Armed forces

India’s New ‘Raksha Mantri’ Needs to Bring a Dose of Defence Economics to the Table

The ‘Make in India’ campaign, launched under Nirmala Sitharaman’s watch, has so far failed to ignite any significant domestic production. While it is a complex process, her potential for success or failure will be in seeing this through.

India’s defence sector has the potential to generate significant returns on investments, and who better to drive this initiative than an erstwhile commerce minister turned defence minister Nirmala Sitharaman. Credit: PTI

For many months now there have been loud murmurs about how defence requires a full time minister. In choosing Nirmala Sitharaman as the new raksha mantri (defence minister), Prime Minister Narendra Modi clearly intends to make defence economics a priority.

The defence sector in India has three broad aspects to it – strategic, economic and financial. Without adequate financial resources, the economic (defence production and self-reliance) and strategic (combat readiness) objectives can never be met. Arun Jaitley has done his bit during his tenure as both finance and defence minister to rebalance the finances of defence expenditure. The recently accepted recommendations of the Shekatkar Committee, though small and only incremental, will lead to great savings in the revenue expenditure that may now be reallocated towards modernisation of the armed forces.

Defence manufacturing has, for many years, been mollycoddled and the result is what we have today – an almost non-existent domestic defence manufacturing base that is far from coming of age. Defence requirements are met predominantly through imports. The Doklam standoff has exposed many home truths including the possibility of a two-front war. Sitharaman, in her tenure, must focus on making India’s armed forces combat-ready. The new defence minister has less than two years before the next general election and therefore, she must prioritise.

The first big task before Sitharaman is to ensure that the 65 reforms of the Shekatkar Committee that have been accepted by the Ministry of Defence (MoD) are implemented by the promised deadline of December 31, 2019.

Second, the defence minister must focus on bringing the deals with Russia, Israel and Japan to fruition. India signed a defence deal with Russia in 2016. Since then, as per the agreement, only the purchase and assembly of Kamov helicopters has seen some traction. The other aspects of the deal appear to be in limbo. India and Israel stepped up their bilateral relationship in 2016 and 2017. India readied over US $3 billion defence deals to kick-start defence cooperation between India and Israel. The deals included everything from Spike ATGMs to Jaguar aircraft to Litening-4 laser designation pods. A defence deal between India and Japan for 12 search-and-rescue (SAR) aircrafts (valued at USD 1.3 billion) is stalled over a pricing issue. India must work towards resolving this soon. Russia, Israel and Japan are important strategic partners and long standing allies of India. The timely execution of these deals will help India to forge a stronger relationship with these countries.

Third, the foreign direct investment (FDI) limits in defence must be reviewed. There were rumours of the government considering increasing FDI limits from its current 49% under automatic route to 100% under automatic route. Many have raised concerns about national security if FDI is permitted under automatic route, but these apprehensions seem inconsequential since India’s defence needs are predominantly met through imports. FDI limits need to be increased not just to encourage foreign inflows, but more importantly to lower costs of capital acquisition, to create employment and to encourage transfer of technology. One of the biggest hurdles that the recently released strategic partnership document will face is that of transfer of technology, ownership rights and intellectual property rights, all of which can be addressed with a proper FDI policy for defence.

The defence minister must focus on bringing the deals with Russia, Israel and Japan to fruition. Credit: PTI

Fourth, a bold move would be to begin the process of review of ordnance factories (OFs). The OFs supply artillery and ammunition to the army. Until recently, the OFs were the only source of supply of munition to the army. It is therefore critical that the OFs are efficient manufacturers, but clearly this has not been the case. Comptroller and auditor general (CAG) reports have highlighted India’s low levels of war reserves. Rarely have the OFs been able to meet their production targets. Never in the past has the MoD taken the OFs to task, but it is time to do so. OFs have huge fixed assets and these must be capitalised on. MoD must push Indian private sector and OFs to work together. While the OFs are reviewed, the MoD must also review the functioning and profitability of the behemoth defence public sector undertakings (DPSUs). As part of the government’s disinvestment strategy, some of the profitable DPSUs will be listed, but the MoD must also have a strategy for the loss making entities.

Fifth, defence micro-small and medium enterprises (MSMEs) must be given their due. As a former commerce minister, no one other than Sitharaman would be in a better position to appreciate the economic contribution of the MSME sector, the pain points in their ease of doing business or their potential contribution to defence manufacturing, especially those units that function as Tier I and Tier II vendors. Defence MSMEs have been conspicuously missing from policy priorities. The Defence Procurement Policy (DPP), 2016 and latest defence offsets policy made a beginning by recognising the role MSMEs play in India’s defence production. Despite all the improvements to the offsets policy and even the approval of the strategic partnership model, very little has been done to ease the process of participation in defence production for MSMEs. It was under Sitharaman’s aegis that the ‘Make in India’ campaign was launched and while it had its successes in some sectors, it failed to ignite any significant domestic production in defence, mainly because of licencing issues. Manufacturing and export license procedures must be made easy. This is something that India’s defence industrial base, especially MSME, is in dire need of at the moment. If Sitharaman is able to focus on building MSME capacity in defence, it would be the single biggest and most significant contribution that she would have made to the defence sector. Sitharaman must champion the cause of defence MSMEs.

Defence reforms require far more than two years. For far too long, India has viewed defence as a strategic sector but not as an industry, much less a revenue generating industry. We have forgotten that economic and financial decision making are necessary inputs for successful strategic implementation. For many years, we have focussed on only the output and never on the inputs. This is why India is forced to discuss self-reliance, self-sufficiency and the indigenisation of defence today. Strategic warfare can only be won when the Indian armed force is fully equipped, modernised and combat-ready. It is time for India to address the economics of defence. India’s defence sector has the potential to generate significant returns on investments, and who better to drive this initiative than an erstwhile commerce minister turned defence minister.

Nirupama Soundararajan is senior fellow, Pahle India Foundation and Dnyanada Palkar is senior research associate, Pahle India Foundation.

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