According to the SIPRI Year Book 2018, global military expenditure in 2017 stood at USD 1,739 billion. United States of America (USA) remains the largest military spender and exporter of weapons in 2017. Other countries exporting significant volumes of military equipment and systems are Russia, China, Germany and France. These countries account for almost a third of the volume of exports globally. United Kingdom (UK), Israel, South Africa and the Republic of Korea also have strong military industrial bases but do not compete for volumes of exports internationally. They predominantly cater to their domestic needs. India with its huge industrial potential aspires to join the exporters group by 2025.
India has been leading the importers list since 2012 (SIPRI Report), accounting for 12 per cent of the total global share. This situation persists even though a major part of India’s domestic defence industrial base was inherited from the British era. The Indian economy has gone through several transitions since Independence.This includes major structural changes made for liberalisation in 1991.However, defence industry remained state controlled through Defence Public Sector Undertakings (DPSUs) and the Ordinance Factory Board (OFB). The policy for allowing private industry participationin defence production was implemented only in 2000-2001, despite which there has not been an increase in participation of private enterprises. High levels of investment required to set up infrastructure and detailed scrutiny of firms are both deterrents to industries taking financial risks in this sector. Leading weapons and military equipment exporters have undertaken policy reforms that are holistic and support the needs of their domestic companies.These include government to government agreements, which allow the manufacturers to sell their products to governments of friendly states.
Entry into the global marketwill depend on integration of private enterprises, bureaucratic and diplomatic institutions. They can coordinate with one another to secure customers as well as foster diplomatic relations. Participation of private sector companies in most weapon exporting states have contributed significantly to economic development. The USA traditionally relies on the privately owned, profit-oriented industrial base. Six out of the top ten defence companies are US based. The military-industrial complex in USA is responsible for 7 per cent of total exports and is the largest net exporting industry. It contributes to approximately 2.25 per cent to GDP annually.
The UK government owns a major share in three key defence equipment companies.However,its procurement policies are based on competition and the military-industrial complex is largely market driven. Similarly, in France, privatisation has taken place at sub-contractor levels. Since domestic requirements are not met by a single prime contractor, co-production with associated civil industry has been undertaken. The government negotiates with other countries purchasing French weapons to help offset procurement costs through co-production and thereby promoting sales. France’s defence industry not only caters to 90 per cent of domestic requirements but also exports to more than 25 countries. Their arms exports have been historically used as a means to maintain their balance of payments. Israel has a combination of state-owned defence industry and a large number of private enterprises in the defence sector. The emphasis on research and development (R&D) has enabled nations to develop state of the art equipment and systems. Defence systems and products coming from Israel account for approximately 35 per cent of its industrial exports.
In countries like Republic of Korea (South Korea), Russia, China and South Africa, the manufacturing of military equipment is guided by each government’s production policies, even though manufacturers in some cases are privately owned enterprises. The Soviet Union’s emphasis on military prowess has resulted in Russia relying heavily on its military industrial complex. In addition to defence equipment, its industries produce almost all associated civilian products. Large organisations which were earlier integrated to support a command economy have now been decentralised for purposes of efficient operations and cost control. In some cases, decentralisation has also resulted in creation of internal competitionamongst subsidiaries within the defence industrial base.
China has a state-guided defence industry. It has progressed from “imitation” to “innovation”. It has through creative adaptation inculcateda major proportion of domestic components on foreign-derived platforms.Additionally, indigenous systems have been updated using incremental innovation. South Korea relied on US military assistance till the mid-1960s after which its Ministry of Defence set up the Defence Procurement Agency (DPA). The agency promoted indigenous production of military equipment. Policies have promoted R&D focused on innovation in various aspects of military designs and systems. The contractors have been given oligopolistic positions to operate in specialised areas of defence production. In effect, exports are facilitated through government to government agreements. South Africa adopted policies supportive of joint ventures (JVs) and vertical mergers of its defence industry. Like all arms exporting nations, South Africa also paid attention to import substitution. R&D enabled all exporters to develop their domestic capacity first.
The Indian defence industry is changing, but at snail’s pace. Policies on procurement and production have been amended. However, this has only added to the confusion surrounding procedures and hamperedimplementation. The addition ofthe ‘Buy: Indigenously Developed, Designed and Manufactured’ (IDDM) category, levels of indigenous content required, and the components overlap with specifications of the ‘Buy & Make: Indian’ category are only a few examples of the changes made. Far from helping, these have made it difficult for the Defence Acquisition Council (DAC) to categorise vendors appropriately and contributed to delaying requests for proposals (RFP), which is one of the initial steps in procurement.
Introduction of the Strategic Partnership (SP) model which promotes JVs of foreign Original Equipment Manufacturers (OEM) with domestic industries isfacing teethingproblems. Existing issues with foreign direct investment (FDI), transfer of technology (ToT), minimum qualification and financial criteria for selection of a strategic partner, and financing of SP only exacerbate the situation. Adding to these is competition between private enterprises and DPSUs which could potentially roadblock SP. Although the government has placed demands on private sector enterprises to participate in manufacturing through the ‘Start-up India’ and ‘Make in India’ schemes, public sector defence manufacturing has been guarded because DPSUs are considered the backbone of India’s defence industrial base. Their poor performance has been debated at length, however they are still securing contracts owing to their large infrastructure and financial capacity. The level playing field that procurement policies seek to provide is not proving to be of any advantage to private enterprises like Larsen and Turbo (L&T), who must compete with Mazagon Dock Shipbuilders Limited (MDSL) to secure a contract for manufacturing P75 submarines in a JV with a French OEM.
Our weapons and systems have been used more as tools of diplomacy than products for market. Major structural changes in production and procurement policies that boost capacity building in terms of technology and efficient production practices are required. Competition between manufacturers and aiming for an indigenous technological edge is necessary. Holistic reforms for strengthening industrial and research base are necessary. The demands of our armed forces need to be met domestically before we aspire to enter the global market. The goal of competing in the international market is admirable, however the path to that goal is yet to be laid.