Ramp Up Defence Production Facilities To Truly Join The Top Three

For the Union Budget 2021 to be announced on February 1^st, all commentary and advocacy is agreed that the government will have to do something extraordinary. Strong growth must be restored to the economy. This cannot just be an incremental budget citing fiscal constraints and revenue generation shortfalls.

Fortunately, the Finance Minister Nirmala Sitharaman has already indicated that the fiscal deficit will be allowed to slip. Estimates say it is already in the region of 7.5% . However, this is a very unusual time. When money needs to be invested but is scarce, there are very few options.

This country, like most others around the globe, will also have to undertake an unprecedented and expensive vaccination process for most of the population.

 The debate is on between those who want the government to promote consumption, and those who want new money spent on productive assets that will yield a return in future.

Of course, a certain degree of welfarism is hard-wired into the Indian system with its socialist moorings. It is aimed at helping the bottom 20% of the population. This must not only continue but be enhanced in value terms. But consumption led growth, which is not organic but pump-primed, will result in a temporary uptick at best.

Will it enthuse greater investment by the private sector and lift the mood of the nation? It seems unlikely. America has followed this course, putting in billions every month straight into the general economy, while maintaining a zero-interest rate regime. This has gone on from 2008 after the housing and subprime lending crash. Still, it has only yielded a survival economy by 2020, growing at 3% on consumption alright, but with a widened gap between the 1% rich, and practically all the others. Zero interest favours those who can put it to productive use. The rest just spend their money on everyday goods and services.

In percentage terms, of all fresh monies pumped in now, some 60% needs to go into productive investments. Without this, the international rating and lending agencies will see India as a fiscally irresponsible economy going forward. The question is what will be the most profitable investment. And the answer is defence production.

Armaments are high value items with strong embedded profits. India has exported Rs. 17,000 crores worth in 2018-19 (approx. 1.5 billion), up from just Rs. 2,000 crores in 2014. The target is Rs. 35,000 crores or about $5 billion annually. The gradualism of doing this in the next five years must be fast-tracked. Can it be done in 2021 itself?

The government has announced plans to invest $ 130 billion in the next 5 years on military production modernisation. Can this be completed by 2022 with the help of this fiscal deficit slippage?

 India has purchased about $100 billion worth of armaments over the last decade or $10 billion per annum pro rata. It actually needs to procure perhaps twice as much to be fighting fit in a two or even multiple front war. It actually ends up buying much less than its wish-list because of fiscal constraints.

The latest emergency annual purchase is, in fact, upwards of $15 billion. Buying more and more from domestic production after recent policy changes is helping, but every part of the exercise, particularly the efficiency and turn-around time of domestic manufacture, needs to be accelerated.

 $ 5 billion in exports achieved in short order would claw back half of the pro rata annual expenditure over the last decade. Estimates indicate India could be exporting $ 15 billion worth annually within a decade. Again, can this time-line not be crunched, given some urgent revamping of facilities and policy initiatives.

Nothing else in the possibilities, including all kinds of manufacturing relocations from China, exports of other manufactured goods including electronics, automobiles, launches of foreign satellites by ISRO, commodities, software, even comes close.

And then there is the import substitution that comes from having a highly developed armaments industry. The money spent stimulates the economy but stays in-country.  However, this is not a swadeshi call likely to truncate quality. Let us note that the imported content of armaments currently made in India is still at 40% as of 2018, though down from 48% in 2014.  The trendline is interesting. The recently cabinet approved bid to export Akash Air Defence Systems with a range of 30 km has a 96% indigenisation figure. Nine countries want to import it.

Other items we could export in short order are the Brahmos missiles, the Pinaka multi-barrel rocket launchers and the Astra air to air missiles. To meet both domestic demand from the Indian armed forces and foreign countries in a competitive time-frame, India must undertake a massive modernisation, expansion, and upgradation programme. This must stand independent of the general defence budget which is mostly consumed by establishment costs and pensions.

Besides, our overall defence budget at $70 billion presently, is dwarfed by that of China at $261 billion, let alone that of the US at $ 732 billion.  Let us note however that there is a demand for Indian armaments internationally, unlike for those from China. The Indo-Russian developed Brahmos missiles could be instant best-sellers if India decides to offer them to friendly governments configured to their specific requirements. This would also mean significant value addition.

The secret configurations of our own missiles and other exported armaments can be safeguarded. Most arms exporting countries do likewise. But no major armaments manufacturing country can sustain the massive costs involved without exports.

India already has a number of facilities serving the army, navy, airforce, logistics, ordnance and engineering requirements. These include DRDO and its 50 labs,4 defence shipyards, 8 defence PSUs and 41 ordnance factories.

In recent times, a number of private companies such as Bharat Forge, the Kalyani Group, Larsen & Toubro, the Tata Group, SSS Defence, HTNP Industries, Alpha Design Technologies, Bharat Advanced Defence Systems, SMPP Private Limited, have also entered defence manufacturing. We are developing a new Defence Corridor in Uttar Pradesh in addition to the older and more mature one in Tamil Nadu. But, as always, the private ecosystem cannot survive without orders. And presently, the orders are mostly from the Indian armed forces.  

Union budget 2021 needs bold strategies to move this country forward and into the reckoning for the future. If India buys 12% of the world’s arms exports by value, but exports just 0.17% of it, there is a huge opportunity that needs to be seized.

Initiatives already fructified such as manufacturing our own, sometimes in joint venture, nuclear and conventional submarines, stealth frigates, patrol boats, our own aircraft carrier, the light compact aircract (LCA), trainer aeroplanes that we have even offered to the US, the Arjun MK-1 A tanks we are inducting into the Indian Army, mobile bridges, bullet-proof vests, small arms, rifles, machine guns, carbines, armoured vehicles, transport vehicles - have all taught us many learnings.

If the biggest roadblock in the past was policy which did not want to develop an Indian armaments industry worth the name, then at present the only real drag is the pace at which we are proceeding to change the template. It takes massive investment, but so do the highways we are building at breakneck speed all over the country.

Our own security needs, our economic well-being, standing in the comity of nations, necessitates this dimension to our development. And the sooner we put urgent emphasis on it the better. We need to put massive resources behind the vision statement and policy changes to realise this crucial atmanirbhar objective.  

An economic power is vulnerable without a strong military supported by its own arms industry. Even if we cannot own the entire ecosphere, because of the practical necessity of not reinventing the wheel, making most parts of the armaments we produce is a valid aspiration. Global players like Boeing and Lockheed-Martin buy a lot of the componentry for their military planes from outside, sometimes international vendors. It is a highly specialised business, and no entity can do everything in-house profitably.

India is on its way from 6^th largest economy towards becoming the 3^rd largest by 2030. But renewed Chinese hostility along the LaC, constant friction with Pakistan and its terrorist infiltrators, plus internal sabotage by forces who wish to retard the economy, have made clear that defence preparedness is both good sense and good business.

(1,393 words)

For: The Sunday Guardian

January 1^st, 2021

Gautam Mukherjee