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Evaluate life-cycle costs for big-ticket acquisitions by the Indian Navy
The Indian Navy has embarked upon aggressive shipbuilding. Indian shipyards have been active, with a large number of ships and submarines on order.
The shipbuilding cycle has significantly reduced in India and platforms are being inducted into service at an accelerated pace. Though ship design and construction are predominantly indigenous, India still imports high-technology equipment of the so-called 'Move' category (which includes high-power engines, gas turbines and propulsion motors and the like), 'Fight' category (radars, missile systems and so on) and special category systems for specialized platforms such as tankers, aircraft carriers and submarines. Indigenization efforts in these categories, however, are currently on a fast track.
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Military hardware projects typically require large amounts of funding. Let us take a broad look at the costs involved in warship projects. Official data is hard to come by, but we have indicative numbers. According to Defence News, Visakhapatnam Class Destroyers, inducted into service between years 2021 and 2025, have been built at a cost of about ₹36,000 crore. Their indigenization level was put at 70%, which suggests an import bill in the range of ₹10,000 crore. The next-generation destroyers that are in the pipeline are expected to cost about ₹85,000 crore; these will have an import component of about ₹20,000 crore (less than 25%), as projected.
The volatility of the current geopolitical situation will demand more and more ships to be built quickly. Debates on India's defence requirements suggest that one or two aircraft carriers will be needed, along with a larger number of submarines. Can the country afford such high budgets for naval upgradation? Probably not.
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However, all defence projects, including warship-building, have a multiplier effect on the country's economy. Prasanna Tantri and Aditya Kuvalekar on 18 May 2025 argued in the Times of India that state expenditure on defence projects in India could deliver a fiscal multiplier of around 2. This means that every rupee spent by the government on these projects should result in ₹2 added to India's annual output. Tantri and Kuvalekar propose the use of long-term borrowing to fund India's defence expenditure. This article takes their argument forward to suggest ways of funding warship-building projects of the Indian Navy.
Seen from a life-cycle perspective, warship equipment has two cost components: the one-time acquisition cost and the ongoing operation and maintenance (O&M) costs. With 25-30 years of ship life, O&M costs typically far outweigh acquisition costs.
New-technology equipment can either be imported or developed by an Indian supplier. While advanced systems can be bought from foreign suppliers, an Indian supplier would need to make significant capital investments in research and development (R&D) and establishing a manufacturing set-up with skilled manpower. Since project tenders under the current system go solely by acquisition costs, Indian suppliers cannot compete with their foreign counterparts on price, as the latter need not bear heavy capital costs.
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Acquisition costs are deal-sealers because they are covered by the capital budget, whereas O&M costs come under the revenue budget. We have no structural or regulatory provision for evaluating the two costs together. But these two costs can be clubbed into 'life-cycle cost' (LCC) by following the principles of life-cycle management (LCM).
The US Navy and some other naval forces follow LCM and integrated logistics support (ILS) principles for evaluating a high-cost project at its early concept or design stage to decide on the best option.
There is a strong case for the Indian Navy to adopt LCM and ILS processes and consider LCC for sourcing costly equipment and systems, especially at a time when India is exploring import substitution opportunities.
Research studies indicate that Indian suppliers would be far more cost effective for new-technology equipment if LCC is taken into consideration. The basic logic of this is clear: R&D costs can be amortized over the equipment life-cycle. The Navy benefits from support during the equipment's life-cycle through local maintenance contracts and shore repair facilities, while onshore testing and training set-ups smoothen the induction of platforms. It aids upgradation planning for obsolescence too. Tender decisions should thus be made on an LCC basis.
There has been much debate on the affordability of aircraft carriers and submarines. Once LCC becomes the norm for comparing the bids of suppliers, the picture will change. Equipment suppliers, assured of a revenue stream throughout the life-cycle of a ship, will recalculate their offers.
It could lead to a new funding model. By assuring Indian suppliers a revenue stream for 25-30 years, the country could expect them to bear a large part of the initial acquisition cost of equipment against that assurance. The capital cost burden of the ministry of defence could significantly be reduced this way, making fiscal space for the induction of more ships. Partnerships with private suppliers like L&T, the Tata Group, Adani Group, Kalyani Group, Mahindra Group and many others could make a big difference to India's naval defence preparedness. The key is to do away with the upfront funding of capital-intensive warship-building.
The author is an Indian Navy veteran with a PhD in life cycle management of naval warship equipment.
