Exim Bank Study – Reforms in the Defence sector set to enhance export orientation

Exim Bank has prepared a comprehensive Study entitled “Defence Equipment Industry: Achieving Self-Reliance and Promoting Exports”, the first copy of which was presented to Gen. (Dr) V. K. Singh (Retd.), Hon’ble Minister of State for External Affairs and Minister of State (Independent Charge) for Statistics and Programme Implementation, Government of India, at New Delhi on May 17, 2016.

The Study has noted that the Indian defence sector is at variance from the global one, where more than 80 percent value addition happens at the integrator stage, with the component suppliers, many of which are SMEs, accounting for only 20 percent. This concentrated structure restricts the growth of private players in the sector and also affects the scope for R&D. Moreover, efficiency in the Indian defence sector (measured in terms of labour productivity) lags behind sectors such as consumer goods and transport equipment which again is at variance from countries like UK where labour productivity in aerospace and defence was nearly 8 percent higher than the overall productivity in all UK companies.

Highlighting the policy initiatives in recent times, the Study has opined that there has been a paradigm shift in the defence sector with a renewed focus on self-reliance, import substitution, technology upgradation and indigenization. The reforms in defence sector coupled with the high domestic demand emanating from extensive modernization plans of the Indian defence services, is set to position India as an important defence sourcing hub.

To alleviate the growth constraints for the sector, the Study has recommended policy oriented, manufacturing related promotional strategies which include among others, reforms in offsets policy; according special priority status to the sector; setting up export control systems in consonance with international non-proliferation regimes; adopting cost-plus contracts structure; PPPs in test facilities; subsidies on test fees for MSMEs; and setting up technology development funds.

The Study has also noted that availability of finance will be a critical element for building the bridge between challenges and opportunities, inertia and inventiveness and status quo and advancement for defence exports. In this context, the Study has asserted that with adequate support from the Government of India, Exim Bank can play a pivotal role in the defence sector by pushing exports to a higher growth trajectory.

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