Strategising India’s Defence Exports

Unleashing further defence industrial reforms, the Department of Defence Production (DDP) announced in early September a Strategy for Defence Exports (SDE) followed by a set of standard operating procedures (SOP) for issue of no objection certificate (NOC) for export of military stores by the Indian defence industry. These two initiatives, which come after the government raised the benchmark defence FDI cap from earlier 26 per cent to 49 per cent, and simplified and streamlined the defence industrial licensing process, are part of the larger reform process for incentivising indigenous arms manufacturing and achieving higher self-reliance. The commentary examines some of the salient features of defence exports reforms. While doing so, it also looks at some of the grey areas that need consideration by the policy makers.

It is noteworthy to mention that the SDE is not a policy document as has often been demanded by various committees and certain sections of the industry. The Strategy Paper categorically rules out the need for such a defence-specific policy by arguing that the existing Foreign Trade Policy (FTP), which is published and revised periodically by the Ministry of Commerce and Industry, is well within its rights to cater to the needs of defence exports. What the SDE tries is to achieve is to create institutional mechanisms and establish clear-cut procedures within the overall ambit of the FTP for facilitating arms exports. For this the document primarily relies on two elements: 1. export promotion/facilitation; and 2. export regulation.Export Promotion/Facilitation ::

For export promotion/facilitation, the SDE talks of setting up of two new institutions– Export Promotion Body (EPB) and Defence Export Steering Committee (DESC) – besides articulating some key measures for the industry. Of the two institutions, the EPB, which is in the process of being set up, is intended as an advisory body. With members planned to be drawn from the industry also, the body is visualised to “render advice to the government on various export related issues, coordinate all export facilitation schemes of the government, increase awareness among the industry about various export facilitation measures and promotion of export through specific marketing efforts in targeted counties.” The body is also visualised to liaise with the Ministry of External Affairs (MEA) and the Department of Commerce to ensure that India’s arms exports are compatible with larger foreign policy goals and the country’s obligations under various international export control and arms control regimes. The DESC on the other hand is a senior level functional institution. It would be headed by the Secretary (DDP) of the MoD, with other members being drawn from the armed forces, Defence Research and Development Organisation (DRDO), Department of Defence (DoD), MEA and Directorate General of Foreign Trade (DGFT). Under the DESC would function the Standing Committee which has already been set up under the chairmanship of Joint Secretary, Defence Industrial Promotion (JS DIP). While the JS-led Standing Committee is entrusted with the day-to-day decision-making for exports, the higher committee chaired by Secretary (DDP) would consider export proposals relating to indigenously developed sensitive defence items. The higher level committee would also “monitor progress in defence exports and suggest specific steps/strategy to boost exports.”

From the industry’s point of view what is perhaps equally important is the measures promised in the SDE for promoting defence exports. Shedding the past reluctance in promoting arms exports through active defence diplomacy, the Strategy Paper promises inclusion of defence industry representatives in India’s official delegation for bilateral meetings. Such inclusion would not only give India’s political backing to the importing nations but would also give a boost to the Indian arms manufactures. To ensure that the Industry does not lose out due to short term buying power constraints of the importing counties, the Strategy Paper talks of exploiting various credit financing options as available with the MEA, EXIM Bank and Department of Commerce. Apart from these, the strategy paper also talks of tweaking of the MoD’s existing offset policy to create export opportunities for Indian industry.Export Regulation ::

For the purpose of regulation of arms exports, the strategy paper primarily dwells upon the SOP for issue of NOC. The detailed SOP, which has been announced subsequent to the release of the strategy paper, is divided into the five parts as follows:

Part A: For export of military stores that require a mandatory license for production
Part B: For export of military stores that are outside the production license purview
Part C: For export for exhibition purposes
Part D: For export for testing and evaluation
Part E: For export for participation in tender

The underlying rationale behind putting items in various parts is the degree of scrutiny required for grant of export license. For the items in the first two parts (A&B), it is mandatory for the exporters to furnish the end use certificate (EUC) and the proof of integrity of chain of transmission (in case the export is undertaken through intermediaries). These conditions are however not mandatory for the items falling under Parts C, D and E, which are not revenue-earning exports as the items are to be imported back after the brief purpose is over. In other words, the temporary and non-revenue earning exports need not go through the same level of scrutiny as the revenue earning export. This would be a major relief for the industry which can avail of the simplified SOPs for showcasing their products in the international market without going through the rigorous end use certification process. To make Indian arms exporters’ life even simpler, the strategy paper also talks of web based platform for submission for export license application and conveying the government’s decision.Complications and Lack of Clarity ::

The above measures notwithstanding, the exports strategy sufferer from certain complications, apart from being opaque at some places. The complications are because of the different interpretation of military stores. It is to be noted that the military stores under Part A have already been identified through list of defence products which was announced in July 2014, giving clarity to the industry as to what are the items that need prior industrial license before the production starts (the original list of defence products has been further revised to include software and technology). However, the items under part B are not yet identified although the Strategy paper indicates Wassenaar List as a possible reference point. The difference in identification apart, the natural question that arises is as to why the MoD is interested to take a lead in regulating the export of the items the production of which it is not at all concerned.

Apart from this there is also a concern regarding the timeline for grant of export license. As per the SOP, the initial scrutiny of the arms export license is to be done individually by all the stakeholders (Defence Research and Development Organisation, armed forces and MEA among others) before the JS (DIP) - led Standing Committee – in which all the stakeholder are again represented – could take a decision. As per the SOP, while the timeline for the initial scrutiny is 15 days, there is no such timeline for the Standing Committee. Besides it is also not clear if the standing committee’s decision is based on consensus or majority. The Indian industry has reason to worry as ‘veto’ by one stakeholder could thwart the industry’s export proposal. In addition, there is also lack of clarity on what constitutes a lethal item based on which grant of export license would be considered by the government. The SOP has left to the industry’s judgement to interpret what should ideally been the job of the government. Addressing these issues, although minor in comparison to the steps taken through the SEP and detailed SOPs, would be of great help to the industry.

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