The United States has an enduring interest in India’s economic and military rise. Just last week, Admiral Harry Harris, commander of U.S. Pacific Command, called the U.S.-Indian relationship “the defining partnership for America in the twenty-first century, encouraging India to step up its joint military activities with the United States as a signal to China. Yet India’s use to the United States depends, in part, on how it marshals its impressive economic growth to invest in new defense capabilities. And on that score, India’s new budget raises troubling questions.

New Delhi, which has the sixth-largest defense budget in the world, will spend at least $50 billion on defense this year. That is roughly 1.8 percent of projected GDP and up three percent (adjusted for inflation) from last year. But there is reason to doubt that such spending will boost its military power in the near term.

For one thing, the costs of military pensions have soared, crowding out badly needed investments in defense modernization. In the last decade, military pensions have grown, on average, by 12 percent each year. Pensions once made up only ten percent of the defense budget; they now represent a full quarter of defense expenditures.

That trend seems likely to continue. Adjusted for inflation, military pensions increased by 30 percent in this budget, from $8.7 billion to nearly $12 billion. The jump is tied, in part, to New Delhi’s implementation of OneRank OnePension, a long-promised reform that requires the Indian government to provide similar pensions to soldiers of the same rank, regardless of when they retired. Veterans groups, who felt the previous system unfairly penalized older retirees, have been a potent political force in India and a major headache for the New Delhi’s Bharatiya Janata Partyled government. Of course, taking care of veterans is vital to the morale of the military and the nation. Yet New Delhi must now grapple with the fiscal implications of its political concession.

Indeed, as military pensions have boomed over the last decade, capital outlays—the money used to buy weapons—have fallen. Since 2006, capital outlays have dropped from one-third to one-quarter of total Indian defense spending. Although the impressive growth of the Indian economy and defense budget means that New Delhi remains the world’s largest arms importer, the shrinking capital budget is already having an impact on India’s defense procurement.

Indian army recruits on the outskirts of Srinagar, March 2016.
Indian army recruits on the outskirts of Srinagar, March 2016.
Danish Ismael / Reuters

Consider India’s planned purchase of Rafale fighters from France to replace its aging fleet of medium-range Russian MiGs. New Delhi originally agreed to purchase 126 aircraft in 2012. But it cancelled that deal last year. In January, the country signed a new agreement to purchase just 36 Rafale fighters. The number of aircraft had to be reduced largely because India’s procurement budget isn’t growing in real terms, a problem India analysts have tracked for years.  

India’s defense challenges will have global ramifications, particularly for the United States.

India’s military modernization efforts will continue to stagnate for two reasons. First, India’s political elite remain relatively ambivalent about defense spending because the issue isn’t considered a priority for the average Indian voter. Good economics—rather than good defense spending—is considered good politics in New Delhi. In addition, fiscal discipline is a major priority of the business-minded BJP government. The current government does not want to upset its economic agenda, particularly not for the sake of the Ministry of Defense. As a result, India’s defense budget represents just 1.8 percent of GDP. This figure has decreased each of the last eight years, and it falls short of the two percent standard that Washington sets for its NATO allies.

Second, India has prioritized its long-term effort to develop a domestic defense manufacturing base over short-term modernization imperatives. This government’s campaign—which aims to kickstart India’s manufacturing sector and make it a “global manufacturing powerhouse” on par with China—diverts defense dollars to domestic companies which have been criticized for having a poor track record in delivering defense items to the armed services on time and under budget. Although supporting Indian manufacturing may be in country’s long-term economic interest, this agenda is already contributing to alarming gaps in India’s military posture.

Indian soldiers rehearse for the Republic Day parade in New Delhi, India, January 2016.
Indian soldiers rehearse for the Republic Day parade in New Delhi, India, January 2016. 
Anindito Mukherjee / Reuters

India’s defense challenges will have global ramifications, particularly for the United States. Resource constraints may prevent India from becoming thenet security providerthe Pentagon wants it to be in the region. And India’s influence will be limited if it struggles to pay for items such as aircraft carriers, submarines, and domain-awareness technologies.

The Indian military’s dwindling capital funds will also complicate U.S.-Indian defense sales and technology transfers. The two countries have often found it challenging to collaborate and engage on defense issues, and India’s decreasing capital outlays will make it even more difficult. U.S. companies have been hesitant to transfer high-level technology to India, but they will do so if the business case is compelling and if India seems like a long-term defense market. If India’s spending on procurement slows, so too will such transfers. This will not only slow the momentum of U.S.-Indian defense ties, it will jeopardize Indian modernization efforts.

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