India’s Defense Industry: Need for Urgent Decisions

By on Wednesday, September 19th, 2012

India’s growth prospects are increasingly uncertain, says a respected commentator. This was no doubt said before the Government of India (GoI) announced its decision on FDI in retail and 49 per cent in aviation.

But Indians are known to swing from pessimism to euphoria with just one GoI announcement that is unlikely to quickly and radically reverse the assessments of our economic experts. Another news report talks of the government’s decision to go slow on higher FDI in defence production because of the concerns of the Ministry of Defence (MoD). Presently, the cap on FDI in defense is 26 per cent. Inflation shows no signs of coming down and the budget deficit is unlikely to remain under the projected figure.

What does all this mean for military modernization?

In a comment in these columns last year, this author had suggested that India needed to entice Western defense majors by making small investments in four or five major producers of defense equipment so that they remained interested in the Indian economy.

If anything, things are looking even bleaker now with the Rupee falling by nearly 25 per cent in recent months. This means that defence procurement might come under increasing strain and the current defense budget may also end up surrendering sizable amounts if decisions on capital acquisitions are further delayed.

FDI in retail is considered attractive because it is expected that foreign investors will also spend large amounts on developing India’s infrastructure such as warehousing, cold storage facilities, roads and other transportation needs. Similarly, higher FDI and Joint Ventures (JV) in defense are also likely to offer other benefits such as faster and more robust development of the defence industry, increased employment opportunities, training of Indian manpower in handling high technology and opportunities for export to third countries.

The only reason for the MoD’s concerns could be the objections from the powerful Defence Public Sector Undertakings (DPSUs) that fear a loss of their clout. The late K. Subrahmanyam had rightly advocated encouraging defence industry as a non-inflationary measure. According to one report, in 2010 alone, India had spent a whopping US $28 billion on various subsidies and yet only 59 per cent of the food grain reached the intended recipient; but that does not stop the GoI from pursuing such populist programs.

In the mid-1950s, Britain permitted India to manufacture the Gnat aircraft and the Orpheus engine under license. In 1963, at the height of the Cold War, the former Soviet Union allowed India a similar option to license-produce the MiG-21. In the late 1990s, Russia neither objected to India demanding the fitting of Western avionics on the Bison, a modified MiG-21 bis, nor the mating of Western technologies with the Su-30 and the Il-76, the latter fitted with the Israeli Phalcon radar.

If neither of these collaborative arrangements adversely affected India’s ‘strategic autonomy’, then why the continued apprehensions to allow a higher than 26 per cent FDI in defence? India’s dependence on foreign vendors for its defence needs is already high and it is unlikely to come down soon.

Given the current economic uncertainties, many big ticket defence deals in the pipeline are likely to be further delayed. Such delays will increase the costs due to a weak Rupee and severely constrain India’s strategic choices. Delayed induction of the 75 basic trainers, for example, will create long term problems for operational readiness of the Indian Air Force (IAF) especially because air force training is already under considerable strain for some time now.

K. Subrahmanyam had also hoped for India to become a ‘knowledge power’. That is unlikely to happen without bold decisions. Such hesitation is also likely to have undesirable effects on the actualizing of the huge offset clauses because, along with an enduring partnership with India, any foreign investor would also like to make profits.

Military modernization requires innovative thinking and perseverance and any perceived complacency might unravel the Indian dream of attaining self-sufficiency in defence. In the absence of a sustained and visible commitment to rapid indigenization,

India’s dependence on foreign suppliers for its defence needs will only increase and India will sadly remain a ‘knowledge colony’.

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