24 December 2014

Opening up the Indian military market for the domestic private sector


(Part one of a four part series on India’s defence modernization initiatives)

 
Since assuming power in June 2014, Narendra Modi government has made India’s military expansion a priority. The policy envisages modernization of the military based on accelerated defense acquisition from abroad and stepped up domestic military production. While inaugurating the largest domestically-built warship, INS Kolkata, Prime Minister Narendra Modi outlined the policy as follows: “My government has taken important steps in improving indigenous defence technology. We dream about making India strong enough to export defence equipment to the world. … I am confident it will boost our military prowess and give confidence to our soldiers.” Within the broad framework of “Make in India” campaign, Modi government is making renewed efforts to secure public-private partnership with foreign financiers and arms makers for defense acquisition and domestic production by creating US-style military-industrial complexes in the private sector.  
For many decades, successive Indian governments have been implementing a military purchase program based both on a buyer-seller relationship as well as joint development and production relationship with foreign weapons sellers. In the last decade, India has emerged as the largest arms importer in the world, its arms import bill rising to $ 8.3 billion in 2013. According to Stockholm-based SIPRI, India outspent the 2nd and 3rd largest importing countries - China and Pakistan respectively - by a ratio of three to one. Arms related capital spending quadrupled from $3 billion in 2000 to $12.2 billion in 2010. Defence budgets have gone up by 9% annually between 2000 and 2006 and then by 17% annually between 2007 and2014, close to $38 billion today. India is expected to become the 4th largest military spender by 2020, only surpassed by USA, China, and Russia. It is estimated that India will spend over $600 billion in military expenditures in the next decade, with $275 billion earmarked for equipment and facility upgrades and purchases.

Currently, India imports 70% of its military hardware. Foreign military procurement is often rocked by major corruption-related scandals. India’s military establishment has shown little faith in domestic production capabilities, which has been mostly confined to public sector defense units. Indigenously assembled Russian fighter jets have been so prone to crash that they have earned themselves a nickname of “flying coffin”. Recent mishaps in domestically assembled ships, submarines and naval equipment, leading to the resignation of India’s naval chief Admiral DK Joshi have only heightened the distrust. Denting confidence further, the Air Force was recently forced to buy engines for the much-publicized Tejas aircrafts from General Electric, after spending billions on developing them indigenously, without success!
Indian private sector has been eyeing to grab a share of the defense pie rising out of the rising military spending. Soon after launching the liberalization and privatization program, Narasimha Rao government formed the National Defence Council in 1993 to chalk out a plan for the creation of a robust domestic defence industry. On the eve of nuclear tests in 1998, Confederation of Indian Industry (CII) and the Defence Ministry organized six joint task forces to promote partnership between military and the private sector, and help domestic industry set up joint ventures with international companies. The negative experience of 1999 Kargill war helped push the mandate further. In 2001, based on the recommendations from the task forces, Vajpayee government approved 100% domestic private equity and 26% FDI in military production, with 100% FDI allowed on a case-by-case basis. In 2004, the Vijay Kelkar committee was formed to further streamline the privatization process. Among its 40 odd recommendations, the committee envisioned the creation of Rakha Udyog Ratnas (RURs), a set of big private companies that would be given special privileges in the sphere of military production. 12 large private companies, including Larson and Turbo (L&T), Tata Power, Tata Motors, Bharat Forge, Mahindra & Mahindra, Godrej & Boyce, Wipro, HCL and others were selected for the program.

Infighting amongst industry rivals and internal clashes between different ministries stalled the RUR program, but the Indian big business still managed to secure a foothold in the military sector. Examples of high-profile contracts include those awarded to TATA Power for building Samyukta (India’s first major electronic warfare system) and for developing computers for fire-and-forget weapons and surveillance and tracking systems; to L&T for building the nuclear submarine and for the delivery of rocket and torpedo launchers; to Mahindra & Mahindra (M&M) for building light combat and armored vehicles; to SKIL Group for developing the Pipavav Shipyard as a ship-building facility, to Bharat Forge to provide bullets for the Bofors Guns; and to L&T, Godrej & Boyce, and Tata Advanced Systems Ltd (TASL) for building drones for the military. However, domestic contracts have remained few and far between, while foreign imports have continued to grow. 

Indian big business and those in the government favoring private sector involvement in defence sector seem to have concluded  nearly a decade ago that teaming up with international private defence companies is the surest path to realize the super-profits by private Indian companies that military production generally brings while pursuing India’s “buy and produce” strategy.  In 2005, defence procurement policy was modified to kick-start international joint ventures. The Defence Offset Policy and “Buy and Make Indian” category were formulated under Manmohan Singh government - the Defence Offset Policy requiring foreign suppliers to have at least 30% of their contracted work to be done domestically – as a way of promoting local military production. Modi’s version of “Make in India” offers another opportunity to escalate the joint venture privatization strategy for militarization of India.

Indian big business houses have made preparations for the joint-venture strategy through internal reorganization, investments, and search for international partners. The $110 billion Tata Group which projects a 40 per cent jump in defence sales in 2015 has created as many as 14 defence companies, including its strategic arm, Tata Advanced Systems Ltd (TASL). It has teamed up with Lockheed Martin, Sirkosky Aircraft (of Black Hawk Fame), and Airbus for bidding in different military hardware. Automobile maker Ashok Leyland has teamed up with Sweden's SAAB to deliver short-range surface to air missile (SRSAM). L&T has invested $400 million into a yard to build naval carriers, and expects annual revenue to the tune of $1 billion within the next five years. It has tied up with Nexter of France to develop a new Caesar 155 MM mounted gun system. Bharat Forge Ltd has entered into a joint venture with Israel’s Elbit Systems to build advanced artillery guns. Ambani’s Reliance has set up two defence subsidiaries, and has teamed up with Raytheon and Boeing of the US, Siemens AG of Germany, and Dassault Aviation of France for medium-multi-role combat aircraft (MMRCA). After the setback with UK’s BAE, India’s largest tractor maker, M&M has started several joint ventures, including Israel’s Rafael Advanced Defense Systems for naval weapon systems.

Indian big business houses concluded time ago that 26% FDI is not large enough to entice international defence companies to warm up to India and part with their technological secrets. In fact, India did not receive any FDI proposal in defence sector between 2009 and 2013. Many of the joint ventures that had started out before 2009 turned out to be non-starters. For instance, UK’s BAE walked out of a joint venture with M&M, citing insufficient control issues. Proposals for raising FDI limit – all the way to 100% – have been floated several times both from within the government and from business interests – only to be stalled because of internal disagreements inside India.
The recent upward revision of FDI limit to 49% following the swearing in of Modi government was a decision that had emerged out of acrimonious debates within CII and FICCI, the two leading bodies of India Inc. prior to the 2014 general election. TATA and L&T are on record for their concerns that even a majority ownership via FDI would not bring “know why” to India; Bharat Forge, SKIL, M&M, and Reliance have argued otherwise. SKIL had argued that even 51% equity was too little to entice international big players. After a hectic wrangling over the FDI cost-benefit calculus, top leaders of the Indian industry had settled on a 49% FDI number prior to the 2014 general election which the Modi government adopted immediately after coming to power.

In spite of the intense domestic and international enthusiasm over the emergence of a potentially $200 billion a year Indian military industry, it is too early to tell if a “win-win” solution can be found for the domestic and foreign private defence interests. The infighting between industry majors (often mirrored in fights between ministries) had stalled the privatization of the defence sector earlier. Since the heady days of nuclear high, the Indo-US strategic relations has remained lukewarm. The Americans simply have not wanted to allow India to emerge as another major independent power in Asia and have been far less interested in providing technical know-hows for the same, particularly to stop the rise of Indian military-industrial houses that would compete head to head with the US ones.  The US continues to envision to sell arms to India instead, scuttling attempts to strengthen Indian domestic military industry. For geo-political reasons of their own, Russia and Israel have been far more open towards joint ventures and technology transfers to India at this time, mostly to the public sector military enterprises. Modi government’s latest “Make in India” policy seem to have given the US a chance to reassess its approach.
Modi government is currently giving fresh life to many privatization initiatives of the past, enabling private capital to penetrate to military and nonmilitary sectors of Indian economy that had seen limited domestic and foreign private capital since independence. Military sector has received special attention, partly because weapons production is known to generate super profits and partly because it is in line with the desire to make India a major imperialist force in Asia and the world. The involvement of big business houses in armament production is crucial for the rise of a military-industrial establishment in India that will form the back-bone of India’s imperial ambitions. 21st century has not begun well for the peoples of Asia - it has brought war, anarchy and devastation to parts of Asia already and has made the geopolitics of Asia very volatile. The militarization policy of Modi government can only make the region vulnerable to further instability and turmoil. It would siphon off precious financial and human resources out of an economy that cannot meet even the basic needs of the vast majority of Indian people today. People can’t afford this policy to be implemented. 

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