The Wire, May 12, 2018
By Pradeep S Mehta and Abhishek Kumar
There has been a rapid change in geopolitical constellations around the world. Citadels of free trade have turned protectionist and the previously more-inward looking nations are now advocating for integrated global commerce and cooperation. Disruption has become the keyword and managing it, a challenge.
But amidst the disruptions, tectonic shifts may have already settled where opportunities for a country like India are many. A retreating US has given way to a new strategic phrase ‘Indo-Pacific’ with significant implications for India. Already, a ‘Quad’ –Japan, India, US and Australia – has come into play to co-create a future strategy for globalisation even as China marches ahead with its grand plans. In this churning, what is also clear is that unlike the past, the future global map will be defined by many power centres characterised by military might, economic strength and market potential.
India seems to have a judicious proportion of all three and therefore somewhere amidst this there is an opportunity for us to address some of its most pressing concerns such as manufacturing growth, job creation and aspiration to become a credible player in global affairs. One way to capitalise this opportunity is by combining India’s strategic outlook with an economic case.
This is possible at the confluence of three important elements: a national security doctrine, a result-yielding export-oriented FDI in defence and linking these two with the national manufacturing plan. The problem with India is that we currently don’t have a composite view. We lack a well-thought-out security doctrine, our FDI defence policy has struggled to gain traction and the national manufacturing plan lies in cold storage.
It is a well-known fact that large-scale defence manufacturing has a high multiplier effect on jobs, innovation and industrial growth but a major concern with regards to defence production in India relates to predictability. There is a dire need for a predictable policy framework to ensure that tenders are well-thought-out, defence budgets are properly and transparently utilised, bidding processes address strategic requirements, timelines are met and most importantly, all this results in modernisation of armed forces in consonance with India’s strategic interests.
So what we really need to do is to start working backwards – begin by defining our strategic interests which must entail security and economic dimensions within and outside our borders. A national security doctrine would be a good point to start. It can spell out the strategic direction that India wishes to take in the wake of threat perceptions and the role that India sees for herself in rapidly evolving global dynamics. This, in turn, will provide necessary predictability about the capability that India wishes to acquire. In other words, once we have a security doctrine, there will be far greater clarity on operational requirements.
The good news is that the Indian government has started some hard thinking on this front even though it has come a day too late in the tenure of the current government. A defence planning committee has been set up under the chairmanship of the national security adviser to articulate strategies on national security and the capability development plan to match that. This will inevitably require a focus on aspects like manufacturing and foreign collaboration.
In the same spirit, another document – the draft Defence Production Policy (DPP) 2018, has also been put out by the government. It spells out the intent to increase indigenisation of defence production not only for self-reliance but also for exports. In its aim to pit India amongst the top five defence exporters by 2025, the draft DPP talks about the integration of MSMEs and creation of millions of jobs in the process. In concrete terms, DPP envisages India’s defence export volume to touch Rs 35,000 crore from the current level of around Rs 2,000 crore in next seven years but experts feel this is possible only with the exports of complete systems as opposed to individual parts.
In other words, what we need is a combination of an attractive FDI policy and advance orders. India does have a policy to allow 100% FDI on a case-to-case basis, i.e. when there is a full transfer of technology, yet it appears that it will turn into a viable option only when there are orders and repeat orders. In the words of Baba Kalyani, the president of Society of Indian Defence Manufacturing, the real problem with the defence sector is that there is no demand.
This is ironic because India is living with a vintage-era security apparatus and we need to modernise our capability on an urgent basis. Take for instance the Indian Air Force which is in need of 200 fighter aircraft and yet for the last few years, the situation remains unaddressed. We have oscillated from scrapping the plan to build the foreign fighter jets in India to cancelling to revamping to buying off-the-shelf and to promoting our indigenous make. What’s even more surprising is that on one day we are told that our indigenous equipment does not meet the requirement of our forces while on the other it is suddenly declared fit for induction.
Defence production
The issue comes back to the need to have clarity for our strategic defence needs. If we can do so, we should be able to find a solution. Let’s not forget that India not only imports but also exports defence equipment. Between the import and export, there is huge latitude for India to rejuvenate its defence manufacturing provided we get the picture right.
There are various ways to assess this latitude. India is one of the largest importer of major arms. Its imports from 2013 to 2017 accounted for 12% of the global total and 65% of India’s defence budget (or 1.8% of its GDP) is spent on defence imports. In absolute terms, India currently procures defence equipment in the range of $20 billion to $25 billion and in addition also imports components for what it manufactures indigenously.
The other way to look at the scope is by comparing our defence spend with China. Currently, India’s military is placed fourth after US, Russia and China but the country sets aside three times less budget than China on defence. Moreover, China today has emerged amongst the largest weapons exporter from a state where it used to rely on imports.
The message here is that if India can become a hub for defence production, it can win many a battle already. Defence production can provide a huge impetus to manufacturing, it can create an ecosystem for the growth of MSME sector, it can lead to significant employment generation, revive export-oriented growth, achieve greater self-reliance and make Indian industry more competitive in addition to creating positive externalities for civilian sectors by spurring innovation.
Clearly, the opportunity is knocking at India’s door but we may again miss the point if we fail to converge economic imperatives with security needs. Therefore, while the constitution of defence planning committee is a great idea, it will be even better if the commerce and MSME ministries are also on the same table.
India already has the National Manufacturing Plan of 2012, which may be revised and revisited in order to better link it with the changed circumstances, such as Industry 4.0 and our defence sector. The plan already deals with the strategies for accelerating the growth of manufacturing in India.
What’s more is that India is not alone in trying to figure out its strategic interest. There is return of great power competition amongst US, Russia and China. This is good news for India. India’s geostrategic location, market size and need for modernisation is its biggest bargaining chip with these countries in their competitive pursuit.
From India’s standpoint, kick-starting large scale export-worthy defence manufacturing in India will depend upon how deftly it works with US, China and Russia on one hand while stitching together internal imperatives with external ones, on the other hand.
Pradeep Mehta and Abhishek Kumar work for CUTS International, a global public policy think and action tank.