The Indian homeland security budget reached US$10.1 bn in 2012

Wednesday 18 July 2012, Amsterdam

India’s defense expenditure is US$37.47 bn in 2012, and grew at a CAGR of 12.36% during the review period. The country’s defense expenditure grew at a rapid pace due to the external threats it faces from hostile neighbours. The country’s strong economic growth has also supported the defense budget’s growth. The total expenditure on defense during the review period was US$158.49 bn (reference see graph).

Despite expanding opportunities in the Indian defense industry, the government’s comparatively strict regulatory regime poses challenges for foreign investors who are keen to enter the country. With an FDI limit of just 26%, foreign OEMs are unwilling to extend sensitive technologies to their Indian joint venture partners. The critical area of concern is the offsets in defense, which have been placed at 30%, and in some cases, such as in the development of Medium Multi-Role Combat Aircraft (MMRCA), offsets rise to 50%.

As a percentage of GDP, Indian defense expenditure stood at 2.1% during 2012. While this is a larger percentage than China, the country’s defense expenditure as a percentage of GDP is lower than the majority of large spenders such as US and Russia. During the forecast period, Indian defense expenditure as a percentage of GDP is expected to increase to 2.3%.

Insufficient information and the lack of clear future plans have been a key challenge for both the private sector and foreign companies in planning the development of research and development technology or the formation of joint ventures. Although the Ministry of Defense has agreed to provide a public version of the long-term plan, its effectiveness remains to be seen.

Since the early 1970s, the Indian defense procurement process has included corruption, delays and bureaucratic hurdles, due to the monopoly of the civilian bureaucracy and politicians over the purchase decisions of the armed forces. Indeed, although the armed forces are in charge of conducting trials on shortlisted equipment and forwarding their recommendations to the Ministry of Defense, any financial negotiations are conducted by civilian officials. This gives rise to the opportunity for corruption, by way of bribes and collecting money for election funds.