There was considerable disappointment in the last year’s budget speech of Finance Minister, as there was no mention of the defence outlay. Arun Jaitley has made amends of it this year, by promising to set up two defence industry production corridors and an industry friendly defence production policy (2018), to promote domestic production by DPSUs, private sector players and MSMEs.
There is, however, all-round disappointment that the capital acquisition budget has been hiked by only 6.8% over last year’s allocation. When the NDA government took over, it was perceived as a services friendly government. There was a swirling expectation that they will implement OROP and ramp up the pace of modernization of weapon systems and platforms.
True to the expectation, it implemented the long pending OROP demand, which has increased the share of P&A and pension from 49% (2015-16) to 55% in (2017-18). Concomitantly, the manpower cost as share of defence expenditure has gone up from around 44% (2011-12) to around 56%; a humungous increase. In contrast, the manpower cost of developed countries like USA constitute only 25%-30% of the defence expenditure. This is largely due to the fact that teeth to tail ratio (fighting arm/support services) in India is around 60:40 as compared to around 80:20 in USA.
A Holistic Picture
The total allocation to ministry under various demands for grants during 2018-19 has been placed at `4.04 lakh crore, which constitute 16.4% of central government expenditure & 2.2% of India’s GDP. This includes `1.08 lakh crore in pension payment to nearly 2.5 million pensioners. Of the total defence expenditure, 34% is accounted for by capital expenditure, which includes land acquisition, construction of new buildings and roads and acquisition of new weapons and platforms.
Distressingly the capital component has been showing a declining trend, from about 40% in 2011-12 to around 33% (2017-18). This is largely due to delay in acquisition, due to long winded capital acquisition procedure and interminable delays in selection vendors.
Share of the Services
Army constitutes the largest standing force of the defence services, with a strength of 1.1 million and accounts for nearly 55% of the expenditure, followed by Air Force (23%), which is most capital intensive in nature and Navy (15%). DRDO has been historically accounting for 6% of the defence services; though the Defence Standing Committee (2008) had recommended that at least 10% should be earmarked to DRDO to improve our self reliance quotient in design and development from 30% significantly.
Modernization Budget
Modernization of weapon systems and platform provide the cutting edge to a country’s capability over its adversary. The allocation of this year for the various services shows that the increase is nominal.
It must, however, be clarified that contrary to popular perception, defence services have never been hamstrung because of lack of funds. In fact, there is an unwritten commitment by every Finance Minister that any expenditure required for bolstering our defence capability vis-à-vis our adversaries would be provided for. The challenge essentially is how to bolster our indigenous manufacturing capability and rev up our military industry complex.
The Global Picture
As per Dan Smith, an expert in International Security and Armament (SIPRI 2017) all global indicators moved in the negative direction during 2017 as more military spending, increase in arms trading and more violent conflicts are in evidence. The total military expenditure during 2017 was of the order of $1686 billion, constituting 2.2% of the global GDP, India’s defence expenditure is in line with the global trends. While the increase over the previous years will 0.4%. Asia shows a maximum increase in military expenditure of 4.6% over the previous year and Europe (2.8%) and the America (0.8%).
But what is distressing is that India continues to the biggest arms importer as the following table would show. The global picture in respect of both exports and import of arms is as under.
Quite clearly USA, Russia and Western Europe dominate global arms exports and India & the Middle East are the major arm buyers.
Make in India in Defence
Given such humungous dependence on arms imports and a Self Reliance Index of only 30% (Kalam Committee, 1993), promoting self reliance in design, development and manufacturing should no longer be rhetoric. Defence and aerospace have been identified as one of the ten champion sectors under the flagship national initiative Make-in-India because of their “potential to become global champion, drive double digit growth in manufacturing and generate significant employment opportunities”. The Finance Minister has made two key announcements; creating two defence industrial production corridors and an industry friendly Defence Production Policy 2018. He has also extended the benefit of 25% corporate tax to MSMEs with a turnover of up to `250/- crore.
Generating employment has been the major challenge for India, as its growth story since 2006 of around 8% has not matched with employment generation. Many critics dub it as “jobless growth”; as the manufacturing sector has remained stagnant, contributing only 16% towards GDP over a long period of time. A committee under Mr. Krishnamurthy had accordingly advocated creation of manufacturing zones as part of NIMZ Policy (2011), which will not only generate around 10 million jobs but also increase the share in manufacturing to 25% by 2020.
The committee had made this suggestion based on global experience of manufacturing hubs created by countries like Germany, Japan, South Korea and China, with surplus Current Account Balance. The committee had strongly advocated that defence manufacturing should part of the larger mosaic of national manufacturing policy, instead of defence being on a standalone basis. A major defence policy announced in 2005 for leveraging India’s big ticket acquisitions to get critical technology and outsourcing orders (Offset Policy) was in conformance with the Kelkar Committee recommendation to provide level playing field to private sector players. Therefore, the announcement of the Finance Minister to have defene industry production corridors is most welcome. But they must be integrated with similar corridors in the pipeline like DIMC, freight corridors and the Sagarmala project, connecting the coastal state.
As regards an industry friendly production policy (2018), it may be mentioned that such a policy was announced in 2011 to promote (a) self reliance in design and development and (b) enhance potential of SMEs. The policy paper also provided separate funding for public private sector in duty SMEs as well as academia and scientists to support R&D initiatives in strategic programmes. Sadly such provision has remained a wistful promises, as it is yet to be operationalised.
The “Make” category under Defence Procurement Policy (2016), also promises to provide 80% funding for among private sector player who can develop a successful policy catering to defence acquisition requirement. This provision has also been buried under the myriad of promises to promote indigenous R&D and manufacturing.
In this backdrop, mention may be made how an ambitious “Make Project” for a Technical Communication System has been long delayed due to the internecine fight between defence PSU and the private players. The futuristic infantry combat vehicle, another flagship “Make” initiative is also stick due to the complex procedure that the “Make” category entails, compared to an import option.
Concluding Thoughts
The defence manufacturing segment has come a long way from its blinkered patronization of DPSUs and OPs to an industry & OEM friendly policy in 2001, which permitted full private sector participation and 25% FDI. The FDI policy has been liberalized to 49%. But the OEMs look for major stake holding. Accordingly long term partnership with design houses, OEMs has been few and far between, FDI inflow has been tepid. The offset policy has also been a cropper.
The Dhirendra Singh Committee (2015) has come up with an ambitious policy of Strategic Partnership Model by identifying six segments, including aircraft, worship, AFNs etc. This was expected to bust the existing monopoly position which DPSUs and OFs still enjoy. Despite the myriad policy pronouncements to make private sector compete on a level playing basis, MoD suffers from a structural constraint as the DPSUs and OFs continue with their monopoly status. Unlike this telecom sector, where the public sector monopoly was busted with far reaching implication in improving the telecom services, the defence manufacturing is caught up in this “structural imbroglio”. The sector needs significant privatization and a coordinated effort between design, development and manufacturing. This has been done by France under the aegis of DGA. The Sisodia Committee had also recommended similar structures in India.
Budget 2018-19 is right in its intent for the defence sector. But is needs a more fundamental upheaval and structural transformation to become a global hub, as the Make in India initiative hopes.