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INDIAN DEFENCE EXPORTS

India has one of the largest defence industrial base in the developing world, however, the quantum of India's defence exports has all along been negligible. The author explains the major reasons for this and the way forward to improve the export…

Export-Import of defence equipment has both security and commercial dimension. In the last few years, India has emerged as the largest importer in the world by accounting for 10 percent of all arms purchases during the past five years. However, it is indeed saddening to notice that when it comes to the export of defence equipments, the figures are negligible. It is to be noted that, though the Directorate General of Foreign Trade (DGFT) is the authority that regulates India's export policy, however, export of all lethal items as well as other equipment and stores manufactured by Defence Public Sector Undertakings (DPSUs) and Indian Ordnance Factories (which includes SALWs) and Indian Private Sector firms is governed by a regime administered by the MoD in consultation with the Ministry of External Affairs apart from the DGFT.

The defence export scenario in India, pre or post liberalization, has always witnessed a feeble growth. India has one of the largest defence industries in the developing world. It consists of Forty-One Ordnance Factories (OFs), Nine Defence Public Sector Undertakings (DPSUs) and emerging private sector. The industry has not managed to attain self reliance leave alone exports where it has performed miserably. India's target of achieving self reliance is reflected in the comparative Export-Import chart where it is clear that we export only about 4 percent of import level. There is no scope for doubt that the country's export performance has always been way off the mark, however, taking into consideration the resource potential and technical know-how with the industry, it has all the attributes of becoming a major exporter of defence equipments; provided the Government takes some concrete steps with regard to rigid export policies, clearing the ambiguities involved in export procedures/defence items, long procedural delays in getting export license & clearance along with heavy taxes. The government should understand that encouraging exports would not only provide economy of scale but would also make domestic defence manufacturers globally competitive.

CURRENT DEFENCE EXPORT SCENARIO OF INDIA
At present, India has been ranked 28th in the arms exporters list based on the volume of arms transferred. 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. The average share of Indian arms exports in the total world's arms exports pie stands to a measly 0.8 percent. Refer Fig.

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Given the fact that the country spends billions of dollars on arms imports every year and rather the largest importer of arms and ammunition in the world, this is indeed a shocking number. One of the major factors in lacking behind in defence exports can be to the fact that Indian armed forces do not have a majority of equipment designed and developed in India.

Defence Exports Trend of India. Considering the last three years from 2011-2013, the country's defence exports stood at pal3try $6.41 billion. However, it is to be seen that the defence exports have been witnessing a rising trend but still in comparison to exports of other countries it has a long way to go. The major countries to which these items are exported consist of Germany, Israel, Australia, France, Israel, Italy, USA, UK, Russia and United Arabs and many other small and neighbouring countries as well.

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Till date, the major items of exports from India is restricted to old variants of aircrafts, ships, armoured vehicles, artillery but with the main revenue generation coming from parts of other aircraft, spacecraft (including satellites) and suborbital and space which is indeed a matter of concern. Table depicts the items of defence exports from India and their trend in the last three years and the top ten countries to which the defence commodities are exported. (See Table-1 )

ITEMS OF EXPORTS2011-12 (Amount in USD Million)2012-13 (Amount in USD Million) 2013-14 (Amount in USD Million)
Artillery weapons (for example, guns, howitzers and mortars) other than revolvers, pistols and swords, cut lasses, bayonets, lances and similar arms thereof and scabbards and sheaths thereof  6.19   10.47  9.05
 Parts & Accessories of Artillery weapons (for example, guns, howitzers and mortars)
 13.43    25.5  41.42
  Other aircraft (for example, helicopters, aero planes); spacecraft (including satellites) and suborbital and space  32.25   557.42  698.7
  Parts of Other Aircraft (For Example, Helicopters, Aero planes); Spacecraft (Including Satellites) And Suborbital And Space   1292.7   1323.86   1164.51
  Non-electrical articles of graphite or other carbon 4.92 3.78  4.5
  Tanks and other armoured fighting vehicles, motorised, whether or not fitted with weapons, and parts  49.92   2.25   89.46
  Other Vessels, Including Warships And Lifeboats Other Than Rowing Boats 360.36    278.2   449.41

MAJOR CAUSES FOR LACKING IN EXPORTS
Although there has been an upward swing in the defence exports in the last few years, however, sadly, Indian defence industry's import- export ratio is inferior to countries with even smaller defence industrial infrastructure. The quantum of India's defence exports has all along been negligible, much less than that of Israel, South Korea or even of Singapore. The impediments for defence exports are multiple, lack of technology and uncompetitive pricing; the existence of a negative list of countries to whom the export of defence equipment cannot be explored; the large number of clearances required and stipulation of 'End Use Certificate', lack of thrust on marketing efforts, skewed national export policies lacking incentives, deficient products, poor marketing and moralities of nonalignment.

WAY FORWARD
India has no doubt laggard in exports. Existing exports from India contribute to a very small portion with regard to aircraft, space craft and parts/components thereof. India has great potential already but desolately no one in the Defence Ministry is serious to tap the potential. Some of the areas which the Government should focus upon to improve the defence exports of the country are:

Harmonizing the lists that classify the products to be exported: Export Licenses are granted on the basis of the classification of the product. However as of now, there is not a single dedicated list, which defence firms can rely on, to describe the defence nature of their production. Unlike some other countries and international arms control organizations, which define defence items through a comprehensive list (for example, the Munitions List of the Wassenaar Arrangement), in India there is no such list that specifies what constitutes a defence product. OEMs have to refer to at least four different lists - the National Industrial classification (NIC) list, the Indian Trade Classification (Harmonized System) ITC (HS) Code, the 'Product List' and the Special Chemicals, Organisms, Material Equipment and Technology (SCOMET) List - depending on the purpose of defining their product which leads to delays and thus have to face long waiting period before getting the export license. Harmonizing the lists is thus the need of the hour.

Creation of different categories to speed up the NOC process: Indian manufacturer can export their items only on receipt of a 'No-Objection Certificate' (NOC) from the Department of Defence Production and Supplies. To speed up approval process for NOC, the Government should adopt creation of different categories for processing such as:

  • Green Channel for express processing. To be followed for those countries that are not under Negative list of the Government and amongst them, those that are signatories to conventions and protocols that are recognized by Government and pre-approved defence products, systems and sub-systems.
  • Yellow Channel for deliberations. To be followed for those countries that are not in the negative list and yet if Government has identified such countries for additional processing
  • Red Channel for detailed processing” requirements. All other cases including those on the negative list be included in this category.

Further, the Government should consider constituting an Apex body to lay down policy in terms of mapping the countries and products for which export clearances can be given without any further reference. This will reduce iterations in terms of consultation from stakeholders when the proposal of a potential exporter in received.

Streamline Policies: The policy for defence export needs to address the requirement of Licenses for Industries desirous of exporting defence equipment and systems.

  • Policies such as defining exportable, restrictive and non exportable items along with the negative list of countries; accordingly 'Deemed Export' status to all supplies made to the armed forces or by sub-contractors to integrators of systems and allowing 'Self Declared End User Certificate' with penal provisions for violations, if any will definitely help in simplifying things for the exporters and boosting exports.
  • The SCOMET list (Chapter 6) should be finalized and announced. The definition and list of Defence Products given in DPP 2013 and the Chapter 6 of the SCOMET list should be harmonized.
  • Existing rules and regulations do not adequately define a 'defence product'. Need to define defence and dual use items through a comprehensive list.

Defence Industrial Licensing and Exports: Industrial Licensing process needs to be streamlined on the basis of industry inputs. It is a fact that number of IL applications are pending over a year for various reasons not under the control of Industry. SME who manufacture niche products faces challenges in exporting their products which are mainly at sub-sub component level. In order to encourage SME and in order to reduce CAD, we must come out with guidelines on exports which simplify export process and are less restrictive for green channel products. It is, therefore, suggested that a Defence Export Promotion Council (DEPCO) be also set up.

Exports of Dual Use items: Foreign Trade Policy is the base document for export. Export of dual-use items and technologies is either prohibited or is only permitted under a license. In Foreign Trade Policy, dual-use items have been given the nomenclature of Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET). Export Policy relating to SCOMET items is given in Appendix 3 of Schedule 2 of ITC (HS) Classification and Paragraph 2.49 of Hand Book of Procedures Vol.-I, 2009-14. Appendix 3 of Schedule 2 of ITC (HS) Classification contains a list of all dual-use items and technologies export of which is regulated. Category 5 and Category 7 of the SCOMET list refers to the defence electronics and the aero space sector. Export licenses are controlled by DGFT. However, for dual-use items, different ITC HS codes should be used to distinguish between civilian and military products.

Defence Export Policy: The defence export RFPs normally provide only 4 to 6 weeks to the Industry to respond. Industry friendly and transparent export policy with a 'single window' clearance system in order to expedite the process is the need of the hour. The export policy document should clearly state the requirement of all clearances / documents necessary to be obtained by the Industry, in addition to the export license. More clarity on Industrial License is required. The policy should define the standard procedure / format for applying for licenses for defence exports.

Facilitating the Private Sector: Time bound clearance should address issues like various clearance needed, no clearance for a repeat order, simple process for exporting for marketing needs only, dual use item clarification, etc. Create a model for "go to market approach" for / by SME with tech transfer coming from DRDO for sub systems. Also the Government should encourage and give incentive for the collaboration between the Public & Private sector companies for defence exports based on a PPP (Public Private Partnership) model. It is to be noted that the exports can take place for tested and proven equipment. Most of the facilities are under Govt domain. To test, industry needs test beds, ammunition; these can be made available by the Govt.

Creating Export Facilitation Agency: Government should think of creating a specific Export facilitation agency under Secretary - Defence Production and active participation from Industry chambers. This agency as in case of many export focused nations should be empowered to monitor the actual progress of defence exports with respect to planned targets and to initiate mid-course corrections as may be required by the policy. Further mandate the Indian Embassy's overseas to facilitate interactions with target country establishments in order to convert major export opportunities in to orders for the Indian companies.

Easing Of Taxes and Duties: There should be a provision of “Deemed Clearance” if not specifically commented on by the “single window” clearance system, especially for the Green item List. Once cleared by the MEA, the products should be exempted from all duties and taxes. Restrict the need to obtain the export clearance at one time for the entire order/contract and not for each consignment of the same order. Also, the Government should advise the EXIM bank personnel for coordination.

Kavita Nagpal

Kavita Nagpal

2 Responses

  1. Very nice post. I just stumbled upon your weblog and wanted
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  2. Hi, your article is very informative from a layman’s point of view. I am planning to get into exports of ammunition so wanted some help. If you could direct me towards someone or some body or organisation that I can consult with regarding the technicalities and the paperwork. I would be very grateful.

    Regards
    Dhaneshwar

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