News Wrap: Modi Pushes Investment in Defense Industry

Indian Prime Minister Narendra Modi has made it clear that his time in office would be spent working to turn India into a manufacturing hub on global supply chains. Whether inaugurating his “Make in India” campaign or meeting with CEOs of major international companies to pitch them on investing in the Delhi to Mumbai Industrial Corridor, the Prime Minister’s first year in office has domestic and international observers waiting to see what types of economic benefits his manufacturing focus might deliver.   

Speaking at the opening of AERO India, a major international aerospace, defense, civil aviation, airport infrastructure and defense engineering conference held in Bangalore February 18-22, the Prime Minister pushed his next “Make in India” objective - boosting domestic defense manufacturing. While much of Modi’s efforts have been focused on the national level, LiveMint points out that specific states are now trying to get in on the action. 

“For the first time, some states that want to be partners in defence production and are keen to set up defence-related industries and special economic zones are also participating in the exhibition, including Karnataka, Gujarat and Andhra Pradesh. Also for the first time, defence minister Manohar Parrikar will chair a Make in India defence manufacturing investors’ summit and global chief executive officers (CEOs) conference.”

Financial Express notes that Modi’s focus is likely on creating large-scale employment opportunities in the defense sector. Noting that India imports up to 60 per cent in the defence sector, Modi said there are studies that show that even a 20 to 25 per cent reduction in imports could directly create an additional 100,000 to 120,000 highly skilled jobs in India. 

“If we could raise the percentage of domestic procurement from 40 per cent to 70 per cent in the next five years, we would double the output in our defence industry,” the Prime Minister said. 

Modi added that India’s defense industry will have more success “if we can transform the manufacturing sector in the country.”

As a Reuters article points out, Modi may be able to change some rules around repatriation of profits in order to increase technology transfer and thereby relinquish India’s position as the world’s top importer of defense equipment.  Modi indicated that the country's offsets policy, which requires original equipment manufacturers to invest a percentage of the value of a defense transaction in India, will be modified to encourage a higher degree of technology transfer, with less focus on simple assembly or production.   

“We have the reputation as the largest importer of defence equipment. This may be music to the ears of some of you. But this is an area where we do not want to be number one,” Modi said while standing before a display of Indian military planes at the air show.

The Wall Street Journal suspects that Modi may have more than just the economic side of defense trade on his mind. With China becoming increasingly aggressive in the Indian Ocean and a long-simmering border dispute with Pakistan that began when the two countries were created, Modi may be eying a strong defense agenda as well. 

“India, which has moved to modernize its fleet as China’s navy has increased its presence in the Indian Ocean, will build seven stealth frigates at domestic shipyards, said Sitanshu Kar, a spokesman for the defense ministry….His moves come as New Delhi faces an increasingly assertive and well-armed China in addition to longtime rival Pakistan. Chinese forays into the waters of the Indian Ocean and maneuvers along the countries’ long-disputed border have set off alarm bells in New Delhi. 

“Our security challenges are well known. Our international responsibilities are evident,” Mr. Modi told the air show audience in Bangalore on Wednesday. “We do need to increase our defense preparedness.” 

If India is able to curb its defense imports by producing more military products domestically, it could potentially enjoy the three-part benefit of lowering its current account deficit, increasing employment in a relatively labor-intensive but technologically advanced field and modernizing its military capabilities. Only time will tell whether this approach will work. It remains to be seen, for example, if foreign defense companies will be lured to India to form joint ventures and share their valuable technologies with Indian private companies and state-owned entities, especially if the foreign manufacturers are limited to 49 percent ownership of such ventures. Modi’s “Make in India” may eventually bump up against other countries’ desire to retain high-paying defense jobs.  One thing is for certain, however – Modi will continue to push India as an ideal destination for manufacturing, especially in technology-heavy fields like defense.