India’s defense exports make quantum jump, based on ambitious target of $5 Billion, new strategy, and streamlining procedures

Rajesh Uppal March 14, 2021 Doctrine & Strategy, Geopolitics, Industry Comments Off on India’s defense exports make quantum jump, based on ambitious target of $5 Billion, new strategy, and streamlining procedures 803 Views

India exported military hardware and equipment worth over Rs 34,000 crore in the last five years, according to details provided by the government in the Lok Sabha in Feb 2021. Replying to a question, Minister of State for Defence Shripad Naik said the total exports by both private and defence public sector undertakings were worth Rs 2059.18 crore in 2015-16 while the number came down to Rs 1521.91 crore in 2016-17. Historically, India constituted less than 1% in the total worlds arms export index. The value of defence export by DPSUs, OFB and the Private Sector Companies, for the financial year 2015-16 was Rs. 1693.80 crore as compared to Rs. 994.04 crore during the financial year 2014-15, according to DDP.

However, in comparison with other tier II arms exporting countries ( Chine, Brazil, Turkey and South Korea) who have established a significant presence in global defence markets- India is still lagging. The growth of exports is very small compared to China that has established itself as a world leader in arms manufacture. In 2011 to 2015, China’s arms imports fell 25 percent compared with the previous five year period, signaling a growing confidence in the country’s homegrown weaponry despite key areas of weakness, the Stockholm International Peace Research Institute (SIPRI) said in a report on global arms transfers. Chinese exports of major arms, which excludes most light weaponry, grew by 88 percent in 2011-2015 compared to the earlier five-year timeframe, SIPRI said. Most of China’s arms sales went to countries in Asia and Oceania, the report found, with Pakistan accounting for 35 percent, followed by Bangladesh and Myanmar.

India has developed a lot of equipment and technologies but no one really applied their mind to export them,” the defence minister said. “The private sector has developed artillery guns and once need of the Indian Army is met, these can be exported.” For india, some of the major export destinations for defence products have been Algeria, Afghanistan, Bhutan, Ethopia, Italy, Israel, Ecuador, Russia, UK, UAE, Indonesia, Nepal, Oman, Poland, Mauritius, Maldives, Sri Lanka, Spain , Chile, Romania, Belgium, Vietnam, Myanmar, South Korea and Sudan. About 50 Indian companies in the private sector have contributed to defence exports.

However, the exports of military hardware went up to Rs 4682.36 crore in 2017-18 and further jumped to Rs 10745.77 crore in 2018-19. The amount for 2019-20 was 9115.55 crore while it was Rs 6288.26 crore in the current fiscal till January 31, according to Naik.

Indian Government has now set an ambitious target 0f $5 billion by 2025, and took several measures to boost exports. India’s defence production and export priorities were recently enunciated at the February 2020 DefExpo, where PM Modi announced his government’s target of increasing arms exports to US$ 5 billion over the next five years. Prime Minister Modi said, “In 2014, the export of defence equipment from India was about Rs 2,000 crore. In the last two years, it has gone up to Rs 17,000 crore. In the next five years, our target is to increase exports to $5 billion, which is about Rs 35,000 crore.” Modi added that the world’s largest democracy cannot remain dependent on imports for its security.

The Indian government in August 2020 introduced a new draft policy that sets a $25 billion defense production target, including making $5 billion from exports, by 2025. The Defence Production and Export Promotion Policy is meant to bolster local production of weapons and platforms by developing “a dynamic, robust and competitive” defense industry. The draft policy also said the Ministry of Defence will set up a technology assessment cell to assess industry’s ability to design, develop, produce and re-engineer assembly lines to manufacture major systems such as armored vehicles, submarines, fighter aircraft, helicopters and radars. “The DPEPP 2020 is envisaged as overarching guiding to provide a focused, structured and significant thrust to defense production capabilities of the country for self-reliance and exports,” the MoD said. However, some defense experts and analysts are unimpressed with the draft policy. Amit Cowshish, a former financial adviser for acquisition with the MoD, said the DPEPP is high on rhetoric but low on specifics.

This was followed by the finance minister’s announcement of a hike in India’s foreign direct investment (FDI) cap in defence production under the automatic route from 49 per cent to 74 per cent. In May 2020, India entered the list of global arms exporters at number 23, with a focus on encouraging future weapons sales abroad.

Modi government reviewing its arms export policy and streamlining the procedure for granting permission to both public and private companies, Indian defence exports have made quantum jump. As per the data published by the Stockholm International Peace Research Institute, or SIPRI, in March 2020, India is ranked 23rd in the list of major arms exporters for 2015-2019 and 19th for 2019. The Ministry of Defence’s annual report 2018-19 records that the defence exports were worth Rs 10,745 crore, a growth of more than 100 per cent from 2017-18 (Rs 4,682 crore) and over 700 per cent since 2016-17 (Rs 1,521 crore).

India is looking at countries like Mauritius, Bangladesh, Philippines, and Afghanistan to export defence equipment. The items that India is looking to export include bridging equipment, missiles, warships, Off-Shore Patrol Vessels (OPVs), Self Propelled Artillery Guns (SP Guns), the Defence Minister said adding that Oman is keen to import border fencing equipment from India. The results have started showing with exports shows phenomenal growth by the industry.

The push in defence exports is accompanied by increased production of the Ordnance Factory Boards (OFB) and the Defence Public Sector Units (DPSU). In the last two years, production in the OFBs and DPSUs has shot up by over 25%. The export by private defence industry has shown accelerated growth. About 12-14 companies in the private sector have contributed to defence exports.

Indian defence product exports to Australia included 5.56x45mm Ball MK N(SS109) cartridges, while it exported protective headgear and hard armour plates to Azerbaijan, helmets, bomb suppression blanket and soft armor panels to Germany, sleeping bags to Guinea, mortar shell covers to Israel, hard armour plates to the Netherlands and the US, radar parts, bullet proof vests and helmets with accessories to Singapore, detonators to South Africa and night vision binoculars to Thailand.

Exporting defence equipment will have diplomatic and gepolictical ramifications. The rise of China and its assertive behavior is creating new challenges for India and other regional countries. China is partnering with Pakistan to sell the jointly developed export varient JF-17 fighter aircraft in Asia. This also provides India with opportunity to become net security provider and thereby increase its defence exports. For instance, Pakistan is unlikely to be happy with India exporting defence platforms to Afghanistan. Similarly, Indian-made warships and missiles in the Vietnamese armory are likely to unsettle Beijing.

India’s Great Nicobar Island in the Andaman Sea is barely 163 km from the Sabang district of Indonesia’s Aceh province. The geographical proximity of these two large democracies and their strategic locations in the Indian Ocean make them natural partners for maritime security. The bilateral diplomatic relationship was established in 1951, and upgraded to a Comprehensive Strategic Partnership in 2018.

Indian naval systems like anti-submarine warfare (ASW) corvettes and advanced offshore patrol vessels (AOPV) could be of interest to Indonesia given its significant—and the world’s third longest—coastline. New Delhi could also assist Jakarta’s attempts to strengthen and expand military bases in the South China Sea’s (SCS) Natuna region, which is vulnerable to Chinese incursions.

India’s New Strategy for defence exports

The world over, defence exports are covered by the defence diplomacy between friendly countries. This also contributes to building local operational capabilities and, therefore, enhances inter-operability with our own forces, especially during UN peacekeeping missions. Wherever feasible and required, the industry delegations from public/ private sector/ JVs of private and public sector would be included in bilateral meetings/ discussions with various countries so that the importing country gets due comfort while importing from India.

The Indian Ministry of Defence (MoD) has proposed a new scheme similar to the FMS (Foreign Military Sales) followed by the United States in facilitating sale of Indian military equipment to friendly countries. The plan, tentatively named Foreign Military Assistance is proposed to be administered by the MoD after taking inputs from the Ministry of External Affairs (MEA).

A draft, currently under consultation stage between the MoD and MEA, proposes to ease the process of supplying defence equipment to strategic partners and optimise the outcomes from the current practice of just extending a line of credit to friendly countries to buy defence equipment from India and leaving the decision to shortlist and choose the platforms and navigate the complex processes in India to the recipient country alone. Often, the countries that want to utilise the generous loan offered by India find themselves battling roadblocks because of a rule that says they need to make a ‘price discovery’ in the Indian market and find their way through complicated bureaucratic processes before concluding a deal.

Furthermore, the bulk of India’s domestic capacity rests with defence PSUs, which have hardly distinguished themselves on the export front. PSUs are hamstrung by red tape and a poor global impression of their ability to deliver on time and on cost, to say nothing of through-life support. Indian warships tend to be either unsuitably configured or too expensive, or both. Per tonne of floating displacement, Indian capital ships are among the most expensive yet poorly armed vessels in the world. On the aviation front, even when Hindustan Aeronautics has a solid performer in the Dhruv advanced light helicopter, it cannot compete on sustainment costs even in a military environment, and has had absolutely no success in the civil aviation world. In much the same vein and closer to present day, fielding and validating the Akash surface to air missile system, Pinaka rocket artillery, and the Indo-Russian BrahMos cruise missile in meaningful numbers, has not translated to any sales outside India, despite constant promises that these are imminent

Now, to overcome the delays and obstacles, the Indian MoD wants to draw up a list of equipment (supplied both by the Defence PSUs and the private Indian defence sector) bought by the Indian military—platforms that can be shared with friendly countries—and then advice the foreign militaries to buy the same equipment using the loan offered by India.

Simultaneously, the MoD proposal says it would ask the DPSUs and successful private sector vendors to sign on on the scheme by agreeing to supply the same item at the price paid by the Indian military with an in-built escalation clause thrown in. By doing so, the MoD is hoping to achieve two primary objectives: One, foreign militaries need not waste time on testing equipment they intend to buy since the Indian armed forces would have already done due diligence. Two, the foreign purchase teams need not run around trying to make a ‘price discovery’ in the Indian market, a never-ending saga in the largely opaque sector. At the moment, negotiating teams from friendly countries keep looking for a ‘fair price’ of Indian products, then negotiate their way through the complex processes that EXIM Bank (designated as the banking platform for export-import) has.

The domestic defence industry would have limited scope for investment in R&D and production if it relies only on the domestic demand. There is a need to promote investment in the defence sector, both in R&D and production, thereby resulting in higher self-reliance and indigenization. While putting in place the policy framework and procedural mechanisms, the thrust would be on indigenous production and exploring possibilities of exports to other nations that may look forward to supplies from India, says DDP.

Since the defence technology needs long term investment, its obsolescence is high with low economies of scale. Hence, the policy of maximizing indigenous production without well supported R&D policy and export strategy may not bring desired results. Therefore, the defence industrial policy has to be supplemented by the strategy for defence exports without which the economic base of the defence industry would be difficult to sustain in the present economic competitive environment.

A specific export strategy for defence did not exist at all until August 2014. Exports were carried out under the Foreign Trade Policy after obtaining a no-objection certificate (NOC) from the MoD. The Modi government hit the ground running and a strategy for facilitating defence exports was formulated and promulgated in September 2014, focussing on export promotion/facilitation and export regulation.

Among the measures already adopted are a mandate for state-owned public sector units to earn 25 per cent of annual revenue through exports by FY2023, and for Indian diplomatic missions abroad to actively promote defence exports, including supporting lines of credit.

Specific incentives were introduced under the Foreign Trade Policy. The Ministry of External Affairs was directed to facilitate a line of credit for foreign countries to import defence products, where feasible defence exports could also be financed through Exim Bank. Currently, India has granted around 1.5 billion dollars as line of credit to friendly foreign countries ranging from Afghanistan to Vietnam, to enable them to purchase defence equipment from India. The list of countries also includes Bangladesh and Myanmar just to name two others.

Online and Time Bound Clearance . A system of time-bound clearance for export permissions/ NOC would be introduced. A web based system would be developed to receive applications for NOC online and convey the NOC to the companies online.

The offset policy was reviewed and aligned towards integration of weapons/systems in India to enable exports. The department has proposed a series of amendments to the Defence Offset Guidelines to open up new avenues for discharge of offset obligations by foreign vendors. Among the new avenues are: investment in specified projects in defence, aerospace and internal security such as testing labs, testing ranges and skill centres. The proposal is also to cover specified critical technology and some specified technology acquisition.

This has brought results — most of the previous fiscal’s Rs 10,000 crore in sales came from private sector players, primarily boosted by their work in defence offsets. If fiscal policy, defence offsets, and capital spending are creatively deployed to enable much more rapid growth in the private sector, the effects will be outsize.

Facilitating body

The government of India has established a committee to support exports of military platforms, the Ministry of Defence (MoD) in New Delhi has said. In a statement In Dec 2020 the MoD said the new committee will provide “faster approvals” for international sales of “major military platforms” including coastal surveillance systems, radar and air platforms, and the Akash surface-to-air missile system. The committee, it said, will comprise India’s defence minister, the minister of foreign affairs, and the country’s national security advisor, which leads the government’s National Security Council.

The MoD said the new committee will be focused on platforms – as opposed to components and subsystems – with the aim to “improve [the country’s] defence products and make them globally competitive”. It added, “So far Indian defence exports [have] included parts and components etc. The export of big platforms [has been] minimal.” The committee’s responsibilities, the MoD said, will be to “authorise exports of major indigenous platforms” and to explore “various options” in facilitating such trade including bilateral government accords.

It was decided that India will set up an Export Promotion Body with participation from public and private industry to advise the government, coordinate all export facilitation schemes of the government, and promote exports through specific marketing in target countries. The role of the body would be to render advice to government on various export related issues, coordinate all export facilitation schemes of the government, increase awareness amongst the industry about various export facilitation measures and promotion of exports through specific marketing efforts in targeted countries.

A Defence Export Steering Committee headed by the Secretary, Department of Defence Production — with representatives from the armed forces, DRDO, Planning and International Cooperation Wing, and Acquisition Wings of the MoD, MEA and Director General Foreign Trade — was set up. The functions include taking decisions on export of sensitive equipment, monitoring the progress of defence exports, and suggesting specific steps/strategies to boost exports.

According to a MOD document, “the body could be in the form of a society or a not for profit company under the Companies Act. The role of the body would be to render advice to government on various export related issues, coordinate all export facilitation schemes of the government, increase awareness amongst the industry about various export facilitation measures and promotion of exports through specific marketing efforts in targeted countries.”

The body will identify the suitable export markets in consultation with Ministry of External Affairs and Department of Commerce, keeping in view India’s foreign policy and various international export control and arms control regimes. Moreover, the MoD is also planning to formally allow Indian Defence and Military Attaches posted in various embassies across the world to do a ‘sales pitch’ about Indian defence products, manufactured both by the public and the private sector. So far, the MAs and DAs have tended to avoid pushing Indian products openly since they are not sure if this is covered in their job description! Now on however the DAs would be mandated to boost Indian defence exports. In February earlier this year, many of the Defence Attaches posted abroad were flown in to interact with the industry at the Defence Expo held in Chennai to better understand the Indian market and of course gather more information about the MoD’s plans for defence exports.

Relaxed export control laws

To improve export situation and also to enhance the role of Indian companies in the global supply chain, the Directorate General of Foreign Trade (DGFT) recently released an amendment to the SCOMET (special chemicals, organisms, materials, equipment and technologies) list, which covers dual use goods, services and technology for exports. The amended list includes the earlier “empty but reserved” and now populated Category 6 of “Munitions List.” This paves the way for India to join the international treaties, Wassenaar Arrangement and the Australia Group, within a few months.

The updated list, which includes 16 broad categories of products that can be exported after clearance, is likely to boost military trade and make clearances easier for private companies pursuing export orders.”This amendment will ease the process for Indian companies to gain the necessary approvals for exports and be an enabling measure for India to achieve its ambitious targets for defence exports,” said Ankur Gupta, vice president at EY.

The list included warships, tanks, armoured vehicles, ammunition, rifles and small arms, military training equipment, electronic warfare devices, software, bombs and torpedoes.

The defence ministry relaxed earlier export control laws that required multiple end user certificates by Indian companies wishing to export components and parts of larger systems. The two things combined, experts said, will go a long way in boosting foreign trade for India’s private companies.

The Ministry of Defence has set in motion a process to identify military equipment that can be exported from India, in an effort to meet the ambitious targets set under the ‘Make in India’ policy. According to private industry sources, the Department of Defence Production has provided a list of 51 items to the industry lobbies to identify how many of them can be manufactured in India and made available for exports. Among the items listed for possible export are howitzers, UAVs, fighter aircraft, assault weapons, sniper rifles, grenade launchers and various software systems for the battlefield and light tanks.

Government is also considering creation of DRDO commercial arm for commercialization / marketing of DRDO technologies / products and services. Some of the products being considered for export are LCA-Tejas, Akash SAM, BrahMos Cruise missiles, Radars and other small arms and ammunitions. Livefist can confirm that BrahMos Corp. will for the interim take over commercial export processing duties for the DRDO, with the possibility of a separate entity being spun off down the line.

India Export items

India has cleared 156 defence equipment for exports including the indigenous Light Combat Aircraft Tejas, artillery guns, battle tanks and missiles, anti-tank mines and explosives. India’s Cabinet has also approved for export the medium-range Akash missile system, which is produced by Indian firms Bharat Electronics and Bharat Dynamics. The MoD said the Akash was inducted into the Indian Air Force and Indian Army in 2014 and 2015 respectively and it has since drawn interest by “many friendly countries”. The export version of the missile would be different to any exports, it said. The MoD added, “Cabinet approval [for Akash exports] will facilitate Indian manufacturers to participate in [tenders] issued by various countries”.

The major defence items being exported are Personal Protective Items, Offshore Patrol Vessels ( OPVs), Spares for Radar, Cheetah Helicopters, Turbo Chargers and Batteries, Electronic Systems (EOPOD ALH System), and Light Engineering Mechanical Parts, SU Avionics, Bharati Radio, Coastal Surveillance Systems, Kavach MoD II Launcher and FCS. Indian exports in recent past include HMS-X2 sonars to Myanmar, Cheetal helicopter to Afghanistan, Dhruv Helicopters and bulletproof jackets to Nepal, Sukhoi 30 avionics and MIG spare parts to Malaysia, offsore petrol vessels to Mauritius and spare parts of jaguar aircraft to Oman.

Indian Defence Industry, a Department of Defence Production publication, lists several land, naval, and air systems for export, including the BrahMos missile, Multi-Barrel Rocket-Launcher (MBRL), fighter aircraft (Tejas, Dhruv, Cheetal), bridging systems, and communication and surveillance systems. This runs parallel to Indonesia’s defence requirements as highlighted in 2014 by the Indonesian Defence Industry Policy Committee, which spoke of the need for efficiency in seven weapon systems: medium tanks, jet fighters, submarines, propellants, missiles, radars and communication devices.