Indian Defence Review

Attack helicopter AH-64D Longbow

Adam Smith, the renowned proponent of economic thought has said, “The first duty of a sovereign, that of protecting the society from violence and invasion of other independent societies, can be performed only by means of military forces.” Implicit in this plain statement is the principle that a nation must maintain a certain level of military strength to meet with its obligations. Also, the protective role is best performed through a capability to not only overwhelm the enemy in the event of a conflict, but more importantly, to be able to project an effective deterrent posture.

Military strength is an important ingredient of national power and an expression or manifestation of its strength. Acquisition of military power is, therefore, synonymous with statehood and sovereignty.

Thus the acquisition of capability to deter and vanquish the enemy is the sacred responsibility of a sovereign state. Military strength is an important ingredient of national power and an expression or manifestation of its strength. Acquisition of military power is, therefore, synonymous with statehood and sovereignty.

While it is the bounden duty of the state to provide the required level of national security, the shape and size of the Armed Forces is influenced by mutually conflicting considerations related to the need for credible defence and affordability. Factors that finally decide the level of military capability of a nation are:

While the first four factors define requirements of force levels, the economic status of a nation is usually the most critical limiting factor and could sometimes well be the overriding consideration. History is replete with examples wherein unbridled expenditure on the military and overstretched campaigns has had far reaching economic and political consequences for nations. Collapse of the Soviet Union in the recent past, or earlier on, the shrinking of the British Empire after the Second World War, adverse impact of the napoleonic wars on france or for that matter, decline of the Mughal Empire are all vivid examples of gross imbalance in the appropriation of resources.

Evidence of history notwithstanding, it would be pertinent to examine whether expenditure on the Armed Forces always produces deleterious effects on the economy and consequent adverse influence on the process of national growth. One indisputable fact is that sustainable military capability must be a judicious balance between the needs of security and the resources that can be made available by the nation. Conventional wisdom holds that expenditure on the Armed Forces is an essential and inescapable drain on the nation’s economy and that it has no contribution to positive national growth. It is also commonly postulated that defence expenditure in fact retards economic growth.

Military Aviation

How far is this view justified in respect of military aviation, which consumes sizeable portions of the resources allocated to defence?  The three major constituents of military aviation in India are the IAF along with the aviation wings of the Army and the Navy, the Indian Aerospace Industry and the Research and Development establishments engaged in aerospace research, including the design and development of aviation related hardware and software. Although organisationally, the three agencies are independent of each other, functionally they are focussed on a common objective and are inexorably linked. The spearhead of the Armed Forces, which provides the most potent deterrence capability, is the Indian Air Force, which also constitutes the bulk of military aviation in the country. Without undermining the contribution of the aviation wings of the sister services, in further discussion, the expression IAF can be assumed to include the Army Aviation and the Naval Air Arm.

While the budgetary allocation to the Armed Forces in the last decade and a half has varied between 2.27 per cent to 3.37 per cent of GDP, of the total allocation to defence, only around 0.6 per cent to 0.8 per cent of GDP has been the share of the IAF. Does the expenditure on the IAF constitute a diversion of resources to non-developmental, unproductive activities resulting in actual withdrawal of resources from economic circulation? In a developing country like India, where investments are low and the rate of unemployment is high, any expenditure stimulates economic growth and so should be the case with expenditure on military aviation. It is also true that expenditure on military aviation could generate inflationary pressures.

However, once again, in a developing economy, inflationary pressure up to a point is beneficial as it provides a growth stimulant and so long as the focus is more on productive investment and less on consumption, one can be reasonably hopeful of a positive impact on the economy.  Also, economic growth of a nation is sensitive to performance in a host of other sectors, primarily agriculture and industry. The influence of these two sectors on the economy is so dominant that the beneficial effect of expenditure on military aviation may not be able to alter the overall picture on account of the relatively low share of GDP.

Finally, many of the intangible accruals on account of expenditure on military aviation, are not directly quantifiable and hence the impact on the nation’s well-being is not easily discernible. However, as the intensity of debate between guns and butter rises in direct proportion to defence expenditure, it is necessary to take stock and make an attempt to assess the true impact of allocation of resources to military aviation on national growth.

Concept of National Growth

National growth is generally understood to mean economic growth. However, the overall development of a nation is influenced by a host of non-economic factors as well. While the determinants of economic growth are quantifiable and can be subjected to detailed statistical compilation and an objective analysis, the non-economic factors are relatively intangible and hence their contribution to national growth is somewhat difficult to correlate or fathom. On the subject of expenditure on military aviation vs. economic growth, opinions are generally subverted on account of ignorance or are based merely on prejudiced intuition.

With the outbreak of the Korean War, Japan received large orders for the supply of goods, a large portion of which were weapons. This came as a shot in the arm for the Japanese industry and very soon the economy, rising from the rubble, began to grow.

In the absence of data, relationship between expenditure on military aviation and economic growth could be extrapolated from the results of research on defence expenditure vs. economic growth. On this subject, Emile Benoit refutes the belief that defence expenditure has any adverse effect on economic growth in developing countries. This conclusion was based on an analysis of data from 44 developing countries, which unfortunately did not include India. However, an MIT study of defence expenditure vs. economic growth, involving 46 countries including India, found a small but positive impact on the economy.

Economic Growth vs Expenditure on Military Aviation

To some, the principles of economics may sometimes appear paradoxical. For example, in order to have individual prosperity, one must save; but to have national prosperity, we must spend! The essence of economic growth is the production of goods and services by the inhabitants of a nation that are required for domestic consumption or to meet with external demand. Higher level of domestic consumption generates higher level of demand that in turn leads to higher level of production necessitating higher level of investment. The consequent rise in income levels results in the rise of living standards. Production to meet with external demand i.e. for export, enhances overall prosperity levels faster than production for internal consumption. After the Second World War, Japan lay in ruins, her industry crippled and her economy totally shattered.

With the outbreak of the Korean War, Japan received large orders for the supply of goods, a large portion of which were weapons. This came as a shot in the arm for the Japanese industry and very soon the economy, rising from the rubble, began to grow. A more recent example is the changing situation in the USA, where the aeronautics industry has traditionally provided the country not only with global leadership in military power but also a favourable balance of trade for the economy.

In the regime of production-oriented activity contributing to economic growth, a direct and obvious spin off from military aviation is the growth of the Indian Aerospace Industry, which has traditionally met with internal demand.

However, with the reduction in both internal and external demand following the end of the Cold War, there has been a significant cut in defence expenditure resulting in a drop in production by the aeronautics industry with a consequent adverse impact on the economy. Thus, for economic growth and prosperity, it matters little as to what is produced, be it services, food, consumer goods, cosmetics, vehicles, or weapons of war, as long as it serves to satisfy demand, internal or external, preferably the latter. And for sustained economic growth, there is need for a continuous rise in levels of demand and supply, leading to growth of employment opportunity, infrastructure, human capital and money supply. Continuous increase of GDP and national income are the usually accepted indicators of economic growth.

To summarise, the basic determinants of economic growth are:

From the preceding it would be evident that in economic terms, expenditure on military aviation generates the same positive forces as any other industry, provided the balance of trade is favourable. Expenditure in the military aviation sector creates well-paid jobs and enhances the demand for a wide variety of goods and services apart from promoting technological progress. A large proportion of the funds spent on military aviation find their way directly or indirectly into the mainstream of the economy.

What is the quantum of resources consumed by the IAF annually for its sustenance and operations? It has been stated earlier on that the budgetary allocation for the IAF has been around 0.8 per cent of GDP. How does it compare with the expenditure in some of the non-productive sectors of the economy? Comparison of budgetary figures for the financial years 1998-99 and 1999-2000 between the IAF budget and the budgetary provisions on subsidies, written off loans to states, and postal deficit are quite revealing. During the financial year 1998-99, as against the IAF budget of Rs 9,046 crore, Rs 24,684 crore was spent on subsidies, Rs 1,225 crore was allocated to cover postal deficit and Rs 979 crore was lost as loans written off, totalling to Rs 26,888 crore. In the following year, as against Rs 10,398 crore allocated to the IAF, the three non-productive liabilities of the Government totalled to Rs 25,672 crore.

Indian Aerospace Industry

In the regime of production-oriented activity contributing to economic growth, a direct and obvious spin off from military aviation is the growth of the Indian Aerospace Industry, which has traditionally met with internal demand. From a modest beginning as a private company set up in 1940 to service Allied military aircraft, Hindustan Aeronautics Limited has evolved into a major industrial organisation with 16 Specialised  Divisions and nine R&D Centres. Today HAL is rated as one of the top PSUs within the country and is rapidly climbing the rating ladder amongst the aerospace industries of the world. Contribution of HAL to economic growth may be listed as being in the following areas:

Production

The range and sweep of activities of HAL in hand and to be undertaken in the future would involve a turnover amounting to staggering figures running into several thousands of crores of rupees, value addition of considerable magnitude and growth of knowledge and productive employment to thousands of personnel at different levels of skill. From a figure of Rs 581 crore in 1985-86, the value of production by HAL steadily rose to Rs 2,565 crore in 2000-2001 and to Rs 4,425 crore in the financial year 2004-05. From its inception, HAL has produced 3,500 aircraft of 11 indigenous designs. It has overhauled 8,000 aircraft and 27,000 aero-engines.