergy between policy, industry and academia”, HAL chairman RK Tyagi went on record to say or
"India needs better training and education infrastructure with a pragmatic policy-industry-academia ecosystem as opposed to top down state led intervention to tap the huge employment potential in the aerospace industry”.
3.4. Civil Aviation Losses
No government failure comes even close to its failure in revamping the country’s national carrier, Air India. Air India continues to bleed losses to the tune of Rs. 2,636 crore in 2015-16 and Rs 5,859 crore in the year 2014-15. Government has once again been forced to inject a sum of Rs. 22,280 crore in March 2016 to keep the airlines afloat. So far, the Indian government has pumped in more than Rs 30,000 crore in the airline. As of December 2015, the 85-year-old airline’s debt stood at over Rs 50,000 crore. Adding to this, it has been steadily losing market share to rivals from the 35% share in 2007 to 16% in early 2016.
There was a time not too long ago when Air India set the global standard for customer service. Now, it seems to have fallen far behind its Middle Eastern and South Asian counterparts in terms of quality services and business excellence.
According to CordantRecruitment(a leading recruitment firm), the key ingredients to global excellence in aerospace are a combination of winning ideas, innovation and talent. A model example would be Britain; more than 3,000 aerospace companies operate in the UK, including BAE Systems, GKN and Rolls-Royce. Other international companies with operations in the UK include: Airbus, Cobham, AgustaWestland, Finmeccanica, Thales, Boeing, and Bombardier.
The aerospace sector employs high technology techniques and attracts a highly qualified workforce and has the largest number of small and medium enterprise (SME) companies in Europe. Also as an important exporting industry, aerospace has benefited from support from UK Expert Finance (UKEF). In 2013/14, UKEF issued guarantees for the aerospace industry of £961 million. This helped to support the delivery of 95 aircraft to 22 companies. Furthermore, UKEF provided support for 15% of all aircraft delivered by Airbus.
4. Way forward.
It may be noted that in the recent past several large-scale projects and joint ventures instituted in this sector in respect of production in both the commercial and military segments will strongly support the future of India's aerospace manufacturing sector. For example, Reliance Defense Limited announced plans to launch a global aerospace technology research center in Bengaluru. Reliance also signed a cooperation agreement with Ukrainian airframe manufacturer Antonov in March to produce dual version air transport aircraft capable of supporting both military and commercial operations in India.
Global Original Equipment Manufacturers (OEMs) have developed sensitive and strategic technologies, especially in the aviation sector, related to engines, navigation, surveillance, avionics and state-of-the-art weapon systems over several decades, investing billions of dollars...
What India needs is a single FDI slab of 74% in defence with clear norms and a level-playing field. Forty-nine % is of no use and 100% may be too one-sided. The Indian obsession with ‘ownership and control’ needs to be curtailed. Higher FDI limit will also expose certain global OEMs that are not keen to invest in India, and are using 49% FDI as a convenient excuse to stay out.
The Indian private sector needs to be co-opted as a partner and not a vendor by DPSUs. Certain non-performing labs and plants of DRDO and DPSUs respectively need to be privatised. R&D funds for defence need to be allocated to the best Indian organisations and universities.
The ‘Make in India’ programme in defence will have to be facilitated by way of bold reforms in policy, procedures and our approach towards global investors. There is an urgent need to facilitate removal of other manufacturing roadblocks, like land, power, transportation infrastructure, taxation and multifarious government clearances. The idea of technology transfer through either licence production or offsets is misunderstood by the decision makers. One way to do this is to develop technologies in-house, both designing as well as manufacturing, so as to catch up. India has to deliberately enter the age of innovation in which research and development becomes an integral component of science, technology and engineering development, an element totally disregarded by the Indian industries so far and unthinkable in the aerospace sector.
National Aerospace Laboratories (NAL) could be made a centre for excellence in aerospace, with capabilities in developing analytical tools, simulation tools, simulator platforms, and a centre of flight research with a fully-capable experimental flight laboratory with their own experimental helicopters and aircraft.
There is a need to incorporate mechanisms for formal public consultations with the Indian defence industry, both private and public, on proposed changes before their adoption by the Defence Procurement Board (DPB) and the Defence Acquisition Council (DAC).
Many Indian companies, especially the new entrants into defence, are yet to understand the finer details of the Long Term Integrated Perspective Plan (LTIPP) and its public version the Technology Perspective Technology Roadmap (TPTR). The MoD needs to make this process more interactive; this would benefit the end users as well as industry. The MoD’s procurement procedures are still very cumbersome and time consuming; these need to have clarity and the procurement cycle shortened.
The reform process in the Indian aerospace industry, both military and civil, stands uniquely poised today and, the industry has set itself on a firm path towards a transformational change.
The process of transformation has begun and there are encouraging signs of the aerospace industry emerging as a major factor in our increasing self-reliance as well as the export-oriented sector, with the potential and capacity to provide world-class opportunities for established firms in the global market. At the same time, the domestic capability is being significantly enhanced, through extensive tie-ups, joint ventures and technology transfers.
Fundamental strength in the Indian Industry already exists, in the form of a large number of SMEs, which in the past have been suppliers at the sub-component and component level: for the aerospace sector DPSUs, HAL, DRDO, ISRO etc. These companies are gradually transforming themselves into major players in this sector, modernizing with cutting edge technologies to become suppliers for global aerospacecompanies vying to outsource products and components from India.
 Changing Dynamics: India’s Aerospace Industry by Pricewaterhouse Coopers (2009)