This article is written by Vineet Kumar S, pursuing a Diploma in Entrepreneurship Administration and Business Laws from LawSikho.com. Here he discusses “Export Licensing and Schemes for Defence Export”.
Historically, defence exports were never the focus area of Indian governments in the past. By 1991, Indian defence exports were almost negligible. After the liberalization of the economy, a slight increase in defence exports was seen in the year 2001 with the 40th rank among 86 arms exporting countries of the world according to SIPRI data. From 2001 to 2011, India did not make any significant progress in the field of defence exports. In 2011, India was ranked 37th among the 74 exporting countries, accounting for 0.01 percent of the total global arms trade. However, with the announcement of the strategy for defence exports and streamlining SOP for grant of NOCs for exports, there has been a slow but steady improvement in India’s global ranking in relation to defence exports. The period from 2014 to 2018 was witnessed with significant progress in Indian defence exports.
Need for Enhancing Defence Export
Self-reliance and indigenization in defence is important for both strategic and economic reasons and, therefore, has been an important guiding principle for the government. Although India has made rapid progress in defence technology and industrial base in recent times, it still remains to cover an important base in terms of the scale of development and production of new products. The domestic defence industry will have limited scope for investment in research, development and production if it depends only on domestic demand.
There is a need to boost investment in defence sector both in R&D and production, thereby resulting in high self-reliance and indigenization. A policy of maximizing indigenous production without a well-supported R&D policy and export strategy may not bring the desired results. Therefore, the defence industrial policy should be supplemented by a strategy for defence exports without which the economic base of the defence industry would be difficult to sustain in the present economic competitive environment.
Defence exports are a testament to the country’s technological prowess and the proficiency of its industry. They are also valuable foreign exchange earners and major tools of geopolitical engagement. These are some of the drivers that propel India from a majority importer of defence equipment to a self-sufficient net exporter.
International Regulatory Framework
All countries are required to maintain export control in accordance with UNSC Resolution-1540. Exports of defence products are characterized by multilateral export control regimes, which are ‘The Nuclear Suppliers Group’, ‘The Wassenaar Arrangement’, ‘The Australia Group’ and ‘The Missile Technology Control Regime (MTCR)’. India is also a signatory to international conventions on nuclear non-proliferation, the Chemical Weapons Convention (CWC) and the Biological and Toxic Weapons Convention (BWC).
To gain access to advanced technology products, India is trying to gain membership of these international control regimes. India joined the Missile Technology Control Regime (MTCR) and became the 35th member on 27 June 2016. India joined the Wassenaar Arrangement and became the 42nd participating state on 08 December 2017. Further, in January 2018, India was admitted as the 43rd member to Australia Group through consensus decision. Therefore, India is currently a member of three of the four major multilateral export control regimes.
Domestic Regulatory Framework
- The Foreign Trade (Development and Regulation) Act, 1992 (FTDRA) forms the basis for India’s export trade regime, including the defence industry. It empowers the government to regulate, restrict, prohibit all or specified classes of exports / imports. The government prepares the Foreign Trade Policy (FTP) and the FTP Handbook to lay down the procedures under this Act. The administration of FTDRA and FTP is the responsibility of the Directorate General of Foreign Trade (“DGFT”). DGFT periodically provides a list of goods and services that may or may not be exported and or imported, as the case may be.
- The Weapons of Mass Destruction and Their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (“WMD Act”) authorizes the government to regulate the export, re-transfer, re-export, transit, transhipment of any goods related to or linked to the development, manufacture, operation, storage, etc. of weapons of mass destruction. The WMD Act is to be read with FTDRA appreciating India’s policy framework regarding conventional weapons. No person or entity can do any export if they are aware that the transaction is related to prohibited activity including development, storage, transmission, etc. of WMDs.
- SCOMET: Potential dual-use items for both civilian applications as well as weapons of mass destruction are classified as “Special Chemicals, Organisms, Materials, Equipment and Technology (SCOMET)” items. SCOMET items are listed under nine (9) categories. Each category has a complete list of items that fall under that category. Special conditions applicable to goods under different categories are mentioned there-under. In addition, the SCOMET list is periodically updated and revised and aligned to reflect India’s commitments to multilateral export control regimes and conventions.
The Directorate General Foreign Trade (DGFT) laid down policy and procedure for regulating the export of such controlled items for the items listed in categories 1 to 5 and 8 of the SCOMET list included in Appendix 3 to Schedule 2 of the ITC (HS) classification of Export and import items, which is available on DGFT’s website. The relevant documents regulating export of SCOMET items are as under:
- Foreign Trade Policy 2015-20 ( Para 1.03, 2.09, 2.16 to 2.19)
- Handbook of Procedures 2015-20 ( Para 2.73 to 2.82)
- Appendix 3 of Schedule 2 of ITC (HS) Classification (Revised as on 03.07.2018)
4. No Objection Certificate (NOC) for defence export: DGFT Vide Notification No. 5 / 2015-2020, dated 24 April 2017 notified the Munitions List in Category 6 of Special Chemicals, Organisms, Materials, Equipment and Technology (SCOMET). The export of goods referred in category 6 of SCOMET (Munitions List), (excluding those covered under notes 2 and 3 of CIN note of SCOMET and items in categories 6A007 and 6A008 of SCOMET) are governed by the extant Standard Operating Procedure (SOP) issued by the Department of Defence Production (DDP) vide No. 1 (4) / 2016-D (EPC) dated November 1, 2018. Unless prohibited, export of munitions list items are permitted against authorization issued by DDP. Detailed procedures are provided in SOP for various processes such as actual exports, exports for testing and evaluation purposes, participation in tenders/exhibitions, exploring business opportunities abroad and transfer of technology/software. NOC issued by DDP is equivalent / same as export license for the purpose and validity specified in it.
MHA vide Notification No. V11026/164/2018-Arms dated 01/11/2018 has delegated its powers & functions exercised performed by it under Section 10 of the Arms Act 1959 to Department of Defence Production for export of Arms & Ammunition specified in Schedule I of the Arms Rule 2016.
Government Initiatives and Support
Ministry of Commerce & Industry already has an overall Export Policy in the form of Foreign Trade Policy (FTP), which, inter-alia, includes various export promotion schemes, duty/ tax exemptions and other facilitative measures. Therefore, there is no separate Defence Export Policy; accordingly, government has taken certain initiatives and schemes for encouraging defence exports within the overall ambit of FTP. The main initiatives are as follows:
- Export Promotion cell under DDP, MoD has been formed to co-ordinate and follow-up on export related action including enquiries received from various countries and facilitate private sector and public sector companies for export promotion.
- An Export Steering Committee has also been formed under the chairmanship of Secretary, Department of Defence Production. The committee will also have representatives from the Armed Forces, DRDO, Ministry of External Affairs and DGFT. The functions of this committee include consideration and decision on matters of export permission (which are outside the purview or scope of subordinate officers/committees), especially the export of indigenously developed sensitive defence equipment, monitor the progress in defence exports and suggest specific steps/strategies to promote exports.
- Incentives and government support through trade missions, diplomatic support, financial and fiscal incentives such as ease of obtaining credit, line of credit, etc.
- The Offset Policy is being reviewed and aligned towards final integration of weapons /systems in India and promoting export of such systems from India.
- A certification scheme for prospective defence exporters launched to improve marketability of their products globally under which DGQA, DGAQA, DGQA (N) and other agencies notified by the DDP/ Government will issue a certificate to exporter for their product as ‘Fit for Indian Military use’ after due trial and evaluations.
- Scheme for promotion of MSMEs in defence has been launched to unlock the potential of the non-defence sector MSMEs located in Tier II and Tier III cities across India by providing them with relevant information about the Government of India’s ‘Make in India’ programme in defence. One of the objectives of this scheme is to give a new impetus to the development of defence production in the country both for its domestic needs and also for exporting to friendly countries, by involving the MSMEs in larger numbers.
The Defence Ministry has set an ambitious export target of Rs 35000 crore by 2025. This is achievable, but it will require foresight, policy making and business environment support to the right areas and direction. It is difficult to create a niche for India in this highly competitive industry. Success in this sector is about getting many interlinked factors right, which is not easy, but is possible through learning from case studies, best practices and examples that can be adopted or rejected. The government has to streamline processes, build dedicated institutions, train and re-train its diplomatic assets and adopt concerted and pragmatic go-to-market strategies keeping in view the strengths and weaknesses of Indian industry and global opportunities. More attention should be given to market research, the country’s defence acquisition process, business culture and the role of geopolitical scenarios to formulate successful strategies for defence exports.
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