Event Reports

Integrate ‘Make in India’ with defence procurement policy

Photolabs@ORF
2016
Jan
21

The ‘Make in India’ programme must be integrated with the defence procurement policy to encourage manufacturing in India and advance MSME participation, according to Mr. M.R. Sivaraman, former Revenue Secretary to the Government of India.

Initiating a discussion on “Defence Spending and Investments” at the Chennai Chapter of Observer Research Foundation, Mr Sivaraman said bureaucratic hurdles and process impediments in defence procurement process must be removed to allow for transparent, cost effective participation of private players.

While promoting private sector participation in the industry, the government must also guard against monopolisation and cartelisation among private players, he said.

Mr. Sivaraman said user participation needs to be increased in product design and conceptualisation of military equipments, thereby satisfying the needs of the on-field user.

He said the government must remove constraints in recruiting foreign experts in specialised ares of defence equipment manufacturing. Further, the legislation around taxation for defence equipment manufacturing and intellectual property rights must be strengthened and stripped of any ambiguity to allow for technology transfer in joint ventures and to promote easy flow of FDI in the defence sector.

Mr Sivaraman noted that “internationally, military expenditure is accepted to be both a driver and preventer of conflicts, although the latter is quite challenging to prove. In today’s democratic world, every country spends a substantial amount on military expenditure, especially in defensive capabilities to counter possible threats and in offensive hardware to protect national interests. It is quite hard to evaluate the “prevention of conflict” aspect of defence spending, most facts state otherwise.”

He said that nations across the world invested a significant chunk of their GDP on defence spending. Quoting figures from the World Bank, he said that Israel spends 5.2% of its GDP on defence, closely followed by Russia at 4.8%, US at 3.5%, China at 2.1% and India at 1.74%. In nominal dollar terms, the US is the largest spender at 60.9 billion USD, accounting for 34% of the global defence expenditure, closely followed by Russia at 60.4 billion. The Indian spend in defence sector is accounted at 38 billion USD. Global military expenditure has grown from 1.4 trillion USD in 2001 to $ 1.76 trillion in 2014, accounting for 22% of the global GDP.

Quoting additional statistics from SIPRI (Stockholm International Peace Research Institute), Mr. Sivaraman said that the arms sale of the top four global defence equipment manufacturers in 2014 was an estimated 401 billion USD. India accounted for 15% of global arms import in 2015 (75% from Russia, 7% US and 6% Israel), other significant importers included China 5% and Saudi Arabia 5%. The spending on ground troops and personnel stands tall amongst all expenditure heads. As per recent statics (February 2015), 28 million soldiers are estimated to be in service in various branches of the military across nations. Indian troops account for 1.33% of the global troop count, China 2.33%, US 1.41% and Russia 0.77%. Other significant areas of military expenditure include, submarines, aircraft carriers, combat aircrafts, armed ground fighting vehicles such as tanks, and nuclear weaponry.

No economic theory

Speaking on the economics of defence expenditure, Mr. Sivaraman noted that there is no concrete economic theory in favour military expenditure. A popular perspective is that defence expenditure increases aggregate demand in the economy through job-creation, salaries, and government procurement, hence stimulating the economy and contributing to its growth. Nevertheless, this theory has certain counter-arguments, firstly, the opportunity cost of military expenditure is often ignored. Money and resources expended in defence could be used in health, education, and other social sectors, which could have potential impacts on the standard of living. Secondly, defence equipment and weaponry (nearly 50%) is often discarded before they have served their purpose, due to obsolete technology and old age, resulting in wasteful expenditure that does not add any tangible value.

Nearly 175 million people have been killed in various conflicts around the globe in the past century and present, including loss of property, livelihood and several billions in material damage. These elements must be considered as the cost of military expenditure, opined Mr. Sivaraman.

Despite the counter-arguments defence expenditure does benefit the macro-economy. The defence sector is the largest employer (across nations), recruitment in various branches of the military contributes significantly towards job-creation in the economy, additionally it creates secondary and tertiary employment in troop stationed regions. Several technology developments in the field of defence eventually get absorbed into the mainstream economy thereby benefiting civilian population, example – mobile telephony and the internet.

A thriving military industry can benefit the nation in terms of defence self-sufficiency, increased employment, balance of trade (exports), and R&D. However, a flourishing defence industry dominated by private players has the potential to result in undesirable consequences. Collusion among private players can lead to cartelisation that may result in corruption and worse, influence government decision making and fiscal priorities.

Imports vulnerability

Speaking on defence expenditure in India, Mr Sivaraman said that 26% of the total government expenditure (revenue receipts) in 2015 was spent on the military, which includes salaries, pensions, procurement of defence equipment, spares and maintenance. It needs to be noted that this expenditure excludes the spending on certain paramilitary and border forces such as BSF, ITBP and SSB.

Providing statistical figures, Mr. Sivaraman said the spending on the army is the highest, accounting for Rs 74,119 crores, followed by air force at Rs 11,360 crores and navy with Rs 6,288 crores. Also, 65% of India’s defence hardware needs are met by imports, and nearly $ 10 billion is spent every year in military capital expenditure. This expenditure not only impacts our balance of payments, but also makes us vulnerable to cost escalations in spares and maintenance. Further, all defence imports are exempt from custom duty. This huge import spend quintessentially supports the case for Make in India, said Mr.  Sivaraman.

Commenting on the Indian defence industry, Mr. Sivaraman said that there are 41 ordinance factories in India that employ nearly 164,000 persons, and over 6000 MSMEs support these factories. There are several private players as well, including foreign manufacturers who have set up shop in India – Airbus, Lockheed Martin, BAE systems and others. Tata Advanced Systems (supplied the Sukhoi fuselage), L&T (produced the hull for India’s first nuclear submarine), Mahindra, Pipanav shipbuilders, Bharat Forge (Bofors shells) are the major Indian private sector companies involved in defence sector production. The private sector is dominated by big corporations, leaving very little room for MSME participation, which is critical to generate large scale employment and expertise.

Speaking on the challenges facing the Indian defence industry, Mr. Sivaraman noted the major hurdle is the mindset of the armed forces. While India has attained significant self sufficiency in the navy, manufacturing of aircraft carriers, nuclear submarines, radars etc, the air force and army still rely heavily on imported equipment. Indian made equipments and vehicles in field of army and air force does not receive the same patronisation as that of imported equipments. This happens due to a variety of reasons ranging from technical deficiencies, competitive gaps, and the perceived superiority of imported goods. This mindset has to change, opined Mr. Sivaraman.

(This report was prepared by Deepak Vijayaraghavan, Associate at Observer Research Foundation, Chennai Chapter)