Trade and industry, National security | Asia, South Asia

18 August 2017

Unless India overcomes the complex challenges hampering efforts to modernise its defence sector, the Indian Armed Forces will not acquire the materiel it needs to defend its interests, Keshav Kelkar writes.

The lack of a healthy domestic industrial base means that the Indian military relies on imports, earning the dubious distinction of being the world’s largest arms importer. That this is a problem was acknowledged recently by Minister of Defence Arun Jaitley: “India has the third-largest armed forces in the world. We are also one of the largest importers of defence equipment in the world. This is a not a label we are happy with.”

The lack of a sizeable domestic defence industry is accompanied by a mixed track record in defence modernisation, resulting in the Indian Armed Forces not receiving the necessary military equipment to match India’s global aspirations.

While successive governments have recited the mantra of self-reliance and indigenisation, these objectives remain elusive.

As the Indian government seeks to develop a robust military industrial base, it has sought to further ease Foreign Direct Investment (FDI) regulations and revise procurement policies to promote greater collaboration between international defence manufacturers and the Indian private sector.

While the increased participation of private sector in defence manufacturing bodes well for the domestic defence industry, the creation of a military industrial base will not occur overnight. Moreover, the defence management system as a whole faces a series of complex challenges that, if not addressed properly, could further stymie attempts to modernise the equipment used by India’s military forces.

India’s unhealthy reliance on foreign imports to meet its defence requirements was identified as a problem in the 1990s, when India still relied heavily on the Soviet Union for much of its materiel. This became a genuine concern with the USSR’s dissolution and the United States’ Operation Desert Shield, which saw Soviet-armed (and partially Indian trained) Iraqi forces suffer a crushing defeat at the hands of a technologically superior US-led coalition. These events prompted Indian planners to revise subsequent weapons acquisitions so as to slowly wean off Soviet hardware and diversify India’s weapons platforms.

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While diversifying weapons suppliers and building new supply chains became a key procurement goal, it did little to lessen India’s reliance on foreign hardware. In 1994, however, the Government set up six task forces under the Ministry of Defence to look into ways that could help India reform and strengthen a domestic defence industry. According to Manjeet S Pardesi and Ron Matthews:

‘the broad thrust of the reforms has been two-fold. First, there was the perceived need to privatise the defence-industrial sector…. Second, there was a push for international co-operation, driven essentially by the need to access high technology weapon systems.’

To entice foreign investment and expedite weapons procurement, India opened up the defence sector to foreign direct investment in 2001, which permitted 100 per cent equity with a maximum of 26 per cent FDI. However, bureaucracy’s distrust of the private sector, ambiguous FDI guidelines, and insufficient incentives dissuaded foreign companies from investing. With a paltry investment figure of $6 million in the past decade, the government has since revised the FDI policy in 2014 and in 2016, first raising the cap from 26 to 49 per cent, then to 100 per cent (subject to government approval).

In 2005, the government introduced a Defence Procurement Policy, which was meant to ‘to ensure expeditious procurement of the approved requirements of the Armed Forces in terms of capabilities sought and time frame prescribed by optimally utilising the allocated budgetary resources.’ The 2005 DPP formalised a key ‘offset clause’ for larger procurement deals, requiring 30 per cent of the contract value be invested in India in the form of offsets.

In principle, the offset clause was intended to channel a portion of the contract value into developing Indian defence industrial infrastructure. However, not a single contract was secured under the 2005 DPP, resulting in its revision in 2006, 2008, 2011, 2013, 2016, and recently in 2017.

While private companies welcome these changes — having lobbied for greater controlling share as a prerequisite for investment — it remains unclear whether new FDI guidelines and procurement policies will be successful in drawing the desired private capital. Past experience suggests otherwise. As has been noted by a former Ministry of Defence acquisitions adviser:

‘“There is no denying that private sector companies continue to operate on the periphery of defence manufacturing even 16 years after the sector was opened for their participation. There is also no denying that all efforts made since then, such as the introduction of the ‘Make’ procedure in 2006 or the ‘Buy and Make (Indian)’ category in 2008, have had little impact.’

That Indian defence procurement policy has undergone so many revisions over the past decade also speaks to a larger problem that plagues India’s defence modernisation efforts: a severe shortage of personnel versed in defence and strategic affairs at key decision-making levels.

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There are critical bottlenecks in defence management, particularly when it comes to staffing and knowledgeable personnel. As Stephen Cohen and Sunil Dasgupta pointed out in a recent book on India’s troubles in building a truly modern fighting force, India’s ‘politicians lack informed military and strategic expertise. The armed forces are highly professional and attuned to global developments, but they lack policy influence.’

The dearth of expertise often results in a parochial view of defence, one that places a disproportionate emphasis on the acquisition of new technology. While modernising India’s aging military equipment is essential, decision-makers need to realise that building capable, technologically competitive armed forces is more than just purchasing or developing modern technology. Modernisation entails the development of institutions and personnel capable of efficiently managing resources and generating strategic thinking. The quest will remain incomplete unless Indian decision-makers overcome this in-built bureaucratic inertia.

Lastly, has the Government earmarked the requisite financial resources to back up the rhetoric of defence modernisation? While India’s defence budget has grown over the years, a closer look reveals that a considerable portion is spent on growing personnel costs, thereby limiting the resources available for the procurement of effective materiel. As a recent paper from the Stimson Center points out, the ‘trend of rising personnel costs and shrinking capital funds will decelerate India’s military modernisation efforts.’

Budgetary issues will also impact potential private sector involvement in defence. Without long-term contracts, certainty of volumes, an efficient selection process, transparency, and fair payment terms, there will be little incentive for private players to invest the huge resources required for defence production.

Unless India overcomes these challenges, India will continue to falter on its mission to modernise its defence sector, and the Indian Armed Forces will suffer as a result.

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