Keeping an ever watchful eye on those that it sees as its would-be enemies and recognising the need to modernise and spend billions replacing ageing and worn out defence equipment, India continues to increase its annual spend on defense at an ever increasing rate.

Over the past few years India has been increasing its defence budget by a well above global average amount and well above that of its western peers. In the process India has already spent considerable sums replacing and modernising surface ship capability for the navy, artillery for the Army and in ordering new fast jet capability for the Indian Air Force but with so much sub-surface, artillery, armoured vehicle, military jet and helicopter capability now nearing the end of planned operational life, the need to modernise and procure more military equipment at an even faster pace has never been greater.

Already amongst the top five of the world’s highest spenders on military equipment, albeit way behind that of the US and China, India currently stands just a touch behind Saudi Arabia and Russia in the league table of the highest military spenders. In 2017 India’s defense spending increased by 5.5% to just below $64 billion and I rather suspect that the annual percentage rise will continue to be at or above that level for many years to come.

Just as Saudi Arabia and others are seeking to do, India has a policy of wishing to manufacture more of its own equipment at home. To that end companies such as BAE Systems have partnered with large Indian based companies such as Hindustan Aeronautics on the Hawk trainer aircraft programme and we can expect future deals with India on combat jets and other military equipment procurement to be on a similar basis.

From a defense perspective India is a fascinating country to observe and while it is one that I have personally and rather surprisingly never visited it is one that remains of great interest to many UK defense companies.

For those that have a vested interest in doing business in India and in the form of this being a useful update of well-sourced current external thinking, rather than my attempting to reinvent the wheel, what follows is an interesting well-written and researched article by Anjani Trivedi published in the ‘The Economic Times’ of India a couple of days ago. It is well worth a read:

‘Why the big bang in Indian defence sector is delayed’

India has millions of military personnel, billions of dollars in arms spending and grave threats on its borders, yet the nation doesn’t make its own fighter jets and anti-tank missiles. Is that a massive opportunity for investors?

Not so fast. India has been striving toward defense self-sufficiency since the 1960s. The country has one of the world’s largest military budgets and also is the top arms importer, buying about 70 per cent of its needs abroad. Last year, defense spending rose 5.5 percent to almost $64 billion, data last week showed. Bernstein estimates this could represent a $35 billion opportunity for the private sector.

Prime Minister Narendra Modi deserves credit for a $250 billion military modernization plan. The so-called Make in India program prioritizes defense manufacturing on Indian soil, luring both global heavyweights and domestic firms to bid on (among other things) the biggest-ever order for fighter planes.

A lot stands in the way of these grand plans, however: Much of the ballooning defense budget goes on salaries, chiefly for the army, at the expense of the navy and air force. Capital procurement – essentially, modernization – now accounts for less than 20 percent of total outlays. Meanwhile, red tape discourages Indian companies from investing or staying the course.

Since Modi took office almost four years ago, the government has increasingly leaned on foreign vendors. To lure more of them, the Defense Ministry earlier this month circulated draft rules to recraft its policy on so-called “offsets” – pay-to-play arrangements that help Western defense companies tap international markets, which haven’t worked well in India. The latest draft presents vaguely defined offsets, which are controversial and not always successful. In Australia and Japan, for example, the system nurtured inefficiencies in the domestic industry.

Indian and foreign companies obviously hope they’ll get a chunk of the business as the policy takes shape. There are billions of dollars of potential contracts for aircraft carriers, destroyers and combat planes. As much as 85 percent of the nation’s submarines, and up to 40 percent of its armoured vehicles, are nearing the end of their operational life.

A lot of the hope, however, may be just that. For one thing, incentives aren’t aligned. Attracting the private sector is key, as India knows. But without efficiency and focused investments, defense companies face compressed margins. It can take at least three years to bid for an order of defense equipment, and simple tenders don’t get enough legitimate bidders.

Meanwhile, changes at the top of the defense ministry have led to some policies that helped private companies being rethought. For instance, Lockheed Martin Corp. set up a strategic partnership with Tata Advanced Systems Ltd. to build fighter jets, but the degree of progress isn’t clear, and there’s political pressure to reconsider the need for such cooperation

State-backed companies, like Hindustan Aeronautics Ltd., remain the biggest beneficiaries of military largess. But investors still aren’t impressed: Shares of Bharat Electronics Ltd., a pure-play defense communications company backed by the government, have fallen almost 30 percent this year because of shrinking margins and delayed orders. The inefficiencies run deep.

Unless India can address these shortcomings with policies aimed specifically at attracting private-sector investors, its dreams of a defense overhaul face a disappointing reality.

CHW (London – 10th May 2018)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

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