India’s Defence Budget for 2014-15 has an allocation of Rs.2,29,000 crores ($38 billion) which is an increase of 12% over the previous year’s allocation. The capital outlay which is for modernization and purchase of new weapon systems and equipment is Rs.94,588 crores ($15.7 billion). The remaining allocation of Rs.1,34,412 crores is the revenue outlay. The sub allocation of capital outlay to Army is Rs.20,655 crores, Navy – Rs.22,312 crores, Air force – Rs.31,818 crores, DRDO – Rs.9298 crores and modernization of Ordnance Factories (OFs) – Rs.1,207 crores. One of the highlights of the defence budget is the increase in FDI to 49% from the existing 26%.
The increase in FDI from 26% to 49% needs to be reviewed as it will not bring in the required investment.
What we need to critically analyse is whether the approach of the defence budget is in line with the requirement of achieving the goals of self -reliance in defence equipment and modernization of the armed forces. The challenges in these two spheres confronting India are unique and enormous. The enormity of the problem can be gauged from the fact that the Indian Armed forces are the third largest with the Indian Army being the second largest in the world. Furthermore, the Indian Armed forces have a perpetual operational commitment of manning unresolved borders with two of her adversaries and intensive employment in counter insurgency / counter terrorism operations in the State of Jammu& Kashmir and the North east. Despite these operational commitments, the nation due to the nascent and dismal state of its defence industry is dependent on imports for 70% of its defence equipment.
Since the past three years India has been the world’s largest arms importer accounting for a share of 12%. India has become the world’s largest arms market because of its large requirements and purchasing power in view of its $5 trillion economy on PPP terms. Therefore, it will never be in the interest of arms exporting countries whose defence industries are major revenue earners for the Indian defence industry to be developed into a robust and modernized industry capable of being self reliant.
The arms exporting countries will always be reluctant to transfer cutting edge and state of the art technology. Even in the generation old technology the original equipment manufacturers (OEM) will hold back a crucial component of the technology with them so that dependency in some form remains. Since we are import dependent for our defence equipment, the modernization of our armed forces has greatly suffered as our procurement procedures are complex, cumbersome and have inherent delays. Most of the procurement cases remain stuck for years and end up getting derailed on flimsy grounds/apprehensions.
The development of infrastructure in border areas will require massive funding and the allocation needs to be increased from Rs.1000 crores to at least Rs.10,000 crores.
The key focus areas of the capital allocation of the defence budget needs to be Defence R&D, Defence Industrial Manufacturing base, infrastructure development in border areas and procurement of new weapon systems/defence equipment.
The Defence R&D allocation is Rs.15,283 crores which is 7% of the defence budget. This allocation is grossly inadequate for acquiring, as well as, developing state of the art and cutting edge technology. As India’s capability in Defence R&D is of very low grade, India will perforce have to depend on acquiring the needed technology from abroad/foreign OEMs for which the nation should be ready to pay any price, even astronomical sums if needed. This was the approach successfully adopted by China and because of this it went from being the world’s largest importer of arms three years ago to today being the world’s sixth largest arms exporter.
Investment in Defence R&D is needed on a very massive scale as this is the most important of the requisites for achieving Self reliance in defence equipment. The allocation for this most important requisite must be increased to at least 20% of the defence budget i.e. Rs.45,000 – 50,000 crores.
The development of the defence industrial manufacturing base is a crucial imperative for achieving self-reliance. This will involve modernization of defence PSUs and the OFs along with large scale participation by the private sector. The OFs need to be restructured in the sense that for better core competency these be responsible for manufacture of only weapon systems, ammunition and explosives. The OFs should be divested of the manufacture of vehicles, general stores and clothing. The allocation for modernization of OFs is meager and must be increased to at least Rs.25,000 crores. The private sector needs to be brought in a big way and it’s entry facilitated. Statutory regulations must be amended to pave the way for private sector in manufacture of ammunition and explosives.
The increase in FDI from 26% to 49% needs to be reviewed as it will not bring in the required investment. The existing FDI of 26% has been able to just get an investment of $4.94 million during the last 14 years . Therefore FDI must be increased to 100% as it will ensure investment, JVs, transfer of state of the art technology and shifting of manufacturing base to India. A similar proposal has also been mooted by the Department of industrial Policy and promotion (DIPP). To sustain the indigenous defence industry and promote our national interests India must export arms which is only possible once the country is able to have a well developed defence industry.
The need of the hour is to make the procurement process responsive and speedier. Also accountability must be fixed at bureaucratic and political levels for delays and lack of decision making.
The development of infrastructure in border areas is a strategic and a national security imperative as it will entail building up our war fighting capability against our adversaries. This will require massive funding and the allocation needs to be increased from Rs.1000 crores to at least Rs.10,000 crores. Furthermore, to expedite infrastructure development the environment clearance requirement needs to be entirely done away with in national interest.
As regards modernization of armed forces, the state is pathetic as we have not been able to equip the armed forces with the latest equipment primarily on account of our procurement process which has number of systematic failings. As India’s defence industry will take at least 10-15 yrs to reach the desired level of development, the dependency on imports will perforce continue. It is worth noticing that over the years the procurement of the planned defence equipment has not taken place despite the availability of the budget. However, surprisingly it is seen that at the end of the financial year the entire capital budget gets utilized though the commensurate equipment does not get procured. This phenomenon occurs as the budget goes in making advance payments on signing of contracts( which as it is have long delivery periods and further get mired in time over-runs) and re-appropriation for procuring equipment which is not on priority list but is available .
The problem is on account of the complex and cumbersome procurement procedure resulting in long delays and most of the cases getting stuck. The need of the hour is to make the procurement process responsive and speedier. Also accountability must be fixed at bureaucratic and political levels for delays and lack of decision making.
The analysis as above clearly brings out that along with increase in allocation there is a need to focus on defence R&D for acquiring and developing cutting edge technology; re-structuring and modernization of defence PSUs and OFs; increase in FDI up to 100% to bring in investment and technology; impetus to infrastructure development by exempting it from environment clearances and reviewing the procurement procedure to make it responsive and speedy. Such an approach is needed in the defence budgets till we are able to develop the indigenous Defence Industrial base.