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India’s defense sector faces the malcontents

by Harsh V. Pant

Once again, the Indian defense sector is raising global expectations. Once again, India is beginning to be courted as a lucrative market for defense supplies. Once again, global vendors and foreign leaders are vying with each other to get the first-mover advantage.

But there have been so many false starts in the past that it would need some serious effort on the part of the Modi government to convince external interlocutors that, this time, it won’t be a damp squib as in the past.

Prime Minister Narendra Modi and his defense minister, Arun Jaitley, have underlined the urgent need to reform India’s defense procurement policy. Jaitley, has been charged with two important portfolios — finance and defense — underscoring the recognition by the highest echelons of the Modi government that, unlike in the previous two decades, India will have limited resources to spend on defense.

In his recent budget, the finance minister raised the foreign direct investmant (FDI) limit in the defense sector up to 49 percent from 26 percent — even as 2.29 trillion rupees have been allocated to the Defense Ministry, marking an increase of around 12.5 percent from the last fiscal budget.

It is well-known that the Indian armed forces face critical shortages. The Indian Army urgently needs new field artillery, with some reports even suggesting that it may not even have sufficient reserves to sustain a full-fledged war for 20 days.

The Indian Air Force has repeatedly expressed concerns about the obsolescence of its ground-based air defense systems. The Indian Navy’s depleting and aging submarine fleet poses its own set of challenges with only 13 conventional diesel-electric submarines.

Army chief Gen. Bikram Singh is reported to have told Modi about the “critical hollowness” afflicting the army after a decade of missed deadlines for procurement and the lack of wherewithal to face war. It will be a delicate task to manage an Indian defense modernization program, a priority of the Modi government, during a time of slow economic growth.

With the world’s fourth-largest military and one of the biggest defense budgets, India has been in the midst of an ambitious plan to modernize its largely Soviet-era arms since the late 1990s — one that has seen billions of dollars spent on the latest high-tech military technology — as it started asserting its political and military profile in South Asia and the Indian Ocean region.

In line with India’s broadening strategic horizons, its military acquisitions have also seen a marked shift from conventional land-based systems to means of power projection such as airborne refueling systems and long-range missiles.

India has been busy setting up military facilities abroad, patrolling the Indian Ocean to counter piracy and protecting the crucial sea lanes of communication, as well as demonstrating a new military assertiveness in general.

Yet, most of this has happened in a context where India’s dependence on external actors in the defense sector is at an all-time high.

Drastic steps are needed as India’s defense import bill is estimated to reach $130 billion over the next seven years even as homeland security purchases are likely to cross $110 billion.

Although in the mid-1990s, India was assured that the indigenous content of weaponry would increase from 30 to 70 percent by 2005, the nation continues to import more than 70 percent of its defense requirements from abroad.

India today imports defense equipment worth more than $8 billion annually even as the story of the Indian state-run defense industry has been largely one of gross inefficiency, incompetence and failure.

The performance of the Defense Research and Development Organization (DRDO) has been abysmal because of the lack of any accountability. The Indian armed forces have not had a reliable experience in working with the DRDO-made armaments.

Given its significant budgetary resources for a developing nation, it seems to have failed in delivering quality output. Most of its key projects have either not been completed on time or have resulted in huge cost overruns.

The Indian defense sector has not been successful in attracting FDI, with a measly $4.94 million coming to India since the opening of the sector in 2001. This is the lowest of any sector.

When the United Progressive Alliance government tried to increase the FDI limit from 26 to 49 percent, then Defense Minister A.K. Antony was steadfast in his opposition, arguing that this would make India dependent on foreign companies and vulnerable to policies in the investors’ countries of origin on a long-term basis.

This was a strange argument to make in a country importing most of its critical weapon systems from abroad. The real reason, perhaps, was Antony’s desire to not rock the boat, which was the hallmark of his time in the government, making him one of the worst defense ministers India has ever had. He neither brought transparency to the moribund procurement system nor provided a strategic direction to defense planning.

There is an urgent need to strengthen India’s weak military manufacturing industrial base by expanding private-sector participation. This can be done by raising the FDI cap in the defense sector and by encouraging joint ventures between Indian and foreign defense firms.

India’s modernization program and the desire by external actors to tap into the new market should be an impetus for reforms. The notoriously slow bureaucratic processes will need to change if India wants to continue reaching the Western markets.

Changes have been slow because some institutional interests are so entrenched in government policy that it is nearly impossible for them to change. An external force might just propel India to change. These external forces might come in the form of a backlash from Western industry over the slow tedious contract process.

The United States and Europe have made it clear that they want to sell to India, but the current procurement process will only be tolerated so far. Eventually someone might walk away.

India certainly could emerge as an attractive destination for foreign manufacturers who seek to set up defense manufacturing facilities in India that will serve global defense markets. This would, in turn, lead to high technology coming into India with cascading effects across multiple sectors.

Even an increase to 49 percent FDI may not seem lucrative enough for global investors. As a result, the Modi government might have to go for a game-changing formula — one that not only enhances India’s credibility in the eyes of global vendors but also encourages the Indian private sector to participate more fully in the defense sector.

For this, domestic political leadership in India is needed. The Indian government has, over the years, failed to demonstrate the political will to deal with the defense policy paralysis that seems to render increasingly hollow all claims of India’s rise as a military power.

There has been no long-term strategic review of India’s security environment, and no overall defense strategy has been articulated. The challenge for the government is to delineate what products it needs and how to build up the industry by significantly reforming their domestic defense manufacturing sector.

In the absence of a comprehensive, long-term appraisal of the country’s defense requirements, there will be little clarity about India’s real needs in defense acquisitions. And India’s rise as a major global player will remain merely a matter of potential.

Harsh V. Pant is an adjunct fellow with the Wadhwani Chair at CSIS in Washington and a reader in international relations in the Defence Studies Department at King’s College London.

  • smita1900

    Why are our media commentators so keen to please foreign arms manufacturers? I cannot understand. All countries want to increase domestic production, only our people mouth other countries’ interests.