First and foremost the Italian economy was too small for it to support a major modern military. The policy of Autarchia instituted by Mussolini wreaked havoc on an already fragile economy that relied on steel & coal imports, and agricultural & finished goods exports.

The state of motorization in Italy was much lower than the other powers. Mussolini understood this and created an elaborate policy scheme to get millions of cars into the hands of the people, Politica Automobilistica in funzione militare. If this policy had been implemented in 1928 and not 1938, Italian automotive industry might have been far more developed by the time war broke out.

The Italian auto industry was not robust enough to mass produce the sorts of tanks & vehicles we'd come to see by '42. Steel and automotive industries lagged far behind the other major powers in terms of production. The structure of Italian automotive industry compounded issues; there were only two companies that could actually make tanks, Fiat: the automotive company, and Ansaldo, a shipbuilding & railcar builder. A real lack of decisive planning compounded issues; the military simply did not have strong opinions about tanks until '39 and the economy as a whole was practically rudderless. There was a Commisione Suprema di Difesa that was supposed to control economic planning, but unlike it's WWI counterpart, it had little ability to actually coordinate anything. The term "Too many chiefs, not enough indians" comes to mind...

Despite all that, the Italians were great experimenters and they were at times way ahead of the game in terms of theory and doctrine. However, none of it mattered because they couldn't possibly pay for it, and their presumed enemies would be in areas where tanks would not be of great value. So nothing was ever implemented in a meaningful way, and everything stagnated.

From a stockpile standpoint the Italians would have been more ready in the 30's than when it joined the war. In the 30's Italy built several thousand odd L/33 & L3/3 tankettes at great cost*, giving them the largest tank force in the world for a time. By 1940 these things were hopelessly obsolete. In this area, you can consider Italy's war-readiness to have peaked too early, and it was left with old, shitty hardware when war actually broke out.

*steel was expensive in Italy for reasons stated above, the poor Italians paid more per ton than any other belligerent. They paid more, for less.

Beyond economics retarding military development, the Italian army spent two decades planning for war against Yugoslavia & Austria, and very little planning against France & Britain, it's allies and major trade partners. This pivot left the military with all the wrong equipment and formations. Planning is like a ship, it takes time to turn around.

Italy was completely and hopelessly unprepared to fight against the Allies. Ironically, it would have been in a much better position to fight the Germans, as the Italian Alpini were first class, along with most of their other elite infantry forces. They had spent years planning for that fight, and built an army well-designed to fight it. Instead, on the eve of WWII, they switched sides. Again.

Source: Iron Arm The Mechanization of Mussolini's Army, 1920-40.

It deals with this topic a lot.

First. Fascism was not a military dictatorship. Mussolini was a civilian and so were the vast majority of the other fascist leaders (the closest thing to a military fascist was probably C.M. De Vecchi, who ended his military career with the rank of Captain and had retained good relations with the Army establishment).

Moreover, even among the social strata represented in the lower fascist ranks, one of the least represented – despite the unquestionable influence that veteran movements had on the development of the fasces – were career military men. In fact for an officer of the Italian Army, joining the fasces in the 1919-21 and taking part to violent action against the State would have been unconcievable.

The military was – in its overwhelming majority – loyal to the King and looked to the fascist movement with suspect, only tempered by their anti socialist stance. Also the King, who was by choice and education a soldier, had a special distaste for civilians parading around in military attire and all the mad up “ranks” of paramilitary organizations.

Mussolini, who had been a socialist himself, had also served in the First World War and supported the military establishment since then, therefore he enjoyed a somewhat better reputation than the Movement did overall. This helped him broker some relations with the Military in the years leading to his appointment as Prime Minister.

If the Army leadership was open to a conditional support of fascism – a quid pro quo if you want – the veterans organization had taken a chance to stress their loyalty to the King during the days of late October 1922. A fact that prompted De Vecchi to claim that they had been among the most significant enemies of fascism up until the March on Rome.

 

In view of this, while we cannot say that the Military was opposing the Regime, its loyalty remained with the King and – by that – with themselves. To reach an agreement with the Military the Regime had to make concessions and Mussolini saw the Army as any other political force, to be pushed around or wooed according to the situation.

As an example of this, consider the establishment of the Militia Volontaria di Sicurezza Nazionale in January 1923 – with the black shirts becoming a force under control of the Government. The Army required that the Officers of the Militia were chosen not among the black-shirts themselves but mostly among Army Officers, and later obtained for the Militia to become part of the Army. Also, in exchange for their approval of the Militia, the Army received a boost (around 20%) of their 1922-23 budget.

 

The lack of a specific strategic focus in developing the Army is also showcased by the history of the military expenses in the Kingdom.

 

Year	Defence (% over total)	Total Expenses (Millions 2009)
1900	21.5	7.265
1901	20.9	7.479
1902	20.8	7.671
1903	21.1	7.434
1904	21.1	7.364
1905	19.2	8.186
1906	18.5	8.719
1907	20.0	8.039
1908	20.2	8.607
1909	20.9	9.586
1910	22.0	9.915
1911	24.0	10.464
1912	28.9	11.123
1913	30.9	11.486
1914	46.7	15.947
1915	69.8	28.170
1916	74.4	39.580
1917	70.2	42.596
1918	64.0	37.879
1919	55.9	33.936
1920	34.1	23.486
1921	17.5	22.081
1922	18.8	30.001
1923	21.8	32.822
1924	20.1	23.157
1925	18.0	16.232
1926	20.7	15.589
1927	17.9	20.364
1928	16.1	22.965
1929	19.5	19.592
1930	20.6	19.796
1931	19.9	23.064
1932	21.3	22.708
1933	19.2	25.604
1934	19.6	27.102
1935	19.6	47.094
1936	23.1	53.815
1937	30.4	37.579
1938	31.7	33.946
1939	37.3	40.919

 

But why didn't Mussolini treat the Army as a major strategic force in his Fascist Nation?

A first issue was the fact that a stronger Army meant a stronger power out of his control – Mussolini knew that the Army was loyal to the King and was wary of favoring its growth, while the Army was wary of giving up its independent role.

Second; a modern Army needed a strong industrial backbone and Italy was in this regard significantly underdeveloped; nor did the Regime succeed in bringing forward a real industrial and infrastructural development – certainly not on the level of Germany or France. The issue of manpower, while not as dramatic, still saw Italy below its European counterparts. Also Italy was lacking in many raw goods departments and, even worse it had depleted its resources during the two wars it had been involved (see the rise in the expenses) in the years 1935-39, the Etiopian War and the Spanish Civil War.

And while these wars are generally regarded as minor conflicts, Italy took part in them exerting its full strength – a fact that contributed to its victories but also wore out some of the best forces under italian control.

And third: Mussolini did not expect Italy to fight an all out war.

It may seem odd but this fact rested on the nature of Italian foreign policy during the years leading up to the German annexation of Austria.

Mussolini was aware that Italy could not win any war against a major European power, whether it were Germany, France or the UK; even worse, he was aware that Italy could go through roughly six months of full scale military commitment.

This led to a revisiting of Italy's traditional policy: enter the “Decisive Weight”. Italy could play a role in an European conflict if it joined the right side at the right time, thus securing the victory of the chosen side with a small, focused effort.

While good in theory, such an approach required a flexible – tactically oriented – Army; a thing that Italy lacked and more so there was little chance to develop in a context where the natural resistance of the Italian Army to changes was increased by the fear that change meant an attempt at fascistization of the army.

 

A further issue arose from the fact that Italy had very little strategic reasons to side with Germany; indeed the most advanced and realistic plans for war involved an invasion of Yugoslavia – a goal precluded by the German influence over the country. And by Mussolini's deep misunderstanding of the nature of Hitler's foreign policy.

Given the old school approach of Mussolini to foreign policy, this is hardly surprising. To some extent he – and his foreign Ministry Count Ciano – bought into the idea that Hitler was a masterful negotiator, consistently able to spot weakness in his adversaries and to exploit it just enough to gain what he wanted without reaching the breaking point. On November 1939, when informed by the Germans, Ciano described his reaction to Ribbentrop's cheerful declaration, as shock and absolute surprise.

Despite this fact, Mussolini knew that, after the war had been going for a few months, Italy could not stay out of it forever. In a secret memorandum on March 31st 1940 he wrote:

Italy can not remain neutral for the entire duration fo the war […] It is therefore only a matter of when Italy will join the war; we must postpone our entrance in the conflict as much as we can, safeguarding honor and dignity: a) in order to get ready to make it so that our intervention will be decisive b) because we can not sustain a long war

The purpose and scope of Italy's declaration of war was clear to the Germans. Hitler wrote to Mussolini – asking him to postpone his declaration o war on France to the 6th or 8th of June

The mere fact of your declaration of war will cause a moment of enormous disarray on our enemy's front

 

Unfortunately for Italy's war effort; the military action was still, for Mussolini, subordinate to his political action.

On the French border, the Army had been instructed to arrange for defensive positions since April 1940. The purpose was to open a second front, when needed, but to begin no offensive operation.

Things changed with the shocking rapidity of the German success: Italy needed to take action. And the Army was instructed to move to offensive in few days after the declaration of war. Now the purpose was to grab some land before the war ends.

Right after the first attempt to enter French territory, in light of French-German peace talks, Mussolini halted the advance. Just to resume it after it became clear that France was not willing to surrender land to Italy and that Germany had no desire to risk alienating the future Vichy leadership.

 

This experience did not improve the Italian conduct of war.

In October 1940, the plan for the invasion of Greece – which involved two major amphibious operations – was approved without informing first the Head of the Navy, admiral Cavagnari, who later had to reply that the actions required would have been impossible even with months of planning.

In 1942, the Army Corp in Russia was set up with the purpose of supporting the German advance on the Caucasus mountains and it involved therefore a large number of Alpine troops. Nonetheless it was employed in the plains north-west of Stalingrad.

 

Overall Italy did not take any systematic well focused steps to modernize or empower its Army. The technical and material shortcomings, were made worse by the fact that Mussolini treated the Army as a mere instrument to support his – confused – foreign policy.

 

Some caution is needed with data about expenditure, since the fluctuating value of Italian Lira over the period. Data source is ISTAT.

As a main source I used De Felice's Mussolini.