Why India is Building Up Its Arms Industry

It was an unusual request about a potentially lucrative deal. In late 2016, the Indian government wrote to defense companies, asking to buy a fleet of fighter jets to replace its aging Soviet-era aircrafts. The catch: It wanted the lucky winner to make them in India, with the help of a local partner.

Both America's Lockheed Martin and Sweden's Saab began jostling to secure the contract. Though neither company nor the Indian government have released details of cost and compensation, India paid close to 8 billion euros for 36 jets from France in September 2016. This time, however, India is not just paying for aircraft; it's paying for an entire aviation industry.

Read more: Modi Jettisons His 'Make in India' Policy and Buys French Warplanes

If the deal goes through, it would go a long way to meeting a major goal of Indian Prime Minister Narendra Modi's: building up a home-grown defense industry. Since 2012, the country has been the world's largest arms importer, according to a recent report from the Stockholm International Peace Research Institute (SIPRI). Yet unlike neighboring China—the fourth-largest importer and third-largest exporter—India lacks the defense infrastructure and technical know how to produce its own military equipment. Even if the country strikes a deal with Lockheed Martin or Saab, analysts say India may be a long way from achieving its goal. "It just hasn't developed the domestic infrastructure to meet its defensive needs," says Katharine Adeney, a professor at England's Nottingham University.

India's need for arms stems from both its desire to be a global superpower and the dangers along its border. "The Indians' threat perception both internally and externally is very high," says Adeney. "You have the ongoing dispute with Pakistan over the disputed territory of Kashmir, and you have ongoing border disputes with China."

Both the conflicts Adeney mentions are decades old. What troubles India now, says Tanvi Madan, director of the India project at the Washington, D.C.-based think-tank the Brookings Institution, is that Pakistan and China have a very close relationship. From 2012 to 2016, China supplied Pakistan with 68.5 percent of its arms, no small number given that Pakistan is the world's ninth-largest arms importer.

India, long seen as China's rival in the Asia-Pacific region, can only dream of such production capabilities. Since achieving independence in 1947, successive governments didn't consider defense spending as a priority, not least because they had other areas—such as health, education and welfare to focus on.

It wasn't until 1991 that India, mired in financial crisis, began a process of economic liberalization. Under then-finance minister Manmohan Singh, the country reduced tariffs and taxes and opened itself up to foreign investment. Over the next two decades, the country averaged annual growth of around 7 percent of GDP, the kind of boom, Madan says, that could allow for greater defense spending.

But it was not until the leadership of Modi that defense became a key concern of the Indian government. In June 2016, Modi's government announced that it was massively increasing foreign direct investment in the defense industry as part of the prime minister's ambitious "Make in India" project to encourage companies, both foreign and domestic, to produce goods and services in India. Modi has said that by 2020, he expects 70 percent of India's weapons to be made domestically.

But that target, says Adeney, is "laughable." Despite India being the world's top arms importer, its total defense expenditure, at $53.5 billion (2.2 percent of GDP) is still relatively low. Indian newspapers made much of China's new budget, announced Monday, which saw defense spending leap 7 percent to $152 billion.

Deals, like the one India is hoping to strike for its new fleet of fighter jets, will help the country grow its defense sector, but Adeney believes it could take decades before India comes close to meeting Modi's goal.