A series of reforms were announced by the Finance Minister on, 16 May, to spur growth in the defence manufacturing sector. Coupled with that, the Atmanirbhar Bharat Abhiyan has underscored the need for self-reliance to meet the security needs of India. It has also accentuated the current scenario where bulk of our security needs is met through import of platforms or sub-systems.
While the theme of self-reliance is being carried forward, there is also a dire need to focus on developing a credible and structured defence export programme that functions as an extension of Indian diplomacy.
While India is one of the key defence markets driven by increasing defence spend, military modernisation plans, and strong engineering base, its focus on exports has so far been negligible.
India’s capital expenditure for defence procurement is expected to be around Rs 15,00,000-18,00,000 crore ($200-250 billion) over the next 10 years and ‘Make in India’ has been the government cornerstone to promote indigenous defence production in the country.
Given the increasing focus on self-reliance, the Ministry of Defence (MoD), has set a target of doubling the defence production to Rs 180,000 crore ($25 billion) by 2025.
The current indigenous defence production is estimated to reach Rs 90,000 crore ($12.5 billion) in 2019-20 and in order to achieve the targeted annual growth rate of 15 per cent the MoD is focusing on boosting defence exports. The increase in defence exports will result in: –
• Consistent revenue for defence companies.
• Better economies of scale.
• Increase in savings and forex reserves.
• Increased competitiveness among domestic industries.
• Reduced dependency on other nations.
Over the last decade, India has developed robust defence production capabilities especially in the South East Asian region, though the country is yet to fully realise the available potential of defence exports.
As per the data published by the Stockholm International Peace Research Institute (SIPRI), in March 2020, India is ranked 23rd in the list of major arms exporters for 2015-2019.
While the significant progress accomplished over the last five years is commendable, India’s share of the global arms exports is still only 0.17 percent. Frugal engineering, cost-arbitrage due to the availability of high-quality competitive engineering talent, IT infrastructure and labour provides India an opportunity to upend this dismal indicator.
Given the potential for defence exports, the MoD targets exports of Rs 35,000 crore till 20246 and in order to achieve this target, the exports have to grow at a CAGR of >40 per cent till 2024.
Several factors, such as simplification of procedures for defence exports, offset obligations (and subsequent linkage to global supply chains) and increased participation of private industry in the sector, has resulted in exports to the tune of Rs 8,620.6 crore ($1.2 billion) in 2019-20 (-10% of total production), which is nearly six times the amount of exports achieved in 2016-17, registering a phenomenal Compounded Annual Growth Rate (CAGR) of 78.3 per cent.
In order to increase exports, the component level manufacturers would need hand-holding from the government while the OEMs (both public and private) will need assistance in identification of opportunities as well as support from various ministries for platform/subsystem level exports. Exploiting G2G relationships that India and its embassies across the world possess would be key to this transformation.
While sustenance from MoD and other agencies is quite crucial, the OEMs in their own capacity should also identify key opportunities especially in the major arms/equipment importing economies of the world, and subsequently engage with MoD for assistance.
Countries that are global export hubs, have an established means to assist their defence manufacturers to not only identify opportunities but also realise the same. It is, therefore, quite pertinent to examine the structures and methodology followed by these countries and develop a system that suits Indian requirements.
Targetted Strategy
Platform/system level exports to developing countries. Developing countries have limited domestic defence manufacturing capabilities and are primarily dependent on imports for meeting their defence forces’ requirements. Rather than going for highly advanced systems, they focus on medium technology platforms and systems and hence should be a focus area for defence exports from India.
Countries from the African continent, South Eastern Asia and Latin American region are some of the markets for export of complete defence systems/platforms by Indian OEMs especially DPSUs. To promote exports to such nations there may be a requirement to provide/ increase the line of credit – a financing mechanism from the EXIM bank to promote exports to such countries.
Forging long-term partnerships with upcoming defence hubs. These are countries that have shown a strong growth in their defence industry over the past few decades and now are focusing on developing indigenous capabilities, such as Australia, UAE, Saudi Arabia, South Korea, Turkey, Norway, Brazil, Poland, Netherlands and Portugal.
These countries are focusing on developing their own systems and platforms and for that are ready to collaborate. MoD in conjunction with domestic defence industry should identify such opportunities in these countries and assist the Indian companies to forge partnerships for joint manufacturing. Similar collaboration in past, such as joint development of BrahMos missile, has yielded fruitful results.
Enlarge the export horizon. Though India exports defence related equipment to 42 countries, the major public sector exports are limited to a few countries only namely Myanmar (46 per cent), Sri Lanka (25 per cent) and Mauritius (14 per cent). The other countries where defence equipment is being exported to at platform/system level are Azerbaijan, Seychelles, Estonia, Indonesia, and Guinea. The MoD has introduced a new scheme to promote defence exports through defence attaches (DAs) and funds have been allocated for export promotion to 34 countries. However, the horizon needs to be increased to at least 70 countries with optimum funding for promotion. The OEMs/DPSUs may also be required to expand their presence through foreign offices in key countries thereby increasing the Indian footprint.
Public sector to target large system/platform level exports. In the last two financial years, i.e., FY19 and FY20, the public sector accounted for only 10 per cent of the overall exports, reflecting limited exports from state-owned organizations including both the DPSUs and OFB. Out of the nine DPSUs, only Bharat Earth Movers Limited (BEML), Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL) along with Mishra Dhatu Nigam Limited (MIDHANI) exported their products. In FY19, HAL and BEL accounting for 95 per cent of the total exports from DPSUs. The DPSUs and OFB have been given a target of exporting 25 per cent of the overall revenue by FY 2022-23, and in order to achieve the target there is an urgent need to focus on platform/system level exports. Each public sector organisation needs to set up a specialised task force for identification of export opportunities, develop market intelligence and long-term strategies for defence exports.
Focus on supplying components/sub-systems to defence manufacturing hubs. The advanced defence equipment manufacturing nations such as the U.S., Russia, France, Germany, Spain, Japan, etc. have limited requirement for major platforms and systems. However, to reduce rudimentary manufacturing processes and to benefit from the cost-arbitrage they establish their supply chains in countries with lower costs of manufacturing. They outsource portions of the less complicated manufacturing (labour-intensive) work to such geographies. Another key demand driver for MSMEs and Tier 1/2/3 companies is the offset obligations of major OEMs and smaller manufacturers should therefore need to focus on enhancing their capabilities with the aim of becoming part of the global supply chains as a natural extension of the offset discharge process.
Hand-holding and support to the MSMEs. The government is already planning to launch a global market intelligence system in various languages and establish 100 export facilitation councils to boost exports from the MSME sector. The initiatives will provide hand-holding support to micro, small and medium enterprises (MSMEs) to enable them to export directly to world markets. Efforts were on to set up an MSME Gateway, “a unique digital platform where Indian MSMEs will do business with SMEs of the world”. The MSME Gateway will help attract large scale foreign direct investment.
Focus on newly developed systems. Over the last decade, Indian defence manufacturers have produced technologically advanced defence equipment/systems/sub-systems with reasonable demand from friendly countries. They have significant export potential in the near future and therefore there is a need to examine the export potential of systems like Tejas, Akash, Dhanush, Pinaka Multi Barrel Rocket Launcher (MBRL), etc. Currently, the primary defence items exported include Dornier 228 aircraft, Chetak helicopter, Cheetal helicopter, Dhruv helicopter, Offshore Patrol Vessels (OPVs), fast interceptor boats, Light Weight Torpedoes (LWT) and coastal surveillance systems.
Conclusion
In conclusion, the way ahead for India in order to maintain and further enhance its defence export trend is to merge the methodology developed by major defence exporting nations by adopting the best practices with the competencies that provide a competitive advantage to India and Indian companies within the sector. India needs to create a collaborative mechanism that enables the identification of business opportunities so that it can be married with capabilities and competencies of Indian companies. This will enable both private and public sector to pitch for existing and future opportunities more effectively. The MoD needs to ensure end-to-end hand-holding for domestic industry in terms of providing them with information on market trends, certification requirements and process, regulatory framework, export guidelines, steps to participate in global tenders, list of active global tenders, etc. on an ongoing basis.
It is imperative for MoD to establish an exclusive organisation/ department focusing only on defence exports. The department needs to identify existing opportunities, create new horizons, facilitate G2G deals, establish lineages with domestic industry, handhold potential suppliers and establish partnerships. The proposed department shall also ensure greater transparency in terms equipment allowed for exports. A good starting point for such mission may be the establishment of an exclusive defence export help desk.
On the basis of inputs from the help-desk, Indian companies need to develop a focused matrix for realising the identified export opportunities and work in conjunction with the government machinery towards realising the opportunity.
With the impetus and focus that has been given to the defence manufacturing sector by the industry and the government, India is poised to transform itself from being the world’s largest importer of defence equipment to becoming a key defence export centre over the next years.
With inputs from KPMG Report on Defence Exports, 2020.
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Measures to Replicate Success Achieved by Leading Exporting Countries
1. Continuous monitoring of existing/upcoming opportunities in countries/regions of interest.
• A mapping of the existing and upcoming opportunities in countries/regions of interest so as to build a pipeline for exports.
2. A well connected domestic ecosystem with clarity on recent developments and detailed offering from the domestic defence manufacturers.
• Continuous sharing of information on capabilities/competencies in defence manufacturing from the industry to the MoD.
3. Detailed analysis for identification of import substitution opportunities basis requirement of each geography/country.
• A mapping of import substitution opportunities in target countries after charting capabilities of domestic manufacturers.
4. Identifying collaboration opportunities with foreign countries and assist in establishing partnerships/joint ventures.
• Addresses the primary concern of global OEMs on IP protection and develop opportunities for establishment of JVs/other partnerships.
5. Increase export horizon and identify best route of engagement.
• Increase the horizon in terms of products as well as countries. Focus on promoting export demand for newly developed systems through diplomatic channels/defence attache’s in countries of interest.
6. Hand-holding and supporting domestic industry for enhancing exports.
• Establishment of a permanent help desk to assist in the conduct of regular seminars for education of domestic manufacturers, especially MSMEs about export opportunities.
