Why is defence spending not booming?

The defence spending has touched a low at 1.62 per cent of the planned GDP growth in 2018-19 even as the budgetary allocation for the sector was increased by 7.81 per cent at ₹2,95,511.41 crore from ₹2,74,114.12 crore in 2017-18.

“A number of initiatives have been taken to develop and nurture intrinsic defence production capability to make the nation self-reliant for meeting our defence needs. Ensuring adequate budgetary support will be our priority,” said Finance Minister Arun Jaitley while presenting the Budget for 2018-19. A close look at the allocation reveals that this is the lowest ever drop in defence expenditure as a percentage of the GDP since 1962 when India was at war with China.

India’s defence spending as a percentage of GDP has been declining steadily since 2013-14. Both China and Pakistan spend over 2 per cent of their GDP on defence.

Experts point out that allocations by the government remain frugal even at a time when the country is facing threats to its security not just from the borders with Pakistan and China, but also from challenges in the Indian Ocean Region.

Just last year the country was engaged in a bitter military face-off with China over Doklam region near the India-China-Bhutan tri-junction area for almost 73 days. And according to reports, China continues to remain actively present in the region.

“Transformation in defence production requires higher allocation. If the government is keen on promoting ‘Make in India’ in defence production then there has to be a proper infrastructure creation for that and that requires huge money. When you are operating under a low budget then all your mega acquisition plans become severely constrained,” said Vikram Mahajan, Director (Defence and Aeropsace), US-India Strategic Partnership Forum (USISPF).

Out of the total allocation of ₹2,95,511.41 crore, only ₹99,563.86 crore has been set aside for modernisation of the forces and new defence purchases, while the remaining ₹1,95,947.55 crore has been allocated for revenue expenditure. In other words, bulk of the allocation is for the daily running expenses of the armed forces. “Focus continues to remain on addressing existing revenue expenditure requirements rather than allocation of capital for acquisition of new equipment. The modernisation process seems to have taken a backseat this year,” said Kabir Bogra, Partner, Khaitan & Co.

Military strategists feel that the Indian Army is in a “sorry state” as it continues to use old armaments. It is in dire need of modern guns and ammunitions, combat vehicles and battle tanks. It has also been waiting for a future infantry combat vehicle for over 10 years now.

The Air Force is seeing a depleting squadron and is in urgent need of the latest fighter jets. The Navy is keen on new warships and nuclear submarines. According to Defence Ministry sources, defence projects worth around billions of dollars are simply not moving due to paucity of funds.

Private push

Meanwhile, the Finance Minister made a strong push on private sector participation to develop defence production and manufacturing in the country.

He said the government will soon be coming out with a “friendly” Defence Production Policy 2018 that will seek to promote domestic production by public sector, private sector and MSMEs. He also announced the creation of two defence industrial production corridors in the country.

“We have opened up private investment in defence production including liberalising foreign direct investment. We will take measures to develop two defence industrial production corridors in the country. The government will also bring out an industry-friendly Defence Production Policy 2018 to promote domestic production by public sector, private sector and MSMEs,” he said. However, the industry is still waiting for the government’s blue print on the way forward to promote these corridors and attract private sector investments.

Puneet Kaura, Managing Director & CEO, Samtel Avionics Ltd, said, “What remains to be seen is how much sops or tax benefits these industrial corridors bring to the private industry, and contribute to ease of doing business.” Earlier this month, Defence Minister Nirmala Sitharaman had asked the Tamil Nadu State Government to work on a defence corridor connecting Kattupalli port, Chennai, Trichy, Coimbatore, Hosur and Bengaluru.

Ganesh Raj, defence and aerospace expert with EY India, feels that the new defence production policy has the potential to turn around India’s defence manufacturing industry just as in the case of the auto sector. He said it will also give opportunity to the MSMEs to take part in defence production.

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