How Can The Private Sector Help India Become A Net Defence Exporter?

At the recent DefExpo-2022, Prime Minister Narendra Modi had said that India is set to become a major defence equipment manufacturer despite the global monopoly of a few companies. He was hinting at India's aim to become net exporter of defence technology and equipment. At the curtain raiser for the event, Defence Minister Rajnath Singh had set the export target for 2025 at Rs 35,000 crore. Both the top leaders had mentioned that private sector has an important role to play in achieving these targets.

However, before delving into the ways in which the private defence companies can contribute, it is important to assess the overall situation of India's defence procurement and where it stands in comparison to the leading arms exporting nation in the world.

Where India's Defence Procurement Stands

Despite having the second largest military force in the world, a key concern for the defence sector in India has been its import-dependence. According to a report published by Stockholm International Peace Research Institute (SIPRI), India emerged as the second largest defence importer during the 2012-16 period. In the subsequent period from 2017 to 2021, India went on to become the largest importer. This is certainly a problem for the nation that seeks to attain 'Aatmanirbharta' (self-reliance) in terms of defence.  
 
Globally, the US enjoys a very comfortable first position when it comes to defence exports. It is way ahead of its competition, thanks to the fact that the leading private arms manufacturers of the world – Lockheed Martin, Boeing, Northrop Grumman and Raytheon Technologies – are based in the US. On the other hand, India is placed at the 23rd position in the SIPRI arms transfer report 2022.

Of late, India seems to be learning from the private-led manufacture-cum-export model in the US. It was only in 2001 that India's defence sector was fully opened up for private players. So far, over 300 private companies have received industrial licenses and more than 100 of them have commenced large scale production as well.  

The sector also allows for 100 per cent foreign direct investment (FDI) via the government route while the FDI is capped at 74 per cent for companies seeking new licenses through the automatic route. In the past few years, there have been several initiatives from the Indian government to encourage increased manufacturing from the private sector.  

Incentivising Indigenisation  

An important initiative from the government's end is the positive indigenisation list— a list of defence requirements that will be exclusively procured from indigenous sources. “The promulgation of ‘positive list’ is a major policy measure that actually shows the intent of the government,” says Sunil Misra, Director General of Society of Indian Defence Manufacturers. He adds, “The combination of cerebral asset of India, conducive policy environment, risk-taking ability of entrepreneurs and capable manufacturing sector will herald a scenario where private sector in defence space will play a major role.”

About 68 per cent of the capital expenditure budget for the defence sector has also been set aside for domestic procurement. With such an assuring demand from the country's armed forces, the private firms in India can manufacture their products in a healthy, competitive market.

However, indigenous defence manufacturing requires the deployment of highly sophisticated technology, which in turn, requires heavy investment in research and development (R&D) processes. So far, private sector initiative in the R&D domain has been found wanting. Keeping this in mind, about 25 per cent of the R&D expenditure has been reserved for the private sector as announced in the 2022-23 Union Budget.  

Even then, is that sufficient funding? India spends 6 per cent of its defence budget on R&D whereas top manufacturers like USA and China are spending approximately 12 per cent and 20 per cent respectively. This implies that India can do better by allocating more of its resources into R&D, if it is serious about the indigenisation plans.

Bottom-Up Strategy

Over-reliance on foreign original equipment manufacturers (OEM) for their technology has been a cause of worry for private manufacturers so far. However, SP Shukla, Chairman, Mahindra Defence & Mahindra Aerospace is optimistic about how this can change. He says, “As the technology transfer funnel grows with the increased involvement of private sector players, we will have higher degree of independence even in the domain of critical technologies.”
 
Before private companies were given better leeway in the defence sector, India followed an inverted pyramid approach to build the ecosystem for defence manufacturing, according to Sachin Agarwal, managing director of PTC Industries, which is into manufacturing high quality components for aerospace and defence. He suggests a bottom-up strategy instead. “If we only keep our sight on the system-level final products like tanks, aircrafts, submarines, etc, we will remain dependent on foreign players and their collaboration. And, that will limit the potential of domestic manufacturers,” he says.  
 
Agarwal further recommends targeted policies for developing supply-chain based ecosystems. He cites semiconductor policy as an example of a targeted approach and calls for such policies in core manufacturing technologies, with cross-platform applications in defence sector. Such policy-level changes can be successfully implemented only with the collaboration of public and private sectors.

Collaborative Growth

When the sector was completely under the public sector, the infrastructure required for building everything ground-up was not established. This is how the import-dependency came about in the first place. Now that the private sector is actively pitching in, several supply chain insufficiencies have become evident. Public-private partnerships can be very efficient at plugging these gaps.  

Neeraj Gupta, managing director at MKU, a leading defence company from India, says, “We are still dependent on procuring strategic materials from foreign sources which form a good chunk of the value chain. The need of the hour is that DRDO (Defence Research and Development Organisation), ISRO (Indian Space Research Organisations) and BARC (Bhabha Atomic Research Centre) should get involved in developing centre of excellence for production of strategic materials within the country and involve the private sector for fast pace co-development.”

Samtel Avionics is a Delhi-based private aerospace company that has already partnered with DRDO and BEL (Bharat Electronics Limited) for developing several key components of the Su-30 MKI fighter jet used the Indian Air Force. Puneet Kaura, managing director & CEO of Samtel, finds cost competitiveness to be an important factor in achieving global manufacturing leadership.  

He says, “Business growth is dependent upon cost-competitiveness, which can only be achieved if critical mass is attained through more orders. Moreover, the Indian industry needs to keep pace with the increasingly high use of technology across the design lifecycle.” Experts in the sector, who have witnessed public-private partnership over the past few years, seem to be in consensus that although we are headed in the right way, there is still a long way to go.  

Small Steps In The Right Direction
 
Despite the relatively short period for which the private Indian defence manufacturers have been around, they seem to have made some important contributions already. Earlier this year, a top MoD official said that India exported defence items and technology worth a record Rs 13,000 crore. This marked a 54.1 per cent rise over the previous year. Reportedly, 70 per cent of the exports came from the private sector.
 
Private manufacturers have also been in the news for some high-profile collaborative actions. Tata Advanced Systems Limited (TASL) is jointly manufacturing C-295 military transport aircraft with Airbus Defence, Pune-based Kalyani group is producing M4 armoured vehicles in collaboration with South Africa's Paramount group, and Jindal Defence is in talks to manufacture small arms in partnership with Brazilian defence company Taurus Armas S.A.
 
There is no questioning the importance or potential of India's private defence sector. However, to become a net exporter in defence, India needs to invest more in R&D, follow a bottom-up approach to decrease dependency on foreign parts and provide more incentives to private companies in the coming years.