When India’s minister of finance presents the annual budget to Parliament, her speech is watched not just for what it includes, but also what it leaves out. Given the general opacity of Indian policy processes, that is often the best way to discern what the government’s real priorities are.
Unusually, this year’s speech never mentioned military spending. That is only one indication of how little Indian Prime Minister Narendra Modi, who casts himself as a muscular nationalist, appears to value national defense.
During Modi’s first term in office, he marginally increased the proportion of federal spending devoted to the military. Yet, safely re-elected in 2019 after a confrontation with Pakistan, he has since presided over a decline.
From more than 17 percent at the beginning of Modi’s first term, the share is now under 13 percent. In fact, defense spending has fallen below 2 percent of GDP for the first time in decades.
The budget has not plumbed such depths since before India’s traumatic loss to China in a 1962 border war, some analysts said.
The numbers are even bleaker than they seem. More than half of India’s defense budget goes to personnel costs. The amount left for equipment purchases and overall modernization is usually too small to improve readiness significantly.
That helps explain why Modi’s promise — issued more than six years ago — to spend US$20 billion on 114 new fighter jets has yet to be fulfilled. India’s air force has only three-quarters the number of planes it needs and would likely have even fewer by the end of the decade.
Worse, the government is mismanaging the dwindling cash it does spend on defense equipment. It tries to juggle multiple priorities — speed, quality and local production — and often winds up paralyzed.
Modi’s big push in recent years has been to increase indigenous defense production. That makes some sense: Recent conflicts have shown how important it is to have domestic supply chains that you can scale up swiftly.
An India that cares deeply about what it calls “strategic autonomy” — or, more prosaically, the ability to irritate anyone you want at any time — is especially wise not to rely too heavily on arms imports. Local defense production grew nearly 17 percent in the past financial year and is up 60 percent since 2019 to 2020.
Yet within those rosy numbers, a murkier picture emerges. Much of the new production is focused on things such as ammunition, rather than high-tech weaponry. More importantly, state-owned giants continue to dominate the local defense industry. After five years of attempted indigenization, the private sector’s share of total production value still barely tops 20 percent.
That does not bode well. The military thinks the public sector’s systems are obsolete. Official auditors have pointed out its history of failures, delays and cost overruns. Even a hand-picked government committee suggested that state-owned defense companies shift from production to basic research.
Given limited budgets, India can ill afford to waste money on defense. The government had hoped that foreign companies might pick up some of the slack. A few years ago, it decreed that they could henceforth own 74 percent of an Indian subsidiary, which could be increased to 100 percent with special permission.
Very few foreign investors have taken up the invitation, mainly because the technology transfer requirements are far too onerous. The only company brave enough to own an Indian subsidiary completely is Sweden’s Saab AB, which began work earlier this year on a factory to produce its Carl-Gustaf portable rocket launcher.
The Indian army already depends on the Carl Gustaf, so Saab was reasonably certain of its market. Others can read the budget numbers and see that the government would struggle to commit to big acquisitions.
Meanwhile, private Indian companies must incorporate the cost of creating new factories and product lines into their bids. That puts them at a disadvantage against public enterprises that rely on the state for support and basic infrastructure.
Far from leveling the playing field, the government seems to be outright suspicious of the private sector.
New Delhi’s “mindset” was that greater private sector involvement “would mean profiteering at government expense,” the chief financial officer of Larsen & Toubro Ltd, a professionally-managed company and one of India’s best-known engineering firms, told the Financial Times last week.
It is hard to imagine exactly which enterprising profiteer would be attracted by the peanuts that passes these days for a defense budget. Modi would have to spend more, and trust more, if he is to make “strategic autonomy” more than a catchphrase.
Mihir Sharma is a Bloomberg Opinion columnist. A senior fellow at the Observer Research Foundation in New Delhi, he is author of Restart: The Last Chance for the Indian Economy.
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