Opportunity Beckons for the Indian Defence Sector
Published by Sharekhan Education | April 24, 2022
Opportunity Beckons for the Indian Defence Sector
Amit Pathak | Sharekhan Education
War brews tension around the world. Case in point: the Russia-Ukraine crisis is causing an uptick in defence spending by countries across the world. Even countries like Germany have doubled their defence expenditure. If one country increases its defence budget most other countries follow suit, owing to national security concerns. Let’s look inwards for now – India’s defence sector plays a crucial role in handling any possible conflict, especially given its troubled relationship with its neighbours – China and Pakistan.
Increasing Defence Spending
India accounts for 3.7% of the global military spending and is currently the 3rd highest military spender in the world. Its defence expenditure makes up 2.9% of its total GDP. And in this year’s budget, India announced around USD 70.2 billion to the defence sector, an increase of 10% from the last year. India is expected to spend a massive USD 130 billion over the next 7-8 years on the modernization of its armed forces. Furthermore, India is the second-largest defence importer behind Saudi Arabia, accounting for 9.2% of global defence imports.
Working on Self-reliance
Historically, India has relied on Russia for defence supplies and technology transfers. Now, this dependence on Russia is causing a concern as it stares at global sanctions. The growth of the domestic manufacturing industry is essential for the strategic autonomy of the country. And to address this concern, the Indian government is focusing on an import substitution strategy. The Defence Ministry has set a target of 70% self-reliance in weaponry by 2027. The government has identified the Defence sector as a focus area for its ‘Make in India’ (i.e. ‘Aatmanirbhar Bharat’) programme. To boost self-reliance, the government has also recently banned 100 additional weapons and missiles for imports. It has an objective to procure military equipment worth USD 65 billion from its domestic industries in the next 5-7 years.
Growing Ambitions
That’s not all, India targets to export military hardware worth USD 5 billion in the next 5 years, in addition to the missiles it already exports to the Philippines. Frugal engineering, cost arbitrage due to the availability of high-quality engineering talent, and a growing IT infrastructure provide India with a lucrative opportunity. The FDI limit has been increased to 74 per cent in defence equipment manufacturing organizations. Two defence corridors have been set up in Uttar Pradesh and Tamil Nadu. In addition to providing revenue to domestic defence companies, an increase in defence exports will also boost India’s forex reserves.
With these developments, the defence sector in India seems to be at an inflexion point. Ambitions to modernize the military and develop the local defence industry serve the dual purpose of self-reliance and creating about one million direct and indirect jobs. The best way to play this theme is via a basket approach having both public sector and private sector defence companies. Companies like Bharat Electronics, Bharat Dynamics, Bharat Forge, L&T and MTAR technologies look interesting as this space heats up.
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