Wanted: a coherent defence manufacturing policy

Uttar Pradesh is set to receive a defence industrial corridor projected to attract an investment of Rs20,000 crore.  the Yogi Adityanath government expects defence manufacturing to be one of the key drivers of industrialization in the state. The problem is, without a coherent manufacturing and acquisition policy from the defence ministry or the central government, achieving that objective will be tough.

The Union defence ministry is increasingly falling short of funds. So much so that some fear that the fast rising allowances and pension costs are crimping funds for modernization and capital spending, the key drivers for local defence manufacturing. The accompanying chart says it all.

For instance, in the recent Union budget, less than 10% of the incremental hike in defence allocation went to fund modernization, shows an analysis by Laxman Kumar Behera, research fellow at the Institute for Defence Studies and Analyses (IDSA). “The share of pay and allowances and pension in the ministry of defence allocation has been increasing consistently since the mid-2010s. A large part of this increase has come at the cost of the modernisation budget, which now accounts for less than one-fifth of the ministry of defence’s total allocation, down from a high of 26%,” Behera said in a note. “This is highly undesirable and needs to be corrected at the earliest for the sake of India’s robust defence preparedness.”

To be sure, given the limited government resources, the Adityanath government can bank on the private sector to build the defence industry. But there are shortcomings here too. Despite the government’s good intentions, domestic defence manufacturing has not taken off in a big way. In fact, a section of the private sector is beginning to tone down its expectations, reflective in another which says that a UK defence industry body which represents over a thousand defence firms is shutting its India office.

The lack of a long-term defence procurement plan and ill-advised conditions such as technology transfer in a stipulated time frame hampered defence sector development in India, says Yellapu Santosh, senior research analyst (institutional equities) at IndiaNivesh Securities Ltd.

According to IDSA’s Behera, the paucity of contracts has been a big dampener. “In defence you only have one customer. You produce against an order or an assurance (which is lacking),” he says.

Behera says the government should have a two-pronged strategy. One is to fast-track contracts and the tender-awarding process. The second set of measures involves a policy push where the government should bring out Indian industry-specific tenders with time-bound awards (contracts for local production). Incentives for defence investments, such as tax incentives or benefits awarded to infrastructure sectors like power, are also needed. It is only then that the private sector will be encouraged to invest.livemint