Once again, the Indian defense sector is raising global expectations. India is being courted as a lucrative market for defense supplies, and global vendors and foreign leaders are vying with each other to get the first-mover advantage. But there have been so many false starts in the past that it would need some serious effort on part of newly elected Prime Minister Narendra Modi's government to convince its external interlocutors that much like in the past, this time too it won't be a damp squib.
Modi and his defense minister, Arun Jaitley, have underlined the urgent need to reform India's defense procurement policy. Jaitley has been charged with two important portfolios -- finance and defense -- underscoring recognition in the highest echelons of the Modi government that unlike during the previous two decades, India will have limited resources to spend on defense in the coming years.
The focus on defense in this year's budget is a welcome change from the perfunctory increases in the defense allocation over the last several years. It emphasizes the Modi government's commitment to military modernization, which was losing traction since 2005, under A.K. Antony, India's longest-serving defense minister. The attempt to do away with anomalies in pensions paid to ex-servicemen under the "One Rank, One Pension" policy and the announcement of the construction of a war memorial and a museum is heartening and should go a long way in assuaging the concerns of the defense community.
The increase in the foreign direct investment (FDI) cap to 49 percent from the present 29 percent, though welcome, is unlikely to be a game changer. It is a welcome first step but hopefully this will be complemented by other moves to make the defense public sector undertakings (PSUs) in India more accountable. And ultimately, it all comes down to setting a strategic direction for Indian defense. That's where the focus should be from now on. Modi can start by promptly appointing a full-time defense minister, allowing Jaitley to focus solely on finance.
It is a well-known secret that the Indian armed forces are facing critical shortages. The Indian Army urgently needs new field artillery, with some reports suggesting that it may not even have sufficient reserves to sustain a full-fledged war for 20 days. The Indian Air Force has repeatedly expressed concerns about the obsolescence of its ground-based air defense systems. The Indian Navy's dwindling submarine fleet poses its own set of challenges; it possesses just 13 conventional diesel-electric submarines, 11 of which are 20-27 years old. Army chief Gen. Bikram Singh is reported to have told Modi about the "critical hollowness" afflicting the Indian Army after a decade of missed deadlines for procurement and wherewithal to face war. It will indeed be a delicate task to manage an Indian defense modernization program, a priority of the Modi government, during a time of slow economic growth.
Modi has emphasized the importance of modernization of Indian weaponry time and again with an aspiration to transform India from the world's largest arms importer into a defense manufacturing hub. Jaitley has recognized that defense modernization had "slowed down" in the last few years and that providing the required equipment to the armed forces in a speedy manner would be the top priority of the Modi government. The Bharatiya Janata Party (BJP) manifesto had talked of "FDI in select defense industries," with a focus on jobs and asset creation, besides increasing private sector participation in the defense sector. In line with this overall sentiment, the Department of Industrial Policy and Promotion (DIPP), a department that regulates the Indian industrial sector, had circulated a note to the Cabinet to raise the FDI cap in defense to 49 percent without technology transfer and beyond that with technology transfer. It had called for a cap of 74 percent in cases where the investor is willing to share technology and for allowing 100 percent FDI in manufacturing of state-of-the-art equipment. Foreign investment in the Indian defense sector is clearly necessary to improve the nation's defense preparedness as well as to reduce India's long-standing dependence on imports.
With the world's fourth-largest military and one of the biggest defense budgets, India has been in the midst of an ambitious plan to modernize its largely Soviet-era arms since the late 1990s -- one that has seen billions of dollars spent on the latest high-tech military technology -- as it has started asserting its political and military profile in South Asia and the Indian Ocean region. In line with India's broadening strategic horizons, its military acquisitions have also seen a marked shift from conventional land-based systems to means of power projection such as airborne refueling systems and long-range missiles. India has been busy setting up military facilities abroad, patrolling the Indian Ocean to counter piracy, protecting the crucial sea-lanes of communication, and demonstrating a military assertiveness hitherto not associated with it.
Yet most of this has happened in a context in which India's dependence on external actors in the defense sector is at an all-time high. Drastic steps are needed, as the Indian defense import bill is estimated to reach $130 billion over the next seven years even as homeland security purchases are likely to cross $110 billion. Though in the mid-1990s, India was assured that the indigenous content of weaponry would increase from 30 to 70 percent by 2005, the nation still continues to import more than 70 percent of its defense requirements from abroad. India today imports defense equipment worth over $8 billion annually, even as the story of the Indian state-run defense industry has been largely one of gross inefficiency, incompetence, and failure. The performance of the Defense Research and Development Organisation (DRDO), the body responsible for developing technologies for the military, has been abysmal because of a lack of any accountability. The Indian armed forces have not had a reliable experience in working with DRDO-made armaments. Given its significant budgetary resources in the context of a developing nation, it seems to have failed in delivering quality output. Most of its key projects have either not been completed on time or have resulted in huge cost overruns. A fundamental revamp of the DRDO and defense PSUs is the need of the hour.
The Indian defense sector has not been successful in attracting FDI, with a measly $4.94 million coming to India since the opening of the sector in 2001, the lowest in any sector. When the previous United Progressive Alliance (UPA) government tried to increase the FDI limit from 26 percent to 49 percent, then-Defense Minister A.K. Antony, steadfast in his opposition, argued that this would make India dependent on foreign companies and vulnerable to the policies of their countries of origin on a long-term basis. This is a strange argument to make in a country that is importing most of its critical weapon systems from abroad. The real reason, perhaps, was Antony's desire not to rock the boat, which was the hallmark of his time in the government, making him one of the worst defense ministers India has ever had, neither managing to bring transparency in the moribund procurement system nor providing a strategic direction to defense planning.
The Indian corporate sector too has been a house divided on the issue of FDI in the defense sector. Initially supportive of FDI of up to 100 percent, the Federation of Indian Chambers of Commerce and Industry (FICCI), an association of business organizations in India, has been changing its tune, suggesting that it is unlikely that technology transfers will be guaranteed with this move. The Confederation of Indian Industry (CII), a rival association that aims to create a favorable environment for industrial growth in India, meanwhile, has argued that FDI over 49 percent should only be allowed on a case-by-case basis, and only with technology transfers. Despite the fact that it doesn't have the capability, the Indian private sector is raising the bogey of the level playing field for the domestic industry in order to scuttle the move to bring foreign companies in.
There is an urgent need to strengthen India's weak military manufacturing industrial base by expanding private sector participation. This can be done by raising the FDI cap in the defense sector and by encouraging joint ventures between Indian and foreign defense firms. India's modernization program and the desire of external actors to tap into the new market should be an impetus for reforms. India's notoriously slow bureaucratic processes need to change if they want to continue reaching Western markets. Changes have been slow to come by because some institutional interests are so entrenched in government policy that it is nearly impossible to change.
An external force might just propel India to change. These external forces might come in the form of a backlash from Western defense industries over the slow and tedious contract process. The U.S. and Europe have made it clear they want to sell to India, but the current structure of the procurement process will only be tolerated so much. Eventually, someone might walk away. India can certainly emerge as an attractive destination for foreign manufacturers to set up defense manufacturing facilities in India for global defense markets. This will in turn lead to high-end technology coming into India with cascading effects across multiple sectors. But even an increase to 49 percent FDI, as proposed in the latest budget, may not be lucrative for global investors. The Modi government needs to go for a game-changing formula, one that not only enhances India's credibility in the eyes of global vendors but also encourages the Indian private sector to participate more fully in the defense sector.
For this, India needs domestic political leadership. The Indian government, over the years, has failed to demonstrate the political will to tackle the defense policy paralysis that seems to be rendering all the claims of India's rise as a military power increasingly hollow. There has been no long-term strategic review of India's security environment, and no overall defense strategy has been articulated. The challenge for the Indian government is to delineate clearly what products they need and how to build up their own industry in the process by significantly reforming their domestic defense manufacturing sector. In the absence of a comprehensive, long-term appraisal of the country's defense requirements, there will be little clarity about India's real needs in defense acquisitions. And India's rise as a major global player will remain merely a matter of potential.
Indian defense policy remains dysfunctional in large part because of the mismanagement by the bureaucracy of the Ministry of Defence, whose knowledge of defense-related issues remains far from adequate. It is now up to the Modi government, with its huge mandate, to provide some strategic direction to Indian defense policy.
Harsh V. Pant is a professor of International Relations at King's College London and a non-resident fellow with the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies, Washington, D.C.