India has established eight Defence Public Sector Undertakings (DPSUs) whose responsibility is to provide the Armed Forces state-of-the-art equipments and at the same time enhance country's self-reliance in defence production. However the performance of these Undertakings is not up to the mark, resulting in import of arms worth billions of dollars every year. A deeper insight into DPSUs' production profile reveals that most of them are over-dependent on external sources for the production needs, and have a very low labour productivity level, negligible export, and a low R&D base.
In past two decades, the Army has witnessed a decrease in its share in the overall budget, whereas the Navy and the Air Force have increased their respective shares. This reflects a shifting priority, from land-centric armed force to an air and naval-centric force.
If the Finance Ministry’s emphasis on fiscal prudence and inclusive growth has resulted in a smaller increase in the latest defence budget, the Report of the Thirteenth Finance Commission does not paint a very optimistic scenario for India’s future defence spending.
While Mahindra’s foray into defence production and the acquisition of foreign companies demonstrates the private sector’s initiative, the government needs to introduce further reforms to promote the role of private companies in Indian defence industry.
Even as the new amendments incentivise domestic companies to enter defence production, the government has made it clear that it wants a competitive environment in defence industry.
The present global economic crisis has slowed down the growth of the Indian economy, affecting among others, the fiscal situation and the revenue mobilisation potential of the central government. Defence being one of the largest recipients of central government expenditure, the present crisis casts a doubt on the adequacy of future resources. This commentary discusses some major options that India’s Ministry of Defence needs to consider in order to withstand the likely resource constraints in the coming years.
Although India has established a formal mechanism for implementation of the defence offset policy, the structure and procedures lack the thrust to fulfil the objective of energizing the Indian defence industry. Besides, the policy is not supported by the existing Foreign Direct Investment (FDI) and licensing policies. While evidence suggests that domestic industry can absorb offsets, what India needs is an effective body to handle offsets, liberal FDI and licensing policies, and a better banking provision.
Budgeting for India’s Defence: An Analysis of Defence Budget 2010-11 and the Likely Impact of the 13th Finance Commission on Future Defence Spending
If the Finance Ministry’s emphasis on fiscal prudence and inclusive growth has resulted in a smaller increase in the latest defence budget, the Report of the Thirteenth Finance Commission does not paint a very optimistic scenario for India’s future defence spending.