Rank and file: Defending India's military market

Statistics show that over the next 10 years, the country would be spending over $250 billion in modernisation of its existing military infrastructure

India’s geography presents a land occupying a very unique position etched on the map of the world. A mighty peninsula surrounded by an endless oceanic expanse, with lofty, snow-capped mountains towards her crown. History is witness to the numerous attempts by invaders who saw strategy in making this land their own, setting the context for a strong defence and security apparatus since ancient times.

This need to bolster national security and build on existing strengths to protect the country against foreign, as well as internal aggression, is all the more urgent today, for which, India has also emerged a mega marketplace for defence procurement.

Over the last ten years, India’s defence spending has grown 12%, and is expected to hit $57 billion by 2018. The country would have the third largest military budget in the world next year, from the current tenth.

Elucidating the scope of India’s defence market to DH, Tom Captain, Global and US Aerospace and Defence Sector Leader and Vice Chairman at Deloitte, says, “The market size may be high by historical standards, but in relation to global benchmarks, it’s still not as high as it may become eventually. Many countries’, like the US and Saudi Arabia, defence spending is more than 4% of their respective GDPs, and even with $57 billion in India, it’s about merely 2.3% of its GDP. There is a lot of room to grow.”

Statistics show that over the next 10 years, India would be spending over $250 billion in modernisation of its existing military infrastructure. Among the major reasons for the defence market to grow at this scale is the country’s rapid progress as an economic powerhouse, as well as its elevation to an important member-state on the regional, as well as international scene, requiring as much the need to be on guard. “India has two threats (Pakistan and China) on its borders. The country needs to be protected, and there is a commitment to ensure security and stability in the region,” Captain says.

Marketplace to manufacturer
Aero India 2017 concluded only a couple of days ago, and like the 10 previous editions before it, offered aerial spectacles and techno marvels from across the world.

The echo rings ‘Make in India’. The question being asked now is, can this market create and sell its own defence know-how, given that a sizeable number of public sector and private players have already devised some remarkable hardware.

According to T S Suvarna Raju, Chairman of Hindustan Aeronautics (HAL), the importance of Make in India in the current situation is due to the acquisition cycle which the government is processing through. “India is one of the few countries that has designed and produced a fourth-generation fighter aircraft (Tejas), an Intercontinental Ballistic Missile (ICBM) in the range of more than 5,000 km, besides its own Polar Satellite Launch Vehicle (PSLV). Yet, there is an overwhelming dependency on imports,” reflects Raju.

The government’s target of 70% self-reliance in defence procurement set for 2005 is yet to be achieved. Currently, the self-reliance index stands under 40%. However, due to various reasons, despite a vast industrial base, India continues to import a majority of its defence and aerospace needs, deciding in favour of foreign products, instead of supporting domestic innovations. “During a significant part of India’s defence history, the focus has been licensed production, rather than indigenous innovation, despite having proven design capabilities,” Raju adds.

India boasts of large, state-of-the-art defence platforms serving its army, air force, and navy, apart from many other paramilitary and security forces. In order to firm up existing orders of fighters, helicopters and UAVs from the armed forces, HAL has planned a massive investment of Rs 17,500 crore over the next five years. 

There is a balancing act required between obtaining the right kind of defence platforms with the right kind of capability, as well as the economic balance to make sure that the value is being placed in the country, and jobs are being created.

The Prime Minister Narendra Modi government’s forward-looking DPP (Defence Procurement Procedure) 2016 has helped address certain key issues that had resulted in decades of disappointment. The era has also forged new strategic alliances.

“Offset credit resolutions, to long-standing issues in FDI — now increased to 49% from the earlier 26%, and there is scope to reach 100% on a case-by-case basis. This is attracting many companies, predominantly from Europe and the US. There are efforts to fix problems in the bureaucracy and extended timelines. There is high degree of interest and optimism to invest,” says Captain.

Meanwhile, in terms of the ease of procurement, the Centre has said that the US export licensing process is very slow and restrictive, while the technology transfer restrictions are hard to deal with. The US government is making progress on taking certain technologies off the US Munitions List, in order to ease out trade in defence.

India has been on a list of 60 friendly nations of the US, but now there is a move to elevate that position in sharing sensitive defence technology, through a list of only 20 friendly countries. Beyond that exists a list of perhaps only two countries with whom top-secret classified military technology might be shared. Hence, says Captain that the real prize lies in co-producing defence platforms and exporting them to countries that lack, or need the capability, but cannot afford it. The JVs with low-cost Indian resources can produce equipment with much-lower price-points, which will be attractive to many countries.

As part of its alliance-bridging exercise with India, Sweden’s Saab, for instance, wants to offer complete aerospace capabilities, enabling the former to become a major defence export hub. As the terms of the understanding, Saab India Technologies Chairman and Managing Director Jan Widerström says, “There may be an opportunity to locally manufacture the Gripen fighter in India, and sell to neighbouring markets. That’s the plan behind setting up a full-fledged aerospace capability in India, which will be a part of our global supply chain. In future, systems and products produced in India could be exported to our other markets.”

India not only provides a market, flexibility, or companies willing to partner on business, but also low-cost sourcing and a cheap workforce. While end-to-end solutions being manufactured here are possible, they must, however, be done by different companies and brought together. Also, India must possess the requisite capabilities and knowhow to work on those solutions, let alone replicate them. Hence, a JV would help in transferring some part of the technology, depending on the sensitivity regimes of the countries involved.

“To put it in perspective, in India, there is neither capability nor a skilled workforce to be able to deliver the amount of platforms needed. The country needs to partner with other nations to develop the skills in defence electronics, intelligence surveillance and reconnaissance, precision strike, and all other platforms such as land vehicles, ocean vehicles, and flying assets,” Captain says.

According to Bharat Forge Chief Managing Director Baba Kalyani, “We have a policy, and the intention, both in public and private sector, as well as foreign companies. But, we still don’t see an order inflow. And after we do start seeing orders, we will start finding it difficult to make things. This is where skills are important.”

Another area is in balancing costs. Around 20% of military equipment’s life cycle cost is taken by acquisition, while 80% is in its maintenance, repair and overhaul (MRO). Balance is needed to buy more equipment, which are strategically important, easy to use and maintain, and within the country’s budget. There is also a need to boost the role of MSMEs.

With a visionary government at the helm, and the above issues fixed, India could well take its rightful place as a stabilising influence and symbol of sovereign security on the world stage.