By Nayan Jain, Edited by Ritwika Chakravarty
“A good leader must never start the war but must always be prepared for it”. With China looming as a danger to our territory and leaving no stones unturned to cast an evil eye in the Indian Ocean region, the hike in the defence budget especially the Navy comes across the step is well received. India has realised that it cannot license China to repeat the pattern it used for the South China Sea and challenge territorial claims. The Union Budget 2022-23 pegged a total of Rs 385,370 crore for capital and revenue expenditure for defence. This is an increase of nearly 11% over the previous budget (The Wire 2022). The defence budget not only dominated the allocation but it has a special focus on ‘atmnirbharta’ or self-reliance with over 68% of the capital allocation towards local procurement and 25% of the R&D budget for private industry, start-ups, and academia. In Budget 2022-23, the capital allocations relating to modernisation and organisational development of armed forces have been significantly amplified to Rs 1.52 lakh crore.
Budgetary allocation for the Ministry of Defence
The Indian manufacturing sector which saw a growth by 49.6 per cent, fell 36 per cent in the same period in 2020 (Outlook 2021). The manufacturing sector in India is declining even as a share of GDP (World Bank 2020). To further exacerbate the situation, the inflationary pressure and predatory pricing have caused problems for the local manufacturers for the procurement of raw materials. In 2008, even a climb of about 10 per cent in the annual defence budget was countered due to inflation which soared at 11 per cent (Rediff 2008). The Indian manufacturing sector and construction are the vital drivers of the thrust in Gross Value Added (GVA) growth. Nonetheless, the manufacturing sector continued to remain well underneath their pre-covid levels and even before the pandemic, the sector was slumping. The Purchasing manager’s index (PMI) had dropped in January 2022 after hitting an all-time high in November. All in all, the Indian defence budget has increased at an annual average rate of 9 per cent in the last decade till 2021. This increase was hardly keeping up with the inflation and the demands of the three services (PRS 2021). However, Indian defence exports have proved to be enduring to the Covid-19 pandemic with just a slight decline in FY 2020 – 21 where total exports stood at Rs 8434.83 Cr against Rs 9115.55 in FY 2019-20. The Private Sector’s contribution, based on export authorisations were valued at Rs 7271.25 Cr in FY 2020–21 and Rs 8007.81 Cr in FY 2019–20, representing 86% and 88% of total exports in those two years respectively, with DPSUs safeguarding the residual (Mint 2021).
Source: CMIE
Source: CEIC
Source: CEIC
Source: CEIC
The need for a strong defence manufacturing sector: -
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Though India is the 3rd largest highest spender on Defence Budget after USA and China, the brunt of being the second-largest importer of arms and ammunition and the dependence on external content by Defence Public Sector Undertakings (DPSUs) can make the national security vulnerable as suppliers might fail to provide weapons during emergency situations. The import range for Hindustan Aeronautics Limited is between 40% to 60%.
The procurement of defence hardware is a long process, involving a great measure of shareholders. Administration issues between these stakeholders sometimes result in delays. Hence, empowering the domestic manufacturing sector is the need of the hour and the budget fixates on this issue very well.
The Ministry of Defence had already incorporated the range of tax reforms and the inclination to give more opportunities for the private sector to participate in the defence sector comes across as a push to the ‘Make in India’ campaign. “The Indian government has set the defence production target at US$ 25.00 billion by 2025 (including US$ 5 billion from exports by 2025). Defence exports in the country witnessed strong growth in the last two years. India targets to export military hardware worth US$ 5 billion (Rs. 35,000 crore) in the next 5 years. As of 2019, India ranked 19th in the list of top defence exporters in the world by exporting defence products to 42 countries. (IBEF 2021)”
With respect to this, the Indian government had taken a slew of steps: -
EMBARGO ON IMPORT
The government had decided to impose a standstill on the import of 101 weapons and military platforms like transport aircraft, light combat helicopters, conventional submarines, cruise missiles, and sonar systems by 2024. The Ministry antedates that the ban on imports would drive the domestic industry and MSMEs. It anticipates that the restriction will result in domestic indentures of nearly four lakh crore rupees within the next five to seven years. Economic Explosive Limited (EEL), the Nagpur-based firm has already received an order to make grenades over a period of two years. India’s stealth fighter, Advanced Medium Combat Aircraft (AMCA), will be produced by a private sector-led joint venture (ET 2021).
CORPORATISATION OF OFB
The government reorganized the Ordnance Factory Boards (OFB) into seven new defence public sector units. This long-awaited measure is expected to bring efficiency in producing arms, ammunition, armoured vehicles, and clothing and enhanced defence exports along with it. (Indian Express 2021).
DPEPP 2020
Ministry of Defence articulated a draft Defence Production and Export Promotion Policy 2020 (DPEPP) which intends to place India amongst the leading countries of the world in defence and aerospace sectors. The goals are
· Improve obtaining ecosystem
· Indigenize and support MSME and start-ups
· Augment resource allocation
· Endorse investments, FDI and ease of doing business (Invest India 2021)
DAP 2020
Defence Acquisition Procedure 2020 (DAP) aims to alter India into a global manufacturing hub with an emphasis on indigenously designed, developed, and manufactured weapon systems, and preference would be given to Indian defence equipment manufacturing companies to produce complete defence products over components or sub-parts (Invest India 2021).
TACTICAL PARTNERSHIP MODEL
In the defence sector, the ‘Strategic Partnership (SP)’ model would be set up for the formation of long-term strategic partnerships with defence manufacturing companies in India through a clear and competitive process, wherein the tie up with global Original Equipment Manufacturers (OEMs) would help in seeking technology transmissions to establish domestic manufacturing infrastructure and supply chains (Invest India 2021).
INNOVATIONS FOR DEFENCE EXCELLENCE (iDEX)
iDEX purposes to cultivate invention and technology development in Defence and Aerospace by appealing to Industries including MSMEs, startups, Individual Innovators, R&D institutes, and Academia (Invest India 2021).
TECHNOLOGY DEVELOPMENT FUND (TDF)
TDF has been created under DRDO to promote self-reliance in Defence Technology through the participation of Public/Private industries, especially MSMEs and start-ups. DRDO will also deliver backing to the domestic industries including Medium, Small, and Micro Enterprises (MSMEs) to design, develop and test the systems (Invest India 2021).
74% FDI IN DEFENCE PRODUCTION
The limit of Foreign Direct Investment in the defence sector has been increased from 49% to 74%. This would upsurge domestic defence production, foster the development of new technology in India and optimise expansion of private sector in defence production. There has been an increase of approximately 26 percent in ‘Foreign Direct Investment’ (FDI) in India’s defence sector (ET 2020).
Economic development and military modernisation must go hand-in-hand and involving the private sector in R and D is a step that was long-awaited.
The budgetary hike facades the challenge of the availability of resources. Another factor of concern is that FDI in the defence sector has remained stagnant for the past two years despite the government allowance of 74 per cent. This suggests that the government has failed to gather confidence of major global arms manufacturers. The finance minister must consider the feasibility of announcing independent service capital budgets especially when the armed forces are undergoing a major transformation with the creation of the Department of Military Affairs (DMA) and theatre commands (The Statesman 2022). The recent US $375 million deal to sell the Brahmos cruise missiles system to the Philippines brought a big lift to the Indian Defence manufacturing sector.
Other countries like Armenia, Vietnam, Indonesia, Bangladesh and Myanmar etc interested in India as Defence Supplier because of low cost as compare to other countries.
With prices of steel, copper, chemicals, semiconductors and other commodities rising, many manufacturers are already dealing with inflated prices for raw materials. The government can also intervene in here to provide a form of minimum support price for raw materials for these industries and ensure that inflationary pressure do not re-encourage imports.
References
ET. 2021. Defence ministry puts restrictions on import of 351 items under staggered timeline. https://economictimes.indiatimes.com/news/defence/india-stops-import-of-2851-components-used-in-defence-platforms/articleshow/88564208.cms?from=mdr.
—. 2020. Govt permits up to 74% FDI under automatic route in defence sector. https://economictimes.indiatimes.com/news/defence/govt-permits-up-to-74-pc-fdi-under-automatic-route-in-defence-sector/articleshow/78171788.cms.
IBEF. 2021. Defence Manufacturing Industry in India. https://www.ibef.org/industry/defence-manufacturing.aspx.
Indian Express. 2021. Govt approves restructuring of OFB into 7 new corporate entities. https://indianexpress.com/article/india/govt-approves-restructuring-of-ofb-into-7-new-corporate-entities-7362296/.
Invest India. 2021. Defence Manufacturing. https://www.investindia.gov.in/sector/defence-manufacturing.
Mint. 2021. India exported defence equipment worth over ₹8,434 crore in 2020-21: Govt. Dec 14. https://www.livemint.com/news/india/india-exported-defence-equipment-worth-over-rs-8-434-crore-in-2020-21-govt-11639396078180.html.
Outlook. 2021. GDP Data: The Story Of India’s Manufacturing Sector. 09 01. https://www.outlookindia.com/website/story/business-news-gdp-data-the-story-of-indias-manufacturing-sector/393296.
PRS. 2021. Demand for Grants 2020-21 Analysis : Defence. https://prsindia.org/budgets/parliament/demand-for-grants-2020-21-analysis-defence.
Rediff. 2008. Inflation hits India's defence plan. https://www.rediff.com/money/2008/jul/03infla1.htm.
The Statesman. 2022. Decoding the defence budget. https://www.thestatesman.com/opinion/decoding-defence-budget-1503044438.html.
The Wire. 2022. With Focus on ‘Self-Reliance’ in Defence, Budget Provides 68% Allocation To Domestic Industry. 02 01. https://thewire.in/government/with-focus-on-self-reliance-in-defence-budget-provides-68-allocation-to-domestic-industry#:~:text=The%20Union%20Budget%202022%2D23,21%20was%20Rs%20340%2C094%20crore.
World Bank. 2020. The World Bank. https://data.worldbank.org/indicator/NV.IND.MANF.ZS.