Arun Jaitley's defence dilemma: faces task of balancing two portfolios with ease
Sandeep Unnithan NA, June 6, 2014 | UPDATED 18:37 IST
Arun Jaitley
The incident rang yet another alarm bell on one of IAF's cruellest dilemmas: It has no choice but to continue operating over 200 vintage MiG-21s designed in the 1950s. The UPA government sat on a proposal to buy 126 Rafale aircraft for two years after the French fighter beat competitors from the US, Russia and Sweden to win the world's largest military deal valued at Rs.42,000 crore in 2011. Then it was time for elections and the UPA regime focused on doling out subsidies of overRs.200,000 crore. Then defence minister A.K. Antony pointed to the Tejas Light Combat Aircraft as an alternative for Rafale. The indigenous plane, however, is yet to enter combat service, even three decades after the project began. "The first LCA Mk-I squadron will be operational only by 2016-17 while the Mark 2 version that actually meets IAF's operational requirements is still on the drawing board at HAL (Hindustan Aeronautics Ltd). So the numbers required to replace MiG-21s are at least a decade away," says retired air vice marshal Manmohan Bahadur of the Delhi-based Centre for Air Power Studies.
Costly low-hanging fruit
Now, the task has fallen on Jaitley. He is the only finance minister ever to also hold the defence portfolio and, thereby, in charge of the country's economic as well as external security. Even if the ministry is a temporary charge "only for a few weeks", as he said, Jaitley has to wrestle with a dilemma. On the one hand, he will have to send proposals to the finance ministry and, on the other, he has to find resources to pay for them in the Union Budget due in the first week of July. That's no mean task. India's current growth rate of 4.7 per cent is the lowest in 25 years. Inflation stands at 8.6 per cent and fiscal deficit-the amount that the government borrows for its working-is over 4.5 per cent of GDP.
Piled on Jaitley's table are pending files on critical but costly replacements for India's antiquated war machine, including MiG-21s, dubbed 'flying coffins' as an alarming number have crashed; 12 in the past five years alone. That much of this hardware is desperately needed is beyond doubt, for it is critical to India's defence preparedness. The army aviation corps pilots, for instance, still fly 120 Cheetah light utility helicopters, literally to the edge of their endurance and service lives, to take supplies to soldiers at the high-altitude posts in Siachen. Like the MiG-21, the Cheetah was designed in the 1950s. A replacement has been delayed by over a decade. There is a need for M777 howitzers for the army's artillery corps, which has not imported a gun since the Bofors scandal over a quarter century ago. At least 10 of the pending proposals worth over Rs.66,894 crore are what the Modi Government calls "low-hanging fruit". These have completed technical evaluations, the penultimate stage before the military and the bureaucracy can sit down with foreign contractors to negotiate prices. Representatives of French jet-maker Dassault have held some 500 meetings with HAL in the past two years, and believe they could sign the contract for the Rafale fighter before the end of this financial year.
A series of such off-the-shelf buys could allow the NDA Government to see through its twin manifesto pledges of modernising the armed forces and fast-tracking defence purchases. Under the UPA government, defence acquisitions had stalled, particularly after charges of corruption in the 2010 purchase of 12 AgustaWestland VVIP helicopters cast questions on the role of several key officials in the deal. The Modi Government's recent directives to empower the bureaucracy could get the acquisitions going again. "If the message goes down the line, then the bureaucracy will be encouraged to speed up decisions," says former defence secretary Ajai Vikram Singh.
Little room for manoeuvre
Attractive as they may be, the defence deals will come at a heavy price. They will reinforce India's position as the world's largest buyer of military hardware, a dubious distinction it has held since 2010. Nearly half the Rs.57,796 crore that India sets aside for military equipment is spent on imports. It imports 14 per cent of the world's arms, nearly three times that of nearest competitors Pakistan and China.
Signing all 10 pending deals will mean the Government will pay foreign firms at least 15 per cent of the cost, or Rs.10,000 crore, upfront. Delays have escalated hardware costs. The defence ministry, for instance, budgeted aboutRs 42,000 crore in 2007 for buying 126 fighter aircraft in 2005. But the cost in 2014 could go up as high as Rs.100,000 crore, with each Rafale costing about Rs.590 crore. This means the Government will have to find additional funds since the defence budget has seen only a modest growth of 5 per cent each year. "With inflation at 8 per cent, this means the defence budget has actually been shrinking in real terms," says Laxman Kumar Behera of the Institute of Defence Studies and Analyses, Delhi.
Jaitley's challenge, therefore, will be to balance a Rs.230,000-crore budget that is traditionally skewed towards manpower costs rather than acquiring new hardware. India spends nearly 66 per cent of its defence budget on salaries of personnel, and only 33 per cent on acquiring equipment. And of the acquisition cost, nearly 90 per cent goes in paying annual instalments for deals already signed. This leaves little cash for fresh acquisitions. So, Jaitley will have to significantly increase the budget. He will have to address another related issue: The defence ministry has ignored a series of proposals for radical restructuring or downsizing to increase its fighting power. Each of the three services still projects its hardware requirements separately. This leads to a huge backlog of acquisitions which the slow-moving ministry is unable to clear.
The minister will also have to make money for the army's gigantic manpower accretion plan: A new mountain strike corps of 90,000 soldiers, nearly the size of the British Army, that will cost Rs.64,700 crore.
Creating indigenous capacity
This year, the Navy hopes to finalise a contract with South Korea's Kangnam shipyard to buy eight sophisticated vessels that can detect and destroy sea mines. This deal, worth Rs.8,800 crore, will be India's largest contract with the Far East Asian nation. South Korea's industry lagged behind India's in the 1970s, but thanks to a farsighted defence policy that roped in the private sector, it has become an arms exporter bidding to sell India jets and howitzers before breaking in with the Kangnam deal. "If there is a country India must swiftly emulate, it's South Korea," says a defence ministry bureaucrat. NDA has promised to boost the indigenous defence industry, including the private sector, which was marginalised under UPA, and raised foreign direct investment in defence from 26 per cent to 100 per cent. This is one reason why the defence budget will be closely watched by the corporate sector. "100 per cent FDI in defence will create jobs, ecosystems, self-reliance and spur technology transfer to India," says Shailesh Pathak, president, corporate strategy, Srei Infrastructure Finance.
However, off-the-shelf purchases could prove counter-productive to the thrust towards indigenisation. Such deals will open the floodgates for more demands from the Navy, Army and the Air Force. Some demands, such as the Navy's for 18 multi-role helicopters, are justified-it has not bought new helicopters for over 20 years and new warships are being inducted without rotorcraft-but others such as importing six conventional submarines worth Rs.36,000 crore under the Project 75 India seem quixotic at a time when Chinese nuclear-powered attack submarines have begun prowling in the Indian Ocean. There are also separate proposals for as many as seven new generation frigates together worth over Rs.48,000 crore that could skewer indigenous defence capability.
Then there are contracts for home- manufactured hardware that may look attractive but add little value to indigenous capability. "It is shameful that despite spending over Rs.23,000 crore to build six Scorpene submarines, we are importing all components including the fire control system," says retired vice admiral K.N. Sushil.
"If India resumes off-the-shelf imports of defence hardware, indigenisation will be set back by decades," warns Rahul Chaudhry, CEO of Tata Power SED. A cheaper and yet unexplored option, he says, will be for the Government to encourage the private sector to buy foreign firms to gain access to technology. At least two Indian firms-Tata Power and Bharat Forge-have bought foreign gun manufacturers and are competing to sell indigenous guns to the Army. Clearly, such out-of-the-box solutions should form part of the finance minister's customary promise in the budget speech: "Constraints will not come in the way of providing any additional requirement for the safety of the nation."
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