The defence manufacturing sector continues to face high cost of capital for investments in advanced manufacturing infrastructure, he says

Arun T Ramchandani, chair of the FICCI Defence Committee and Executive Vice President and Head of the L&T Defence, tells DH’s Gyanendra Keshri that while India’s arms exports surged, the defence manufacturing sector continues to face high cost of capital for investments in advanced manufacturing infrastructure.

Why has India’s defence exports surged over the past few years? What were the bottlenecks?

India's defence exports have dramatically grown from Rs 700 Cr in 2015 to Rs 10,700 Cr in 2020 and currently are around Rs 16,000 Cr in 2023.

The Government has taken a number of measures to improve defence exports, key amongst them being simplification of processes for defence exports, formation of separate cell in the Department of Defence Production to coordinate for export related actions, thrust on enforcing offset obligations, specific initiatives by the Ministry of External Affairs through embassies in friendly nations and encouraging enhanced participation of private industry in the sector. The government has also supported in the way of providing certificates for all trial evaluated equipment and in conduction of trials for foreign customers to foster defence exports. In addition, Indian defence attaches abroad have played a crucial role in promoting defence exports.

The draft Defence Production policy has been recast into draft Defence Production and Export Promotion Policy (DPEPP) and the same has already been reviewed by the Empowered Group of Secretaries and is currently under consideration of the Empowered Group of Ministers, before being presented for the approval of the Cabinet. The DPEPP has laid emphasis on building a robust defence industry with inclusion of private sector on a level playing basis with the public sector to address the nation's targeted growth aspirations.

Most of the export contribution comes from the public sectors (DPSUs, Ordnance factories and Brahmos Corporation). Why is the private sector not there in a big way? What kind of difficulties does it face when the private sector enters into defence manufacturing?

The private sector has been playing an important and active role in defence exports in the form of offerings pertaining to aero structures, light armoured vehicles, armoured protection solutions and other key sub systems. It is now playing an increasingly key role in defence exports with significant orders for artillery guns and rocket systems and other larger weapon systems including auxiliary vessels.

The public sector having been offering air, sea and land based weapon systems and platforms have been able to garner a larger share of the current exports. With the increasing thrust on indigenisation and realisation of systems based on indigenous design and enhanced Public Private Partnership, we expect to see a significant growth in defence exports from the private sector.

Key challenges that the defence manufacturing sector continues to face are high cost of capital for investments in advanced manufacturing infrastructure, huge investments required in R&D, stringent quality requirements, long gestation periods for contract realisation and lack of continuity in orders.

What are the advantages for India to excel in defence manufacturing?

The Indian defence manufacturing sector is right now ahead of the inflection point after substantial evolutions in acquisition policies and procedures. Few significant initiatives include priority to procurement of capital items of Buy Indian (IDDM) category from domestic sources under Defence Acquisition Procedure (DAP)-2020.

Capital Acquisitions over the Long Term Integrated Perspective Plan (LTIPP) (2012-27) is estimated with over Rs.4 Trillion opportunity for domestic industry in the period 2022-27. The planned Defence Capital Acquisitions are to the tune of Rs.15 Trillion over the next decade and has a vision to enhance defence indigenisation from current levels of 35-40% to 70-75%. 75% of the Capital procurement budget (Rs 1 Trillion.) will be earmarked for domestic industry in 2023-24, up from 68% in 2022-23.

A strong MSME sector, a large technical manpower base and improving infrastructure and logistics in the country would also serve as enabling factors for excelling in defence manufacturing.

The government has set a target of Rs 35,000 crore worth of exports by 2025. Is it achievable? If not, what more should the government do?

The Lines of Credit is known to be offered to friendly countries. It is industry's experience that complete system or platforms do get preferentially nominated to the DPSUs citing track record that was denied to the private sector through nominations of domestic requirements. By inclusion of the private industry across the board and allocating them the exports of goods already sold to GoI, the End User would also have a better choice at a competitive offering and build volumes. The government can also consider making the LoC process under EXIM bank more user friendly.

The Government must also consider institutionalizing a "Foreign Military Sale" entity for exports to friendly countries. This would provide a win-win-win situation to the Buyer country, the Seller and the Government of India through better price discovery and risk mitigation.

What are the challenges that the government needs to address for India to emerge as a big hub for defence manufacturing?

The government should continue to provide thrust on self-reliance by focusing on system of systems and platforms development under Make 1 (government funded development programs), building capabilities in design & technology development (IP Ownership), Departure from dependence on Govt. Owned organization for Design, Development, Production, ToT, Develop indigenous Defence solutions through maturing Indian industry – supported by Govt. for development & hand-held by the user and implementation of Merit based selection of development partner.

In order to create a robust defence industrial base the government can support by providing PLI schemes, Capital subsidies for investment in defence technology and manufacturing infrastructure, enhancement of defence testing infrastructure. Availability of highly-skilled workforce, creation of science and engineering infrastructure and imbibing cultural factors with a focus on high quality will also foster the defence manufacturing ecosystem.

To promote R&D in defence, the government can incentivise investments in R&D through tax benefits, ensuring 25% of Government Defence R&D fund flowing to Industry, Start-ups & academia and providing supportive IP regimes. The acquisition process can be made faster and simplified by setting up of a professional Procurement Wing in MoD Acquisition, implementation of QCBS process to enable selection of industry partners based on merits of capabilities and competencies and ensuring Time bound acquisition process with accountability for delays.