1

DR. RAM MANOHAR LOHIA NATIONAL LAW

UNIVERSITY, LUCKNOW

Import of Defence Equipment and its Effect on Indian

Economy

SUBMITTED BY:

SRISHTI BHARGAV

180101139

SEC: B

SUBMITTED TO:

MITTALI TIWARI

Asst. Professor
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Table of Contents

1. Acknowledgment……………………………………………………………………3

2. Introduction And Plan of Study……………………………………………………..…4

3. Literature Review………………………………………………………………..…….8

4. Reasons for largest importer in the world: Defence Equipment……………………...11

5. Effect on the economy…………………………………………………………….….14

6. Policies of Government of India……………………………………………………..16

7. How to control excessive import…………………………………………………….19

8. Reference…………………………………………………………………………….24
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ACKNOWLEDGEMENT

I express my gratitude and deep regards to my subject teacher Dr. Mitali Tiwari for giving me

such a challenging topic and also for her exemplary guidance, monitoring and constant

encouragement throughout the course of project.

I would also like to thank the librarian of Dr. Madhu Limaye Library who extended their

assistance to me by helping me in providing some research material.

Lastly, I thank almighty, my family and friends for their constant encouragement without which

this assignment would not have been possible.

I know that despite my best effort some discrepancies might have crept in which I belive my

humble Professor would forgive.

Thanking You All

Srishti Bhargav
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INTRODUCTION AND PLAN OF STUDY

India is the largest importer of defence equipment in the world according to the Stockholm

International Peace Research Institute. India increased its arms imports by 43 per cent

(Rajagopal, 2018), between 2007–11 and 2012–16. In the last four years India’s imports were

far greater than those of its regional rivals China and Pakistan, SIPRI said in its report released

today on international arms transfer. There is a reason behind the largest importer of defence

goods for in India in the world. The Government of India is responsible for ensuring the defence

equipment of India. The main task of the Defence Ministry is to obtain policy of the

Government on all the defence and security related matters .There is long history of department

of defence for the betterment of the situations of import of the defence equipment. There is an

urgent need for a culture of joint ness to be developed in govmiernment institutions and decision

making,” said S Jaishankar, the erudite former foreign secretary, while talking on national

security at the Air Commodore Jasjit Singh Memorial Lecture in Delhi. The most common

reasons are lack of technology, corruption etc. Excessive importation of the any goods will bring

inflation in the economy. Being largest importer of defence equipment will effect and create an

imbalance the ratio between import and export of goods and services of an economy which will

reduce the monetary value of our own currency as of others ,it will also reduce the money supply

in an economy which will not be good for the economy as it also effect the domestic production

and increase the competition for the domestic producer .There are policies made by Government

of India in relation to control the imbalance and boost the domestic production of defence goods

in India . Make In India is a really famous policy of Government of India for promoting and

encouraging the domestic production and inviting the foreign companies to invest in India and

produce their goods in India ,by doing this new technologies will come along with the
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competition . Russia, is the largest supplier of defence goods to India , USA is the second and

Israel is the third . There must be some techniques and policies which they must have been

following to be the producer of defence goods which can be supplied to country like India. India

also supplies defence goods to counties like Italy, Maldives, Sri Lanka, UAE, Poland, Russia etc.

The value of export by Defence Public Undertakings (DPSUs), Ordinance Factory Board (OFBs)

and private defence industry (based on the NOC’s issued) for the financial year 2016-2017 is

Rs.1495.27 Cr.

RESEARCH QUESTIONS

1. Why India is the largest importer of defence equipment in the world?

2. How importation of defence equipment will effect Indian economy?

3. What are the government policies are made to control the importation of defence

equipment and how successful are they?

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OBJECTIVES

1. To find out the reason for India to be the top country for importing the defence goods

since four years.

2. To analyze the current and previous policies made by Government of India to control the

import of defence equipment.

3. To insight the impact of importing defence equipment on Indian economy.

RESEARCH METHODOLGY

• Consulting secondary sources of data that include research papers, journals, internet,

newspaper, and articles.

• Qualitative analysis of data to provide insights into the issue or help to develop ideas or

hypotheses for potential research.

CHAPTERIASTION

1. Introduction and Plan of Study.

2. Literature Review

3. Reasons for largest importer in the world: Defence Equipment.

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4. Effect on the economy.

5. Policies of Government of India.

6. How to control excessive import.

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LITERATURE REVIEW

1. (Ghasawalla, 2016): Despite having the seventh largest defence budget in the world,

India continues to be the largest arms importer globally. India continued to be the main client for

arms exports from Russia, hogging 39 per cent of total exports, while both China and Vietnam

got 11 per cent each. India was the second most important client for the UK in terms of arms

exports, after Saudi Arabia, which cornered 46 per cent of total exports from the UK during

2011-15, as compared with India’s 11 per cent, followed by

Indonesia at 8.7 per cent.

2. (pandit, 2018):India has also made a little in in getting its private sector to take to defence

production in a big way. The NDA government’s much-touted “Make in India policy with

foreign collaboration has also come a cropper,with no major defence production project actually

taking off last four year.

3. (Laxmi, 2014): India is the world’s largest buyer of weapons, accounting for 14 percentof

global arms imports, almost three times as many as China. Over the next seven years, India is

likely to spend more than $130 billion importing arms, officials say, to upgrade its understocked,

Soviet-era arsenal with modern weapon systems. India’s military modernization can generate

billions of dollars worth of business for American companies, but it also helps strengthen the

nation’s strategic role in the region — at a time when the Indian and U.S. militaries are

conducting more and more joint exercises.

The massive buying spree coincides with India’s growing border tensions with China and

Pakistan, and the approaching drawdown of international forces from Afghanistan this

year.
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4. (Rajagopal, 2018) :According to this study increase in arms transfers are driven by

demand in Middle east and Asia, with imports by countries in South East Asia going up by 6.2

per cent from 2007–11 to 2012–16. Vietnam was another in South East Asia that made a big

jump with its arm imports. Being the 29th largest importer in 2007–11 to the 10th largest in

2012–16, a 202 percent jump in its arms imports.

5. (www.export.gov, 2018):The defense sector continues to be one of the government’s high

priority focus areas. This year’s total allocation for the defense sector is approximately $46.11

billion, which represents a 7.8 percent increase from last year (share of capital expenditure

approx. $30 billion exceeds that of revenue approx. $15 billion). The GOI has announced

measures to develop two Defense Industrial Corridors in the country. The first corridor is

proposed for development in the south Indian state of Tamil Nadu and the second corridor in the

north Indian state of Uttar Pradesh. Additionally, the Indian government issued the Defense

Production Policy in 2018 to promote public and private sector production, as well as encourage

medium and small enterprises participation in defense production. We anticipate significant

opportunities for U.S. exporters in the defense sub-sectors.

6. (Russia still India's largest defence partner, supplies 68% arms, 2017) : A major reason

for the high level of imports is that India's arms industry has largely failed to produce

competitive indigenously designed weapons.

7. (AFP, 2014)India has been spending worth nearly $3.5 billion to boost its ageing Soviet

era military equipment. It has been pushing for greater indigenisation of the military industry as

India imports around 70 per cent of its defence hardware mainly from Russia, Japan, Israel and

United States.
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8. (Behera, 2018)The military budget of India is about 1.49% for year 2018-19 of the total

GDP. The 7.7 per cent increase in the defence budget and the 12.4 per cent growth in

MoD’s total allocation in 2018-19 have affected key defence parameters in

different ways.

9. (Minister, 2018): Defence expenditure for the 2017-18 fiscal year, based on allottments

by its Ministry of Finance was 86,488 crores for Defence capital and 296,000 crorers for defence

pensions.

10. (www.indiabudget.gov.in. Ministry of economic affairs, 2018): With strength of over

1.39 million active personnel, it is world's 2nd largest military force and has the world's largest

volunteer army. The total budget sanctioned for the Indian military for the financial year 2018 is

$62.8 billion, about five times what it spends on education and welfare.
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Reasons for largest importer in the world: Defence

Equipment.

Earlier, in November in 2015 , Nripendra Mishra, principal secretary to the prime minister,

called together six defence industry captains in the capital to deliberate on how to increase

investments under the Make in India programme.

Again, Mishra had one key question: should the foreign direct investment (FDI) cap in

defence be increased to 76% from the current 49%, given that the current limit has not

attracted any major global players to invest in the country in a significant way?

The main issue of the meeting on defence equipment was ow can the country balance its

stated policy to bring transparency and speed in defence procurement even as it has embarked

on an ambitious programme of Make in India in defence?

This dilemma is accentuated against the backdrop of a growing chorus of corruption in

defence deals that have found a fresh echo in the AgustaWestland deal, where senior officials

and the helicopter manufacturer find themselves at the centre of allegations of bribery and

corruption over the purchase of a fleet of helicopters.

More recently, defence dealer Sanjay Bhandari’s apparent proximity to the defence ministry —

along links with prominent politicians — came to the fore when enforcement agencies reportedly

pointed out that Bhandari had access to documents pertaining to key proposals for acquisition of

equipment.
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Indeed, when reports of corruption emerge, lawmakers and bureaucrats step back and deals

are derailed. That has, time and again, delayed the army’s modernisation efforts. Nevertheless,

India’s is also the exporter of the defence goods to its nehibouring countries and also other

countries such as Iran, etc.

India is the largest importer of the defence goods in the world even though its defence budget

th
ranks 7 (Ghasawalla, 2016) the economy is effected badly because the budget is less than the

actual import of the defence goods which has been done. The country’s total share in the import

international market was 14 % in the year 2011-15. India continued to be the main client for

arms exports from Russia, hogging 39 per cent of total exports, while both China and Vietnam

got 11 per cent each. India was the second most important client for the UK in terms of arms

exports. India has tried, but failed, to create a sizable domestic manufacturing industry for

weapons or even basic military goods, while China has increased production of defense supplies.

About 75 percent of India’s weapons purchases came from imports during 2007-11, said

Laxman Kumar Behra of the Institute of Defense Studies and Analysis, a government-funded

research organization.

Some analysts in India attribute the failure to create a domestic defense industry to government

involvement. “India’s public sector is very inefficient and the private sector is by and large kept

out of arms production,” Mr. Behra said. “We lack long-term vision,” and a culture of research

and development, Mr. Behra said. “The government keeps on forming one committee after the

other but there is hardly any implementation” of the committee’s recommendations, he said.

There is the lack of culture of research in the mindset of the people and corruption is also one

of the main reason behind the largest importer of the defence goods in the world
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There is a table which has the figure of total import, total export, total production of goods and

services etc

2018
2015 2016 2017
(Estimated)

Total Local
27701 26937 29583 32594
Production

Total Exports 4940 5402 5797 6087

Total Imports 6770 10527 11308 11873

Imports from the 5590 223 758 796

US

Total Market
29531 32062 35094 38380
Size

(total market size = (total local production + imports) - exports)

Data Sources: Directorate General of Foreign Trade, Ministry of Defense, Global Trade Atlas
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EFFECT ON THE ECONOMY

There are many negative effect on the economy by importation of any goods. They are explained

as under

1. If a country imports more than it exports it runs a trade deficit. If it imports less than it

exports, that creates a trade surplus. When a country has a trade deficit, it must borrow from

other countries to pay for the extra imports.

2. Imports make a country dependent on other countries' political and economic

power. That's especially true if it imports commodities, such as food, oil, and industrial

materials. It's dangerous if it relies on a foreign power to keep its population fed and

its factories humming.

3. Countries with high import levels must increase their foreign currency reserves. That's

how they pay for the imports. That can affect the domestic currency value, inflation, and interest

rates.

4. Domestic companies must compete with the imports. Small businesses that can't

compete will fail. Since they create 70 percent of all new jobs, that will affect employment.

The military budget of India is about 1.49% for year 2018-19 of the total GDP. However, it

spends nearly an equal amount in importing arms from other countries.

Its defence expenditure for the 2017-18 fiscal year, based on allottments by its Ministry of

Finance was 86,488 crores for Defence capital and 296,000 crorers for defence pensions.

India has been spending worth nearly $3.5 billion to boost its ageing Soviet era military

equipment. It has been pushing for greater indigenisation of the military industry as India
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imports around 70 per cent of its defence hardware mainly from Russia, Japan, Israel and United

States. The production of Indian defence equipments prior to 2011 was completely in the hands

of the Government of India. The Government of India also opened up the Foreign direct

investment to 49% from the existing 26% and thereby increasing flow of funds from foreign

countries. With the increase in FDI cap, private players such as companies from many developed

countries will also be attracted to the Indian defence economy as they can have share in the

Indian defence Companies.

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POLICIES OF THE GOVERNMENT

The Indian government’s Foreign Trade Policy (FTP) 2015-2020 announced on April 1, 2015 is

primarily focused on increasing India’s exports of goods and services to raise India’s share in

world exports from 2 to 3.5 percent. The FTP consolidated most of India’s existing export

subsidies and other incentives into two main export incentive schemes, namely the Manufactured

Goods Exports Incentive Scheme (MEIS) and the Service Exports Incentive Scheme (SEIS).

India lacks an overarching government procurement policy and, as a result, its government

procurement practices and procedures vary among the states, between the states and the central

government, and among different ministries within the central government. Multiple

procurement rules, guidelines, and procedures issued by multiple bodies have resulted in

problems with transparency, accountability, competition, and efficiency in public procurement.

A World Bank report stated that there are over 150 different contract formats used by the state

owned Public Sector Units, each with different qualification criteria, selection processes, and

financial requirements. The government also provides preferences to Indian micro, small, and

medium enterprises and to state owned enterprises. Moreover, India’s defense offsets program

requires companies to invest 30 percent or more of the value of contracts above 3 billion

rupees (approximately $56 million) in Indian produced parts, equipment, or services.

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India has started the legislative process for enacting a new Procurement Bill. Comments were

requested in April 2015. Speaking to foreign investors in September 2015, Finance Minister

Arun Jaitley stated that the Procurement Bill (the public procurement act,2015) is high on the

government’s agenda and would be put forward for parliamentary approval soon. The Indian

Ministry of Defense also announced in August 2015 changes to its offset production regulations

for defense industry companies contracting with the Indian government, providing greater

flexibility in designating Indian offset production partners. These offset changes will apply to all

current and future contracts. India’s National Manufacturing Policy calls for increased use of

local content requirements in government procurement in certain sectors (e.g., ICT and clean

energy). Consistent with this approach, India issued the Preferential Market Access notification,

which requires government entities to meet their needs for electronic products in part by

purchasing domestically manufactured goods. India is not a signatory to the WTO Government

Procurement Agreement, but is an observer.

The Indian Government in its first year cleared 39 capital procurement proposals, of which

32 proposals worth ₹889 billion (US$12 billion) (or 96% of value of total proposals) were

categorized as Buy (Indian) and Buy and Make (Indian)—the top two prioritized domestic

industry-centric procurement categories as per the defence procurement procedure (DPP).

In July 2015, the defence ministry eased export regulations and stopped demanding multiple

assurances on end-use from foreign governments even for sale of components by Indian citizens.

There are several Indian SMEs that cater to the Defense industry by supplying sub-assemblies

and components and providing services like system integration. Under the Make in India
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initiative, these organizations are set to enhance their manufacturing and development efficiency,

thereby contributing to making India self-reliant in defense production. Some of the system

Integrators catering to the Defense sector in India are Tonbo Imaging, Alpha Designs, Astra

Microwave and SLN Technologies among others.

The Union Government constituted a high-level task force under Chairmanship of Cabinet

Secretary PK Sinha to identify various items and policy. Aiming to join the ranks of global

leaders in arms production, India is to soon unveil the Defence Production Policy 2018. The

policy, which aims to achieve a turnover of ₹1,70,000 crore in defence goods and services by

2025, and an export target of ₹35,000 crore, is expected to be tabled soon. In 2016, the Ministry

of Defense released the first five chapters of its Defense Procurement Procedure 2016 (DPP-

2016), announcing several modifications to institutionalize, streamline, and simplify the

procurement procedure to promote India’s defense sector. Other important chapters and various

appendices and annexes were released in 2016. The final chapter, which describes the rules and

processes for the "Strategic Partnership" model, was released in May 2017. This chapter

describes how Indian industry and foreign industry will be selected by the Ministry of Defense to

partner with each other in defense subsectors such as fighter aircraft, submarines, helicopters,

and armored fighting vehicles.

DPP-2016 prioritized the promotion of indigenously-designed, developed and manufactured

defense equipment. Encouraging increased participation of Indian industry, particularly

MSME, in the defense sector.

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Under the "Make in India" program, there are broadly six procurement categories with the

Indigenously Designed Developed and Manufactured category being the most "preferred"

acquisition option. The six categories are:

Buy (Indian – Indigenously Designed Developed and Manufactured): Direct purchase from an

Indian vendor whose products meet Indigenous Content requirements.

Buy & Make (Indian): Purchase from an Indian vendor (including an Indian company forming

joint venture/establishing production arrangement with OEM), followed by licensed

production/indigenous manufacture in the country.

Buy (Indian): Direct purchase from Indian vendors whose products meet a minimum

indigenous content.

Buy & Make: Purchase from a foreign vendor followed by licensed production/indigenous

manufacture in the country.

Buy (Global): Purchase from foreign or Indian vendors. There is also a "Make" category that

can be pursued separately, in sequence or in tandem, with any of the five above categories.

Acquisitions in the "Make" category must be designed, developed and manufactured by an

Indian vendor. Candidates for this category are selected early in the planning and are therefore

prepositioned ahead of all the other categories.

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HOW TO CONTROL THE EXCESSIVE IMPORTATION

OF THE DEFENCE GOODS

To reduce or control the excessive importation of the defence goods we need to focus on

the research work more and try to find out many others ways to develop our technology and

produce our own made defence goods with advanced and high level technology.

Well, lack in technology is not the only reason for us to be on the top the world the race of

Importation of defence goods. One of the major component is corruption. People involved in the

area of production, importation of defence goods need to be transparent and more loyal towards

their own country. There are many policies which have been made by the government as

mentioned above for the betterment of our countries condition in the international market and we

need to help the government by being loyal to the country and follow the policy.

We need to import less than export as it can create a depreciation in the exchange rate.

The other effect is that a rise in imports will, ceteris paribus, cause a depreciation in the

exchange rate. This is because to buy imports, we have to supply more pounds to be able to buy

foreign imports. This rise in the supply of sterling causes a depreciation in the pound.

A depreciation in the exchange rate tends to increase inflationary pressure because:

• Imports become more expensive

• Exports and AD increase causing demand-pull inflation

• With more competitive exports, firms have less incentive to cut costs
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It is one of those issues where it is impossible to say with certainty exactly what will happen. It

depends on which effect is bigger – the reduction in AD or depreciation in the exchange rate.

Overall, I would imagine the impact on inflation of higher imports to be negligible.

It’s a bit like saying how do higher interest rates effect current account deficit?

• Higher interest rates increase exchange rate worsening current account

• But, on the other hand, higher interest rates reduce consumer spending, reduce imports

and improve the current account.

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ABSTRACT

The largest importer of arms in world- India consecutively four years in line. There must

theories, guesses, logic, reasons, for being the top country for importation of defence goods.

This can effect our economy as most of the arms are imported and this lead to negative effect in

balance of payment there will be excess of importation than exportation and for any developing

country like India it is not favoring the economy and development. This study is done to analysis

the reasons for being on top for importation of arms in the world, how it can effect our economy,

what are the government policy are there to delt with the issue. This will be done through the

secondary data available on various websites, articles, news etc. Over the past decade, India has

become the world‘s largest arms importer. During the

Cold War, India bought arms mostly from the Soviet Union, but now it is increasingly

buying from other suppliers. The Russia-India defense trade relations are not as bleak

as often presented, however, as Russia supplies highly sensitive arms and technology.

Likewise, the USA-India defense trade relations do have weaknesses, as the USA still

has strict export controls on high-tech arms, technology, and post-export use of the

arms. This thesis provides a holistic overview of all the motivations India has to buy

from specific suppliers. All the different choices can be traced back to one larger

theme. As India grows, it wants to improve the domestic capacity, increase strategic

autonomy, and be accepted as an equal player in the worldwide arena. To do so, New

Delhi needs to become independent and decrease the leverage that often comes with
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arms supplies. Developing its own industry, diversifying suppliers, avoiding countries

that trade for ulterior motives, improving multilateral relations, and joining global

export control regimes are some of the strategies India has used over the pass two decades for

achieving those goals

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REFERENCES

• Lakshmi, Rama. (2014). India is the world’s largest arms importer. It aims to be a big

weapons dealer, too. too/2014/11/15/10839bc9-2627-4a41-a4d6-b376e0f860ea_story.html?

utm_term=.278371f113cc

• IANS. India world’s biggest arms importer, spat with Pak and China fueling demand.

https://www.business-standard.com/article/current-affairs/india-world-s-biggest-arms-importer-

spat-with-pak-and-china-fueling-demand-118031700475_1.html

• Daniel, Workmen. (2018). India’s top 10 imports. www.worldstopexports.com

• PTI.(2017). India is world’s largest arms importer : SIPRI.

https://www.hindustantimes.com/india-news/india-is-world-s-largest-arms-importer-sipri/story-

Ahi6LhqR7WcZStOyDuIRKL.html

• Verbruggen, Maaike (2015). India’s Arms Imports.18-20. id=42292186

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