There has been an increased push for indigenous defence production over the last three decades with successive governments pushing for greater domestic production through revision of defence procurement policies, creation of positive and negative lists, increasing the FDI limit in the defence industry, among others. But what does the data say about India’s defence expenditure & procurement over the last ten odd years?
India’s tryst with indigenization in defence began in 1962 when a separate department for defence production was created. But the real impetus came in the 1990s when a committee for self-reliance review under Dr. APJ Abdul Kalam was formed. The committee charted out a map for the growth of indigenous production from 30% in 1992-93 to 70% in 2005. Three decades later, this goal is yet to be achieved. Despite the low indigenous growth, successful governments have been taking measures to revive the domestic defence industry. The measures include revision of defence procurement policies, creation of positive and negative lists, increasing the FDI limit in the defence industry etc.
Defence is one of the key areas of strategic importance in matters of national security. India stands as the third largest defence spender as per the Stockholm International Peace Research Institute (SIPRI), 2020. Hence, indigenous production is of utmost importance and provides strategic autonomy coupled with financial savings.
In this story, we review the trends in defence production and acquisition over the years. For the data, we referred to the Union Budget and Reports of Standing Committee on Defence. (2014-2015, 2019-20, 2020-21)
127% rise in Defence expenditure over the decade, but with skewed distribution pattern
The budget for Ministry of Defence (MoD) is one of the highest among all the ministries. Over the years, the budget allocation has grown consistently. It has increased by 127% from 2011-12 to 2020-21. However, the distribution of this allocation between revenue and capital expenditure is skewed, with revenue expenditure growing at a faster rate than capital expenditure. The primary reason behind the higher growth of revenue expenditure is the rising spending on defence pensions.
The defence revenue expenditure saw an increase of 140% from 2011-12 to 2018-19, while the capital expenditure grew by 101% during the same period. The percentage of defence pensions out of the total defence expenditure grew from 18% to 26% during the same period.
Decline in the expenditure from indigenous sources in the capital acquisition budget
Expenditure from capital acquisition budget could be in two ways: either through foreign contracts or through indigenous sources. The expenditure under the capital acquisition budget could be spent on armaments, ammunition, or equipment.
The expenditure on only the defence equipment from 2010-11 to 2019-20 shows a decline in the percentage of expenditure on indigenous contracts. This is directly in contravention to the goal of maximizing indigenous production. The percentage of expenditure from indigenous sources was highest in 2010-11 at 69.6%, which eventually declined to 47.4% in 2013-14. The years 2014-15 and 2015-16 saw a spike, followed by a decline in the subsequent years. It must be noted that these numbers only indicate the capital acquisition budget of the MoD, not the entire expenditure on Defence Procurement.
With majority contracts being from foreign sources, this also highlights the shortcomings in the Indigenous defence production arena. Indigenization of this component alone could result in huge savings in foreign reserves for the nation.
Average Indigenous procurement rose by 15% from 2010-14 to 2014-19
Indigenous procurement indicates the overall procurement of equipment, armaments, and ammunition through indigenous sources.
The average value of indigenous procurement during 2010-14 stood at Rs. 35,270 crores, while the average value of indigenous procurement improved to Rs. 40,712 crores during 2014-19. This improvement is despite the fall in the share of expenditure on indigenous sources on defence equipment.
Defence Public Sector Units (DPSU) turnover jumped by 63% from 2009-10 to 2020-21
The DPSUs play a vital role in enhancing indigenous production. However, India faces a unique paradox. While it has a huge defence industrial base, most of the defence equipment and services are imported. Sixteen DPSUs have been set up since 1962 to cater to the needs of the defence services.
The average annual turnover of the DPSUs (excluding the Ordinance Factory Board) has increased from Rs. 30536 crores between 2009-14 to Rs. 42628 crores between 2014-21. This translates to a jump of 63% in turnover from Rs. 28653 crores in 2009-10 to Rs.46711 crores in 2020-21.
The profit after tax of these DPSUs also witnessed an increase of 88% from Rs. 3478 crores in 2009-10 to Rs. 6544 crores in 2020-21. The average profit after tax increased from Rs. 4156 crores between 2009-14 to Rs. 5478 crores between 2014-21.
Allocation for R&D largely remains unchanged since 2011 despite huge push for Indigenization:
Any policy for indigenization will be futile without significant investment in research and development. Unfortunately, in India, the actual spending on research and development as a percentage of the total defence expenditure has remained unchanged.
The percentage of actual spending on R&D to the total defence expenditure was above 6% during 2005-11. From 2011 onwards, the expenditure percentage fell below 6%. This highlights the lopsided vision, particularly when there is a greater push for indigenization. Despite the growing tensions in the global world and increasing military expenditure of countries towards enhancing defence capabilities (2.6% increase in real terms from 2019 to 2020, as per SIPRI), there is no significant increase in the investments made towards R&D.
450% increase in the value of defence exports from 2016-17 to 2020-21:
The proportion of defence exports from India increased significantly from 290.51 crores in 2010-11 to 8434.83 crores in 2020-21. In fact, the exports value has seen a 450% increase from 1521.86 Cr in 2016-17 to 8434.83 Cr 2020-21.
However, the exact composition and the nature of these exports is not known. This is important because much of the expenditure from the capital acquisition budget is still spent on contracts from foreign sources. It would not be prudent to highlight this growth in exports as the attainability of self-sufficiency.
Rising expenditure on foreign contracts, while value of defence exports is increasing
The trends above indicate a quite contrasting view on the state of indigenous defence production in the country. While the total value of defence exports is seeing a huge jump of 450%, the expenditure on foreign contracts for defence equipment under the capital acquisition budget is also rising. This calls for closer scrutiny of the indigenization process in defence sector. Goods with relatively cheaper cost of production and easy replaceability, which offer economies of scale are being indigenized while the advanced technologies and equipment are being imported, an example being the recent acquisition of Rafale Jets from France and S-400 missiles from Russia.
In an answer to the Parliament on the savings due to indigenization, the government cited the lack of such an assessment. However, it must be noted that not all indigenization results in savings. Proper and timely assessment of the savings due to indigenization could motivate the DPSUs and government to take steps towards maximum indigenization. The primary focus should be on indigenizing those areas which necessarily translates into savings, reducing the dependence on foreign procurement.
