India no Longer the Largest Importer of Arms: What explains the drop?

India slide to the second position in Arms import does not seem to be either because of any drop in the demand for military hardware or on account of any noticeable upswing in domestic production to substitute imports. The author deliberates........

India is no longer the largest importer of arms. According to the Stockholm International Peace Research Institute’s (SIPRI) Fact Sheet released in March 2019 Saudi Arabia overtook India in arms imports during the period 2014-18. As a matter of fact, during this period there was a negative 24 percent change in the volume of defence imports by India, compared with the preceding five years (2009-13), bringing down its share of the global arms imports from 13 percent to 9.5 percent during the same period.

This should have been good news, except that India’s slide to the second position does not seem to be either because of any drop in the demand for military hardware or on account of any noticeable upswing in domestic production to substitute imports. Ideally, the slide down the list of the largest importers should have been the result of India progressively increasing domestic production to meet the requirement of arms and ammunition, but that does not seem to be the case.

India has a long list of the military hardware it requires. The requirement ranges from small arms and ammunition to artillery guns and air defence system; unmanned aerial vehicles and helicopters to fighter aircraft; and, submarines and other naval vessels to an aircraft carrier, just to give an idea of the enormity of the demand. There was no let up in the demand during 2014-18. If anything, the demand has gone up with more and more of the in-service equipment reaching the end of its useful life.

As for the upswing in domestic manufacturing in the defence sector, there is little evidence of the outcomes matching the extravagant hype about the ‘Make in India policy concerning the defence sector. According to the forty-second report of the Standing Committee on Defence, presented to the parliament in March 2019, as many as 187 contracts with the total value of Rs. 2,40,814.22 crore were signed between 01.04.2015 and 30.11.2017.  This included 119 contracts with the Indian vendors for a total value of Rs. 1,16,522.89 crore and 68 with the foreign vendors involving Rs. 1,24,291.33 crore. This works out to an average of Rs 980 crore per contract awarded to the Indian vendors and Rs 1,828 crore per contract awarded to the foreign vendors, which is hardly an indicator of decreasing dependence on imports.

Even if this is dismissed as statistical mumbo jumbo, the same report also shows that the imports during the aforesaid period included several items that India has been importing for a long time, such as rockets, simulators and component level repair facility for tanks from Russia; laser designation pods, radars, radios, weapons and missiles from Israel; aircraft, helicopters, missiles, artillery guns and simulators from the USA; and, aircraft, ammunition, bimodular charge system, and high zone modules of artillery guns from France. This reinforces the view that there was no decrease in India’s dependence on imports during the said period.

So, if a let up in the demand or spurt in domestic manufacturing of defence items are not the reason why India is no longer the largest importer of arms, what is it that explains India’s drop to the second spot in the list of the largest importer of arms in the world during the period 2014-18? Three factors come to mind immediately.

First, statistically speaking, India was simply outrun by Saudi Arabia with a whopping 192 percent change in the volume of its total arms imports during 2014-18 vis-à-vis its imports during 2009-13. This is not surprising. Saudi Arabia consistently spent far more than India during the first four years of the period in question for which the data is available. Consequently, during this period its share of global imports went up to 12 percent from 4.3 in the preceding five-year period. (See Fig. 1) It would not be surprising if this trend continued in 2018 as well.

The gap between the spending by the two countries may have narrowed down somewhat in 2016 and 2017, but the spurt in the spending by Saudi Arabia in the preceding two years and consistently high levels of spending in terms of its share in the Gross Domestic Production (GDP) vis-à-vis India’s defence outlays evidently took the country ahead of India as importer of arms. During the period in question, Saudi Arabia was the largest importer of arms from the United States of America, the United Kingdom, Switzerland, Sweden, and Canada. No other country was the largest importer of arms from that many countries during the said period. This trend was in keeping with one of the Kingdom’s strategic objectives, which is to modernize its weaponry and armament. There is just no way India could have possibly matched this level of spending, even if there were no negative growth in its imports.

Which brings us to the second possible factor that accounts for India coming down in the list of the largest importers of arms. The allocation for capital expenditure has always been modest but the trajectory of growth in capital outlay during the period 2014-18 was evidently more modest than the increase between 2009 and 2013; in fact, even this modest trend was actually interrupted by a small drop in the allocation in 2016-17. (See chart)

(Note: These figures, sourced from the Demand for Grant for the relevant financial years exclude the allocation in respect of the Ordnance Factories, Defence Research & Development Organisation, Inspection Organisation, Ex-servicemen Health Scheme, and the National Cadet Corps)

The almost-flat trajectory of allocation for capital expenditure accounts for a massive gap between the requirement of funds projected by the armed forces and the allocation actually made during the entire period from 2008-09 to 2017-18 as per the data are given in various reports of the Standing Committee on Defence. (See Fig. 2)

It can be seen from Fig. 2 that the gap between the projection and allocation was narrower between 2008-09 and 2012-13, but it became substantial in the following years. That the difference came down from Rs 43,759.75 crore in 2013-14 to Rs 35,726.38 crore in 2017-18 does not imply slow-down of demand as in 2018-19 it again rose to Rs 51,925.48 crore(1.3-16/42). This persistent gap indicates underfunding of the capital acquisition plan of the armed forces, more so during the 2009-13 period than between 2014-18.

It would not be wrong to assume that had the gap during the later five-year period been as narrow as, during 2009-13, the armed forces would have been able to procure more equipment, with a substantial portion of the procurement being from the foreign companies in the absence of a robust defence industrial base in India. In essence, therefore, India’s coming down to the second position in the list of the largest importers of arms has a direct linkage with under funding of the acquisition plans.

The third factor that apparently accounts for the change in India’s status as the largest importer of arms is the disorganized way in which the policy initiatives were taken and implemented. Tied to its ‘Make in India' rhetoric, MoD had no option but to refrain from awarding many big contracts to the foreign companies under the Buy and Make or even Buy (Global) categories, which is now probably seeking to replace by the SP model. This may have contributed indirectly to the slowdown in India's imports without a corresponding increase in domestic production.

Delivering his maiden budget speech, the then Finance Minister, Arun Jaitley had said on 10 July 2014:

"India today is the largest buyer of Defence equipment in the world. Our domestic manufacturing capacities are still at a nascent stage. We are buying a substantial part of our Defence requirements directly from foreign players. Companies controlled by foreign governments and foreign private sector are supplying our Defence requirements to us at a considerable outflow of foreign exchange. Currently, we permit 26 percent FDI in Defence manufacturing. The composite cap of foreign exchange is being raised to 49 percent with full Indian management and control through the FIPB route."

It is surprising that raising the cap of 26 percent on Foreign Direct Investment (FDI) should have been seen as a means of bringing down the dependence on imports. The little addition Rs 16.83 crore since the raising of the cap (the total FDI had gone up from Rs 24.36 crore in May 2014 to Rs 41.19 crore in December 2018) clearly shows the ineffectiveness of the policy to promote domestic defence production by raising the cap on FDI.

The next major step was taken when a revised Defence Procurement Procedure (DPP) was promulgated in April 2016, with a view to aligning it with the imperatives of ‘Make in India’ in defence. The most significant of various new features included in this DPP, was the introduction of a category called Buy (Indian Designed, Developed and Manufactured), or Buy (IDDM), and splitting of the ‘Make’ category to enable the Indian industry to take up design and development projects without any funding from the Ministry of Defence (MoD). This was followed a year later by the introduction of the Strategic Partnership Model (SPM) in 2017. The SPM is intended to boost domestic defence manufacturing with the help of transfer of technology from the foreign manufacturers to the private sector companies in India in four strategic segments: aircraft, helicopters, submarines and armoured fighting vehicles/main battle tank.

Since 2016, the Acceptance of Necessity (AoN) has been accorded in a large number of cases under the Buy (IDDM) as well as other categories like ‘Buy (Indian)' and ‘Buy and Make (Indian).' But AoN is merely an approval-in-principle to start the tendering process, and it will take, on an average, three to five years, to complete the process before awarding the contract. Going by the past experience, many cases could fall through on the way. Meanwhile, the MoD is yet to finalise the modality of selecting the Indian companies which could be enlisted as potential strategic partners under the SP model is still to be worked out.

The impact of these policy initiatives will be known in the years to come, if and when contracts get awarded to the Indian companies, especially under the SP model, and the Indian companies start making the equipment in India, which is presently being imported. It is difficult to say when will this happen, but one thing is sure, which is that these policy initiatives have held the MoD back from awarding contracts to the foreign companies, thereby indirectly contributing to the slow down in imports and, fortuitously, resulting in a welcome slide to the second slot in the list of the largest importers of arms.

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