defence economics

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THREE ECONOMISTS AND THEIR THEORIES

The three most important economists were Adam Smith, Karl Marx, and John Maynard

Keynes (pronounced canes). Each was a highly original thiner who de!eloped

economic theories that were put into practice and a""ected the world#s economies "or

generations.

Adam Smith and $is %n!isi&le $and o" 'apitalism

Adam Smith, a Scot and a philosopher who li!ed "rom *+ to -, is considered the

"ounder o" modern economics. %n Smith#s time, philosophy was an allencompassing

study o" human society in addition to an in/uiry into the nature and meaning o"

existence. 0eep examination o" the world o" &usiness a""airs led Smith to the conclusion

that collecti!ely the indi!iduals in society, each acting in his or her own sel"interest,

manage to produce and purchase the goods and ser!ices that they as a society re/uire.

$e called the mechanism &y which this sel"regulation occurs 1the in!isi&le hand,2 in hisground&reaing &oo, The Wealth of Nations, pu&lished in 3, the year o" America#s

0eclaration o" %ndependence.

4hile Smith couldn#t pro!e the existence o" this 1hand2 (it was, a"ter all, in!isi&le) hepresented many instances o" its woring in society. Essentially, the &utcher, the &aer,and the candlestic maer indi!idually go a&out their &usiness. Each produces theamount o" meat, &read, and candlestics he 5udges to &e correct. Each &uys the amounto" meat, &read, and candlestics that his household needs. And all o" this happenswithout their consulting one another or without all the ing#s men telling them how muchto produce. %n other words, it#s the "ree maret economy in action.

%n maing this disco!ery, Smith "ounded what is nown as classical economics. The eydoctrine o" classical economics is that a laissez-faire attitude &y go!ernment toward themaretplace will allow the 1in!isi&le hand2 to guide e!eryone in their economicendea!ors, create the greatest good "or the greatest num&er o" people, and generateeconomic growth. Smith also del!ed into the dynamics o" the la&or maret, wealthaccumulation, and producti!ity growth. $is wor ga!e generations o" economists plentyto thin a&out and expand upon.

Karl Marx: It's Exploitation!

Karl Marx, a 6erman economist and political scientist who li!ed "rom 77 to 77+,looed at capitalism "rom a more pessimistic and re!olutionary !iewpoint. 4here AdamSmith saw harmony and growth, Marx saw insta&ility, struggle, and decline. Marx&elie!ed that once the capitalist (the guy with the money and the organi8ational sills to&uild a "actory) has set up the means o" production, all !alue is created &y the la&or in!ol!ed in producing whate!er is &eing produced. %n Marx#s !iew, presented in his 73tome Das Kapital (Capital ), a capitalist#s pro"its come "rom exploiting la&or9that is, "rom

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underpaying worers "or the !alue that they are actually creating. :or this reason, Marxcouldn#t a&ide the notion o" a pro"itoriented organi8ation.

This situation o" management exploiting la&or underlies the class struggle that Marxsaw at the heart o" capitalism, and he predicted that that struggle would ultimately

destroy capitalism. To Marx, class struggle is not only inherent in the system9&ecauseo" the tension &etween capitalists and worers9&ut also intensi"ies o!er time. Thestruggle intensi"ies as &usinesses e!entually &ecome larger and larger, due to theinherent e""iciency o" large out"its and their a&ility to withstand the cyclical crises thatplague the system. ;ltimately, in Marx#s !iew, society mo!es to a twoclass system o" a"ew wealthy capitalists and a mass o" underpaid, underpri!ileged worers.

Marx predicted the "all o" capitalism and mo!ement o" society toward communism, inwhich 1the people2 (that is, the worers) own the means o" production and thus ha!e noneed to exploit la&or "or pro"it. 'learly, Marx#s thining had a tremendous impact onmany societies, particularly on the ;SS< (;nion o" So!iet Socialist <epu&lics) in the

twentieth century.

%n practice, howe!er, two e!ents ha!e undermined Marx#s theories. :irst, in socialist,centrally planned economies ha!e pro!en "ar less e""icient at producing and deli!eringgoods and ser!ices9that is, at creating the greatest good "or the greatest num&er o" people9than capitalist systems. Second, worers# incomes ha!e actually risen o!er time, which undercuts the theory that la&or is exploited in the name o" pro"it. %" worers#incomes are rising, they are clearly sharing in the growth o" the economy. %n a !ery realsense, they are sharing in the pro"its.

4hile Marx#s theories ha!e &een discredited, they are "ascinating and worth nowing.

They e!en say something a&out weanesses in capitalism. :or instance, largecompanies do en5oy certain ad!antages o!er small ones and can a&sor& or undercutthem, as shown &y examples as old as Standard =il (now ExxonMo&il) and 6eneralMotors and as recent as Microso"t and %>M, in high technology, and 'onAgra and 0olein agriculture. %n addition, as we will see in 4ealth and ?o!erty, income distri&ution in;.S.style capitalism, which is a 1purer,2 lessmixed "orm o" capitalism than that o" Europe, can tend to create a twotier class system o" 1ha!e#s2 and 1ha!e not#s.2

Keynes: The Goernent Sho"l# Help O"t the E$onoy

John Maynard Keynes, a >ritish economist and "inancial genius who li!ed "rom 77+ to

@3, also examined capitalism and came up with some extremely in"luential !iews.They were, howe!er, /uite di""erent "rom those o" Karl Marx and, "or that matter, AdamSmith. %n +3, he pu&lished his General Theory of Employment , Interest , and Money .4e will examine Keynes#s theories later. They mainly in!ol!e people#s propensity tospend or to sa!e their additional money as their incomes rise, and the e""ects o" increases in spending on the economy as a whole.

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http://www.infoplease.com/cig/economics/wealth-poverty.html

http://www.infoplease.com/cig/economics/wealth-poverty.html



The larger signi"icance o" Keynes#s wor lies in the !iew he put "orth a&out the role o" go!ernment in a capitalist economy. Keynes was writing during the 6reat 0epression.%t#s worth noting at this point that in the ;nited States unemployment reached a&out *percent and millions o" people had lost their li"e sa!ings as well as their 5o&s. Moreo!er,there was no clear path out o" the depression, which led people to seriously /uestion

whether Smith#s in!isi&le hand was still guiding things along. 4as this worldwidecollapse o" economic acti!ity the end o" capitalismB

Keynes &elie!ed that there was only one way out, and that was "or the go!ernment tostart spending in order to put money into pri!atesector pocets and get demand "or goods and ser!ices up and running again. As it turns out, ?resident :ranlin 0.<oose!elt ga!e this remedy a try when he started a massi!e pu&lic wors program toemploy a portion o" the idle wor"orce. $owe!er, the ;nited States entry into 4orld 4ar %% rendered this a less than pure experiment in go!ernment spending. The war e""ort&oosted production to extremely high le!els (to mae guns, ammunition, planes, trucs,and other materiel) while simultaneously taing millions o" men out o" the ci!ilian

wor"orce and into uni"orm.

The !alidity and desira&ility o" Keynes#s prescription "or a sluggish economy9using

go!ernment spending to prime the pump9are still de&ated today. Again, we will loo at

the theory and practice o" what came to &e nown as Keynesian economics later.

Many other economists o" note ad!anced theories and otherwise added to the &ody o"

nowledge in the science. 4e will loo at their ideas as they arise in our examination o"

economics. $owe!er, Adam Smith, Karl Marx, and John Maynard Keynes (later Cord

Keynes) are widely recogni8ed as the most in"luential9Smith &ecause he "ounded and

"ormali8ed the science o" economics, Marx &ecause he challenged capitalism and hadsuch a "orce"ul impact on society and politics, and Keynes &ecause he prompted new

practices as well as new theories in the world o" economic policy. Keynes also played a

ey role in the "ounding o" the %nternational Monetary :und and in other political

economic measures taen at the end o" 4orld 4ar %%.

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THE %AR ECONOM& AND THE EACE ECONOM&

Europe "lutters on the edge o" declared recession. Since the E'> has no room to lower

rates &ecause o" the in"lationary pressures "rom the ;S dollar , and Europeango!ernments are close to the top o" de"icit allowances "rom the re/uirements o"

monetary union, Europe is liely to enter recession. The E'> will &e a&le to lower rates

when the actual contraction is !isi&le in lowered oil demand, &ut not until. This means

that the Euro will deteriorate as the ;S is in a tightening phase.

The &asic con"lict here is &etween the American 4ar Economy and the European

?eace Economy. 4hich is not to &e con"used with militarism !ersus paci"icim, &ecause

the only ind o" peace economy that will wor, is one that has a military instrument

capa&le o" &eing the um&rella under which nations can &e &uilt.

The typical story o" a postwar recession &egins D4hen the central &an tightens...D et

the E'> has held rates steady "or a !ery long time, there has &een no tightening o"

monetary policy to com&at in"lation. %nstead, "rom the perspecti!e o" Europe in"lation is

an exogenous e""ect it isn#t anything Europe is doing that is causing in"lation. For has

Europe passed regulations that will amount to tightening, so one can#t argue that there

has &een de "acto tightening o" the regulatory leg o" the Mundell:leming triad o"

monetary policy, "iscal policy or regulatory policy. =ne can also not argue that Europe

has li"ted regulations that would cause in"lation.

%n short, and this is !ery o&!ious to Europeans, the source o" their current economic&ind is !ery simpleG the ;S is printing dollars, pre!enting ;S consumers "rom "eeling the

pinch o" their &orrow and s/uander "iscal policies, and easy monetary policies.

$owe!er, Europe is also aware that the Asian central &ans ha!e more or less topped

out their a&ility to soa up dollars, and they can no longer a""ord to tae a &ath on ;S

&onds, which are yielding as much as +-- &asis points &elow other completely sa"e

currencies.

Thus "ree maret 8ealots in the ;S are calling "or Europe to Thatcheri8e slash wages

and &ene"its, slash social spending and sell o"" assets at "ire sale prices to waiting

&illionaires. Europe, which is a great deal closer to <ussia, the last nation to try Dshoc

therapyD, reali8es 5ust how &ad an idea this is. >ut as yet they do not ha!e any ideas o"

their own.

%n the run up to 4orld 4ar %%, it was reali8ed &y people lie 4inston 'hurchill that the

6erman Economy wasn#t really healthy, instead, 6ermany was &orrowing !ast sums o"

money to run what &ecame called the D6erman 4ar EconomyD. This lead 'hurchill to

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http://news.ft.com/cms/s/bd657964-a2a9-11d9-b4e8-00000e2511c8.html


http://peaceandjustice.org/article.php?story=20050328115511734


http://peaceandjustice.org/article.php?story=20050328115511734



argue pu&lically, and others pri!ately, that war with 6ermany was ine!ita&le, since there

was only one use "or the capital they were &uilding.

%n the run up to, and particularly a"ter, 4orld 4ar %%, the ;nited States &ecame a war

economy one which had a large military, and then had to de!elop the in"rastructure to

support it. The ;S go!ernment had to create demand "or goods which supported the

war economy "or example the designs o" nuclear power plants "rom which enriched

;ranium could &e extracted. The @ is a military ci!ilian hy&rid 5et which means it is

not !ery "uel e""icient, &ut it is !ery dura&le. =ne can#t strap a space shuttle to the &ac

o" a 5et &y accident it has to &e designed to tae that ind o" stress.

Eisenhower would warn o" the Dmilitaryindustrial complexD, and other ?residents would

wrangle with the Diron triangleD in !arious ways. The de"ense &uild up that 'arter &egan,

&ut which <eagan accelerated tremendously, pro!ided a new generation o" war

economy. %t was only &udgetary reality which "orced the downsi8ing o" the military

during >ush#s term &ut it was &lamed on the 0emocrats as a, and the parallels to post

world war % 6ermany should &e noted Da sta& in the &acD. The ur&an legends o"

mistreatment o" Hietnam !eterans were used as a rhetorical su&stratum to &lame the

0emocratic ?arty "or the pain o" ri""ing and &ase closings.

The essential pro&lem is thisG the world is still too unsta&le, particularly in its resource

supplies, to do without a superpower. That superpower will ha!e one &ig ad!antageG it

will &e "unding a huge amount o" <esearch and 0e!elopment, and a &ig disad!antageG

it#s &asic economy will &e "ar less e""icient than one designed "or peace time uses.

:or decades this pro&lem was sol!ed &y ha!ing Europe and Japan "orm Dpeace

economiesD which were tightly lined with the ;nited States. %n the wae o"

decoloni8ation in the -#s and 3-#s Europe "ound it could do without ha!ing to

support military in"rastructure &y, instead, &acing the ;nited States dollar. This lead to

a small, &ut noticea&le, spread &etween corporate &onds and ;S treasuries, which was,

in e""ect, a sienurage tax on Europe to pay "or the de"ense o" the :ree 4orld. %t was not

a matter o" 4ar economy !ersus ?eace economy &ut a matter o" spreading out the

cost o" the war economy o!er a larger sphere.

The hole in the &ottom o" a war economy is energy, military e/uipment is, almost &yde"inition, &igger, hea!ier, more dura&le and there"ore more expensi!e to mo!e than

e/ui!alent ci!ilian only e/uipment. Since the late 7--#s the /uest "or energy supplies to

"eed military machines has increasingly dominated thining. %n the th century it was

DcoalingD and the creation o" Dcoaling stationsD around the world. The ;S entry into the

Spanish American war and annexation o" $awaii was, in no small part, a&out creating

coaling stations.

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'hurchill as :irst Sea Cord in >ritain helped mo!e the >ritish "leet to oil, and then as

'olonial Secretary, wored to gain access to oil "or that military. The access to oil was

central to $itler#s geopolitical thining as well as the reason "or the Japanese dri!e to

expansion in the +-#s. 4hen :0< wanted to "inally pro!oe the Japanese, he

em&argoed ;S oil ?earl $ar&or "ollowed soon therea"terward.

%t would &e a mistae to o!eremphasi8e this point and mae it into a !ast conspiracy

that dominates e!erything &ut it is a !ery important part o" strategic thining, which has

lead to ;S in!ol!ement in parts o" the world which we would otherwise not care a&out. %t

has also created numerous constituencies in the ;S which support the 4ar Economy,

&ecause their current economic arrangements are &ased, directly or indirectly, on that

war economy. To mo!e the ;S o"" o" a war economy means "inding a means o"

compensating the losers, e!en as they are mo!ed to other areas.

%n no small measure the 'linton policy was "orced down this lineG &oth &y instinct,

searching "or a Dpeace di!idendD, and &y political reality. %ncreasingly the war economy

constituencies were the hard core o" the opposition to 'linton. This line o" clea!age

not &etween prowar and antiwar, &ut &etween the war economy and the peace

economy in the ;S &ecame increasingly !isi&le in the di!ision in the electorate. The

metropolitan economy is largely in!ol!ed in importing and exporting, and "or it, while the

military is important to protect access to materials and trade relations, the war economy

itsel" is largely a &urden. This economy has !oted increasingly "or 0emocrats,

particularly since the early -#s when much o" the de"ense research &udget was

pulled and "ar less o" the metropolitan research and de!elopment engine was tied to

de"ense. The early -#s recession "orced the metro research economy to wean itsel" "rom de"ense oriented research, and while this was pain"ul, it was also, ultimately,

li&erating.

The exur&an areas are, o" course, most closely tied to the war economy, and not only

the most important &ene"iciaries, &ut also the most tied to war economy in"rastructure.

These areas ha!e increasingly &ecome <epu&lican, particularly as many ha!e reali8ed

that they can get the largess "rom 4ashington that they need, without ha!ing to "orm

common cause with social li&erals and other metropolitan constituencies that they

dislie. =nce the <epu&licans "ound out how cheap appalachia was to &uy, they went

out and &ought it. The result shi"ted Kentucy and Tennessee "irmly into the <epu&licancamp, and in"luenced ?ennsyl!ania, Ala&ama, Mississippi, Missouri, Hirginia, Forth

'arolina and e!en South 'arolina and 6eorgia. %t seems liely to mo!e 4est Hirginia

into the <epu&lican camp.

Also interestingly is a shi"t in politics in the rural and "rontier areas while resource

extraction in the "orm o" minerals and oil is part o" the war economy, the agricultural

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sector is increasingly pressured &y that same war economy and its demand "or

standardi8ed "ood products. $igh 0iesel prices, agri&usiness consolidation, higher

"ertili8er prices and the "unnelling o" credit into home &uilding and spraw all threaten

"arming as a way o" li"e. %n no small part the 0emocratic re!olt in Montana is dri!en &y

this increasing shi"t o" agriculture away "rom the <epu&lican sphere. %" the 0emocrats

can tae ad!antage o" it that is.

The European ?eace economy has had a no less tumultuous history. The dismantling o"

the European war economies in the -#s caused tremendous dislocation, the attempt

to maintain the remains o" the >ritish 4ar economy in the 3-#s caused tremendous

dislocation. The gradual creation o" the European 'ommon Maret is not a smooth and

continuous process, &ut one "illed with stops and starts, good and &ad decisions,

political tensions. 6o!ernments ha!e "allen o!er the whether to &e pro or anti Europe,

and the economic trou&les in Europe now show how di""icult the process has &een.

The "undamental di""erence &etween a war economy and a peace economy is the

/uestion o" demand. %n a war economy there is &oth a constant demand "or certain

goods, "rom resources to machine parts. This is &oth a &ene"it, in that it generates

employment, and a pro&lem, in that that demand must &e maintained at all times in

order to eep &oth the wor"orce and the capital in top condition. :rom the Few 0eal

"orward, preser!ing the industrial &ase has &een a top priority o" successi!e American

administrations. A peace economy has no such &asic stream o" demand, and there"ore

can and must create a stream "or Dso"t demandD.

A peace economy must also run a much tighter ship "inancially since it cannot imposesienurage taxes to pay "or military protection. %t must run only managea&le de"icits and

&e a&le to reach surplus "rom time to time. As a result, the European ?eace economy,

e!en more than the American war economy, has &een aggressi!e a&out "orcing open

de!eloping nations to capital in!estment.

%n the present two e""ects ha!e &ecome important. =ne is that the <epu&lican ?arty has

gained almost complete control o!er the top down apparatus o" the 4ar Economy in the

;S. %t is now using this control to re!erse many o" the changes in society made through

the 0emocratic !ersion o" the 4ar Economy. 4hile many on the le"t loath anything with

the word DwarD in it, it should &e pointed out that it was the war economy#s need "or la&or which was one o" the cutting edges o" the creation o" ci!il rightsG Truman integrated the

military, &ecause he had to. The 4ar economy o" the -#s needed la&or, and it drew

A"rican Americans in. The war economy o" the 3-#s ur&ani8ed large populations out o"

the need "or la&or. Many cherished institutions o" the le"t, including la&or unions as

opposed the older cra"t unions had their &argaining power &ecause war economies

cannot a""ord insta&ility. %t was worth paying more to get a steady stream o" la&or.

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used to getG constant, and rising, growth and demand. 'hina#s Dso"t landingD is going to

&e 7I growth in real 60?. That#s a slow down "or them. The tiger economy 8one is

pro5ected to grow &y I.

That neither Japan nor Europe ha!e managed a true ?eace Economy, and that the

highly managed 'hinese economy is !ery success"ul shows how misguided and

intellectually dishonest li&ertarianes/ue &lather a&out "ree marets is. 'hina is a

protectionist, mercantile, top down thoroughly un"ree maret economy. %t is &ooming.

Japan is in theory capitalist. %t is star!ing. The ideological di!ides &etween DsocialismD

and DcapitalismD are pure nonsense and are no more rele!ant to the present world

situation than theories a&out whether the num&er o" angels that can dance on the head

o" a pin is "inite or in"inite. They simply do no matter. There is no such thing as a "ree

maret 4ar Economy 4ar Economies are, &y de"inition, top down, and they are,

there"ore, not capitalist either. They may well ha!e a set o" owners o" capital who are

&ene"iciaries, and are there"ore adamant a&out not pay the pareto &alancing taxation &ut this has &een true since the days when wars were "ought on horse&ac. 4ar

Economies are also price insenti!e, which di!orces them "rom the maret mechanisms

signals o" a&out resource allocation. A war economy must ha!e whate!er it must ha!e,

and will tae it i" need &e.

4hat does matter is the control o" the crucial "orms o" scarcity and the trading

relationships &uilt on them. ?resently the ;nited States, &y &eing the designated

economic loser, has the a&ility to consume "ar more than it produces. $owe!er, this is

only &ecause it is the designated loserG the Asian economies aren#t helping the ;S &y

&uying dollars, they are throwing an an!il to their competitors here in the ;S. 0espitedramatic de!aluation o" the ;S dollar, American exports ha!e not sign"icantly reco!ered

a&o!e what would &e expected "rom the ending o" the "inancial crisis and world slow

down o" *--+. 4hat has happened instead is simply that goods that used to &e

orderd "rom a&road are now made here. The <epu&lican ?arty has returned to its roots

as the party o" high protecti!e tari""s, this time enacted &y monetary policy.

4hat this means "or the le"t cannot &e put in &lunter termsG to turn &ac the o&li&eral

mo!ement in America, and to tae power and go!ern, there must &e a coherent

go!erning idea.

The pro&lem in the American le"t, &oth 0emocrat and 6reen, is that there is, at present,

an ideological clea!age. Much o" the rhetoric o" the le"t loos &acwards to economic

circumstances which are the result o" the war economy. This clea!age, &etween war

economy demands "or 5o& sta&ility and la&or sta&ility, and peace economy demands "or

li&erali8ation and nationali8ation o" health care are in &asic con"lict. The ;S cannot

&oth ha!e a war economy degree o" sta&ility "or worers, and a peace economy degree

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o" &ene"its. Europe is going through this right nowG it must li&erali8e its economic

structures, simply &ecause the demand stream "rom the ;S 4ar economy is &eing cut

o"".

$owe!er, "ailure to understand this shi"t will &e lethal "or the le"t, which e!er party it

&acs. This is &ecause the <epu&licans ha!e sought, and are getting, complete control

o!er the top down war economy. This means that the direct &ene"iciaries o" that war

economy are now lost to the 0emocratic party as supporters, and the indirect

supporters are mo!ing to the right. The reason why the <epu&licans ha!e made such in

roads into Minnesota, 4isconsin, Michigan and ?ennsyl!ania is &ecause, "or the

present, resource extraction and raw manu"acturing are &ene"iting "rom the <epu&lican

4ar Economy. Steel is up in price, S;Hs are !ery pro"ita&le "or 0etroit, mining is doing

well. :iddling with the edges o" social conser!atism does nothing a&out any o" this.

Social conser!atism "ollows the attachment to the <epu&lican 4ar Economy, not

precedes it. ?eople get hostile and xenopho&ic when they need enemies &ecause their 5o&s depend on ha!ing enemies.

Since this highly re!ed !ersion o" the 4ar Economy is unsta&le war economies at high

speed must go to war to lower their input costs o" la&or and resources these e""ects

are o""set &y the growing num&er o" people who are &eing held out o" the &ene"its o" the

4ar Economy. The young, in particular, are getting hammered&y it. This means that the

"uture is against the 4ar Economy, since it must economically slag the prospects o" its

input sources o" la&or. <ight now Europe and Japan are on the menu. American la&or,

and not 5ust low scale wage la&or, &ut intellectual la&or, is also on the menu. As the war

economy consumes its own demand &ase, it runs a larger and larger de&t.

%n short, while the temptation o" returning to a li&eral 4ar Economy is almost

o!erwhelming a"ter all, almost e!eryone in elected o""ice grew up in the 4ar Economy,

was elected promising to protect the 4ar Economy, and to mae sure that its &ene"its

were distri&uted widely, and is used to the mechanisms o" the 4ar Economy and that

is &oth in the ;S and Europe, across the political spectrum it is also a mistae o"

glo&al proportions.

This is &ecause the threat to glo&al sta&ility comes not "rom a concentration o" armed

might, &ut "rom the growth o" assymetrical threats and economic nationalism. The 4ar Economy is going to, in "act, encourage economic nationalism simply &ecause other

nations will want to o""set the protectionism that a 4ar Economy generates with

protectionism o" their own. Argentina, %ran, <ussia, Hene8uela and 'hina are at the

cutting edge o" the shi"t to economic nationalism &y those countries which can either

supply their own energy, or ha!e la&or competiti!e ad!antage enough to "lout the "ree

trade rules o" the 4T=.

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The solution to this pro&lem is nation &uilding. Fation &uilding on a scale that has not

&een seen since the end o" 4orld 4ar %%. %t is nation &uilding, and nation &uilding alone,

that can supply the enormous !oid in demand that would &e le"t &y the end o" the war

economy. %t is nation &uilding alone that can de"use the assymetrical threats, and it is

nation &uilding, and only nation &uilding, which will pro!ide the maret incenti!es to

de!elop peace economics.

The series o" 4ars that was the *-th century is o!er. Either we can set oursel!es on the

course "or another series o" resource wars, as !arious nations mo!e "rom economic

nationalism, to war economy since the war economy is the ultimately end o" economic

nationalism or we can set oursel!es on the di""icult course o" weaning oursel!es "rom

the heroine o" the war economy.

This is not to say that there is no role "or the military in this process. =n the contrary,

military discipline, military !irtues, and military sense o" sel"denial "or a larger cause

are, in "act, going to play an essential role in any nation &uilding system.

%t is only &y ending the threat o" "ailed states, and the glo&al plague o" dictatorial or

oligarchic states that the economy can &e shi"ted away "rom one where the military is a

cost that the general economy carries, to one where it is part o" the expansion o"

prosperity. :or all o" the tal "rom the neoconser!ati!e mo!meent a&out how it is

committed to creating 0emocracy around the world, the reality is /uite di""erent. :or a

star example o" this, loo at the ceremonies that too place to announce the new %ra/i

go!ernment. 4ell scripted, with "lags and polished "urniture, it seems that all is in order.

>ut loo again, note how all the men on that stage are "at. Fow loo at whate!er !ideo"rom the %ra/i street you can "ind you will see no "at %ra/is. 4hat has happened is the

installation o" so"t, "at, and out o" touch leaders who ha!e li!ed well through the times o"

trou&le in %ra/, and their maintenance &y ;S power. This might wor in %ra/ and the

present price o" oil an economy doesn#t ha!e to &e that e""icienty &ut it will wor

!irtually nowhere else.

%t may seem ironic, &ut, in "act, it is the caseG nation &uilding re/uires the instilling o"

discipline and order, and the means "or doing this must include a strong set o" military

institutions. Military institutions which are Dpro"essional, competent, loyal and patrioticD.

The military itsel" must &e weaned "rom the 4ar Economy, which warps its outlootowards weapons systems, and towards creating we&s o" industrial supply chain. The

military itsel" would do well to &e li"ted "rom the &urden o" the war economy. 'anada and

>ritain ha!e thri!ing martial traditions, without ha!ing a 4ar Economy.

>ut the military o" nation &uilding is !ery di""erent "rom the military o" the 'old 4ar or o"

the o&li&eral state. %nstead it is a military that can sta&li8e an area, end ci!il !iolence,

11



and "orm an um&rella "or rapid rede!elopment o" an a""licted area. This process was

seen in outline in >osnia and Koso!o with numerous pro&lems and with a long list o"

ca!eats a&out the points o" "ailure in those missions, which the participants themsel!es

ha!e &een willing to point out. Fot least was the amount o" "orce needed to produce

sta&ili8ation itsel"G the military does not ha!e the tools to sta&ili8e, the military instrument

is still too &lunt.

$owe!er it is the complete "ailure o" this process to date in %ra/ that has &een the

hallmar o" the postin!asion period. Fow with oil as expensi!e as it is, %ra/#s new

go!ernment is going to ha!e numerous chances. More o!er all it needs to do is assert

control o!er a small section o" the country that produces oil and manages its export. %"

%ra/ can produce oil at * million &arrels a day consistently, that is almost -- million

dollars a day o" "ree cash "low. %n a nation the si8e o" %ra/, that is a huge amount o"

money.

>ut most nations are not sitting on an ocean o" oil. And the expense o" re&uilding %ra/

compared to the "inal pro"its to the outside world are so ruinously &ad, that this is a

!ictory that loos "inancially lie de"eat. The model pro!ided &y %ra/ is simply not

scala&le to most other nations, &ecause most other nations cannot &e disrupted to the

degree o" an oil state where most o" the !alue can#t &e &om&ed &ecause it is &elow the

ground. Thus the model pro!ided &y %ra/ is an in!asion that is too expensi!e, an

occupation that "ails to sta&ili8e, a de!elopment period that has "ailed to put &asic

utilities on line, and an open ended committment that is a massi!e drain on manpower

and logistics.

This e""ect is seen in e!ery component o" military supply chain. M tans, while the

&est &attle"ield superiority tan e!ery &uilt, are taing high attrition against guerillas in

ur&an areas. $elicopter parts are wearing out /uicly a military helicopter in %ra/ is a

giant !acuum cleaner in a land o" sand. The warnings o" a num&er o" generals, and

military analysts including this one were "irmly repeated &y one o" the earliest and

highest pro"ile opponents o" the %ra/ in!asionG 6eneral 4esley 'lar in his testimony

&e"ore the Armed Ser!ice 'ommittee. The picture that 6eneral clar so "orce"ully

outlined is that the attrition on ey parts, personnel and logistical pinch points is

reaching crisis proportions in the ;S military. $is warnings are not speculati!eG attrition

in helicopters, and crashes attri&uta&le to maintenance pro&lems are growing.

Thus the military itsel" must &e trans"ormed "rom a machine designed to meet a large

army on the &attle"ield, to one that can pro!ide sta&ili8ation. %t must shi"t its priorities

away "rom high per"ormance, i" sexy, air superiority "orces and towards sustaina&ility

o" operations. A pro&lem which has as many technical challenges as hte a&ility to super

cruise a 5et "ighter. The military must shi"t its training and logistical systems to a "orm

12



which will allow the secure mo!ement o" goods &y ground through many inds o"

terrainG the insurgency has targetted trucing with great e""ect in %ra/, a tactic that is

sure to &e repeated o!er and o!er again in the coming decades.

This process o" going to a ?eace Economy, without losing the essential edge and

"uction o" the a&ility, not merely to engage in peaceeeping, &ut in peacemaing is one

that is the challenge &e"ore the le"t, simply &ecause the right has neither a conception o"

how to do it, nor the will to do it. The collapse o" the long standing agreement &etween

those who run the American 4ar Economy and the ?eace Economies o" other nations

that li!ed under the protection o" that 4ar Economy indicates that the current world

economic structure is unsta&le. Either real wages must collapse so that the 4ar

Economy can "eed itsel", or there must &e a dramatic read5ustment in the means &y

which de!eloped nations maintain their security and economic sta&ility, one which

generates, rather than consumes, resources.

The only road to doing this is "or the de!eloped nations to aggressi!ely dri!e down their

own resource and energy costs the 60? o" a de!eloped nation must &e much more

Denergy denseD than present. As importantly, the de!eloped world must shi"t the nature

o" its miltiary instrument "rom one o" &attle"ield con"lict &etween nations, and towards

creating an interior 8one o" sta&ility within which economic de!elopment can occur. %t

must &e a&le to not merely de"end &orders, &ut hold territory, and do so sustaina&ily "or

long periods o" time with smaller committments o" manpower. The military can only do

this i" there is a ci!ilian leadership committed to maing this transition.

%n summaryG

The old system o" America ha!ing a 4ar Economy, which other de!eloped nations paid

"or, and had, in return, ?eace Economies, is &reaing down. The ;nited States, no

longer a&le to extract surplus !alue "rom the states that supply it resources, is now

engaged in taxing through sienurage the other de!eloped states. The end point o" this

process is a dramatic drop in real wages in those states, as they race to the &ottom with

'hina as a la&or pro!ider. 'hina, needing resources, is destined to &ecome a war

economy when it can do so, &ecause only this will generate enough demand and social

sta&ility to hold their large population together and employed.

This process is destined to dramatically raise materials prices, and produce a large

mo!ement towards economic nationalism, "irst in resource states, as is already

happening in Hene8uela, Argentia, <ussia and %ran, and then in other nations as they

progressi!ely "ace outside pressure on wages and currency "low. ;nless halted, it will

mean an end to "ree trade, and the esta&lishment o" nationalist states o" a /uasi

dicatorial "orm o" either the right or the le"t around the world.

13



The le"t "aces a challenge in that many o" the traditional mechanisms o" the le"t

including la&or sta&ility are creatures o" the 4ar Economy, e!en socialist and green

parties support these arti"acts o" the pre!ious li&eral 4ar Economy. Since the war

economy has now &een completely coopted &y the right wing and the <epu&lican ?arty,

these mechanisms are increasingly useless, and the people tied to them are going to

continue to mo!e to the right. %nstead the le"t must see a ?eace Economy solution.

That ?eace Economy must rest on nation &uilding, since it is only through the ending o"

assymetrical threats and "ailed states that the de!eloped world can continue to prosper.

The 4ar Economy model o" nation &uilding, as seen "rom %ra/, is an a&5ect "ailure at

producing sta&ility and de!elopment at any reasona&le cost only a nation sitting on as

much resource wealth as %ra/ could ha!e this model implemented.

To engage in this transition then, re/uire a military instrument that is capa&le o" nation

&uilding not the dissol!ing, &ut the trans"orming o" the military. A transition, &ecause it

will "ocus on martial !alues will, in "act, li&erate the military "rom the corrupting role o"

&eing the industrial policy "or the American economy. This military instrument must &e

a&le to control space, sustaina&ly, "or long periods, rather than &eing designed "or rapid

in!asion.

4artime ?rosG 6o!ernment expenditure increase 60?, puts more money into the

economy, and decreases unemployment.

'onsG Although there may &e more 5o&s and a higher 60? o!erall wel"are may go down

&ecause o" rations (gasoline, tires, sugar, etc. during 44%%), higher prices (gas during%ra/ 4ar), go!ernment &udget de"icits, and less production o" consumer goods.

?eacetime ?rosG More consumption goods, cheaper goods, no rations, and in a per"ect

world a &alanced go!ernment &udget.

'onsG $igher unemployment, less 60?, less production.

14



ECONOMIC IMACT O( %AR%t is ironic that, "rom a certain perspecti!e, war can &e &ene"icial "or an economy.

4ar leads to higher go!ernment spending, higher employment and can there"ore

pro!ide a &oost to domestic demand, economic growth and help reduce unemployment.

$owe!er, this &oost to domestic demand doesnt ha!e to come "rom military spending.

>ut, war is o"ten a !ery good excuse "or the go!ernment to &orrow much more than it

could do in peace time. The ;K national de&t is currently 3-I and e!eryone thins we

need to cut spending and reduce the le!el o" de&t. >ut, in war time, ;K national de&t

has o"ten risen a&o!e -I o" 60?. (in war, there is o"ten a patriotic "er!our to &uy war &onds L A patriotic "er!our which wouldnt &e there in current climate.

Although, war can pro!ide a temporary &oost to domestic demand, it is important to

&ear in mind the cost o" war. %n particular the opportunity cost o" military spending, the

human cost o" lost li!es, the cost o" re&uilding a"ter the de!astation o" war. Also it

depends on the ind o" war, how prolonger, where and how it is "ought.

%hat Happens A)ter %ar*

4ar in!aria&ly leads a legacy o" de&t and an army o" demo&ilised soldiers.. A"ter theSecond 4orld 4ar, the de&t was not a constraint to growth and we had one o" the

longest periods o" economic expansions on record. (?ost 4ar >ritain)

$owe!er, the a"termath o" war, is not always so positi!e. The ;K struggled a"ter the end

o" Fapoleonic war and :irst 4orld 4ar. The 6erman economy was ra!aged &y the

a"termath o" the :irst 4orld 4ar and reparation payments.

15

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http://econ.economicshelp.org/2010/02/post-war-economic-britain.html



/i0 Copetition an# E))i$ient ro#"$tion:

0ue to competition &etween &oth pri!ate and pu&lic sectors, the le!el o" e""iciency

remains, high. All "actors o" production wor e""iciently in the hope o" pro"it.

/ii0 So$ial %el)are:

;nder this system, the main priority is gi!en to social wel"are through e""ecti!e

economic, planning. The pri!ate sector is controlled &y the go!ernment. ?roduction and

price policies o" pri!ate sector are determined to achie!e maximum social wel"are.

/iii0 E$onoi$ Deelopent:

;nder this system, &oth go!ernment and pri!ate sector 5oin their hands "or the

de!elopment o" socioeconomic in"rastructures, Moreo!er, go!ernment enacts many

legislati!e measures to sa"e guard the interests o" the poor and weaer section o" thesociety. $ence, "or any underde!eloped country, mixed economy is a right choice.

Deerits o) Mixe# E$onoy:

The ain #eerits o) ixe# e$onoy are as )ollo-s:

/i0 1n4sta.ility:

Some economists claim that mixed economy is most unsta&le in nature. The pu&lic

sector gets maximum &ene"its whereas pri!ate sector remains controlled.

/ii0 Ine))e$tieness o) Se$tors:

;nder this system, &oth the sectors are ine""ecti!e in nature. The pri!ate sector does not

get "ull "reedom, hence it &ecomes ine""ecti!e. This leads to ine""ecti!eness among the

pu&lic sector. %n true sense, &oth sectors are not only competiti!e &ut also

complementary in nature.

/iii0 Ine))i$ient lannin,:

There are no such comprehensi!e planning in mixed economy. As a result, a large

sector o" the economy remains outside the control o" the go!ernment.

/i0 2a$5 o) E))i$ien$y:

17



%n this system, &oth sectors su""er due to lac o" e""iciency. %n pu&lic sector it is so

&ecause go!ernment employees do not per"orm their duty with responsi&ility, while in

pri!ate sector, e""iciency goes down &ecause go!ernment imposes too many restrictions

in the "orm o" control, permits and licenses, etc.

/0 Delay in E$onoi$ De$isions:

%n a mixed economy, there is always delay in maing certain decisions, especially in

case o" pu&lic sector. This type o" delay always leads to a great hindrance in the path o"

smooth "unctioning o" the economy.

/i0 More %asta,es:

Another pro&lem o" the mixed economic system is the wastages o" resources. A part o"

"unds allocated to di""erent pro5ects in pu&lic sector goes into the pocet o"

intermediaries. Thus, resources are misused.

/ii0 Corr"ption an# 6la$5 Mar5etin,:

There is always corruption and &lac mareting in this system. ?olitical parties and sel"

interested people tae undue ad!antages "rom pu&lic sector. $ence, this leads to

emergence o" se!eral e!ils lie &lac money, &ri&e, tax e!asion and other illegal

acti!ities. All these ultimately &ring redtapism within the system.

/iii0 Threat o) Nationalis:

;nder mixed economy, there is a constant "ear o" nationalism o" pri!ate sector. :or this

reason pri!ate sector does not put into use their resources "or the common &ene"its.

18



The end result is a one sided and parochial perspecti!e that is un"ortunate "or two

reasons. :irst, it pushes the !ital de!elopmental aspects o" national security under the

carpet o" relati!e insigni"icance. <arely do we hear our security experts showing their

concern o!er near incessant "looding in Assam and >ihar or "or that matter the "amine

deaths in South %ndia. %t doesnt matter to most o" them i" %ndia still has millions who go

hungry e!ery day or remain undernourished. 4hen an Amartya Sen attempts to de"ine

these de!elopmental issues as security concerns, there are no taers in the

mainstream.

Second, there is too much emphasis on military matters. ="ten, the issues are

emotionali8ed and metamorphosed into holy cows where /uestioning their logic is

deemed irrationality. 4itness "or example, the demand "or raising the de"ence &udget to

+ percent o" the 60? or expansion in the o""icer cadre o" the armed "orces. >oth the

demands are /uite in contrast with the contemporary glo&al trends.

Things would ha!e &een &etter had there &een an institutional attempt to correlate

de"ence and de!elopment issues. 0e"ence &eing a nonplan expenditure, the ?lanning

'ommission has largely ept out o" de"ence matters and does not prepare the de"ence

"i!e year plans &y itsel". Similarly, the Fational 0e!elopment 'ouncil also does not

touch de"ence "i!e year plans. %ronically, this arrangement does not mae the armed

"orces happy since the de"ence "i!e year plans su""er in terms o" timely appro!al,

resource commitment and plan execution. Fo wonder the ser!ices ha!e recently

demanded the constitution o" a de"ence planning commission. The "inance commissions

ha!e also gi!en a marginal treatment to de"ence issues and ha!e suggested the

progressi!e trimming o" "uture de"ence &udgets to cur& "iscal and re!enue de"icits. TheFational Security 'ouncil Secretariat (FS'S) too, going &y the contents o" its

sponsored annual pu&lication on %ndias national security, perhaps treats de"ence and

de!elopment as watertight compartments.

The annual report o" the Mo0 too does not del!e into the de!elopmental aspects o"

security while descri&ing the threat en!ironment. 0itto "or se!eral go!ernment

commissioned committees and commissions on de"ence re"orms, which did not explore

a possi&le correlation o" de"ence and de!elopment in their reports. The only exception

has &een the H K Misra 'ommittee on cur&ing o" waste"ul expenditure that has &een

mind"ul a&out optimi8ation o" the de"ence &udget. The committees recommendations, i"

implemented, can spare the 6o!ernment "rom the &urden o" sparing additional

resources hitherto meant "or de!elopment.

%n recent times, the go!ernment has &een taling o" inclusi!e growth in its policy

statements. Accordingly, the "ocus, as the ?rime Minister o"ten says, should &e on the

marginalised sections, sectors and areas that are lagging &ehind. $owe!er, i" the dream

20



o" inclusi!e growth has to &ecome a reality, it must &e lined to de"ence policy o" the

country. 4hile the +th :inance 'ommission has recommended the cur&ing o" de"ence

&udget to .3 per cent o" the 60? &y *-@, more needs to &e done so that resources

are not a pro&lem "or either de"ence or de!elopment. :or example, the diplomatic

aspects o" de"ence ha!e to &e accorded more weightage and the country should

engage its neigh&ours in !arious "orms o" military diplomacy. Simultaneously, the

ser!ices should &e encouraged towards internal resource generation in nonsensiti!e

areas.

%" %ndia is to ha!e a""orda&le and sustaina&le de"ence, there is no escape "rom de"ining

de!elopment as security, &oth at a policy and strategy le!el. There is a need to

&roaden the concept o" national security to one that encompasses de"ence and

de!elopment as twin elements. 'oncurrently, strategies need to &e identi"ied that see

the progression o" &oth without one compromising the other. ?erhaps here lies the

challenge "or the Faresh 'handra 'ommittee when it sits to dra"t a national securitydoctrine.

TECHNO2OG& IN(2O%S: ISS1ES7 CHA22ENGES AND

METHODO2OG&

The de"ence o""set policy mandates the "oreign suppliers to plough &ac a minimum o"

+- per cent o" the contractual !alue o" pro5ects worth <s. +-- crores or a&o!e to the

domestic de"ence industry. The o""set route is intended to strengthen the domestic

de"ence industrial &ase through a com&ination o" technology trans"er, in!estment in

<0 and in production "acilities, &esides export &usiness generation. :rom the national

21



!iew point, the o""set aims sel"reliance and indigenous capa&ility enhancement in the

!ital de"ence sector in!ol!ing ad!anced technology.

The real success o" technology a&sorption pro5ects and technology enhancement

schemes has always &een a su&5ect matter o" de&ate &etween the administrators and

technologists. =ur experience o" serial license L production agreements re!eals the

yawning gap &etween certain types o" licensed manu"acture and de!elopment o"

indigenous capa&ility. $ence while "inali8ing o""set contracts, apart "rom the commercial

angle, it is !ery important to ensure that the re/uirements o" short and medium term

goals o" de!eloping indigenous capa&ility and now how are ensured.

This paper attempts to highlight the 1Technology %n"lows2 as emerging "rom the

implementation o" o""sets as well as 1'hallenges2 "oreseen in such implementations and

suggested 1Methodologies2 "or its e""ecti!eness. This paper primarily deals with

technology concerning 0e"ence Electronics as the applica&ility in other sectors may

need suita&le adaptation.

Te$hnolo,y In)lo- Ro"tes

=!er the period, some o" the important commonly accessed routes "or technology in"low

through o""sets to the recipient countries are "ollowingG

a. 'ode!elopment and 'oproduction

'ode!elopment and coproduction is seen as a !ery e""ecti!e mechanism in

state o" the art technology induction and a&sorption. %n 5oint de!elopment

programs, the access to technology that indi!idually the partnering companies N

countries could not ha!e de!eloped is reali8ed at su&stantially less cost and time.

The 5oint de!elopment also ensures that the part o" production wor along with

the 5o&s it creates is ensured to the %ndian partner also.

>y this process, the companies N countries will &ecome partners at speci"ic

contri&ution le!els. There are "inancial &ene"its connected with the contri&ution,

the primary &ene"it &eing the access to ad!anced technology and an ad!anced

product. :urther, it pro!ides the %ndian !endors with the necessary sill sets

through their contri&ution in the 5oint program.

Joint %ntellectual ?roperty (%?) rights and shared international maret space

should &e part o" the negotiated contract there&y pro!iding international exposure

and a "air share o" the resultant re!enues to the %ndian "irms.

&. Su& contracting N 'ontract Manu"acturing

22



Su&contracting N contract manu"acturing occurs when a "oreign !endor procures

de"encerelated components, su&systems or products "or export "rom industries

in countries where the !endor has to meet o""set o&ligations.

%n the short time"rame su&contracting N contract manu"acturing is an e""ecti!e

mechanism in &ringing the technology. This could, howe!er, get limited to

"a&rication, assem&ly and related ser!ices. The su&contracting can either &e

through >uild to ?rint2 or 1>uild to Spec.2

>uild to ?rintG The "oreign !endor pro!ides the complete documentation pacage

to the (%ndian) de"ence industry. The documentation pacage could include

manu"acturing drawings, Ouality re/uirements, Test methods, Acceptance N

<e5ection criteria, etc. The %ndian industry executes the tas &ased on user

supplied data, &eing a&le to source N manu"acture the parts, assem&le and test

the su&assem&lies N product &e"ore they are deli!ered. The design issues, i" any,

is an essential responsi&ility o" the supplier while %ndian industry could share the

responsi&ility "or design !eri"ication, especially while implementing modi"ications

to the original documents.

• >uild to SpecG The "oreign supplier pro!ides the detailed Technical Speci"ication,

Ouality re/uirements, etc. to the (%ndian) !endor who undertaes the design,de!elopment, manu"acture and supply o" the product. This method may also gothrough the phases o" de!elopment o" prototypes, user trials and e!aluation, etc.as applica&le to the product or su&assem&ly.

• 0uring contract negotiation stage the %? related issues are to &e resol!ed so asto a!oid legal pro&lems later.

Joint Hentures

The technology in"lows can &e a""ected through esta&lishment o" Joint Hentures (JHs).

$owe!er, the in!estment le!el remains a critical "actor a""ecting the success o" a Joint

Henture. %n a Joint Henture with "oreign e/uity participation restricted to *3 per cent, the

=EMs, since they guard their %?, may inhi&it N hesitate the colla&orating partners to &ring

in cuttingedge technology. There are instances where the JHs ha!e &ecome non

"unctional due to technology o&solescence, with the "oreign partner limiting his

in!estments and continue up gradation to his technology.

Cicensed ?roduction

The trans"er o" technology (ToT) to a local de"ence industry capa&le o" a&sor&ing the

technology, i" implemented in true sprit, where &oth the supplier and the recipient are

competent organi8ations, the local industry will &e a&le to "urther de!elop the

23



technology and this result in leap"rog on the existing technology lag. $owe!er, it has

&een experienced N seen that the a&sorption o" technology and later its enhancements

are o"ten critical issues in its implementation.

:rom the sellers !iewpoint, he would &e throwing away his competiti!e ad!antage i" he

trans"ers all o" the technology related to the product &eing sold. :urther, "rom sellers

perspecti!e, he would &e gi!ing away now how to a partner who may later &ecome his

competitor. The seller there"ore, may estimate the opportunity cost excessi!ely causing

a!oida&le increase in ToT costs. Also, precise !eri"ication o" technology cost is di""icult

due to nona!aila&ility o" su""icient details.

%n!aria&ly, the depth o" technology &eing trans"erred &ecomes selecti!e at the hands o"

seller. The proprietary items included &y the seller in the T=T contract results in &uyer

&eing dependent on the seller. The &uyer is una&le to le!erage the ToT. There are

always gaps &etween the needs N expectations o" the &uyer and the o""er "rom the seller.

4hile these aspects are primarily applica&le to hardware related programs, the issues

&ecome "urther complicated where there is su&stantial so"tware content also. 6enerally,

the executa&le codes o" so"tware are trans"erred to the &uyer who will &e a&le to copy

the same "or implementation in another module. The now why is not normally part o"

the trans"er without which the &uyer can not carry out any enhancement Nmodi"ication o"

the product "or its uninterrupted usage or e!en marginal upgradations to o!ercome

o&solescence related issues during its ser!ice li"e.

Maintenance ToT and Training

Congterm customer support acti!ities ha!e &ecome mandatory. The training o" local

industrial partners and user agencies in maintenance o" the system through applica&le

le!el o" technology trans"er ensures e""ecti!e and committed maintenance support. The

esta&lishment o" Maintenance <epair and =!erhaul (M<=) :acility on partnership &asis

is an option to achie!e this o&5ecti!e. >y this the local de"ence industry ac/uires the

technology and o""ers maintenance support to the user agency on a longterm &asis.

Esta&lishment o" training "acilities lie "light simulators and usertraining centers &y the

"oreign !endor in partnership with local de"ence industry will ade/uately meet this

re/uirement. %t will also &e necessary to stoc and maintain ade/uate /uantity o" spareparts "or meeting 0le!el maintenance re/uirements.

Iss"es an# Challen,es asso$iate# -ith Te$hnolo,y Trans)er

4hile the technology in"lows may &e through !arious means as explained, there are

many issues and challenges "oreseen in respect o" our goal o" achie!ing sel"reliance

24



$owe!er, this critical aspect o" the %ndian industry could "ace a technical challenge in

"uture endea!ours where the a&sorption o" imported technology is carried out within

speci"ied time"rames and applied either directly "or new products or in related areas "or

di!erse product ranges.

%t should &e noted, howe!er, that mere su&stitution o" proprietary components with

indigenous ones would tae us only a limited distance "orward in areas o" impro!ing

existing products. The emphasis should &e on internali8ing the capa&ilities in such a

way that new and di!ersi"ied products can &e de!eloped inhouse &y le!eraging the

trans"erred "oreign technology.

In#"strial Ret"rns

Apart "rom the most important aspect o" meeting the !ital de"ence needs "or which the

technology is imported in the "irst place, the technology on o""er must necessarily &ring

in industrial returns either "rom domestic maret or "rom international maret or "rom

&oth and there"ore should &e assessed "or this potential.

2i$ense Iss"es

:re/uently, it is "ound that the technology concerned is su&5ect to appro!al o" the "oreign

go!ernment and hence o&taining latest technology &ecomes di""icult. %n many areas o"

cuttingedge technologies, "oreign suppliers do not part with their technologies citing

patents, %?<s etc., or may "ix enormous prices "or the same. E!en in cases where the

supplier is willing to sell the technology "or a price, the go!ernments in /uestion do not

permit the same under their respecti!e export control regime. A !ery expensi!e and

extensi!e licensing procedure, which is a !ery time consuming, has to &e gone throughin order "or the product N technology to &e exported. :inally, there are certain products N

technologies that are &arred "or exports to certain third world countries and certain

organi8ations.

Deterination o) M"ltiplier (a$tor

Since Technology trans"er &ecomes a ey component o" the =""set agreement, suita&le

multiplier "actors may need to &e wored out, i" re/uired, to promote and encourage the

"oreign supplier who is willing to trans"er the necessary technology. The negotiated

!alue o" the technology is o"ten &ased on the "oreign suppliers prior in!estment in

research and de!elopment, the maret !alue o" the technology or the cost o" de!elopingthe technology in %ndia. Multipliers should &e applica&le only "or !ery critical technology

and that too i" trans"erred totally so that %ndian industries can "urther de!elop on them.

Te$hnolo,y 8al"ation: Iss"es an# Metho#olo,ies

Haluation o" technology is highly complex and extremely di""icult and at times may

appear to &e su&5ecti!e. This is in "act the greatest challenge in the whole process o"

26



technology trans"er. $owe!er, technology !aluation is a critical component o" the

technology trans"er process and it is essential that this is carried out in as accurate and

transparent manner as possi&le.

=""set agreements and contracts meet !arious re/uirements o" the go!ernmental

agency entering into the contract with the "oreign supplier. %" go!ernment intends to use

the o""set !alue through direct o""sets lie manu"acturing andNor technology trans"ers in

the purchased product area, then the !alue o" the o""set is wored out &ased on the

!alue o" the costs o" manu"acturing, !alue o" the technology that is to &e trans"erred,

etc.

>ased on the a!aila&ility o" in"rastructure "or product manu"acture, support and "uture

utility o" such in"rastructures, decisions could &e made "or o""set !alue considerations.

The multiplier issue can also &e addressed &ased on such "actors. As "ar as trans"er o"

technology is concerned, the o""set !alue can &e arri!ed at only a"ter complete analysis

o" the !alue o" the technology.

$ence it &ecomes imperati!e to carry out a complete analysis o" the !alue o" technology

in!ol!ed in the transaction. %n this regard, the technology !aluation should consider the

"ollowing aspectsG

• 0etails o" technology and its applicationsG %n todays industry, technology used "or

a gi!en product ser!es as at least a guideline "or numerous other products thuspa!ing the way "or increased scope o" products and ser!ices. Also manytechnologies ha!e a dualuse application and thus many de"ence technologies

also contri&ute to the ci!il sector.

• Expected impact o" technology in terms o" pro"itsG %t is &ecoming increasingly

di""icult to manu"acture products with older technologies due to o&solescence o" parts and processes leading to considera&le erosion in pro"its caused &yincreased costs o" manu"acture and su&se/uent maintenance. $ence, the impacto" latest technology in terms o" ease o" production and maintenance is reali8edthrough increased pro"its o" operation.

These two "actors ha!e a signi"icant impact on the importance o" the e""orts spent on

technology !aluation.

As regards in"ormation to technology and its applications are concerned some rele!ant

/uestions to &e ased areG

• %s it &asic research leading to a new product or replacement o" an existing

productB'osts o" technology "or totally new products need to &e e!aluated against

27



replacing the existing products o" older designs N technology as this could pa!ethe way "or newer system designs.

• $ow does it &enchmar with respect to other researchers and competitorsB

:re/uently, the new technology is attempted &y se!eral companies in the same

industry and the speci"ications on o""er need to &e critically e!aluated &e"ore"inali8ing agreements.

The impact o" technology can &e assessed &y examining the "ollowing aspectsG

• Technology impact in terms o" incremental impro!ement !ersus &rea through

in!ention. The costs o" products and ser!ices &ased on incrementalimpro!ements in the a!aila&le technologies are "re/uently "ound to &e higher than that incurred "or &reathrough technologies which may cost higher up"ront&ut pro!es cost e""ecti!e later on.

• ?otential maret si8e. ?roducts directly &ased on imported technologies couldha!e &roader maret &ase than local marets. 4hen products are de!eloped inhouse a"ter im&i&ing the technology that is compara&le to international le!els, theproducts &ecome eligi&le "or international marets. Also in case o" dualusetechnologies, the ci!ilian products could ha!e a much wider maret in %ndia itsel".

• 'ompetiti!e ad!antage which can &e translated into pro"its. 4hen local

contractors &ecome eligi&le "or international marets and thus deri!e competiti!ead!antage o!er other !endors, this translates into de"inite pro"its due to the lower manu"acturing costs in %ndia.

Some o" the ma5or "actors to &e considered in !aluing technology are as "ollowsG

• A!aila&ility, accepta&ility o" alternate technologies. %ssues related to licensing &y

"oreign go!ernments sometimes "orce %ndian industries to opt "or alternatetechnologies that are more readily a!aila&le. This &ecomes an issue not only thato" a!aila&ility o" technology &ut also that o" accepta&ility due to the standards o" products limited &y a!aila&le alternate technologies.

•

•

Ouality o" %?. Some o" the cutting edge technologies are protected &y %ntellectual?roperty <ights. The num&er o" such %?< controls and ?atents can "orm another &asis "or !aluing technology that is o""ered.

• ;se"ul li"e o" technology. The point o" introduction o" the new technology in the

industry will determine the use"ul li"e o" the technology. :or example, i" a gi!enproduct &ased on slightly older technology has already met most o" the maretre/uirements, and i" the cost o" upgrade N replacement o" all the existing products

28



are "ar higher than the cost &ene"its due to the new technology, then the li"e o" the technology is limited to that o" the remaining maret. These three "actorsde"ine the competiti!e ad!antage o""ered &y the technology. 'ompetiti!ead!antage generally comes in three ma5or types, lower operating costs,generation o" a new product and generation o" related products and ser!ices.

• Stage o" ?roduct 0e!elopment The product can &e in any o" the nown and

de"ined stages o" de!elopment such as, <esearch (pro!e the concept),0e!elopment (reduce the concept to practice), Application testing (productper"ormance), ?ilot product and 'ommercial production. =!erall system designsare in"luenced &y a!aila&le technologies at the time o" product conceptuali8ation.%n cases where system designs ha!e already progressed &ased on a!aila&letechnologies and new technology is sought to &e introduced "or a part o" thesystem that may or may not &e possi&le to integrate at a late stage, this &ecomesa "actor "or consideration. %n such a situation the new technology may not pro!euse"ul.

• Maturity le!el Again gi!en a products li"e cycle, the products maturity le!el plays

a part in decisionmaing. %ntroduction o" a new technology in a product nearingthe end o" its li"e cycle may not &e use"ul.

• Maret status Sometimes the maret may not &e ready "or a particular

technology. %ntroduction o" the technology at such a stage may pro!e to &e uneconomical. These "actors are indicati!e o" the strength N si8e o" the unmetmaret need, the competiti!e situation and the cost situation (manu"acturing,operating capital).Nli

Metho#s o) 8al"ation o) Te$hnolo,yThe commonly adopted ma5or methods o" !aluing technology are the "ollowing.

'ost Halue o" technology &ased on the cost to create itG The cost approach is one o"

the methods o" !aluation. >ased on the !aluation principles, the o""set !alue is wored

out using the suggested !alue "rom the supplier and peer re!iew !alue "rom a panel o"

experts. ;sing the suggested !alue "rom the seller, the real !alue is e!aluated &y a

panel o" technology experts "rom rele!ant institutes and de"ence "irms with the use o"

pro!en tools. Economic "actors such as &udget reduction, economic spillo!er, and

technical use"ulness "actors, technical "actors such as technical le!el, technical

importance and technical di""iculty "actors and de"ence strength "actors such as urgency

o" technology, de"ence contri&ution, and de"ence needs are considered in the process

o" e!aluation. This has the ad!antage that it is a !ery simple and easily understood

concept. $owe!er, it su""ers "rom the disad!antages o" the "act that, the cost may &ear

little relationship with potential &ene"its o" intellectual assets, it is di""icult to mae

accurate cost estimates and that the opportunity cost is not considered.

29



Maret 'ost o" ownership o" similar technology through recent transactionsG This

method has the ad!antage that it is simple and is &ased on actual transaction data. >ut

the disad!antages are that the transaction data are limited since transactions are

in"re/uent and most o"ten not pu&lic. Also the characteristics o" pre!ious transactions

could &e uni/ue and hence di""icult to compare with the present transaction.

%ncome Halue o" Technology as the present worth o" pro5ected economic &ene"its. The

income&ased !aluation is the most accepted practice as it captures the !alue in use o"

the technology. The ad!antages o" this method o" !aluation are &eingG (i) %t is &ased on

economic &ene"its deri!ed "rom owning N using the technologyP (ii) %t re"lects "ull e""ects

o" riss including o&solescence associated with the technology. $owe!er, the !aluation

is su&5ecti!e as it is &ased on anticipation o" "uture income.

The optimum !alue o" a technology trans"erred (in N out) is a "air percentage o" the cash

"low generated &y the competiti!e ad!antage o" the technology (sold N purchased). The

maret thum& rule is that * per cent o" the expected pro"its "rom the &usiness arising

out o" the technology should go to the licensor "or contri&uting the technology. >alance

per cent o" the pro"its go towards manu"acturing, mareting etc. %t may also &e

!iewed that at the time o" product introduction, - per cent o" the ris still remains and

there"ore * per cent re"lects a -G- sharing o" maret ris. %t should &e &orne in mind

that the use o" industry standards can wor well i" the &asis "or the de!elopment o"

these standards is well nown to &oth parties negotiating the contract and are

applica&le to the speci"ic situation. <ational licensees N purchasers o" technology are

unliely to pay money or put money in to a !enture with out a &elie" in "uture cash "low.

Con$l"sion

The &usiness opportunities arising out o" the mandatory o""set pro!isions in the de"ence

import contracts pro!ide ample scope "or the %ndian 0e"ence %ndustries to get state o"

the art technology and i" e""ecti!ely a&sor&ed &y us, in due course, we can progress

su&stantially towards achie!ing sel" reliance in indigenous design and manu"acture o"

de"ence products. Through care"ul analysis and assessment during the selection

process o" technology on o""er and through proper and e""ecti!e monitoring o" o""set

contract implementation we can reach this goal o" sel" reliance along with signi"icant

enhancement in technology capa&ility as well as its spin o"" e""ects in associated

industrial and research sectors o" the national economy.

30



MI2ITAR& 61DGET /TRENDS0

On analyst estimated that the military had a $400-billion equipment deficit. By this accounting,

was no way in which a serious defence can be mounted on less than four percent of G! "aboutwhat the # spends%& for a first-class military "though not a super-class military li'e the #%(ndia would need ) percent of G!.

efence got $*+-billion for 0+)-+ "#$+(/))%, .* percent of G! as against $1)-billionand +.* percent of G! the pre2ious year. 3apital ependiture rose to 45 percent of the budget.6ccording to the 7edium 8erm 9iscal !olicy tatement presented by the 9inance 7inister,:uring the pro;ection period of 0+-+5 and 0+5-+< it "re2enue budget% is estimated toincrease by +0 per cent o2er pre2ious years. 8otal efence ependiture including the 3apitalcomponent is estimated at about +.) percent of G! in 0+-+5 and 0+5-+<.=

8he /6 go2ernment continuously fell short of utilising its defence allotment o2er the pre2ioustwo years. 8he defence ministry spent less by +1.* percent "s ++,*<* crore% of its allocated budget in 0+*-+). 6nd in the pre2ious year of 0+4-+*, it could only spend 5* percent of itsallocation.

6s a ratio of the pro;ected G! for 9> 0+*-+), (ndia?s defence ependiture was pegged at +.4 per cent 2is-a-2is +.) per cent in 0+4-+*. Of the total allocation for defense for 0+*, the armywill get s +,04,+*5.<* crore, the na2y s +*,**.)4 crore, the air force s 1,000.0< crore, the

31



ordnance factories s ,554.1 crore, the efence esearch and e2elopment Organisations s),*0.0< crore. 8he remaining amount of s <4,*55 crore has been allotted on the capitalaccount for the acquisition of modern weapon systems, including initial payments for +) multi-mission, medium-range combat aircraft, +< light helicopters and +4* #ltra-light @owitAers,among others. (t is well 'nown that (ndia plans to spend approimately #$ +00 billion o2er +0

years on defence modernisation.

8he +0.<* per cent increase of s 4,1* crore from s ,,10 "e2ised stimates for 9>0+4-+*% to s ,4), "#$ 1<.5 billion, Budgetary stimates for 9> 0+*-+)% is inadequateto allow for inflation, which is ruling at about ).0 to .* per cent. 8he upee?s steady slideagainst the # dollar to s ) to a dollar has eroded its purchasing power considerably. 6nnualinflation in the international prices of weapons, ammunition and defense equipment is generally between + to +* per cent.

(ndia cleared a bul' of defense pro;ects worth $+1 billion in a bid to boost the countryCs nationaldefense preparedness, the (ndian efense 6cquisition 3ouncil "63% said * October 0+4. 8he

council decided that si submarines will be made indigenously at a cost of about *0,000 crorerupees. (t also decided to purchase 5,1*) (sraeli anti-tan' guided missiles at a cost of 1,00 crorerupees for (ndian 6rmy. 8he council finalised purchase of + upgraded ornier sur2eillanceaircraft with impro2ed sensors from @industan 6eronautics Dimited at a cost of +,5*0 crorerupees. 8he 63 also decided to buy 1) infantry fighting 2ehicles at a cost of )) crore rupees.8he decision to manufacture the submarines in the country is in line with !rime 7inister /arendra 7odiCs 7a'e in (ndia pitch.

The total allocation under the Defence Services Estimates forndia is as under!"

Rs in

crores

In billion

US $*

2008-2009 1#05#600$00 23$79

2009-2010 1#41#703$00 31$93

2010-2011 1#47#344$00 33$20

2011-2012 1#64#415$49 37$05

%&ssumin' the current rate of dollar to ru(ee conversion of )s$44$36 to a dollar$

8he (ndian defence budget stood at # $++.5 billion in 00+. On 9ebruary +, 0+4 (ndian9inance 7inister !. 3hidambaram announced a +0E increase in (ndiaCs defense budget, ta'ing it

32



8he rules pro2ide that no ependiture which has not been pro2ided for in the Budget or whichha2ing been pro2ided, has not been sanctioned shall be authoriAed without the concurrence of the9inance i2ision. 8he strict obser2ance of this rule is automatically ensured as the 3ontrollers of efence 6ccounts will not ma'e any disbursement in respect of charges not co2ered byregulations or Go2ernment orders.

#ntil +<) defense spending was deliberately limited. (n the wa'e of the war with 3hina,defense spending rose from .+ percent of the gross national product in fiscal year +<) to 4.* percent in 9> +<)4. (n 9> +<<4, defense spending was slightly less than * percent of grossdomestic product. (n terms of dollars, 9> +<<4 total defense ser2ices ependitures were pro;ected at #$. billion "but are li'ely to ha2e been close to #$.5 billion%. !roportionately, based on figures pro2ided by the go2ernment, 45.4 percent of ependitures were for the army,+*. percent for the air force, *.< percent for the na2y, and 10 percent for capital outlays fordefense ser2ices and defense ordnance factories. 8he latter pro2ide matMriel to the armed forcesthrough some thirty-nine ordnance factories and eight public-sector enterprises that build ships,aircraft, and ma;or defense items.

8he defense budget for 9> +<<4 was ).* percent higher than the re2ised estimate for 9> +<<1.8he allocation increased to +4.< percent of the total central go2ernment budget, up from +1 percent in the pre2ious two fiscal years. /uclear energy and space research are not fullyaccounted for in the defense budget, but most paramilitary forces fall within the pur2iew of the7inistry of efence.

6fter the Nargil war in +<<<, the defence forces were spending less than the allocation. uring+<<<-000, the defence forces spent s 45,*04 crore - nearly s 1,000 crore more than theallotted sum of s 4*, )<4 crore. (n 000-0+, they spent s *4,4)+ crore as against the allocationof s *5,*5 crore - less than s 4,000 crore. (n 00+-0, the defence forces are estimated to

ha2e spent s *, 000 crore as against the re2ised allocation of s )*, 000 crore - a big gap of s5,000 crore.

"s. (n crores%

9(/6/3(6D >6 638#6D L

6DDO368(O/

!3/86G (/36

O 6D( >6

+<<)-+<< <*0*.05 <.5)

+<<-+<<5 1*.<< +<.*

35



+<<5-+<<< 1<5<.*5 +1.+0

+<<<-000 400.)1 +.<5

000-00+ "% *44)0.<+ +*.0

00+-00 "B% )000.00 +1.54

8he increase in defence allocation for 00-01 o2er 00+-0 was modest. 8he 9inance 7inister,7r >ashwant inha, proposed a defence budget of s )*,000 crore against s ), 000 croreallocated in the fiscal which is coming to an end. 6 significant de2elopment in the current fiscalis that the efence 7inistry will be spending only s *,000 crore out of the allotted s ),000crore, lea2ing a shortfall of s *000 crore. 8hus, compared with the actual ependiture duringthe current fiscal, the budget proposes an increase of s 5,000 crore. 8he allocation for the 6rmyhas been fied at s 1*,1)5. crore, mar'ing an increase of ).)< per cent. (t, in fact, getsreduced to .*< per cent while ma'ing allowance for inflation. 8he increase co2ers a number ofsectors ranging from other equipment li'e tan's, artillery and electronic hardware such asweapon-locating radars, welfare and housing and stores "upgradation of eisting assets%. 8he

increase on account of other equipment is a huge s +,400 crore, re2ealing the go2ernmentCs planto pro2ide the 6rmy with the modern tools of war. 8he 6ir 9orce gets s +*, *5< crore, anincrease of 10 per cent o2er the re2ised estimates. 8he allocation is epected to ta'e care of theupgrading of the fighter aircraft "7iG-+ Bi%, licence payment for manufacturing of #-10fighter aircraft and purchase of Faguars from @industan 6eronautics Dimited.

"s. in crores%

>ear Budget stimates e2ised stimates 6ctual penditure

00-001 )*,000 *),000 **,))+.51

001-004 )*,100 )0,100 )0,0)*.50

004-00* ,000 ,000 *,51*.+4P

P!ro2isional, accounts not yet closed.

(n Fuly 004, in order to catch up with the bac'log of ependiture that had not been pro2ided for,the Go2ernment increased the allocation for efence to s.,000 crore. 6fter a gap, defenceependiture in 004-0* has matched the Budget stimates. (t was proposed to increase the

36



allocation for efence in 00*-0) to s.51,000 crore, which included an allocation of s.14,1*crore for capital ependiture.

8he efence and efence related penditure is about s.<*,< crores "004-0*%, including the3i2il stimates of around s.+),000 crores comprising about s.++,000 crores towards efense

!ensions. 8he outlay for defence ser2ices in the Budget 004-0* is s 000 3r. 8his consists ofs 41,*+.+* 3r for re2enue ependiture and s 11.45.5* 3r for capital ependiture. 8heallocation is +.< per cent more compared to 001-04 Budget. 8he increased outlay, particularlyfor capital ependiture, is a reflection of the Go2ernmentCs 'eenness to ensure speedymodernisation of the 6rmed 9orces.

er2ice-wise allocation for 004-0* 2is-a-2is Budget 001-04 is as followsJ

2003-04 Budg! 2004-0" Budg!

6rmy 140.*1 1).*0

/a2y ++<50.)) +1+4<.<

6ir 9orce +*4+<.1 10.*1GO9 "-%1)).4+ "-%+1<.*5

Q 1)4.)0 4000.<4

GR6 4+).10 440.)4

8otal )*,100.00 ,000.00

8otal $# $+4.4 billion $+.15 billion

8he budget estimates 004-0* cater to increased allocation for each of the ser2ices and researchand de2elopment acti2ities. 6n attempt is made to pro2ide funds to meet the er2icecommitments both for meeting their maintenance requirements and modernisation. (n addition to

the abo2e, one new feature in this yearCs Budget is eempting from income ta the family pension recei2ed by widows, children and nominated heirs of members of the 6rmed 9orces andthe para military forces 'illed in the course of operational duties.

:Non-Plan Expenditure for Defence Services: (net of recoveries and revenue receipts in Rs.

Crores)

H#d 2004-0"

Budg!

2004-0"

R$%&d

200"-0'

Budg!

( C)#*g

Budg!

200"-0'

+$ udg!+. 2004-0"

"6% e2enue"B% 3apital

41*+11451

41*+11451

45)*141*

++.4.))

37



T+!#/ 000 000 13000

8he #nion Budget for 00*-0) was presented to the parliament by the 9inance 7inister, 7r. !.

3hidambaram on the 5th of 9ebruary, 00*. (n this, the allocation for efence has beenincreased by about eight per cent o2er that of the last year from s.,000 crore to s. 51,000crore, or about $+5.* billion at current echange rates.

!urchasing !ower !arity S!!!T is an indicator of the real con2ersion factor that should be usedwhen comparing dollar and rupee costs. !rior to the the switcho2er to a fleible echange ratearrangement in (ndia in +<<1, by one estimate the !!! ratio was about three. (n the period afterthe float, by this analysis the mar'et rate was close to the !!! 2alue. SO#3T 6notherobser2er suggested that by 001 the !!! was around si, that is, a salary of s ) la'h in (ndia isequi2alent to a salary of one la'h dollars in the #. By 004 the !!! was estimated at about fi2e,or perhaps somewhere between si and eight. 8he precise !!! would depend on the bas'et of

good --- that is, in principle there is a !!! that is specific to military spending, which would bedifferent from that for the economy in general. 9actoring in !!!, (ndiaCs military budget mightthus be estimated as the equi2alent of about $+00 billion.

8he allocation for defence for the year 00*-0) is well in tune with the policy of the go2ernmentto gi2e this core sector its due. 8he defence ependiture pegged at s 51,000 crore for the yearamounts to an increase of s ),000 crore or .< per cent o2er the current year "004-0*%. 8here2ised estimate for the new fiscal has been 'ept at the le2el of s ,000 crore, the same as inthe budgetary estimate "B% of the current one. 8he pro2ision for re2enue ependiture in theforthcoming fiscal is s 45,)4.5) crore. 8he allocation for capital is s 14,1*.+4 crore whichincludes s ,*4+.5) crore for research and de2elopment and s +,1)4 crore for married

accommodation pro;ect.

8he proposed increase in defence ependiture should ta'e care of the normal growth in pay andallowances, inflation and other specific requirements. 8he bul' of the capital outlay goes to meetthe requirements for the ongoing acquisition pro;ects. 8he allocation for capital will be pro2idingo2er s ,000 crore for new pro;ects for modernisation of the forces.

(ndia has to ma'e up for what has been 'nown as the lost decade of defence modernisation. (n00-01 alone, it surrendered s <,000 crore "s <0 billion%. (n 2iew of this, last year the Budgethad s 11,451 crore earmar'ed for capital purchases. But that was hardly sufficient for the whole purpose. 8he go2ernment decided to buy 7irage ;ets as well as @aw' trainer fighters. 9or the

/a2y, (ndia had decided to go in for the aircraft carrier 6dmiral Gorsh'o2 along with its 7iG-<fighters. !ayments had to be made to honour contracts for airborne warning and control system"6K63%. 8he pre2ious Go2ernment had signed these contracts but made no allocation for thesame. Besides, /ew elhi has had plans to purchase submarines, more multi-role fighter aircraft,multiple-roc'et launchers, plane-based radar systems, light helicopters and artillery guns andmany other sophisticated equipment for the three er2ices. 8he multi-role fighters andsubmarines alone are estimated to cost o2er s 0,000 crore. (n other words, the last yearCscapital outlay left little for any fresh defence acquisition. /o wonder, immediately after the

38

http://econwpa.wustl.edu:8089/eps/if/papers/0405/0405010.pdf

http://www.expressitpeople.com/20031229/management1.shtml


http://www.atimes.com/atimes/South_Asia/FK16Df06.html


http://blogs.ittoolbox.com/emergingtech/outsourcing/archives/000773.asp


http://econwpa.wustl.edu:8089/eps/if/papers/0405/0405010.pdf






Budget was presented last year, efence 7inister indicated that the amount earmar'ed for capital purchases might not be enough for other necessary fresh contracts and he might ha2e to see'additional funds from the #nion 9inance 7inistry. 8he proposed capital ependiture has to beassessed in this contet.

(t is, howe2er, epected that the new allocation would enable the er2ices to mo2e forward in thedirection of their fresh acquisitions. !ertinently, in the new budget the re2ised estimate "% ofthe defence ependiture "% is the same as the budgeted estimate "B%. (t means that theamount allocated at the beginning of the current fiscal has been fully spent. One can hope thetrend to use the capital outlay would continue. 8he capital outlay for research and de2elopmenthas been increased from s +,)*.5 crore in the current fiscal to s ,*4+.5) crore in the newone. 8his should help the O in gi2ing a momentum to some of its ongoing programmes.(ndia has already started deploying its short range 00 'ms 6gni-( and intermediate range ,000'ms plus 6gni (( surface-to-surface missiles. 8he O is all set to carry forward the process of missile research and de2elopment programme so crucial for the countryCs doctrine of Ccrediblenuclear deterrenceC and triad. 8here has ,of late, been an increasing interface between the

designer engineers and user agencies so as to determine what eactly is needed by the er2ices.

8he O is de2eloping a contemporary weapon locating radar for the 6rmy. (t is speeding upthe manufacture of the main battle tan' "7B8% 6r;un to ensure its supply to the 6rmy by duedate. (t has also been wor'ing on se2eral na2al pro;ects. 8here are some analysts who argue thatthere is no fair increase in capital allocation this year. 6ccording to them, the pro2ision forefence er2ices stimates in the Budget stimates-004-0* was s ,000 crore. 8his had s41,*+.+* crore for e2enue penditure and s 11,45.5* crore for 3apital penditure. 8heallocation of s ,000 crore was an increase of +.< per cent o2er the pro2ision of s )*,100crore made in Budget stimates of 001-04. 8he capital outlay of the in 004-0* increased by an almost +00 per cent from s +),5)1 crore to s 11,451 crore. (n contrast, in the fiscal year

00*-0), the capital outlay has increased marginally by .)) per cent from s 11,451 crore to s14,1* crore.

(n the (nterim Budget 00<-+0, the allocation for efence was increased to s.+,4+,01 crore"# $< billion%, about 1* percent increase in current prices from the pre2ious yearCs re2isedestimates. 8he total re2ised ependiture for 005-0< was s.+,+4,)00 crore. 8he !lanependiture will be to the tune of s.5),5< crore against s.1,)00 crore and will include s.*4,54 crore for capital ependiture as against s.4+,000 crore in the for 005-0<. 8he raisehas been made to strengthen the security in 2iew of the recent terror attac's. 8he (nterimBudget 00<-0+0 was presented to the !arliament on 9eb +), 00< by hri. !ranab 7u'her;ee,@on. 7in. of 9inance and ternal 6ffairs, Go2t. of (ndia.

By 0+ (ndia?s defense budget was growing by between +1 and +< percent, dependinginterpretation of the numbers, against a forecast G! growth of .) percent. 8here are basicallytwo opinions about how to deal with 3hinaCs military pressure. One emphasiAes clinging to adefensi2e position on the land while ta'ing ad2antages of (ndiaCs superiority in na2y and on the(ndian Ocean to potentially threaten 3hinaCs energy-importing and trade passages. !roponents for this strategy call for boosting the de2elopment of na2al and air forces. 8he other opinionreiterates the importance of land forces, belie2ing (ndia should strengthen military building and

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infrastructure construction in the 3hina-(ndia border area so that itCs capable of a strongcounterattac' in the e2ent of armed conflict. upporters of this opinion include the land forces aswell as the 7inistry of @ome 6ffairs which eerts certain controls o2er border management.

(n the new century, (ndiaCs defense budget has fa2ored the air and marine forces, which causes a

soaring demand for increasing the ground force at the frontier. 6fter the tent confrontation between the (ndian and 3hinese militaries in 7ay 0+1, the (ndian 7inistry of 9inance wasreported to ha2e agreed to appropriate around )*0 billion (ndian rupees "$<.<4 billion% for thecreation of a mountain stri'e corps.

defence economics

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