Anushka Chavan
MIT-WPU, Pune
Introduction
The Indian Armed Forces are ranked fourth in the world behind China, the United States, and Russia with more than 1.44 million active personnel. The Indian Army is the second-largest army in the world with more than 1.2 million active personnel. India being a developing nation, spends a significant part of its budget on strengthening its military capacity. India had the third largest defense budget in 2019 accounting for US$ 60.9 billion. In the year 2020-21, 15.5% of the union budget and 2.39% of the estimated GDP were allocated to the Defense Ministry.
The need for adopting a military strategy that requires an increased expenditure in the sector is driven by increasing remuneration and security measures in respect to external issues like terrorism and territorial tensions with Pakistan and China, and internal issues such as Naxalism, terrorism, and insurgency, that give rise to the uncertainty of peace and security at and within national boundaries.
Need for Privatization
Despite having the second-largest army in the world, the Indian Army is often known as the ‘Vintage Army’ as more than 60% of the weapons are outdated.
Therefore, a dedicated private manufacturing sector would ensure 3 key aspects- modernization, quality, and cost-efficiency, the absence of which have held back India’s military capacities. Privatization would enhance R&D, thereby producing more advanced technologies and a variety of designs and sophisticated weapons produced in India. Unmonopolizing this sector will create competition amongst producers, thereby ensuring the best quality products manufactured and sold at low prices, consequently saving foreign exchange.
Before Privatization
The Defense Research and Development Organization (DRDO) was formed in 1958 by the core group of industries formed under the British. In 1962, after the defeat in the Indo-China War, the defense expenditure was increased from 1.5% of the GDP to 2.3%. In 1965, The United States imposed embargos on India after the Indo-Pak War of 1965. Following this, India ratified several defense deals with the Soviet Union and imported huge shares of defense products from the country.
After 1980, India made significant efforts in restructuring the defense production sector by investing large funds in DRDO for the development of indigenous missile systems such as ‘Prithvi’, ‘Akash’ and ‘Nag,’ aeronautical projects such as the Light Combat Aircraft and the supersonic cruise missile system ‘Brahmos’.
The Indian Defense sector was privatized in 2014, before which there was heavy dependence on foreign defense procurement. The Government of India emphasized strengthening the military’s capabilities by procuring defense goods from other countries but failed to strengthen the defense manufacturing and production capabilities, which led to India being completely dependent on imports during the time of war.
After Privatization
Since opening up of the sector to private businesses, the government has formulated policies that have increased Foreign Direct Investments (FDIs) inflows, simplified the industry licensing procedures, and taken measures to promote indigenous defense products and boost their exports.
This has relieved the burden of the economy by reducing its dependence on foreign military products through self-reliance and conserving foreign exchange reserves which can be utilized for other developmental and civilian activities.
An increase in defense expenditure can have direct and indirect positive implications on numerous sections of the economy. An increase in defense expenditure would be spent on the development of infrastructure, military facilities, training centers, higher manufacturing of military products such as weapons, ammunition, guns, missile systems, tanks, aircraft, ships, machines, carriers, submarines, and surveillance equipment and creation of architecture for Artificial Intelligence.
All these rely on the Manufacturing and Research & Development sectors, which necessitate employment in a number of allied industries such as construction and real estate, robotics, IT, automobile, aerospace, hospitality, raw material, and heavy metal industries. Indirectly, they also act as a basis for the finished products of unrelated industries like the Film, Television, and Music industries whose outcome is inspired by military narratives.
Foreign Direct Investments (FDIs) are a major driver of economic growth and an important source of non-debt finance for the economic development of India. Since 2014, the defense sector has witnessed a stream of progressive changes after privatization, which attracted FDIs worth US$ 55.46 billion in 2015-16, as compared to US$ 36.04 billion during 2013-14.
Through privatization under the ‘Make in India’ program, it is expected that by 2025, the defense manufacturing sector alone will contribute US$ 1trillion out of the estimated GDP of US$ 5 trillion. The Defense Production Policy, 2018, suggests several measures to boost the economy by utilizing the defense sector as a key contributor to economic growth. Under the Policy, an anticipated US$ 10 billion investment in defense and aerospace goods and services is expected, thereby creating employment opportunities for 2-3 million people, by the year 2025.
India exports defense products to 84 countries, with the top recipients being Myanmar, Sri Lanka, and Mauritius. The products include important defense equipment like weapon simulators, tear gas launchers, torpedo loading mechanisms, alarm monitoring, and control, night vision monocular and binoculars, lightweight torpedoes, and fire control systems.
The arms imports of India have increased from US$ 334 million in 2014 to US$ 1539 million in 2018. However, due to privatization, the arms exports have witnessed a drastic change as they have increased from just US$ 317 million in 2014 to US$ 1537 million in 2018.
The Ministry of Defense has set a goal of a turnover of US$ 25 billion (approximately Rs 1.75 lakh crore) in defense manufacturing and an export target of US$ 5 billion (approximately Rs 35,000 crore) worth of military hardware, by the year 2025.
Since 2019, India has not only been consistently improving in the World Bank’s ‘Ease of Doing Business Rankings’ by jumping down from the 142nd rank in 2015 to the 77th rank in 2019 but has also made it to the list of top 25 defense exporters of the world, by becoming the world’s 24th largest exporter of major arms.
From the year 2016, India’s defense exports witnessed a staggering growth of 700% as they rose from Rs. 1521 crore in 2016-17 to Rs. 10,745 crore in 2018-19. The government has signed 304 contracts worth more than US$ 37 billion since 2015, 190 of which have been awarded to Indian companies, thereby taking off the burden on the foreign exchange reserves, by reducing imports and supporting domestic manufacturing.
