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India's Promise of Defense Funding Boost Fizzles

Jul. 12, 2014 - 03:45AM   |  
Lower Numbers: Arun Jaitley, India's finance and defense minister, leaves his office to table the budget in Parliament in New Delhi on July 10. The proposed defense budget is well under expectations. (AFP/Getty Images)
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NEW DELHI — Despite the new administration’s plans to hike defense spending by 20 percent, funding will rise by only 2.3 percent above proposals announced by the outgoing government due to India’s sluggish economy.

In addition, the government is boosting foreign direct investment (FDI) from 26 percent to 49 percent. Yet analysts say that since foreign investors lose out on the control that a 51 percent stake provides, the new FDI limit still won’t be lucrative for the overseas firms.

Arun Jaitley, who is dual-hatted as defense minister and finance minister, on July 10 proposed to Parliament a $38.16 billion defense budget for fiscal 2014-15. The outgoing administration had proposed a budget of $37.3 billion. The new proposal is 12.1 percent higher than the fiscal 2013-14 budget.

Under the Capital Head, used to buy weapons and equipment, the minister has allocated $15.76 billion compared to $14.93 billion proposed by the previous government, a jump of 5.6 percent.

However, the bulk of the increase — $1.5 billion — is for research and development, leaving almost no additional money for weapons and equipment, a Defence Ministry source added. The research-and-development budget is 55.6 percent higher than the former government proposed.

Ongoing research projects of the Defence Research and Development Organisation include ballistic missiles, medium-range sur­face-to-air missiles, the air variant of the BrahMos supersonic cruise missile, 155mm artillery guns, Navy light combat aircraft, UAVs and sea-launched missiles.

The spending hike is insufficient for the defense forces, which were expecting much more from the new government.

The MoD has projects worth more than $20 billion awaiting final clearance in this financial year. To pay 10 percent of the total $20 billion, as required for new programs, MoD will need an additional $2 billion in the Capital Account Head.

The projects that are nearly finalized include:

■ $12 billion for the Medium Multi-Role Combat Aircraft (MMRCA) program, with French company Dassault as the preferred bidder.

■ $1.5 billion for eight mine countermeasures ships from Kangnam of South Korea.

■ $1.2 billion for six Airbus A330 tankers.

■ $1.1 billion for 22 Boeing Apache attack helicopters.

■ $1 billion for 197 light utility helicopters.

■ $833 million for 15 Boeing Chinook heavy-lift helicopters.

■ $600 million for light howitzer guns from BAE Systems.

■ $350 million for 1,418 Israeli-made thermal imaging sights for T-72 tanks.

■ $250 million for 262 Barak mis­siles from Israel Aerospace Industries.

■ $200 million for 98 Black Shark torpedoes from Italy’s WASS.

A senior Indian Army officer said that with practically no hike in defense spending over the outgoing government’s proposals, the bulk of the fund will be used to pay for past commitments, leaving little for buying new equipment.

With a meager spending hike, the major defense project most likely to be affected will be the MMRCA program. An Air Force official said the program is expected to cost $20 billion, well above the $12 billion when the request for information was floated in 2007.

“Government’s capacity to spend, whether on defense or any other sector, depends on how much revenue it is able to generate, which, in turn, is dependent on the state of economy,” said Amit Cowsish, retired MoD financial adviser and defense analyst. “There is not much that, in my view, government can do to increase the defense budget at a time when the growth has slumped to below 5 percent, except for taking measures to revive the economy to generate higher revenues so that it could make higher allocations not only for defense but other sectors also.”

As for the increase in FDI limits, the domestic industry opposed any move by the government to increase beyond 49 percent. Earlier, the government was contemplating raising the limit to as high as 74 percent for defense projects that involve transfer of technology.

Ever since the domestic sector was opened to FDI in 2001, only $5 million of foreign investment has trickled into the domestic industry.

“There was increased expectation that the new government will announce a major jump in defense spending and also increase the FDI to a level where the foreign investor will find it lucrative to invest in domestic defense industry,” said Nitin Mehta, a defense analyst. “The budget announcements have been a big climb down.” ■


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