The recent Indian Defexpo 2010 (February 15-18) was “Asia’s biggest arms bazaar”, the sixth biennial exhibition of land and naval defence systems, with over 650 companies and official delegations from many countries around the world assembled in New Delhi. There was much discussion (for example, a lead article in Time magazine declared ‘For the Arms industry, India is a hot market’) not only of what was on offer but also of issues such as the potential of the Indian defence market (estimated to be 100 billion USD by 2020) and the growing presence of US, Israel, and even the UK as sources of competition for the traditional Indian business partners, such as Russia.

India is one of the top ten defence spenders worldwide. From 1998 to 2008, India’s military spending rose by 44 percent, and in the last five years expenditure was double that of the preceding five years.

(Sources SIPRI and UN)

Since India relies heavily on import of militarywares, rather than domestic production, it has consistently been one of the largest recipients of conventional weapons - between 2004-08, it was the second largest recipient of major weapons, second only to China - and its expenditure constituted seven percent of the world’s total (here). In terms of Arms Transfer Agreements between 2001-2008, India was also one of the two leading recipients here. Field trials are ongoing in India for the biggest arms deal in the world, worth 10.4 billion USD. Modernisation and security are thought to be the reasons for this.

From the nineties onwards, there has been a rapid and dramatic change in the defence sector globally with an increased concentration of the industry: the arms sales share of the top 5 companies worldwide has risen from 22 to 43 percent in the period 1990 to 2005, and there has been a reversal towards the ‘spinning in’ of civil technology into the defence sector (see SIPRI’s report on concentration in the arms industry).

In India too, the last decade has been marked by fundamental and significant changes. The first Defexpo was held in 1999, private sector was allowed entry in the sector in May 2001 (with a cap at 26 percent for foreign direct investment (FDI)), fast track procedures (FTP) for urgent procurement were introduced in September 2001, the formalised Defence Procurement Procedure was first rolled out in 2002 and then subsequently reviewed.

At present, nearly 70 percent of defence needs are met through imports. From 2006 onwards, the concept of ‘offsets’ was introduced and revised to include offsets banking recently, so that deals over 3 Billion INR in some categories (but not all, FTP excluded, for example) require an offset of minimum 30 percent investment back into India. The intention is to promote indigenisation of the defence industry, and there was emphasis on this in the official statement at the opening of the Defexpo this year. In addition, India’s first aerospace/defence SEZ was set up in November last year in Karnataka.

Within this developing framework of incremental learning and institutional change, and leaving aside the various actual and possible instance of rent-seeking behaviour (there are reports of recent scandals in defence deals) within the sector, it is quite important that there be a conscious effort to broaden the public discourse and encourage uninvested commentators on defence issues. This polyvocality will lead to greater scrutiny of the reasons for, and directions of, the increasing defence spending. It will also ensure a sustained focus on genuine indigenisation, something that will not only be good democracy, but also good economic common sense.

At the moment, research reports produced by the arms industry and the private sector (for example, the CII-KPMG report 2010) are constructing the debate in terms of the relative “attractiveness” of the Indian defence sector, and advocating the adoption of largely market-based solutions. This includes the trading of offsets, use of multipliers, rollover defence budgets, less “demanding” tax regimes, removal of “barriers to entry”, and increasing the cap on FDI from 26 to 49 percent (something for which apparently there is a “clear expectation” of). The role of incentives is important for the perspective defence contractors have on issues such as India’s borders (“15,000 kms, running through a variety of terrains”) or homeland security (“worth an additional 9.7 billion USD by 2016"), or see trade-offs (“the need for transparency, probity and public accountability should not be at the expense of efficiency and the proper use of discretion and cost-benefit trade-off judgements”), or set up comparators (“countries like Turkey, Greece, Saudi Arabia and Kuwait are doing better than India” on the offsets policy).

The modernisation of equipment must follow, and not precede, a modernisation of procedures and relationships.There needs to be a greater awareness of the pressures from the private sector (“industry demands”), both foreign and domestic. The laudable intent to indigenise must not result in a greater replication of foreign pressures within the domestic territory by firms in lucrative tie-ups, whose incentives are now aligned with foreign players. Equally, there must be an understanding that such indigenisation must not “crowd out” investment from other domestic industries (civilian, agricultural, and so on) as they move into the defence sector.

The conventional characterisation, in economics, of civilian and defence spending in terms of guns versus butter production has always served to help argue that guns must be produced before butter (viz., if you don’t make guns, you can’t secure the butter, and will end up with neither); but this is a fallacy, as security includes economic and livelihood security (if you make too many guns before making enough butter, the starving may turn those guns at you or upon themselves).

Defence is a bread and butter issue for any democracy, especially for a country like India, with a high opportunity cost to the money spent, coupled with typically low levels of social investment. A country is vulnerable not only when it is attacked by terrorists (though it is most visibly vulnerable then), but also when its people are vulnerable (and there are enough routinely starving and destitute to testify to that). The issue of defence spending must not be seen in terms of India competing to be an attractive investment target; it should be driven by demand and not supply (with a vigilance against demand-creation).

Concrete policy shifts must be widely debated along with the burden of evidence, as they set specific precedents. Finally, defence should be more about rationality than emotions, even rhetorically. Guarding the territorial sovereignty of each inch of land is a worthwhile emotion but not the best opening line with international arms manufacturers eager to sell anyway. Especially when there is a perception that such spending is being done by India with China in mind (China was not invited to Defexpo 2010), which is also unhelpful regional diplomacy. Securing a homeland within and without need not be a zero-sum game with the neighbours.

A healthy dose of cynicism is essential to keep aware of the interests of foreign arms manufacturers at the time of a recession which has hit the west badly. In large parts of the world, economics of militarism has been obvious. In India, in these incipient stages, it is crucial to prevent the entrenchment of a strong and systematic private-military-industrial complex which eventually creates its own political lobbies and renders bureaucracy and government oversight toothless.

The ten countries with the highest military expenditure in 2008 and their ranking in terms of Human Development Index (HDI).