Specific allocation to pave way for the indigenous solutions through Make programs and Make 2 programs and seeing restoration of incentiviasation for the indigenous R & D and product development

The key policy announcement post Doklam crisis was the setting up of an institutional mechanism called the Defence Planning Committee (DPC) under the chairmanship of National Security Adviser, along, the foreign secretary, chairman of chiefs of staff committee and chiefs of the Army, Navy and the Air Force as its members. The overarching body has its task out- outline threats and build up capability for credible deterrent. In zero sum, it falls on the scale and scope of modernisation of the Indian Armed Forces and the money to ramp up such programs.

The former defence minister and now the Finance minister in the Modi 2.0, Nirmala Sitharaman is certainly aware of the simmering tensions along the orders of India and, beyond, the geopolitical surfeit of upheavals in the Indian Ocean and choking trade blocks in South China Sea. As an industry veteran and Executive VP, Defence & Aerospace, L&T, Jayant Patil looks at the finance minister with greater optimism said, “Now that Finance Minister is well aware of the issue involved with defence, expectation is to see higher allocation of funds being addressed.”

The Indian Air Force’s Balakot Strike against the suicide attack on a CRPF bus in Pulwama brought back the convention of the war to the forefront and the intermittent reality that India faces the two fronts’ threat and must gear up. Twelve Mirage 2000 fighters crossed the Line of Control (LoC) and fired five Spice guided bombs on the Balakot terror camp, killing an unspecified number of terrorists. At the same time, Indian Air Force witnessed its MiG-21 being shot by F-16. This puts heavy on the fact that IAF will be within 31 squadrons against the least sanctioned strength of 42 squadrons to be able to defend two fronts in such eventuality.

Though the Indian military is considered among the top five in the world, but it is the fact that Army is still holding onto the jammed proned INSAS (India Small Arms system). Army is looking for the replacement of INSAS and a large number of light machine guns, battle carbines and assault rifles are being purchased at a cost of nearly Rs 40,000 crore to replace its ageing and obsolete weapons. 

After a significant delay caused by the general elections, the Indian Navy also issued the Requests for Proposals (RFP) worth over Rs 15,000 crore for a range of warships. This includes the “Buy Indian” acquisition of six Next Generation Missile Vessels (NGMV), 8 Fast Patrol Vessels (FPV), 12 Air Cushion Vehicles (ACV) and 8 ammunition barges for the Coast Guard.

However, shortage of funds impacted the Army's modernisation drive. The Army told a Parliamentary Standing Committee in March, 2018 that it was reeling under severe fund crunch and struggling to even make emergency procurement. And after the long hiatus since 1980, finally in 2018, Army procured M777 howitzers and K9 Vajra, in first major induction of artillery guns since Bofors. Under General Bipin Rawat, army stuck in the garrison full of vintage arms and ammunition set out to modernise by instigating, Special Forces Division, Defence Cyber Agency, the Defence Space Agency and the Defence Space Research Agency along with Integrated Battle group. And, it is all about the continuity of such initiatives.

With such concerns, defence sector calls out for higher allocation as said Jayant Patil, Executive Vice President Defence & Aerospace, Member of the Board L&T points out: “Industry expects higher allocation of funds on sustained basis for implementing modernisation of Armed Forces.” He also talks about the capital part of the defence budget which is simply the money allocated for the new machines and equipment for the modernisation said: “The ratio of capital to Revenue has seen sustained decline over the past years and expectation is to see the same getting addressed.”

In the interim budget for 2019-20, announced on February 1, defence was allocated Rs 319 trillion, a hike of 6.87% compared to the previous year. Military experts termed the 6.87% inadequate (it is 1.52% of India’s GDP) but the fact is that defence capital expenditure (CAPEX) amounted to 31.28% of the country’s capital expenditure in 2018-19. But industry experts point out that post GST, an increase for capital incentive in fact puts the budget at par with FY 16-17 despite the increase in overall outlay in 2019 interim budget. Since there is no separate fund allocation for Tax reimbursement to the Defence OEMs, substantial part of the defence capital budget allocated is consumed for GST reimbursements.

Defence As An Industry For Economic Growth

The perspective that security is the foremost concern and the budgetary allocation is prioritised, such framework is just the lack of foresight among the policy makers.

The capability development to ensure national security in conventional, cyber, information, space and other domains of warfare cannot be developed by Defence procurement alone, because it is unaffordable and reduces our reliability at critical junctures, hence defence manufacturing, ‘Make in India’ and defence industries including private sector have to be given a push. What is observed is the cumulative anticipated Capex spend over next 10 years for Defence is of the order INR 15 lakh Crore. With the Government’s program boosting Indigenisation in Defence from the current 35-40 % to 70-75 % levels, and raising indigenous volume from 25000 Cr to 1.7 Lakh Cr a year over coming 8-10 years an estimated opportunity larger than 8-10 Lakh Cr will open up for the Indian Industry. As Jayant further puts it: “With Multiplier effect to the economy, this could create a staggering addition of Rs 65 to 75 lakh crore to the Indian economy (>2% of GDP) and generating more than 5 lakh new highly skilled jobs.

How does a policy implementation work and make a valiant case of the immense potential and opportunity in defence sector? Look at the export number last year which has crossed the Rs 10000 Crore target set by MoD. A clear cut target and policy at place, government mandated the DPSUs to gear up and set mechanism to explore the worldwide market. Budget must look at such provisions and incentive for the public and private players. As Sartaj Singh, Director, Solar Industries India Ltd talks about the expectation added, “We at Solar Industries expect that there should be at least 12% increase in budget allocation of Funds for Capital & Revenue procurement for Defence, over the last year, with specific emphasis on 'Make in India' Projects. As Ministry of Defence has set high targets for Defence related exports, Incentives to the Defence Industries should be provided for exports related to Defence.”

That is the case for the defence industry which is at the threshold and requires hand holding in terms of credible incentives in the budgetary allocation. “Specific allocation to pave way for the indigenous solutions through Make programs and Make 2 programs and seeing restoration of incentiviasation for the indigenous R & D and product development,” Patil outlines the expectation from the budget on 5th June.