Covid 19 started off as global health crisis but soon turned into a global economic crisis. Its simultaneity and relentless scale has crippled all sectors as national efforts are directed in saving lives and controlling the spread. The global dynamics are yet to stabilise to predict the future scenario with certainty but what is clear is that the world order will never be the same again nor international security. Billions of dollars are being pumped in by nations in an unprecedented stimulus packages and a long and deep global meltdown lies ahead.
The impact of all this on the Indian defence industry would be unprecedented and long and would set back all plans for self-reliance. With an already decelerating GDP since 2019, the pandemic poses fresh challenge to the GDP. A CII- Niti Aayog joint study of Apr 20 has identified 03 possible GDP scenarios.
- Scenario 1: Lockdown lifted on 15 Apr 20 with work in ‘safe lives and livelihood’ with fiscal and monetary stimuli (GDP at 1-2%).
- Scenario 2: Lockdown continues till mid May 20, with moderate relaxations, restarting supply chains and normalising production, fiscal stimuli package larger than scenario 1(GDP at -2-3%).
- Scenario 3: Additional 2-3 weeks lockdown in Q2 and Q4 view resurgence of virus, low labour availability, stimulus even larger than Scenario 2(GDP down to-8-10%).
As of now we are already in Scenario 2, so negative GDP is imminent. The possibility of Scenario 3 is quite likely which would send the GDP plummeting to minus 8-10%, a severe economic depression. The mitigating options proposed by Niti Aayog have suggested structural reforms for sectors as infrastructure and construction, manufacturing in electronics, food processing, pharma, opening up of freight and logistics, oil and gas, power, telecom and airlines and hotels in phased manner. The fiscal stimuli needed for all this will be around 13.1% of the GDP which will result in a fiscal deficit of over 26.3 lakh INR crores.
The reprioritised government spending will put all major defence modernisation and acquisition plans in suspension till the economy revives to sustainable levels. Along with the 20% cap imposed on the present fiscal year defence spending as part of the Covid-19 mitigation strategies, the government has also frozen all defence pay-outs for major programs for the first quarter of this financial year. All future RFI and RFPs as also major programs in defence have been put on hold. The Defence Public Sector Undertakings and private defence industries, on direction of the MoD have diverted all resources to tackle Covid-19. Routine defence production lines have been stopped and more and more ventilators, personal protection equipment, face shields, masks, hand sanitisers and other disinfectant and protective gears are being manufactured by the defence companies.
The post Covid impact mitigation and economic recovery strategies are likely to last another 3-4 years if not more. All through these years the defence budget will see severe cuts. Other nations will similarly cut defence spending impacting both demand and supply. Consequently production and manufacturing facilities and supply chains will be severely affected. Companies may have to make tough choices that could impact finances and competencies. The effects will differ based on the size of defence companies, nature of business, product portfolios, supply chain dependencies, and business plans. The Public Sector Undertakings could survive through government support. The big private players may re-orient to non-defence sector and hold on to any major plans of expansion in the defence. The eventual stock price declines will bring secondary effects. The MSMEs will be the worst hit. A study by E&Y has indicated that 40% of the MSMEs will get wiped out 3-4 months unless a support package is put in place by the government. The revival could take over a year, and by then the cost of raw material logistics would have gone up and the cost of the product would increase.
All this will unfold not immediately but in the years to come and accurate future predictions cannot be made. But what is certain is that impact of the pandemic fallout on the defence industry will be severe and long lasting with many defence industries especially MSMEs closing down. Our defence services and establishment must work out a plan to keep the security forces combat ready and keep the defence industry afloat. Ongoing capital procurement must continue and the government must clear all pending payments and advances. Some offset could be achieved through savings on revenue expenditure- cutting down on movement of troops and equipment, suspending and holding on to all transfers and rotation of personnel, cutting down on training and exercises and all international engagements. A much granular analysis needs to be done to keep the defence industry alive and agile.
Author: Cdr Sunil Chauhan (Retd.)
The Author is a defence and security analyst and is presently Director in Indra Sistemas SA India Pvt Ltd. The views expressed are entirely personal.