India to Reduce Defense Budget, Boost Local Weapons Production

India, the world’s seventh-largest defense spender in 2011, will reduce its military budget and boost domestic weapons production as the government tightens its spending, Defense Minister A.K. Antony said.

“The government is passing through difficult days,” Antony told a press conference yesterday in Bangalore at the Aero India 2013. “But there won’t be any cut that will affect the operational preparedness of our ground forces.”

The plan to cut spending comes as defense equipment makers including Boeing Co. and MiG Russian Aircraft Corp. compete in a market where weapon purchases were estimated to increase. KPMG International last year had estimated India over five years will seek bids for $42 billion of military hardware.

“This is essentially being targeted to reduce the revenue expenditure such as pay and allowance, while not hurting the capital expenditures and won’t affect the acquisitions and military modernization programs,” said Deba Ranjan Mohanty, chairman of Indicia Research & Advisory, a New Delhi-based defense researcher. “This temporary reduction comes because of political compulsions keeping a view on the next general elections.”

India’s central bank last month said the country’s economy will expand 5.5 percent, the slowest since 2002-2003. The current-account deficit is expected to have widened in the quarter ended December, the central bank said, from a record $22.4 billion in the previous three-month period.

Pakistan Tension

Finance Minister Palaniappan Chidambaram said in an interview last month that he plans to stick to a budget deficit target of 4.8 percent of gross domestic product in the year through March 2014 from 5.3 percent in the previous year. Government spending and a drop in the rupee have contributed to an inflation rate exceeding 7 percent, even as economic growth slows.

The South Asian nation tripled its military outlay over the last decade. India has ramped up its defense budget and made changes in policy to procure weapons to upgrade and modernize its military, both to thwart its traditional rival Pakistan as well as counter China’s rising power.

Last month, India and Pakistan traded accusations of deadly violations of their border truce in the disputed Himalayan region of Kashmir, casting a shadow over moves to improve ties between the rivals. The two nations have fought three wars since their independence from British colonial rule in 1947, two of them over claims to Kashmir.

Local Production

Prime Minister Manmohan Singh’s government seeks to raise the proportion of defense equipment produced at home to 75 percent from about 30 percent in the next 10 years. The country depends on imports for about 70 percent of its 1.93 trillion rupees ($36 billion) annual defense budget.

The government aims to increase local production of weapons and reduce imports, Antony said today.

“We are very serious about indigenization,” said Antony. “I don’t believe that there can be zero imports in defense, but we want to substantially reduce imports.”

In 2011, the government revised its policy on military procurement, further encouraging private-sector companies to expand into a new market. The new procedures added a “buy and make Indian” provision. For contracts that require certain expertise, only local companies, including joint ventures with overseas companies, can enter bids.

‘Fine-Tune Policy’

India also tweaked rules governing local purchase requirements. Foreign suppliers were required to source at least 30 percent of a defense contract from local companies, a rule known as offset policy. The scope of that had been expanded to allow foreign arms makers to purchase civil aerospace components, and offer weapons and services for homeland security, to meet the obligation.

“We’re fine-tuning our policy on procurement and we’ll have a new defense procurement policy and offsets,” said Antony. “For every procurement, transfer of technology is a must.”

In November, China achieved a military milestone when a homegrown fighter jet landed on its new aircraft carrier, in its modernization bid that’s recorded advances in submarines, cyber warfare and in outer space.

China, the biggest spender on defense after the U.S., has doubled its defense budget since 2006. The country’s military spending last year was estimated at 670 billion yuan ($107 billion).