‘Govt should help private industry access foreign currency finance to boost defence export’

Reaching the Rs 35000 crore defence target will be easy, but sustaining there will need a lot of effort, says S P Shukla

S P Shukla, President (Defence) at Mahindra Group and the President of the Society for Indian Defence Manufacturers, tells DH’s Kalyan Ray that reaching the Rs 35,000 crore defence target may be easy, but sustaining there will need a lot of effort.

Why has India’s defence exports surged over the past few years? What were the bottlenecks?

Yes, India has been really focussing on increasing its defence exports since 2016-17. These have already reached an all-time high of Rs 15,920 crore in the financial year 2022-23, from a mere Rs 1,522 crore 2016-2017. A creditable feat indeed.

India’s defence exports surged from less than 3% to 15% of its domestic production since 2016-17. I would like to give a lot of credit to the union government, particularly the Ministry of Defence (MoD), for a very sustained effort for showcasing and promoting the industry’s capabilities through its outreach series of webinars, the DefExpo and the Aero India show. The government has also put up a very enabling framework of policies.

Read | Arming the world and aiming high

Major bottleneck for Indian industry was ‘market access’. Initially, ‘offset policy’ provided that for a large number of large industries as well as MSMEs. Having been forced to have a serious look at what the Indian industry was capable of, the FOEMs (Foreign Original Equipment Manufacturers) have on their own accord found a lot of competitive value. Most of them (Lockheed Martin, Boeing, Airbus, GE, Rolls Royce, Thales) have a large vendor base here in India. Regular interactions with the target foreign countries are continued to be undertaken by MoD.

Why are the private defence industry are still lagging behind the public sector?

It is well known that the Government of India permitted private sector participation in the defence sector only from 2001. Therefore, the sector even today continues to be dominated by the DPSUs (Defence Public Sector Undertakings), including the ones carved out of the erstwhile ordnance factories through corporatisation recently. They have been manufacturing all types of defence platforms and weapon systems under Transfer of Technology (ToT) arrangements facilitated by the Ministry of Defence (MoD). Therefore, when it comes to major defence platforms or weapon systems, they have a lead. Things are changing though. The private industries too have made huge investments and are now the OEMs for several types of military capabilities – personnel and platform protection, all types of land mobility and protected vehicles, simulators, naval ships and artillery gun systems. There are several such areas where private industry has established its credentials.

What are the advantages for India to excel in defence manufacturing?

Firstly, India has a large, multi-disciplinary defence industry ecosystem, which is presently manufacturing almost all major military platforms – ships, submarines, helicopters, fighter aircraft, missiles, armoured fighting vehicles, all types of ammunition, all types of weapon systems and sensors. Secondly, the Indian industry now owns designs of platforms and weapon systems either through the efforts of the Defence Research and Development Organisation or on its own.

Read | ‘Govt should institutionalise Foreign Military Sale entity to promote India’ defence exports to friendly countries’

It is therefore logical to infer that Indian industry must capitalise on the present opportunities – over $100 billion over the next 5-6 years – presented by the modernisation plans of the Indian Armed Forces. That can happen only if the industry produces equipment and systems that are globally competitive both in terms of their operational performance and cost. There is another angle, that is the attractiveness of India as “supply nodes” of the global OEMs. Abundant availability of skilled technical manpower in India and a capable industry ecosystem are strong magnets to attract the FOEMs to invest with the Indian companies to develop global supply nodes here. Over 48 joint ventures by FOEMs in a multitude of disciplines, and almost 50 plus “Engineering, Design and Technology Centres” of the FOEMs are a testimony of that.

The government has set a target of Rs 35,000 crore worth of exports by 2025. Is it achievable? If not, what more should the government do?

I think that Rs 35,000 Cr exports by 2025 is an achievable target. That could happen with the ongoing momentum or liabilities of the foreign OEMs as offsets.

The challenge however would be to maintain the exports at 20-25% of the domestic production. India has set a dual target in its Defence Production and Export Promotion Policy 2020. That is domestic defence production of Rs 175,000 Cr and exports of Rs 35,000 Cr. So, while reaching the targets may appear easy, sustaining there will call for a lot of efforts by both the government as well as the industry.

There are two major areas (apart from promotion and facilitation of industries the way it is already being done) which, in my opinion, deserve government intervention.

Firstly, the governments in all countries with significant share in the global defence export market play a significant and pro-active role in obtaining large ticket business for the companies of their countries through the Government-to-Government routes. The governments of these major suppliers are actively engaged in assisting the export efforts of their domestic defence industries in the competitive international arms market. Some governments also provide military equipment to allies at beneficial rates as a key plank of their foreign and defence policies, something that often benefits defence equipment manufacturers based in these countries, whether public or private. Our government and the services too will have to find suitable means to promote Indian military platforms and weapon systems to all friendly foreign countries.

Secondly, the defence sector necessitates an entirely different approach for business development and execution. Timelines from tenders to contract are generally extended, competition is stiff (and more so for Indian industry which is in its infancy as far as exports are concerned), volumes are small, delivery periods (for platforms or complex systems) are long and most importantly for high technology systems or platforms requirements for capital investments are huge. Indian industry still needs to depend on imports for several key and critical inputs – raw materials, parts or components and even sub-assemblies and major systems such as aero engines. All these factors call for long term capital (finance) for project execution and for establishing design and manufacturing infrastructure, business development, and therefore greatly affect the competitiveness of the defence industry, both domestically and globally.

It is therefore necessary that the Indian Defence industry is provided access to adequate, low-cost capital in foreign currency during the initial five to seven years of its forays in the global market. The amount should cover the entire pre-shipment and post-shipment requirements of the industry against orders in foreign currency.

Defence exports need to be treated as a ‘key enabler’ for sustainability of the domestic defence industry. The MoD should consider instituting certain measures to provide access to foreign currency finance, at globally competitive rates, for defence exports by the Indian defence industries.

What are the challenges that the government needs to address for India to emerge as a big hub for defence manufacturing?

I wish that there could be an easy and straightforward answer for this. Notwithstanding, let me try to articulate certain key aspects, which will surely improve manufacturing competitiveness of Indian industry.

Promotion of industry led R&D is important. The MoD has launched several schemes to encourage creation of additional capacities in the private sector for manufacturing major defence platforms, in addition to those existing in public industry. These include strategic partnerships in areas, such as fighter aircraft, helicopters, submarines and main battle tanks. Then, there is a “Make” procedure under which private industry can be funded to undertake design and development. There has also been an announcement to encourage “Special Purpose Vehicle” based public-private partnership between the DRDO and industry to undertake R&D or D&D. There is a need to accelerate these schemes. Make-II, iDEX and TDF schemes are giving good traction to the MSMEs and the start-ups.

The government needs to focus on defence testing infrastructure too. Defence is a niche technology sector. It requires a myriad of test, certification and validation infrastructure for various types of military assets. Such infrastructure is extremely capital intensive. Whatever is available in India is either with the DRDO or the DPSUs, while some are with the services themselves. There is a need to create much more, and also make it available to industry easily, and at competitive rates. Otherwise, to get the products certified from foreign laboratories is expensive as well as very time consuming.

India is itself a huge market as far as the defence sector is concerned, given its modernisation plans of its armed forces ($100 billion over the next 5-6 years). But when viewed alongside synergistic sectors such as civil aviation (over 800 aircraft on order by the scheduled airlines), homeland security (Central Armed Police Forces, State Armed Police Forces, Special Forces whose capability requirements for surveillance, small arms, ammunition, and personnel protection and troop comfort are identical to those of Indian Army); and space, the opportunity multiplies manifold. This makes a very strong case for private investments in these sectors both for fulfilling domestic demand and also to access huge global opportunities. At $1.8 billion to $2.0 billion, our exports are not even a drop from the ocean given the fact that global defence business is worth $ 630 billion.

Therefore, the government must create and adhere to a policy framework that captures these synergies and promotes development of indigenous industries. Recently, policy development for the space sector has been very encouraging for the industry. The objective should be to create at least 10 companies with annual turnover of $5 billion in these sectors.