MP-IDSA Fellows Seminar: Defence Public Sector Units and Exports

MP-IDSA Fellows Seminar by Dr. S. Samuel C. Rajiv, Associate Fellow, on ‘Defence Public Sector Units and Exports’ was held on 31 May 2023. It was chaired by Mr. Amit Cowshish, Former Financial Advisor (Acquisition) Ministry of Defence, and Former Distinguished Fellow, MP-IDSA. The external discussants for the paper were Dr. Manisha Mathur, Sr. Dy. GM, International Marketing, Bharat Electronics Limited (BEL) and Dr. Sameer Patil, Senior Fellow, ORF, Mumbai. Gp. Capt. (Dr.) Rajiv Kumar Narang (Retd.), Senior Fellow, MP-IDSA, and Col. (Dr.) Rajneesh Singh, Research Fellow & Centre Coordinator, Defence Industry and Economics Centre, MP-IDSA, were the internal discussants.

Executive Summary

In recent years, India has experienced a significant surge in defence exports. The paper explored the primary issues faced by DPSU’s in research and development, marketing, and competition from international aerospace businesses. The DPSUs’ future success in the fiercely competitive defence export market would be essential for India’s military manufacturing and indigenisation aims.

Detailed Report

The Chair, Mr. Amit Cowshish opened the session by highlighting the 23 per cent growth in India’s defence exports from Rs. 686 Crore in Financial Year (FY) 2013-2014 to Rs. 16,000 Crore in FY 2022-2023. This denotes the advancement in the design and development of the Indian defence industry in the global defence manufacturing sector.

Dr. Rajiv in his paper ‘Defence Public Sector Units and Exports’ noted that during the ten-year period 2012-23, India exported defence equipment worth about Rs. 67,500 cr. Exports surged from Rs. 446.77 crores in 2012-13 to Rs. 15,918.16 cr in 2022-23. The paper examined issues related to exports by DPSUs and the Ordnance Factory Board (OFB).

Dr. Rajiv stated that ships overwhelmingly comprise the quantity of defence exports from India, followed by helicopters/aircraft and sensors (radars etc). This is as against major global defence exporters, like the US, Russia, France, China and the UK, for whom aircrafts constitute the major chunk of exports. The share of DPSU defence exports was over 56 per cent during 2013-14 and was about 9 per cent in 2021-22. The OFB share in the defence exports pie has reduced from nearly 3 per cent in 2013-14 to less than 1 per cent in 2021-22.

During the ten-year period from 2012-22, around Rs. 9600 crores is the value of exports (both defence and civil) executed by eight DPSUs. Hindustan Aeronautics Limited (HAL) has accounted for more than 37 per cent of all exports by DPSUs, followed by Bharat Electronics Limited (BEL) at over 30 per cent and Goa Shipyard Limited (GSL) at nearly 13 per cent. As for exports by the OFB during 2012-22, about Rs. 688 crore worth of items/equipment have been exported. The OFB has exported various items like brake parachutes and ammunition to many countries over the years.

Dr. Rajiv gave certain examples of some significant export items by DPSUs. These included Offshore Patrol Vessels (OPVs) and helicopters to countries like Mauritius, Sri Lanka, Nepal, Afghanistan, Seychelles, Namibia, Ecuador and Suriname. Some of the significant contracts that the DPSUs did not succeed in securing have included the $300 mn contract for Frigates by Philippines in 2016 (which went to a South Korean firm) and $900 mn contract for Trainer Aircraft by Malaysia (which was again bagged by a South Korean competitor in 2023).

Dr. Rajiv then highlighted issues relating to DPSUs and R&D, their marketing and strategic partnership efforts and use of Lines of Credit. He noted that most DPSUs have tie-ups with academic and research institutions like IITs. BEL has more than 300 collaborative R&D partners, including with more than 150 MSMEs.  BEL has also been granted a total of 24 patents, Mishra Dhatu Nigam Limited (MIDHANI) - five and Bharat Earth Movers Limited (BEML) - 12 patents respectively, while shipyards like Garden Reach Shipbuilders and Engineers (GRSE) have filed over 100 IPRs out of which more than 60 have been granted. BEL has the highest R&D spending among DPSUs while average R&D spending of Bharat Dynamics Limited (BDL) over the five-year period from 2017-22 has been less than 2 per cent. DPSUs have also been making efforts to increase their marketing footprint overseas, with BEL, HAL and GRSE at the forefront of such efforts. Dr. Rajiv noted that countries like Bangladesh, Sri Lanka, Mauritius, and Surinam have used LoCs to source Indian defence equipment.

DPSUs are actively participating in Request for Information (RFIs) and Request for Proposal (RFPs), to enhance their export profiles. Mazagon Dock Limited (MDL), for instance, as of December 2021, had responded to over 30 RFIs and RFPs, involving nearly 200 vessels. The last vessel that was exported by MDL though was way back in 2014. DPSU shipyards point out that highly competitive markets and low pricing of the products from North–East Asian countries were some of the challenges. DPSU’s like HAL will continue to have stiff competition from global aerospace majors with their T-50 (Korea Aerospace Industries and Lockheed Martin), T-7A (Boeing and SAAB), or M 346 (Leonardo) Trainer Aircrafts. HAL though unveiled a new Hindustan Lead in Fighter (HLFT-42) Trainer Aircraft at the Aero India 2023.

Goa Shipyard Limited (GSL) expects export order book of Rs. 1200 crore during 2021-25, including OPVs and Corvettes to the Philippines Navy, Fast Interceptor Boats (FIBs) to Comoros and Floating Docks to Sri Lanka. New DPSU corporate entities like Munitions India Limited (MIL) hope to increase exports from the existing 2 per cent of annual Value of Issue to 8 per cent by next year.

Going forward, Dr. Rajiv noted that DPSU’s face a highly competitive export market for defence products. DPSUs are some of the biggest defence companies in the world in terms of sales. With the government’s stress on Atmanirbhar Bharat and ambitious targets relating to defence production, defence exports and defence indigenisation, the ability of the DPSUs to contribute to the exports pie will continue to be in focus.

Dr. Manisha Mathur

Dr. Mathur began by complimenting the author for the meticulous presentation of data and stated the need to analyse the challenges and various initiatives to increase India’s defence exports. She spoke about the various initiatives which Bharat Electronics Limited (BEL) has been making in the expanding global defence market.

Dr. Mathur delved into the challenges in dealing with developing countries in the South Asian region, particularly on the limited flexibility in the operations of the DPSUs compared to Chinese counterparts. In comparison, the private sector might have greater flexibility. She delved into the various initiatives and efforts by the Indian Government, High Commissions, and Embassies to provide support through brand promotion, participation in exhibitions, and financial assistance such as Lines of Credit (LoC) from the Export-Import Bank of India to facilitate exports to these developing countries. Secondly, she flagged that India is not part of the NATO supply chain, which could have added to the exports pie. Thirdly, Dr. Mathur stressed the need to focus on R&D, customised solutions, product support, and leveraging licensed production of Russian platforms. However, she also expressed caution in sharing sensitive defence information and maintaining the confidentiality of partner countries in the public. She was optimistic about the future course of defence exports and spoke on the upward trend in collaboration with foreign and private sectors; she was optimistic about swift clearance regarding defence exports and obtaining NOCs (No Objection Certificates). She added that there is growing interest in India’s defence sector, pushed forward actively by the Raksha Mantri in his visits to countries in India’s extended neighbourhood as well as by a few countries appointing Defence Attaches to explore collaborative partnerships with the Indian defence industry.

Dr. Sameer Patil

Dr. Sameer Patil appreciated the comprehensive research and use of statistics. He stated that the declining share of Defence Public Sector Undertakings (DPSUs) might be attributed to factors such as the absence of critical technologies, poor design capacities, long gestation periods, weak industry-academia interface, and limited success in the commercial arena. He remarked that the paper would benefit from providing background information on the role of DPSUs and the Ordnance Factory Board (OFB) in defence manufacturing and the government’s initiatives to boost defence exports. Dr. Patil further suggested that the author may include an explanation for concepts like legacy liabilities and strategic partnerships and the link between capturing new markets and leveraging partnerships. He indicated that the paper may include a uniform usage of units and currency (USD or INR) throughout for clarity and comparison.

Gp. Capt. (Dr.) Rajeev Narang

Group Captain (Dr) Rajeev Narang emphasised the importance of understanding the factors that contribute to successful defence exports and identifying obstacles that hinder them. The Indian Government has implemented initiatives like Make in India, Strategic Partnerships, Joint Venture, Transfer of Technology (TOT), and Aatmanirbhar Bharat to achieve self-reliance in technology and become a defence export hub. He commented that as the percentage of defence exports has increased, the private sector has shown more significant growth than DPSUs. He stated that it is essential to differentiate between DPSUs to assess their value addition and export potential. Gp. Capt. Narang stated that collaboration with global manufacturers, civil product exports, and adherence to international standards are crucial to improve technology and export quality. Each institution has strengths, challenges, and associated areas influencing their export goals.

Gp. Capt. Narang stated the importance of user feedback from friendly countries, which is crucial to evaluate the perception and quality of Indian defence products. He stressed that understanding limitations, hurdles, and reasons for missed projects helps assess export potential. He discussed the significance of factors like testing facilities, standardisation, accreditation, and quality assurance that contribute to the growth of the export ecosystem. Gp. Capt. Narang elaborated on the challenges in global market entry, user satisfaction, supply lines, and regional variations. Comparison with other countries, such as China, highlights the importance of assessing technology transfer and understanding their approach. Collaboration with global manufacturers, civil product exports, and understanding international standards and testing procedures play a role in improving technology and export quality.

Col. (Dr.) Rajneesh Singh

Col. (Dr.) Rajneesh Singh highlighted the decline in the share of defence exports by DPSUs in recent years from over 56 per cent in 2013-14 to approximately 9 per cent in 2021-22. In contrast, the private sector’s share has surged to over 90 per cent during the same period. He stressed the need to study the reasons behind this substantial shift to understand the underlying factors. The Ordnance Factories turned DPSUs have witnessed a decline in their share of defence exports. He expanded on the potential reasons for this decline, including unattractive product lists, lack of competitive production quality/prices, and marketing issues that should be  analysed. Col. Singh recommended that Ordnance Factories turned DPSUs should focus on establishing joint ventures with foreign Original Equipment Manufacturers (OEMs), producing critical items through technology transfer, and engaging in collaborative innovation for defence research and development in niche technology areas. This strategic approach would optimise capacity utilisation, enhance efficiency, and facilitate modernisation with capability development. Moreover, the assessment of defence export volume should carefully consider aspects like After-Sales Maintenance and Support, overhaul, and training and clarify whether these services are accounted for when receiving/executing the export order or at the time of payment realisation.

Col. Singh suggested that a collaborative approach between various government ministries, including the Ministry of Defence, Ministry of External Affairs, Department of Economic Affairs, and Ministry of Corporate Affairs, is vital to provide diplomatic support for achieving export orders, facilitating technology transfer deals, implementing offsets effectively, producing dual-use technology items, establishing joint ventures with foreign OEMs, and forming strategic market partnerships. Furthermore, DPSUs can be crucial in supporting defence Micro, Small, and Medium Enterprises (MSMEs) by providing a suitable forum/platform for exports, extending market support, offering technological guidance, and enhancing capability. Lastly, to obtain a realistic assessment of the defence industry, he suggested that a time period longer than a 10 years be considered. Such a timeframe would account for any spikes or irregularities in orders, ensuring that accurate conclusions are drawn.

Mr. Amit Cowshish

The Chair appreciated the suggestions and recommended certain changes to be incorporated into the paper.

Firstly, he suggested including a list of policy measures the government has taken as it pertained to defence exports, including issues like the Open General Export License (OGEL) and other procedural changes.

Secondly, he mentioned that, while the paper focuses on R&D, marketing efforts, and LOCs as facilitators, there is a need for more coverage of the limiting factors.

Thirdly, Mr. Cowshish flagged data points on exports and value of authorisations and noted that countries like France consider both physical exports and authorisation values, to get a better picture of the country’s defence exports.

Fourthly, he clarified that DPSUs also manufacture civilian products and make efforts to segregate defence export figures from civilian products.

Finally, he also highlighted the role of the private sector in defence exports, along with changes in acquisition procedures and offsets. He commented on the limitations of obtaining user inputs and mentioned the limited market in the neighbourhood but expressed hope for success in Southeast Asia, Central Asia, and South America. Finally, the significance of Micro, Small, and Medium Enterprises (MSMEs) in the defence export story and their collaboration with DPSUs was flagged.

Dr .Rajiv expressed gratitude for the constructive comments and suggestions and stated that he intended to incorporate them to the extent possible while revising the paper and also use the suggestions for future research.

Questions and Comments

The Director General Amb. Sujan R. Chinoy began his comments on the paper by suggesting the inclusion of the initiatives for critical and emerging technologies between India and the US, as India was recognised as a major defence partner in 2016 and was given the STA-1 status in 2018 by the US. These steps aim to boost India’s technology and R&D capabilities, which can potentially impact the country’s defence as well as high-technology exports. He cited the example of the GE 414 afterburning turbofan engine, on which India and the US are expected to sign a major deal during the visit of Prime Minister Modi to the US. Amb. Chinoy enquired as to how best we can utlisise such opportunities to enhance the domestic manufacturing base. Secondly, he advised the author to include the contribution of positive indigenisation lists for Atmanirbhar Bharat, on Indian manufacturing capabilities and its effect on exports. Thirdly, he  enquired whether we can categorise long-term lease arrangements as defence exports, like the transfer of the Kilo-class submarine, INS Sindhuvir to Myanmar. Amb. Chinoy also flagged the Chinese example of using a European engine in the C919 commercial aircraft, which they are aggressively marketing for exports. He also asked the author to explore the connection between Indian Armed Forces’ procurement decisions and exports. If the Indian Armed Forces purchase in large quantities significant equipment like the LCA Tejas, given the  Rs 48,000 crore deal, it should naturally translate, sooner or later, into possible export opportunities for the indigenous fighter aircraft powered by the US engine. Lastly, Amb. Chinoy flagged the need for appropriate decision-making vis-à-vis R&D investments, including on aspects relating to when to enter the technology lifecycle and which specific technologies to focus on.

Deputy Director General Maj. Gen. (Dr.) Bipin Bakshi commented on Dr. Mathur’s statement where she mentioned the importance of entering the NATO supply chain and highlighted the substantial defence budget of the US. Gen. Bakshi flagged the possibility of Indian companies benefiting if and when India and the US sign the Reciprocal Defence Procurement (RDP) Agreement, which seems to be in the works. He flagged business opportunities in terms of Maintenance, Repair and Operations (MRO) of Russian equipment in the inventories of other countries, given the current geo-political scenario. Gen Bakshi suggested that testing and accreditation facilities in the public sector need to be made more accessible to the private sector defence companies as well. The limitations in critical technologies such as chips, engines, and precision guided munitions was flagged.

The Q/A session broadly revolved around the themes of indigenisation, defence exports, joint ventures arrangements, as well as public and private defence industries.

The speaker responded to the comments and questions.

(Report prepared by Ms. Shayesta Nishat Ahmed, Research Analyst, Defence Economics and Industry Centre, MP-IDSA).