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SUMMARY:MP-IDSA Fellows Seminar: Defence Public Sector Units and Exports
DESCRIPTION: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. \nExecutive Summary\nIn  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. \nDetailed Report\nThe 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. \nDr. 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). \nDr. 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. \nDuring 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. \nDr. 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). \nDr. 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. \nDPSUs 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. \n  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. \nGoing 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. \nDr. Manisha Mathur\nDr.  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. \nDr.  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.  \nDr. Sameer Patil\nDr.  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.  \nGp. Capt. (Dr.) Rajeev Narang\nGroup 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. \nGp.  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. \nCol. (Dr.) Rajneesh Singh\nCol.  (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. \nCol.  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. \nMr. Amit Cowshish\nThe  Chair appreciated the suggestions and recommended certain changes to be  incorporated into the paper. \nFirstly\,  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.  \n  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. \nThirdly\,  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. \nFourthly\,  he clarified that DPSUs also manufacture civilian products and make efforts to  segregate defence export figures from civilian products. \nFinally\,  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. \nDr  .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. \nQuestions and Comments\nThe 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. \nDeputy  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.  \nThe  Q/A session broadly revolved around the themes of indigenisation\, defence  exports\, joint ventures arrangements\, as well as public and private defence  industries.  \nThe  speaker responded to the comments and questions. \n(Report  prepared by Ms. Shayesta Nishat Ahmed\, Research Analyst\, Defence Economics and  Industry Centre\, MP-IDSA).  
URL:https://idsa.in/idsa-event/mp-idsa-fellows-seminar-defence-public-sector-units-and-exports
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