Funding Crunch Leaves Modi’s Military Purchases a Pipe Dream

Anurag Kotoky and Bibhudatta Pradhan
1 / 2

Funding Crunch Leaves Modi’s Military Purchases a Pipe Dream

(Bloomberg) -- Global companies from Lockheed Martin to Sweden’s Saab AB are offering military hardware from submarines to helicopters to Prime Minister Narendra Modi’s government as part of his $250 billion defense modernization program. But bureaucratic delays and a funding crunch has made future deals next to impossible.

Airbus SE won a $1.7 billion contract to supply transport planes to the Indian Air Force in 2015 -- it’s first military agreement in the South Asian nation since 1962. Five years later, that deal is yet to be signed.

India’s inability to speed up the modernization of its weaponry to guard the border with arch rivals Pakistan and China shows the Modi-led administration’s challenge to transform an industry plagued by red tape. While New Delhi is the world’s fourth-biggest military spender, its air force, navy and the army are still equipped with weapons that are largely obsolete.

“The defense procurement procedure needs major, thorough reforms, not just an update,” said Jon Grevatt, the Asia-Pacific defense industry analyst with Jane’s, adding the complex approval processes and lack of finances are the main drag on military modernization. “Unless the Modi government really introduces major reforms into its procurement process then we will continue see delays.”

No Orders

An air of despondency hung over the gathering of top arms manufacturers last week in Lucknow, a nineteenth century battleground city in northern India. Executives heard Modi and Defense Minister Rajnath Singh extolling the need to modernize, collaborate and export out of India, while remaining silent on future orders.

A historic mandate about six years ago handed Modi a unique opportunity to aggressively buy arms, without fearing the political opposition that often derails such purchases. But implementation has been poor. The prime minister has missed that window of opportunity, at least seven executives said, asking not to be identified as they still do business with the government.

A Defense Ministry spokesman wasn’t immediately available to comment.

About 60% of defense spending goes to paying salaries for India’s 1.3 million soldiers -- one of the world’s largest standing armies. What’s left is spent on past purchases, leaving the forces with obsolete equipment and not enough ammunition.

India’s spending in the year starting April 1 will be $47.34 billion, of which $16.2 billion is for capital expenditure and of that, about 90% is devoted to existing obligations and committed liabilities. That leaves little to meet demands for weapons purchases and modernization.

Time Lag

The political leadership is well aware of the need for modern weapons. The mainstay for Indian Army’s artillery are the Swedish-designed Bofors guns bought in the 1980s, while the air force and navy have an aging fleet of Soviet-era aircraft and warships.

The process to buy fighter jets started more than a decade ago. When talks stalled over price and quality guarantees, the government scrapped the purchase of 126 fighter jets in 2015 and instead bought 36 Rafale jets separately. In 2018, it began the process to buy another 114 aircraft.

Aiming to develop a robust military industrial base, Modi’s government has revised defense procurement procedures, pushed for long-term strategic partnerships between Indian companies and global equipment manufacturers, further eased overseas investment regulations and diversified weapons suppliers.

Meanwhile, the U.S. State Department has approved a possible sale to India of an Integrated Air Defense Weapon System, that includes radar systems, missiles and rifles at cost of $1.8 billion, the U.S. Defense Security Cooperation Agency announced Monday. It comes ahead of President Donald Trump’s two-day visit to India starting Feb. 24

Still, a parliamentary panel said implementation of the strategic partnership model which envisaged private players building military platforms like submarines and fighter jets in partnership with major global defense companies remains a non-starter. That’s mostly because of a lack of coordination in attracting foreign defense companies to set up local manufacturing, according to the 2018 report.

Technology Transfer

Saab AB pulled out of the race to locally build submarines after it realized it would have to assume all liabilities but wouldn’t have control over the venture. The company, which is pitching its Gripen jets to the government with billionaire Gautam Adani’s defense business, has now made clear it wants control of the venture if it’s required to transfer state-of-the-art technology to its local partner.

During the last three financial years till 2019, 149 capital acquisition contracts were signed and of these, 58 contracts worth about $20 billion were placed with foreign vendors, the defense ministry told parliament in December. These are small ticket items only, the company executives said, not submarines, jets or helicopters. Procurement from Indian vendors also fell to its lowest level in five years to financial year 2019.“We are at least convinced that Saab and also other global original equipment manufacturers would be willing to transfer more technologies to India, if we have majority of control,” said Ola Rignell, chairman and managing director of the Saab India Technologies Pvt. Ltd.

(Updates with U.S. announcement in 13th paragraph)

To contact the reporters on this story: Anurag Kotoky in New Delhi at akotoky@bloomberg.net;Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net

To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, ;Young-Sam Cho at ycho2@bloomberg.net, Unni Krishnan

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.