Indian defence spending amongst four largest armies in the world

11 December 2017 3 min. read

The Indian army has emerged as one of the top four spending armies across the world, according to a new study by a consultancy. Between 2015 and 2016, the country imported $5.5 billion (Rs. 35,000 crore) worth of defence equipment, which only covered around 70% of its requirements.

According to a benchmark study by Alea Consulting on the Indian defence sector, India has become a hub of sorts for research and development (R&D) in weaponry, not only for Indian companies but also for a substantial number of international firms. Global entities investing in defence R&D in the country include major players such as Rockwell Collins, Boeing, Textron GE, and Honeywell.

These entities have been encouraged by the relaxation of regulations on foreign direct investment in the country. This includes measures such as the removal of the requirement that Indian ownership be 51% of equity, as well as the removal of the three-year lock-in period for FDI equity transfers.

Governmental measures

According to the analysis from the consulting firm, which has three offices in India and one in Hong Kong, the Government of India (GOI) hopes to indigenise 60% of the weapons development in the defence sector. Currently, this figure stands at 33% produced locally, including advanced technologies such as Advanced Tower Artillery Gun Systems, Basic Trainer Aricraft HTT-40, and other naval systems such as ABHAY, HUMSA, and others.To meet its objective of further indigenisation, GOI has been particularly active in supporting the sector, in a regulatory and a financial sense. For example, the sector was cleared for private investments, with licensing conditions attached, in 2001. The government also began a number of policy initiatives such as the Raksha Udyog Ratnas, which allows selected firms in the country to openly collaborate with foreign firms and be treated at par with public sector defence companies in the country.

Financially, GOI has significantly increased the budget allocation for the defence sector. This year, the budget allocation for the sector shot up by 6% to reach a value of $38 billion (Rs. 2.5 lakh crore), which accounts for 1.9% of the GDP of the country.

Privatisation efforts

However, the primary challenge for GOI remains incentivising private investment in the sector, as the lion’s share of defence enterprises in the country are currently state-owned, thereby lacking the competitiveness required for substantial growth. As a result, GOI has taken a number of incentive measures to encourage the entry of private players.

For example, the licensing system around weapons manufacturing has been considerably relaxed. At the state level, a number of governments have begun to offer subsidies on construction costs and external borrowings, as well as exemptions from power costs and tax reimbursements.

Manufacturing firms that also engage in R&D are eligible for a weighted tax deduction of up to 200%.  And the GOI has established a Defence Innovation Fund, aimed at encouraging R&D in the field. Initial finance for the fund will come from Bharat Electronics, which is a state-owned enterprise working in the defence sector. The capital expenditure to procure equipment from local vendors increased from Rs 31,500 crore , which is 47% of the total procurement value, to Rs. 41,800 crore (60.5%).

As India emerges as an economic powerhouse, both as a driver of regional growth and as a global economic power, it is, according to officials, important for the defence sector to privatise operations, thereby reducing the financial burden on the government and increasing the efficiency of the army.