- Aug 7, 2009
Political Affairs Magazine - Push For Military-Industrial Complex in India?
An orchestrated campaign is now underway by global consultancy firms, leading industry associations and some strategic experts to increase the permissible FDI limit in Indian private sector defense companies from the present 26 percent to 49 percent. Some are even calling for allowing 100 per cent foreign-owned firms to operate in India.
The current flurry of news items and commentary especially in the print media, and more so in business papers, has been led by the report of a joint study by ASSOCHAM and the international consultancy firm Ernest & Young which has been submitted to the ministry of Defense last month. The report argues that foreign investors, read foreign armaments majors, lack sufficient incentives to bring in FDI into the fledgling Indian private sector defense industry within the present 26 percent stake cap that would deny them control. “The contributions from international defense majors in the form of both capital and technology can enhance the ability of [the] Indian private sector, which in turn would contribute to India's defense industrial capability and exports," the report said. It also called upon the government to stop extending preference to defense public sector undertakings and to expedite declaration of Raksha Udyog Ratnas among private sector players.
The report itself does not present any new findings or recommendations. It is essentially a rehash of previous reports by E&Y updated annually. The same basic report with minor changes has been released by E&Y separately, with FICCI and now with ASSOCHAM! Articles based on these reports have been carried in the print media over the past year or more each time referring to a “recent report” by E&Y!
So why are some circles so keen to pressurize the government to deepen the involvement of Indian private sector players and foreign defense majors in the Indian defense industry? And what are the various implications of such involvement?
Sharp increase in military imports
Indian acquisitions of military hardware are the hot topics 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 (some say second largest after China) importer of armaments with annual expenditure of around $6 billion (Rs 27,000 crore) on this count, a sizable proportion of India’s defense budget of $28 billion for 2009-10.
Indian capital expenditures in defense 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. Much of this huge expenditure has been on big-ticket imported items such as aircraft, naval vessels, missiles, tanks, artillery and accompanying communications systems. These acquisitions are explained on the one hand by the obsolescence of current equipment, inordinate delays in replacement or upgradation, and failures in indigenous development and production, and on the other by a more outward looking strategic posture emphasizing force projection and outreach in the wider Indian Ocean region or even beyond.
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 plane. The Navy has acquired the Lockheed P8 long-range maritime reconnaissance and anti-submarine aircraft from the US, 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 the refitted aircraft carrier Admiral Gorshkov and lease of two nuclear-powered submarines. All three services have also acquired numerous types of tactical missiles and related systems, mostly from Israel Aerospace Industries (IAI) but some also from Russia, for land, sea and air operations. 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. 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 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.
Regrettably, despite a few notable successes in missiles and electronics, India has never come close to meeting its declared goal of self-reliance in defense production, leave alone R&D for development of new, advanced equipment. Most objective assessments put the ‘self reliance index’ in India as somewhere in the 30-35 percent 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. How such pressure forces compromise is clearly evidenced by the fact that, despite proven corruption by Israel’s IAI in earlier deals, India’s Defense ministry has been unable to blacklist the firm and has instead rewarded illegality by placing huge repeat orders such as the Army’s recent $2 billion deal with IAI for land-based missile defense systems. Aside from the national security angle, India has also not been able to acquire independent technological capability in many defense-related sectors as it has in certain strategic areas.
Offsets policy only abbot money
Against this background, the government has adopted a new policy of offsets, as has been done by many other countries. Under the new Defense Procurement Procedures announced in 2007, all import orders worth more than $60 million must be executed by spending at least 30 percent of the value on products and services sourced from Indian firms. In exceptional cases of high value, this could even be increased to 50 percent. 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.
This policy was ostensibly expected to tackle the weaknesses in the Indian defense industry 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. [/B]
So Boeing could, for instance, if it won the tender to supply 126 F/A-18 fighters, avoid sub-contracting any part of the F/A-18 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 defense-related technologies will simply not take place. Offsets will boil down just to money and the structural problems of repetitive imports and scant self-reliance will be perpetuated.
Privatization of defense production
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”. And involvement of the private sector is seen as a panacea for solving all problems. But even in defense and national security?
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 defense 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.
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 defense production subject to licensing and also allowed up to 26 per cent FDI in such firms. Over the years, even though the Indian private sector as a whole received only 9 percent 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 percent 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 defense firms such as European conglomerate and Airbus manufacturer EADS Defense & Security and US aerospace major Boeing.
The present push for a major involvement of Indian private sector corporations in defense manufacture, greater FDI and partnership with prominent mostly Western defense 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 defense 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 defense hardware would increasingly be driven by corporate and commercial interests, and export of armaments would become an important driver of India’s external policy.