×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

How defence spending can benefit the economy

How defence spending can benefit the economy
Comment E-mail Print Share
First Published: Wed, Jul 15 2009. 09 59 PM IST

Updated: Wed, Jul 15 2009. 09 59 PM IST
It is a universal belief that defence expenditure is a waste of valuable resources. In an absolute sense, that may be a fact. In an ideal world, even a fraction of the resources being spent on defence globally could solve many of the world’s problems. Having said that, mankind has always been and will probably always be, in conflict. Countries will be at war and communities will constantly battle each other. If anything, this attrition will only exacerbate as conflict follows the universal principle of scarcity—that as resources reduce and contenders increase, there will be war.
But the moneys that a country allocates to building war capabilities also benefit it in many ways. In this article, I want to talk about how resources allocated for primarily “destructive” purposes can and do spur economic growth and well-being.
Almost all major inventions, discoveries and management philosophies owe a lot to warfare. If the technology wasn’t invented specifically for war, it was most certainly scaled and mass-produced for it. Radar, sonar, communication equipment, computers, wireless, missiles, rockets, assembly line production efficiencies, logistics, air transportation and countless other technologies and processes have their origins in defence labs and battlefields. Most technologies that were designed for warfare have extensive non-military use. The Internet, nuclear power, space programmes, deep oceanic mapping and transcontinental communications are just some of the examples.
The second benefit that the armed forces give to the community is the pool of disciplined, well-trained young men and women. The Indian Army, with at least 13 million troops, discharges some 50,000 trained soldiers back to the hinterland. These men bring with them a national outlook, skills that the army taught them, and the secular world view they have experienced during their stint in the forces.
Thousands of ex-servicemen have returned to their native villages and started entrepreneurial ventures leveraging their competencies.
The defence procurement and the offset policy is another example of how our defence expenditure can contribute to nation-building. The current defence budget has a procurement component of Rs54,800 crore, which will be used to purchase state-of-the-art equipment. Around 70% of this is in the form of imports. The procurement policy lays down the provision of “offsets”, which essentially mandates that the seller of the armament has to buy or provision up to 50% of the cost of the weapon platform from Indian manufacturers. This ensures that a sizeable percentage of money spent on defence procurement is ploughed back into the economy. The offset structure also incentivizes collaboration with Indian partners to indigenize substantial parts of the equipment to fulfil the offset obligation, thereby facilitating technology transfer into Indian industries. Global firms are expected to channelize up to $20 billion in 10 years into India. This creates very interesting opportunities.
While the purpose of the policy and, therefore, the aim of the weapon’s suppliers would be to try and indigenize the equipment, three distinct benefits will accrue from this arrangement.
Firstly, in a pursuit to increase the indigenous component of equipment, sellers will need to transfer technology. This will serve to jump-start private sector firms into the defence space, which until now was largely the domain of government establishments. Secondly, as the process of offsetting starts in earnest, it will lead the seller and his Indian partner down the road into “offshoring”. This means the weapon platform could be built at a lower cost enabling it to become globally competitive and establish India as a global defence production and service hub. Thirdly, the entry of global firms and defence funds into India will create and rejuvenate an entire ecosystem of tier II and tier III manufacturing firms. Given that defence spending is largely recession-proof, this infusion of funds and assured order books will do for the manufacturing sector what the business process outsourcing/knowledge process outsourcing industry did for the IT offshoring industry.
The government has begun to encourage private participation in defence. Listing of select group of firms as raksha ratnas and the government’s willingness to fund major development work with private firms will further contribute to growth of indigenous defence and ancillary manufacturing capability.
Our defence budget also consists of regular revenue expenditure in the form of salaries, allowances and sustenance costs of maintaining an army. Food has to be bought, roads have to be built, vehicles need to ply and the agricultural produce of several thousand villages goes to maintaining garrisons stationed all over the country. An entire ecosystem thrives on maintaining and mobilizing the defence forces. Cantonment towns are examples of cities which have been fuelled by defence establishments that literally created them.
Economic historians attribute the meteoric rise of the US industries to the thousands of discharged military men from World War II, who brought leadership qualities, process orientation and a “can do” attitude back from the war zone. Indian defence forces can play a similar role in constructive nation-building in addition to its primary task of providing national security, which is an essential component of economic growth.
Raghu Raman is chief executive of corporate risk consulting firm Mahindra Special Services Group that advises companies and organizations on threat assessments and risk mitigation strategies. Respond to this column at crosshairs@livemint.com
Comment E-mail Print Share
First Published: Wed, Jul 15 2009. 09 59 PM IST