Push for military-industrial complex in India?

Indian acquisitions of military hardware are the hot topic in the global armaments bazaar. India is expected to spend around $30 billion on arms imports over the next few years. India is perhaps the world’s largest importer of armaments with annual expenditure of around $6 billion on this count, a sizeable proportion of India’s defence budget of $28 billion for 2009-10. Security analysts are fond of pointing out that this is only around 2.5% of GDP compared to India’s neighbours Pakistan and China whose annual defence budgets are around 4.5% ($4.4 billion) and 4% ($100 billion) of their GDP respectively. While the merits or otherwise of India’s defence spending are beyond the scope of this article, it rather addresses an aspect that has largely escaped scrutiny. The nature and scale of India’s massive defence imports, the recent and growing involvement of large Indian corporates and global armaments manufacturers, and the government’s policies in general and those governing the defence industry in particular are all coming together to lay the foundation of what may be a military-industrial complex in India coming up in place of a staid, some would even say dull, inward looking and mainly state owned industry.

Three distinct but inter-related trends are visible in India’s defence sector. First, there is a steady trend of rising defence budgets related to substantive modernization of India’s military as well as a new strategic outlook. Second, large-scale procurement of new high-value military hardware is a major element of these modernization plans, due to a combination of flawed and delayed procurement of equipment in earlier decades, obsolescence of current hardware and failure of indigenous efforts to meet the military’s requirements. Third, a major proportion of this procurement is from foreign suppliers but with offset provisions under which domestic firms should be substantially involved in execution of these orders. These trends put together reflect a significant shift in Indian military, industrial and science and technology policy with noteworthy implications for the Indian defence industry but also for the global arms industry at least in the short to medium term.

Rising imports

Indian capital expenditures in defence have been on a steady upswing since 2004-05 when acquisitions went up from around $3.5 billion in value to around $7.5 billion in each of the following three years and then rose to around $11 billion in 2008-09. Aircraft, naval vessels and accompanying communications and weapons systems are of course very expensive and their acquisition has involved big-ticket orders. Adding to the need for, and cost of, the military modernization programme has been the so-called “Revolution in Military Affairs” (RMA) --- a term applied to the qualitative jump in hardware capabilities and development of “force multipliers” --- due to rapid advances in electronics, satellite-based communications, computers and networking systems, along with the sharp increase in use of missiles, other airborne systems and precision-guided munitions.

In India, force modernization in the Army has meant acquisition of new infantry gear, artillery guns, contemporary tanks and anti-aircraft and anti-missile systems. Whereas even these have involved relatively large expenditure, the real big money has been spent on the navy and the air force. This trend is likely to continue well into the next decade as well.

The Indian Air Force has in recent times acquired Hercules troop carrier aircraft from the US, Ilyushin mid-air refueling tankers from Russia, Phalcon airborne early-warning systems from Israel mounted on a Russian Ilyushin plane, quite apart from the agreement with Russia in the late 1990s for the custom-built Sukhoi 30 MkI fighters of which 40 have been purchased outright with a further 100 being produced under license in India with an option for additional numbers if required. The Navy has acquired the Lockheed P8 long-range maritime reconnaissance and anti-submarine aircraft, has entered into a deal with France for co-production of 6 Scorpene diesel-powered submarines, and has agreements in place with Russia for purchase of a refitted aircraft carrier and lease of two nuclear-powered submarines, combining to give it a blue-water capability in the wider Indian Ocean region or even beyond. All three services have also acquired numerous types of tactical missiles and related systems, mostly from Israeli Aerospace Industries (IAI) but some also from Russia, for land, sea and air operations. A $2 billion deal was recently concluded by the Army with IAI for land-based missile defence systems. Suppliers the world over are now holding their breath waiting for India to complete user trials and then place orders for 190 advanced helicopters costing around $1 billion and the truly mouth-watering so-called “mother of all orders”, the largest single order in military aviation history, for 126 multi-role combat aircraft (MRCA) expected to be worth about $10 billion.
The above acquisitions from abroad have been over and above the completed or on-going indigenous production of numerous battleships, five nuclear-powered nuclear-armed submarines (the first of which, the INS Arihant was launched just last month), two aircraft carriers, an Indian-designed Main Battle Tank to supplement the license-produced T-90 tanks of Russian origin, the forthcoming serial production of the Indian-designed Light Combat Aircraft and the many different indigenous short, medium and long-range ballistic missiles.

India has also entered into joint design and development collaboration agreements related to several systems it wants for the third to fifth decades of this century such as with Russia’s Mikoyan Bureau for co-development of a 5th Generation fighter aircraft and with Israeli Aircraft Industries and its sister concern Rafael for medium range anti-missile systems.

The above pattern of acquisitions reveals that the Indian military is transforming from an essentially defensive force oriented to protect the country’s borders and coastline to one capable of extended outreach, offensive operations and force projection well beyond India’s frontiers. This has enormous significance for regional and global geo-politics and is a subject of tremendous interest for those who closely follow strategic affairs, albeit beyond the scope of this article. Of greater relevance here is the fact that most of the hardware for this new capability is being acquired through imports.

Failure of indigenization

In the 1960s and ‘70s, India’s defence policy was characterized by a more modest defensive posture and a programme of building indigenous capability in manufacture and later in design and development. India built up an extensive industrial base of Ordnance Factories, state-sector defence undertakings making aircraft, tanks, armoured and heavy transport vehicles, radar and communications equipment. Through the ‘70s and ‘80s, this base was expanded and given depth with the addition of numerous defence research laboratories. Arms exports were never given serious thought, mainly on political grounds of wanting to preserve neutrality between nations and a hint of moral pangs over profiteering from war merchandise.

However, despite a few notable successes in missiles and electronics, India never came close to meeting its declared goal of self-reliance in defence production, leave alone R&D for development of new, advanced equipment. Most objective assessments put the ‘self reliance index’ as somewhere in the 30-35% range. Today, after three to four decades of efforts to build indigenous capability through foreign collaboration and technology transfer, the implications of this failure are quite clear. India should have been in a better position to modernize its military building upon its own solid industrial manufacturing base and a reasonable capability for development of new systems, but it is not and finds itself compelled to go in for repetitive and costly cycles of imports and license production.
Over-dependence on foreign suppliers has reached dangerous proportions. It will reduce India’s bargaining power, push up prices and pressure India into compromising its independent foreign policy under pressure from supplier nations. India has had ample experience of technology denial by the US over many decades, pressure tactics by the UK on technology transfer, and acute problems in supply of spares from Russia. Aside from the national security angle, India has also not been able to acquire independent technological capability in many defence-related sectors as it has in certain strategic areas.

Many explanations are advanced for how and why India came to such a pass: Poor management, non-professional culture in state-sector defence production and research establishments, lack of accountability in an overly secretive system, and notorious delays in decision-making by the political and civil bureaucracy. Even conspiracy theories about the techno-bureaucracy who dominate decision-making, or even elements of the military involved in equipment selection processes, deliberately disrupting indigenous efforts or recommending imported equipment against equivalent Indian-made ones may have some element of truth.

New offsets policy

Against this background, the government has adopted a new policy of offsets, as has been done by many other countries. Under the new Defence Procurement Procedures announced in 2007, all import orders worth more than $60 million must be executed by spending at least 30% of the value on products and services sourced from Indian firms. In exceptional cases of high value, this could even be increased to 50%. Indian firms, and armaments majors of other countries, are now greedily eyeing the prospects of sharing about $10 billion likely to be up for grabs through offsets in just the next few years.

On the face of it, this policy could be expected to tackle the now-structural problem highlighted earlier apart from ensuring that a substantial part of the funds remain within the country. In theory, the industrial base in India would get strengthened and absorb new technologies, thus building self-reliant capabilities for the future. In practice, however, things are likely to turn out quite differently. And there are other dangerous portents too.

The offsets policy has already been diluted in important ways under pressure from the global armaments industry. Foreign suppliers have now been permitted to “bank” their offset obligations, that is, to accumulate offset provisions over two or more projects and then enter into a single sub-contract equivalent to the accumulated amount. Offset obligations can now also be transferred from one contract to another, including in the civilian sector. So Boeing could, for instance, if it won the tender to supply F/A18, avoid sub-contracting any part of the F18 manufacture but instead sub-contract manufacture of doors or other sub-assemblies for Boeing 737 passenger jets. By de-linking offsets from contract-specific obligations, the desired technology absorption in advanced defence-related technologies will not transpire. Offsets will boil down just to money and the structural problems of repetitive imports and scant self-reliance will be perpetuated.

This should not come as a great surprise when neo-liberal policies and globalization have been embraced by the Indian ruling elite. Self-reliance itself is seen by these sections as an old-fashioned idea dating back to the “bad old days”.

The defence industry in India had traditionally been dominated by the state-sector. Starting from the 1990s when India embarked on the path of liberalization, involvement of the private sector in India has been gaining momentum. In 2001, government formally decided to encourage private sector participation in defence production subject to licensing and also allowed up to 26% FDI in such firms. Over the years, even though the Indian private sector as a whole received only 9% of total military orders or around $700 million annually, a few engineering majors have emerged as important players executing sub-contracted work even in strategic areas. Given the anticipated offsets boom, there is now a scramble to set up joint venture firms with international armaments firms who are expected to bring in capital but more importantly technology and capability.

Tata Advanced Systems has been set up as a joint venture (JV) with an investment of $150 million and 76% holdings by the mammoth Tata Industries and $50 million by Israel’s IAI to manufacture Unmanned Aerial Vehicles (UAVs), electronic warfare systems, missiles, radar systems and security systems. Tatas have also tied up with US aviation company Sikorsky for helicopter sub-assemblies. Similarly, Indian automobile major Mahindra & Mahindra has linked up with UK’s largest and the world’s fourth largest military manufacturer British Aerospace for land-based armament systems and with a subsidiary of Italian Finmecanica for underwater systems. Engineering and construction giant Larsen & Toubro has started joint ventures with several international defence firms such as European conglomerate and Airbus manufacturer EADS Defence & Security and US aerospace major Boeing.

An orchestrated campaign is now underway by global consultancy firms such as Ernest & Young along with the leading Indian industry associations calling upon the government to increase the permissible FDI limit from 26% to 49% with some even calling for allowing 100% foreign-owned firms to be allowed into the Indian defence sector! The argument runs along lines familiar to those following the Indian liberalization story: the state sector has proved incapable of timely delivery of quality military hardware, therefore the private sector should be encouraged to step in. Maximum FDI should be encouraged because defence hardware is a risky, capital intensive business and because Indian firms do not have the requisite capability --- the irony can hardly be missed. The icing on the cake, it is further argued, will be the opening up of an export market for armaments made in India or outsourced from India, a path that India had hitherto wisely eschewed.

The present push for a major involvement of Indian private sector corporations in defence manufacture, greater FDI and partnership with prominent mostly Western defence manufacturers, all aided by the new offsets policy that emphasizes money transfers through sub-contracts rather than building of indigenous capability, are all part of a larger plan. The idea is to undermine and ultimately dismantle the Indian state-sector defence industry, which for all its weaknesses is and would be subservient to broader political goals subject to public accountability, and replace it with large private sector corporates with substantial or even controlling interests of global arms manufacturers. In such a dispensation, acquisition and upgradation of defence hardware would increasingly be driven by corporate and commercial interests, and export of armaments would become an important driver of India’s external policy. Watch this space… an incipient military-industrial complex is in the making.

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