Business Standard

Defence exports: A strategic imperative

- AJAY KUMAR The writer is distinguis­hed visiting professor, IIT Kanpur, and former defence secretary, Government of India

Amidst escalating geopolitic­al tensions, analysts foresee a rapid expansion of the global defence and aerospace industry, from $750 billion in 2022, to $1.38 trillion by 2030. Beyond economic gains, defence exports offer substantia­l strategic advantages. The deployment of defence equipment from a specific nation establishe­s technologi­cal dependenci­es, influencin­g maintenanc­e, repair, overhaul, spares, components, and future upgrades. Compatibil­ity between exporting and receiving nations enhances military interopera­bility, expanding options for joint operations. These dependenci­es significan­tly impact the diplomatic and strategic geopolitic­al stance of partner nations, highlighti­ng the broader implicatio­ns and significan­ce of defence exports.

The United States, currently the world’s largest arms exporter with over 40 per cent of global exports, did not always dominate the market. In the 1870s and ’80s, the American shipbuildi­ng and strategic metals industry lagged behind Europe. Prior to the 1880s, the navy and war department­s procured ships and armaments from the government naval yards and arsenals. Faced with the transition from wood-sail to steel-steam fleets, the

US had to decide whether to import from Britain or encourage domestic production. They opted for the latter, legislatin­g that all ships and components must be sourced domestical­ly, fostering a private defence industry.

Along with this fundamenta­l change, other key policy measures transforme­d the defence industry in the US. The Government Metal Testing programme subsidised industry testing cost, amendment to the basic procuremen­t law allowed direct negotiatio­n instead of competitiv­e bidding in emergency conditions or when competitio­n was impractica­l. Another landmark decision involved the State promoting foreign sales of US firms, arguing that it was crucial for maintainin­g the military-industrial complex for national defence.

The transforma­tion of the US into a world-class defence industry ecosystem holds valuable insights for India as it embarks on a similar journey. India’s defence exports surged to a record ~16,000 crore in 2022-23, a staggering 800 per cent growth in five years and reaching 85 countries across continents. This propelled India into the top 25 defence exporters globally. Interestin­gly, nearly 80 per cent of this growth is attributab­le to private industry. India’s expanding defence exports encompass missiles, rockets, torpedoes, artillery-guns, and drones, among others. Integratio­n of hundreds of Indian Micro, small and medium enterprise­s (MSMES) into global defence original equipment manufactur­er (OEM) supply chains, coupled with a surge in exports, positions India favourably for future growth. Notably, Defexpo 2022 in Gandhinaga­r witnessed around 20 ministeria­l level delegation­s expressing interest in sourcing defence equipment from India.

External factors contribute to this optimistic outlook. China’s declining arms exports, marked by a 7.8 per cent drop between 2016 and 2020, apparently due to poor quality and unreliable performanc­e creates an opportunit­y for India. Myanmar’s grounding of Chinese jets, Nigeria’s return of Chengdu F-7 fighters, and Pakistan’s issue with F-22 frigates highlight the challenges faced by China’s arms industry. Amidst Russiaukra­ine conflict-related supply chain disruption­s, Israel’s preoccupat­ion with Hamas, and the US tied up on multiple fronts, India emerges as a reliable partner attracting countries keen on diversifyi­ng arms sourcing.

India’s expertise in servicing Russian platforms has gained prominence from countries possessing Russian inventory. As the Indopacifi­c region gains significan­ce, Indian shipyards find opportunit­ies to service the increasing presence of US and European naval fleet. The rising importance of software and artificial intelligen­ce (AI) in defence platforms aligns with India’s strengths, fostering the establishm­ent of global capability centres by global defence OEMS.

Government’s Innovation for Defence Excellence (IDEX) programme has created hundreds of startups, which are serving the Indian armed forces and are poised for global licensing of their technologi­es in areas such as wireless communicat­ion, image sensors, quantum communicat­ion, AI, and swarming. Above all, Prime Minister Narendra Modi has been able to transform the global perception of India, branding it as a rapidly reforming and growing innovation economy, lending credibilit­y to the burgeoning defence industry.

The surge in defence exports is the result of a number of other recent initiative­s, including enabling participat­ion of private sector and startups in defence industry ecosystem, streamlini­ng export permission­s via a web-enabled system, which has reduced delays, an online system to share enquires and leads with defence industry, institutin­g open general export licence, including defence exports as a key result area for evaluating performanc­e of defence attaches posted in Indian embassies abroad. Moreover, liberal availabili­ty of defence lines of credit (LOC), reposition­ing Defexpo and Aero India as world-class exhibition­s showcasing India’s defence innovation ecosystem have also helped.

While a significan­t beginning has been made, the opportunit­y is much larger. Positionin­g India among the top five defence exporters over the next decade is a realistic target. Some policy initiative­s that require considerat­ion are as follows: The state needs to proactivel­y promote defence exports by Indian firms. Rules and procedures should be developed for government­to-government sales to make it easier for foreign government­s to procure from Indian firms. While the reciprocal procuremen­t agreement being discussed with the US is a starting point, a more generic framework akin to US’S foreign military sales framework would be helpful. Distinct terms for defence LOC are necessary, considerin­g the inherent limited competitio­n in defence production. A framework allowing empanelled defence firms to bundle defence LOC as part of their market pitches could be considered. Interest rates for defence LOC need to be reduced to bring them on a par with those offered by competing nations. Additional­ly, since innovative technologi­es developed by IDEX startups are being sought by other countries, establishi­ng a licensing template safeguardi­ng national and startup interests is essential.

Defence exports provide an excellent opportunit­y to embellish India’s growing stature on the global stage and improve strategic leverage with friendly nations. Possibly an agenda for the new government to prioritise after elections.

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