India’s Gradual Transition from ‘Defense Market’ to ‘Export Hub’
Devsena Mishra

2019, the final year of current Indian government, is the perfect time to trace and evaluate how much progress India has made on some of the ambitious targets related to defense sector i.e. promotion of indigenous defense development, reducing country’s defense import dependence and further changing India’s status from a ‘defense market’ to ‘defense export hub.’ At first glance, with India’s current status of defense imports, these objectives seem unlikely to succeed but careful observation reveals that India is making steady progress in reversing the existing trends. Throughout the last four and a half years, in between the headlines on some major trends about defense deals, some minor yet impactful moves and numbers remained out of focus. The unfair coverage and muted responses of media for some of the critical moves of the Ministry of Defense, in a way, turned out to be good for their successes because sometimes spotlight becomes a target.

India is at a crucial juncture of its journey towards self-reliance in defense production which started primarily with imports, then gradually progressed towards licensed production from the 1970s, took substantial form in 1980s and 1990s and now we are talking about indigenous design, development, manufacturing and export capabilities. A sector which was closed to the private sector till 2001, when for the first time former Prime Minister Atal Bihari Vajpayee opened it up for private sector participation, has a lot a more to do to develop a defense industrial complex and export potentials. From the experiences of the growth of other sectors such as automobile and heavy engineering, we can hope that directed and gradual progress can bring a significant change in the future. It appears that ‘defense diplomacy’ and ‘defense reforms’ are the two key areas in which the Government has dedicated majority of its efforts.

Defense Diplomacy

For the first time, consultations between the Ministry of Defense (MoD) and Ministry of External Affairs (MEA) are going on to chart out a plan for promoting country’s defense products across friendly nations. Four years back, the Department of Defense Production released a well thought ‘Strategy for Defense Exports’ of the country. Apart from defining the structure of export financing, export regulation, promotion, and facilitation, the strategy also highlighted the role of defense diplomacy between friendly countries to cover defense exports.

It recommends1 that “wherever feasible and required, the industry delegations from public/private sector/JVs of the private and public sector would be included in bilateral discussions with various countries so that the importing country gets due comfort while importing from India. If required, Industry delegations would be taken to target countries and Indian Embassies/Missions abroad would be associated in making targeted efforts for promoting the export of Indian defense products.” The theme of bilateral and multilateral exchanges plays an important role in creating a positive atmosphere in not just one country but sometimes in the entire region. To leverage such an environment for the broader goals of defense export promotion, the diplomatic teams can play a crucial part and the defense export strategy point towards that.

To combine the synergies of foreign and defense teams, India has instituted ‘2+2’ dialogue mechanism too. At present, we held defense and foreign secretary level dialogues with Japan and Australia and minister level with the USA. In the last four and a half years, the frequency of foreign visits of Indian delegations including chiefs of all three services, Defense Minister, Defense Secretary and the other key stakeholders from the sector has increased remarkably. The defense diplomacy arm typically includes defense agreements, exports, providing aid for the purchase of defense products to the economically weaker countries, joint exercises, maritime cooperation, and training. While India has maintained the high trajectory of bilateral defense cooperation with the Russia and concluded the first tri-service joint military exercise INDRA at Vladivostok, it has also expanded its cooperation with Central Asia by attaining a full membership of Shanghai Cooperation Organization (SCO). India’s defense ties with France, UK, and EU partners, as well as Israel, are going well with a cross section of defense engagements. A good number of bilateral military industrial conferences were held with different partners to explore mutually beneficial opportunities under ‘Make in India’ and ‘Make with India’ framework.

India is also offering Line of Credit (LOC) for the purchase of defense equipment to the neighbors like Afghanistan, Bangladesh, Myanmar, Vietnam, Sri Lanka, and Nepal. At present, India has military-to-military cooperation with some 18 African countries2. Our military training teams are engaged in Botswana, Zambia, Lesotho, and Seychelles. Other than that India’s peace-keeping contingents are active in Congo, Ethiopia, Eritrea, and South Sudan. Foreign military officers from some 38 countries regularly participate in India’s higher level defense courses. India does naval, land and air exercises with a host of different nations including annual Malabar exercise with the USA, which is from 2015 with Japan become a trilateral one. The Indian Air Force is also actively participating in joint exercises with countries like Russia, UK, France, and the USA. In 2017, a 45-member Indian Air Force contingent participated in the biennial multilateral ’Blue Flag’ exercise of Israeli air force with the US, Greece, Poland, France, Italy, and Germany.

For the first time, on the Republic Day Parade 2018, India presented its indigenous defense capabilities before the heads of all 10 ASEAN nations and on the sidelines of Republic Day Parade, Prime Minister Modi concluded six bilateral meetings with the Vietnam, Philippines, Myanmar, Thailand, Brunei, and Singapore in which defense and security cooperation was one of the key focus areas. Some of the Indian defense entities are considering opening their business offices in the ASEAN countries to access new markets in the region. These moves are playing a crucial role in strengthening India’s credentials to become a reliable defense trade partner.

In June 2016, India was admitted to MTCR (Missile Technology Control Regime). In December 2017, India joined the Wassenaar Arrangement. In January 2018, India was admitted as the 43rd member of the Australia Group. As of now, India has joined three out of four major multilateral export control regimes. Today, India is exporting3 light helicopters to Afghanistan, Nepal, Suriname and Namibia, a 1300 ton offshore patrol vessels MCGS Barracuda to Mauritius (the Barracuda is India’s first ever export of a home built warship), and DRDO developed HMS-X2 Sonars to Myanmar. We are offering our Akash surface-to-air missile system to Vietnam and other ASEAN states. The government-owned Goa Shipyard Limited is building offshore patrol vessels for the Sri Lankan Navy, and fast attack craft for Mauritius. India is exploring the possibilities to export new offshore patrol vessels, interceptor craft, corvettes, and frigates to littoral states in the Indian Ocean Region. Some East African countries are also looking at India for coastal fleets. And some of the Indian private and public sector shipyards are in a fine position to compete for foreign orders.

Defense Reforms

Introducing reforms in the Indian defense sector which was once a key victim of policy paralysis is not a simple task. The Government’s involvement in the defense manufacturing sector is unique in many ways; it grants license to manufacture, and since it is also the only buyer, it also grants an order and even grants permission to export too. In the last four and a half years, India has made a humble beginning to reform defense manufacturing licenses, defense offsets, exports, foreign direct investment, and defense procurement related processes.

Unarguably, 2014-2018 is one of the most reformative phases for the Indian defense sector. In almost all key policy reforms of the MoD whether it’s Strategy for Defence Exports, Defence Procurement Procedure (DPP 2016), simplified Make-II Procedure, Defense Offset Policy, ‘ease of doing business’ reforms for defense sector, revision in licensing process, new strategic partnership policy etc., the focus is on developing a robust indigenous defense production eco-system and strengthening country’s export potential. Through continuous efforts towards streamlining and liberalization of the defense trade regime, the defense export value touched 4682 cr in 2017-18 from 1940 cr of export in 2014-15.

Some of the recent reforms4 which are crucial for country’s defense export promotion are:-

  • Online system for receiving applications for No Objection Certificate (NOC) on export of military stores has been developed.
  • The list of Military Stores has been notified.
  • From July 2015, the requirement of End-User Certificate to be countersigned/stamped by Government authorities for the export of parts, components, and other non-sensitive military items has been eliminated.
  • The provision of ‘in-principle’ approval for export incorporated in the Standard Operating Procedure (SOP) so that domestic players can explore opportunities in overseas markets.
  • Simplified procedure for tender, exhibitions, testing etc. and Applications are being received online.
  • SOP for the issue of authorization for export put in public domain. Specific time limit introduced for the issue of authorization.
  • A ‘Defense Exports Steering Committee’ (DESC) under the chairmanship of Secretary, Department of Defense Production has already been constituted in accordance with the strategy for defense exports. The Committee has representatives of Headquarters Integrated Defence Staff (HQ IDS), the Armed Forces, DRDO, International Cooperation and Acquisition Wings of the MEA, Director General Foreign Trade (DGFT) and other key stakeholders. The committee is open to incorporate views of industry and other experts as per the requirements. The DESC is responsible for taking decisions on proposals of export permissions beyond the purview of subordinate authorities/committees particularly related to the export of indigenously developed sensitive defense equipment and for monitoring overall progress of defense exports.
  • One of the key themes of DefExpo 2018 was to brand India’s defense export potential by showcasing the strengths of emerging defense startups and Micro, Small and Medium Enterprise (MSME) base. During 2018, the promotion of country’s defense export potential remained a key topic of bilateral discussions with neighboring countries.
  • Setting up of Defense Investor Cell, Society for Indian Defense Start-ups, innovations for defense excellence platform (iDEX), different startup challenges, hackathons or the decision to establish defense industrial corridors in UP and Tamil Nadu, all these moves will have a long term implications on India’s defense manufacturing and export potential.
  • In the last four and a half years, the contribution of small and medium scale sector to defense production has grown by 200 percent. In the mid-term review of Foreign Trade Policy (FTP) launched in the month of December 2017, the Indian Government has announced fresh incentives worth Rs 8,450 cr to boost exports and to support the MSME and labor-intensive industries.

It is worth mentioning that India’s export performance5 is making a gradual progress, from Rs 1143 cr in 2013-14 to 1940 cr in 2014-15 to 2059 cr in 2015-16 to 1522 cr in 2016-17 - the drop is the temporary impact of some crucial economic reforms but numbers again gained momentum in 2017-18 with Rs 4682 cr of exports. In terms of overall performance of defense production, the value of production of Ordinance Factory Board (OFB) and Defense Public Sector Undertakings (DPSUs) is increasing from Rs. 46380 cr in 2014-15 to 52393 cr in 2015-16 to 55375 cr in 2016-17 to 58759 cr in 2017-18. While the direct import as a percentage of the value of production is decreasing from 29.07 percent in 2014-15 to 23.50 percent in 2017-18. In May 2014, the total number of defence export permissions granted was 118 with a total value of $577 million. In the last four and a half years, India has issued 794 more export permissions, with a total value of over $1.3 billion.

The DRDO’s performance with 19 successful trials, partnership with over 250 industries, and generation of 268 Intellectual Property Rights (IPR) portfolios including 214 patents in India and abroad, is indicating satisfactory trends too. Some 34 DRDO developed high-value products are approved for induction into the Armed Forces and 139 of its products are identified having export potential. The production value of DRDO developed products cleared by Defense Acquisition Council (DAC) has grown by 60 % in the last three years, from 1, 60 and 902.54 cr in 2014 to 2, 65 and 261.60 cr in May 2017 respectively.

India, the world’s largest defense importer, with a 14 % share of global imports, has enough reasons to reverse the existing trends of its arms sale. The number of imports can get offset by the substantial numbers of export, China is one such example, which is the third largest defense importer with 4.7 % of global imports but at the same time, it is the third largest arms exporter too after USA and Russia. The economic, as well as strategic dividends of being a good defense exporter are numerous and for the first time, India seems to make some serious efforts in this direction. A continuous policy push, crucial administrative reforms and the responses from the industry give this hope that India can develop an ecosystem which is required for the growth and sustainability of our defense sector.

(Devsena Mishra is a promoter of advanced technologies, startup ecosystem and the Indian government’s business and technology related initiatives like Digital India, Make in India, Smart Cities, Startup India etc.)

End Notes
  1. Strategy for Defence Export- accessed on 27 December 2018.
  2. Article 'Aligning India's defence and foreign policies' by Kanwal Sibal, published at The Telegraph on 18th October 2018.
  3. Export of Defence Equipment, Press Release, Ministry of Defense, Government of India released on 24 July 2015.
  4. Source of Facts about Defense Reforms- Press Release, Ministry of Defense released on 25 July 2018.
  5. Source of facts about defense export performance, DPSUs and OFBs production value, no contract signed, licenses issued, DRDO’s performance etc.- E-Book ‘India Stands Strong’ of Ministry of Defense published on May 2018.

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>

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