Why defence production is yet to achieve its real potential

DEPENDENCE on imported weapons has always been a public policy concern in India since they adversely affect precious foreign exchange reserves. However, there are good tidings for India’s domestic Military-Industrial Complex (MIC). One indication came early this year when the MIC’s turnover crossed Rs 1 trillion. Now, a fact sheet released recently by Swedish think-tank Stockholm International Peace Research Institute (SIPRI) speaks about the robust growth of some Indian weapon production companies. These indicators, amidst a sluggish global growth, vindicate the public policy initiatives for the expansion and consolidation of the domestic MIC and self-reliance in weapon production.

As per the fact sheet, titled ‘The SIPRI top 100 arms-producing and military services companies, 2022′, the revenue of the top 100 arms-producing and military services companies totalled $597 billion last year, a decrease of 3.5% in real terms compared to 2021. While this decrease is partly attributed to many Russian companies not reporting their revenues in 2022, a significant proportion of the decrease is also attributed to US companies doing miserably last year. The total arms revenue of 42 top 100 companies headquartered in the US fell by 7.9% to $302 billion in 2022. Apart from the US and Russia, the countries whose MICs have been in a torpid mode are the UK, France, Italy, Spain, Japan, South Korea and Singapore.

India is one of the few countries to have bucked the trend. There were three Indian companies in the top 100 in 2022 — one more than in 2021. Their aggregate arms revenue went up by 7.4% to $6.4 billion. With a 28% revenue increase — due to the delivery of warships and submarines to the Indian Navy — Mazagon Dock Shipbuilders (ranked 89th) entered the top 100 for the first time. SIPRI’s statistical presentations sound sweeter as India’s arch-rival China registered a revenue growth of only 2.7% for its arms companies.

Besides the SIPRI fact sheet, the defence production data available on the dashboard maintained by Department of Defence Production also provide some positive insights about the quantum jump in defence production. The production has gone up by more than 30% from Rs 74,000 crore in 2016-17 to more than Rs 1,00,000 crore in 2022-23. The trends so far indicate that the target of Rs 1,35,000 crore for the current year seems realistic.

Credit should go to the established defence PSUs whose turnover has gone up by more than 50% during the same period. They form the major constituent of the domestic MIC. After the corporatisation of ordnance factories as new defence PSUs, the collective share of the PSUs in defence production has gone up to 75%. Concurrently, defence procurements from domestic sources have gone up to 75% and defence exports touched almost Rs 16,000 crore in the last fiscal.

Yet, the production upsurge should not become a cause for complacency since India has a huge ground to cover at the global level. For instance, India has only three companies on the SIPRI list of the top 100 arms-producing companies. India accounts for only 0.2% of the global arms exports. We may be exporting arms to about 85 countries, but they are mostly small and ancillary weapons. Most importantly, India perpetually remains either the first or second largest weapon importer on the SIPRI list of arms-importing countries, accounting for almost 11% of the global arms imports.

Together, these statistical revelations dilute the charm offensive around the recent turnaround in domestic weapons production.

Several factors explain why the domestic defence production is yet to achieve its real potential.

First, the ordnance factories, despite corporatisation and numerous other public policy reach-outs, are not able to usher in a substantial take-off. From 2016-17 to 2022-23, the annual turnover of ordnance factories increased from Rs 14,825 crore to Rs 16,998 crore, an increase of a mere 14.66%. Perhaps, it would take a couple of years more before they get metamorphosed into corporate businesses and expand their turnover as well as profit.

Second, the private sector has also been loath in taking advantage of numerous policy initiatives to reform the defence sector and ensure a level playing field for themselves vis-à-vis the defence PSUs that had a monopolistic domination of the country’s MIC until recently. During the same period, the turnover of the private sector has gone up from Rs 14,104 crore to merely Rs 19,925 crore. Though this is a healthy increase of 41.27%, it does not do justice to the huge policy investments in the defence sector. The contribution of the private sector in the total turnover is only 18.65%.

Third, there is a healthy progress in the two defence industrial corridors (DICs). While the one based in Uttar Pradesh has managed an investment of Rs 2,656 crore so far, the Tamil Nadu-based DIC has garnered Rs 4,085 crore; the target for each DIC is Rs 10,000 crore by 2024. The DIC-based experiment seems to be fruitful, as is evident from the substantial investments, numerous proposed joint ventures and specialisation-based production plans. Unfortunately, these are the only two stand-alone examples and, therefore, do not do justice to the actual potential of the expansion and consolidation of the domestic MIC.

National security imperatives demand that we become self-sufficient in weapon production to reduce our dependence on foreign arms suppliers and the consequential supply-chain and technology-related vulnerabilities.

However, this is possible only if India’s domestic MIC proliferates and matures sooner than later. The growth trends so far are largely a consequence of public policy initiatives rather than of a proactive initiative from the MIC constituents. Therefore, while the observations of the SIPRI fact sheet are encouraging, there is a long way for India to go.

Views are personal