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Defence Exports: Gaining Momentum

A vibrant domestic defence manufacturing will build strategic domestic depth while also enhance the export potential for economic advantage, further accentuating the job creation.

There has been a seven-fold increase in defence exports of India over the last two years and this can be attributed to the liberalization of procedures, including online clearance of proposals by the Government. The momentum seen in defence exports from India in the year 2018-19 stands at Rs 10745 Crores doubled as compared to Rs 4682 Crores in 2017-18 with 90 percent of the products as components. Refer Fig. Basically, the recent trend of growth in exports can be attributed to the low cost of production in India and discharge of offset obligations; however there is a need for a lasting commitment.

Noteworthy, earlier, the exports from Defence Public Sector Units (DPSUs) were not permitted unless the domestic demand of the Armed Forces had been fully met. However, now they have been given a 10% dispensation for exports. Government is aiming to achieve one-fourth of the turnover by DPSU from exports. As for the Indian private defence manufacturers, at present bout 50 Indian companies in the private sector have contributed to defence exports with their share gradually increasing in the total defence exports year on year. Refer Fig.

India has ambitious defence export targets. According to a Draft Defence Production Policy in 2018, the Government's aim is to achieve yearly exports worth Rs 35000 Crores (USD 5 billion) by 2024.  Presently, the major defence items being exported consist of Personal Protective items, Offshore Patrol Vessels, ALH Helicopter, SU Avionics, Bharati Radio, Coastal Surveillance Systems, Kavach MoD II Launcher and FCS, Spares for Radar, Electronic System and Light Engineering Mechanical Parts etc. While India exported forging equipment, electronic assemblies, flight control panels to the US, it sold transmitting tubes to the UK and MIG and Sukhoi 30 aircraft spares and services to Russia. However, it is worth mentioning that most of the exports from India till date are for components (around 85-90%) with parts for small arms topping the chart. All types of components made by Indian defence production units are being bought by companies worldwide. This clearly indicates that the Indian Defence Industrial base (DIB) has the capability to fulfill the requirements of global Original Equipment Manufacturers (OEMs) and not just the own requirements.

Taking the growth momentum in defence exports further, the Government has come up with a recent licencing procedure- 'Open General Export License' (OGELs). Implementation of this is expected to give India added access to the global market as blanket permissions will be given on select items; thereby further increasing the defence exports exponentially. The Ministry of Defence (MoD) has issued two notices on issue of Open General Export Licences for export of certain parts and components and intra-company transfer of technology to select countries including Belgium, France, Germany, Japan, South Africa, Spain, Sweden, UK, USA, Canada, Italy, Poland and Mexico. The items permitted under OGEL includes components of ammunition and fuse setting devices without energetic and explosive material, firing control and related alerting and warning equipment and related systems and body protective items. The Transfer of Technology (ToT) to the countries is subject to the condition that the export is an intra-company transfer from an Indian subsidiary (applicant exporter) to its foreign parent company to subsidiaries of the foreign parent company. Further, OGELs will be one-time, for two years, and granted by the Department of Defence Production (DPP) but on a case to case basis.

This new licencing regime is aimed at supporting access of local defence companies to international markets and further promoting industrial competitiveness by looking for newer platforms and avenues. Earlier the exporting Indian company had to give an End User Certificate duly signed by the importing company. The certificate contained the details of the items being exported, their quantity and cost, the purpose for which they would be used and the final end user which had to be a government entity. If the item being exported was a complete system, the End user Certificate had to be signed by the Government of the importing company. Now only certain critical items, which use sensitive Indian technology, need the foreign government's countersignature in the end-user certificate. The entire process of taking permission from the government will thereby be further reduced.

For acquiring the export licence, it would be mandatory for an applicant to have an Import-Export Certificate. The quarterly and end of the year reports on all the transactions done under OGELs should be submitted to DPP for examination and post-export verification. Both the state-run and private industries have been seeking liberalization of the rules, and hence the Defence Ministry's approval, another effort to ameliorate the country's defence export figures. There is however some grey areas in the OGEL notices issued. The notices have made it mandatory that the exporting company have an appropriate/certified Internal Compliance Programme (ICP) or an Export compliance programme of its own. This terminology is vague and the requirements of the programme need to be clarified. Another grey area is the requirement that the exporting company has to certify that they have internal controls in place to prevent transfer of goods to countries/ entities facing UNSC sanctions or arms embargo. The notice already specifies a very limited number of countries for which an OGEL would be issued. The importing entity would be providing an End User Certificate in which the end user country of the final product would be specified. It is not possible for the exporting Indian Company to verify that the importing entity has not deviated from the End User Certificate. Also the list of countries/entities which are under UNSC sanctions is not available in the public domain. It would also be modified periodically. It would not be practical for an Indian company to keep up with these details.

Globally, in 2018, amongst the top ten world exporters of defence items, India ranked 21st with cumulative exports of USD 118 Million and a share of 0.8% in total exports of arms and ammunition; parts and accessories thereof during the same period. The biggest contributor to Indian has been the US, accounting for nearly Rs 5000 Crores worth of exports with a share of around 38%, followed by Israel with 26%, Myanmar with 4.2%, France with 4.2%, Czech Republic with 4.2%. Further, in the past, India's defence exports have ranged between 1.5-2.4 percent of the total production, with an import: export ratio of 194:1, as compared to 1.3:1 in the case of Israel, 8.8:1 in the case of South Korea and 19.7:1 in the case of Singapore.  Thus, there is a long way to go.

Export Potential

A vibrant domestic defence manufacturing sector will build strategic domestic depth in key sectors and also allow the economy to tap into export potential in the defence sector. This would be further beneficial not only in terms of improving export-import balance, but also further accentuating the job creation potential of the sector. The Ministry of Defence is looking to go beyond exporting components mainly and is keen that the public and private sector should now focus on exporting include bridging equipment, missiles, warships, Off-Shore Patrol Vessels (OPVs), Self Propelled Artillery Guns (SP Guns). Thus, in efforts to boost international sales, the MoD has identified 85 target countries. These countries have been classified as per the possibility of exports. Refer below given Figure. The scheme will play a catalytic role in addressing interventions required for exploring new markets and promoting export-oriented activities by defence attaches in the countries to which they are attached.

Thrust on defence exports bring in economical advantage, it will also help India build its might in the region. DRDO is looking at opportunities to export previous versions of defence products, as it makes better or advanced versions for indigenous consumption. DRDO even keen to design and develop exclusively for somebody at lower costs. As indigenous production move towards upgrades of their products, the early versions could be customized and offered along with technologies to friendly and neighboring countries.

Way Forward

One of the most important pre-requisite for any enterprise aiming for an Export market is to become globally competitive, have technical capability & capacity to produce. It requires following steps:

  • The Indian defence industry needs to invest in industrial and technological capabilities with increased capacity to be able to become part of global supply chain.
  • The Government needs to address the impediments for defence exports and incentivize the private industries.
  • Public sector needs to be competitive rather than being nominated.
  • Encourage and give incentive for the collaboration between the Public & Private sector companies for defence exports based on a PPP model.
  • Most of the infrastructure & facilities are under Government domain which needs to be shared/made available to private players as export can take place only for tested and proven equipment.

Conclusion

India's defence export performance is making a steady progress and need boost in terms of incentives. The “Make in India” programme for defence equipment is likely to be viable only, if there is a significant export component to it; the requirements of the Indian Armed Forces alone are unlikely to provide the economy of scale. Until now arms exports were moot given the ineffective public sector units, which can barely provide the requirements of the armed forces but as private companies are stepping in, defence exports is seeing a new beginning. Further, there is need to invest in Research and Development (R&D), production facilities and maintaining quality standards to contend on platforms globally, coupled with strong export policies beneficial for defence production units to ensure defence exports continue to grow exponentially.

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