Non-Subscriber Extract
JWDI briefing: India's defence industry
18 September 2007
With a defence budget that is set to increase from USD23.6 billion in 2006 to USD33.2 billion in 2009, Western defence companies have prioritised India as a key market. Although much of this money is committed to procurement of foreign equipment, local defence industries are also enjoying an unprecedented period of high profits as the country modernises its ageing equipment throughout its armed forces.
However, India's defence system is in need of repair. Too many - if not all - major indigenously designed and manufactured platforms are delayed and over budget, some by up to 20 years. Traditionally India's state-owned companies have been selected for all major defence contracts in the country and have been supported by a complex process that, judging by the continued delays, is archaic and ineffective.
The government, however, is aware that it needs to make changes to its defence system and, over the past few years, has started to introduce a number of measures - including offsets and the pending Raksha Udyog Ratnas (RUR) policy. Together, these policies and reforms could make a positive difference to India's defence industries and provide the 75 per cent self-reliance that the government craves. Without the government discipline and a level of ruthlessness that would be needed to make the policies work, however, the reforms will be nothing more than the traditional sound-bites that defence analysts are used to hearing from New Delhi.
Indian defence spending in the years between 2001 (USD13.81 billion) and 2007 (USD22.1 billion) has seen an increase of 60 per cent. The 2007 budget has been set at USD25.08 billion, a 12.6 per cent increase over 2006. The published defence budget covers, and is the sum of, the following six areas: military pensions; the army; the navy; the air force; capital expenditure; and research and development.
The actual execution of the defence budget, however, is plagued by inefficiencies and corruption, the former resulting in billions of rupees remaining unspent and returned to the Ministry of Finance (MoF). In 2006, the Parliamentary Standing Committee on Defence revealed that up to INR10 billion (USD246 million) set aside for capital investment and modernisation was unspent during that year; while two years earlier the same committee said that, since 1999, a total of USD7 billion had remained unspent and was consequently repaid to the MoF. All this has had a significant impact on the defence budget as, according to the Fiscal Responsibility and Budget Management Act, monies repaid to the MoF are removed from the next year's budget. This is part of the reason that expenditure as a percentage of GDP is on the decline. This seems likely to remain the case until defence procurement processes are significantly improved.