May 2, 2016    4 minute read

Indian Defence: On The Cusp

   May 2, 2016    4 minute read

Indian Defence: On The Cusp

As things stand, India is currently the world’s largest conventional arms importer. The country tends to spend a fixed 2.5% of its GDP (in rupees) on defence per year. With analysts expecting India’s GDP to reach about $4 trillion by the end of the decade, that works out to about $100 billion per financial year. Considering Indian soldiers are paid in rupees, there is a significant chunk remaining to spend on purchasing weapons in dollar terms. Furthermore, this projected figure acquires extra significance owing to the fact that defence budgets in the developing world are shrinking in the aftermath of cutbacks for fiscal management due to the 2008-2009 financial crisis. India’s conventional forces are in need of a drastic overhaul after years of neglect and slow decision making which has resulted in dangerously low levels of all the armed forces from submarines to squadrons of fighter jets. This is not an ideal position to be in, considering the country sits in a volatile and unfriendly neighbourhood. India needs rapid change if it is to emerge as a world power.

Historically, India has imported most of its weapons from Russia (before that, the Soviet Union). This has resulted in a similar culture of funding governmental agencies such as DRDO and HAL, who, for numerous reasons (under-funding to lack of expertise) have failed to produce viable results over the last two decades to spearhead an indigenous programme. This is in contrast to western nations who have privately owned companies bidding for and meeting set defence criteria.  There are also economic considerations. India has never run a positive current account. Importing expensive weaponry further impacts this imbalance negatively.

To remedy the situation, the government has recently announced 49% FDI in the defence sector, upping it from 26%. It is part of the “Make In India” campaign. India does have a robust local automotive sector with companies such as Mahindra and Mahindra and Tata Motors (owners of Jaguar Land Rover) providing armoured personnel carriers to the army. The aim is/was for foreign companies to set up joint ventures with local Indian companies mentioned above (amongst others) to bid for contracts to meet the armed forces needs promptly by manufacturing locally.

The problem with this approach is that while the Indian army and governmental agencies who produce arms under licence from foreign firms have an excellent record of not reverse engineering technology (unlike some neighbours), the same cannot be said about the private sector local companies. It is this fear of transferring knowledge and technology earned via billions spent in R&D which is keeping western firms from investing in the defence sector in India. While there have been some successes on this front with BAE Systems recently teaming up with Mahindra to produce howitzers for the Indian Army, big ticket items such as warships, tanks and jets remain elusive. Needless to say FDI in the defence sector has been weak as a result.

The government has recently put 100% of FDI in defence on hold. This appears to be a step back for the Indian defence sector. Just like India, South Korea is another country aiming to become a player on the global arms trade market. In contrast, South Korea has a world class shipbuilding, automotive and electronic industry. All the successful ingredients needed to make a foray into defence. India is still decades away from reaching this stage of development within these key auxiliary sectors. Allowing 100% of FDI in defence (and purchasing only from locally based firms)  will ensure that all the major global players from BAE to Airbus will set up subsidiaries to manufacture and cater to the local market. This creates jobs and reduces India’s import bill (weapons being cheaper to make in India). Eventually, due to low costs global firms might manufacture arms exclusively in India and export them all over the world. This would certainly boost India’s macroeconomic situation and create a viable industry from nothing.

The Modi government has been excellent in promoting FDI. With Indian exports falling and the government’s pro-reform agenda, it is only a matter of time before 100% of FDI in defence becomes a reality. With this in mind, it is important for the global majors to identify local companies who have contacts in government and know how the system works right now before what is potentially a vast untapped market truly opens up.

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