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India’s security threats range from ‘two-and-a-half’ front war comprising of coordinated aggression by Pakistan in the West, China in the North and internal insurgencies in J&K, North East and Maoist/Naxalite violence, growing Chinese Navy activities in the Indian Ocean and COVID-19 pandemic. India shares a 3,323km land border with Pakistan, and an even longer 3,488km border with the People’s Republic of China (PRC), and has territorial disputes with both countries over the ownership of the Northern State of Kashmir and the North Eastern State of Arunachal Pradesh, respectively.
These factors have played a crucial role in spurring growth in Indian base defense expenditure (excluding pensions) over the historic period, which increased from US$39.3 billion in 2016 to US$47.3 billion in 2020, reflecting a CAGR of 4.80% over the historic period. The need to secure strategic interests, against the backdrop of ever increasing Chinese presence in the Indian Ocean region, continues to fuel the growth of India’s defense expenditure and the Indian defense market.
Rising Military requirements
India has been engaged in a military standoff with the Armed Forces of China near Ladakh for the past several months. The confrontation occasionally flared up leading to casualties on both sides. The Government of India has approved the acquisition of arms and military equipment worth Rs22.9bn ($310.1m) amid an ongoing military standoff with China. The procurement proposals were approved at a meeting of the Defence Acquisition Council (DAC) chaired by Indian Defence Minister Rajnath Singh. The DAC cleared the acquisition of around 72,000 SIG Sauer assault rifles at a cost of Rs7.8bn ($105.62m). The frontline troops of the Indian Army will be equipped with these SIG Sauer assault rifles, which have an effective range of 500m.
According to The Times of India, the Indian Army has already inducted more than 72,400 of the rifles under a fast-track procurement deal signed last year. Additionally, the DAC approved procurement of Static HF Tans-receiver sets and Smart Anti Airfield Weapon (SAAW), under the Buy Indian category. The field units of the army and airforce will be equipped with HF radio sets to enable seamless communication. This procurement values around Rs5.4bn ($73.12m). The Smart Anti Airfield Weapon acquisition will amount to Rs9.7bn ($131.35m), boosting the firepower of the navy and airforce.
India is expected to procure and invest in segments such as multirole aircraft, frigates, destroyers, corvettes, submarines, tanks, artillery guns, multi-barrel rocket launchers (MBRL), helicopters, surface-to-air missiles and unmanned aerial vehicles (UAV). The Indian Army Modernization with an explicit emphasis on development and induction of new wheeled armored vehicles and the Futuristic Infantry Fighting Vehicle (FICV) program will drive the Indian Army defense modernization spending. On the other hand, the thrust to induct LCA Tejas aircraft in greater volumes to replace the now obeselete MiG-21 aircraft will spur growth in the Indian Air Force defense expenditure, while the Indian Navy which accounts for the smallest portion of defense capital spending is anticipated to focus on modernization of its submarine arm and induction of new minesweepers.
Between 2014-2018, India was ranked as the second largest importer of defense equipment, behind only Saudi Arabia. The acquisition of defense equipment is mainly driven by the need to gain a significant technological advantage over Pakistan, while retaining a level of strategic parity with respect to China.
Indian Defence Sector
The global defence market is estimated at USD 1800 Billion. India ranks among the top 10 countries in the world in terms of its military expenditure and import of defense equipment. India is among the world’s top five defence spenders with its military budget at USD 50.7 billion, overtaking Saudi Arabia and Russia. The US, China and the UK remain the top three defence spenders while India has the fourth largest military budget, followed by Saudi Arabia and Russia, according to the ‘2016 Jane’s Defence Budgets Report’, released by research firm IHS Markit. After three years of budgetary constraints, the definitive UK-based defence magazine forecasts that Indian spending will rise from USD 38 billion in 2010 to USD 64 billion in 2020
It allocates about 1.8% of its GDP to defense spending, of which 36% is assigned to capital acquisitions. However, only about 35% of defense equipment is manufactured in India. Moreover, even when defense products are manufactured domestically, there is a large import component of raw material at both the system and sub-system levels.
The defence equipment held by Indian defence forces is 50% obsolete, the proportion of state-of-the-art equipment also needs to double from current 15% to 30%, according to military experts. This justifies the huge requirement of new systems. Ongoing projects include submarine building, advance early warning aircraft, Rafale fighters, missiles, missile shields, aerostat radars, all of which already signed for and delivery schedules have begun. The future requirement includes multi-role combat fighters, basic and intermediate jet trainer, attack helicopters, drones, infantry clothing and weapons, artillery guns, gun-mounted turrets for tanks, improved electronics and sat-nav equipment for all three services and a host of equipment to modernize the forces.
Defence Systems and Technology caters to common technology / equipments across all the defence segments namely Army, Navy and Air Force. The technologies are used to build various common equipments such as Radars, Electro-optics, C4I system (Command, Control, Communications, Computers, and Intelligence), Underwater systems, Missiles and Guided Weapons, Avionics, Communication and Electronic Warfare. It’s a high value, complex and high technology segment that requires highly skilled intellectual capital for implementation and IPR from global OEMs.
India’s defense budget for 2020-2021 will be $73.65 billion, the country government announced in Feb 2020, but officials and analysts are warning the amount is unlikely to meet new demands for weapons purchases and military modernization, as India is set to spend about 90 percent if its defense funds on existing obligations.Of the total budget, $18.52 billion is for weapons purchases; $32.7 billion is for maintenance of the military’s weapons inventory, pay and allowances, infrastructure, and recurring expenses; and $21.91 billion is for defense pensions.
India is the largest importer of defence products accounting for 14% of the total global imports in the year 2016. Currently, about 70% of the Indian defence procurements are imported. India will have Rs. 86,000 Cr of defence expenditure in the year 2017-18. This will offer large opportunities for Indian Private Sector Defence Companies, given renewed thrust by Government of India towards “Make in India” in the Defence sector.
The global defence industry which is primarily dominated by a few Original Equipment Manufacturers (OEMs), works similarly in close co-ordination with SMEs and their prime contractors through a well defined supply chain. OEMs require that the SMEs they work with should have the ability to perform, maintain continuity of supplies and clearly understand how the defence procurement procedure works. Hence, to be able to integrate successfully in the value chain, SMEs must try to develop niche products and capabilities, continuously innovate and fully leverage export opportunities that are now available to them under the Defence offset policy.
India US Cooperation
On October 27, 2020, India and the US signed the ‘Basic Exchange and Cooperation Agreement for Geo-Spatial Cooperation (BECA)’ to strengthen defence ties between the two countries.
India is slated to make a number of purchases through the U.S. Foreign Miltiary Sales program, including 22 MQ-9 Reaper (Predator B) drones for $2.6 billion; and additional six P-8I maritime surveillance aircraft for $1 billion; two Gulfstream 550 aircraft for intelligence, surveillance, target acquisition and reconnaissance for nearly $1 billion; and one unit of the National Advanced Surface-to-Air Missile System II for more than $1 billion.
In December 2020, the Indian Military acquired Sea Guardian drones from the US under the 2018 Communications Compatibility and Security Agreement, which facilitates secure exchange of military information and data between platforms operated by both countries. The partnership eases way by which India can buy unmanned aerial vehicles (UAVs) and promotes greater India-US cooperation on maritime domain awareness.
Make In India
Indigenization is only route forward as it is cheaper to build, operate and maintain, results in building of strong defence industrial base and growth of R&D leading to strong technology innovation ecosystem. It is also insurance against denial of critical weapons and spares by foreign countries in crisis or conflicts in pursuit of their political or strategic interests. The civil military integration resulting from indigenization shall result in military technologies to be applied in civilian fields, making high-tech equipment available to commercial markets, as well as military to benefit from civilian innovations. This will lead ultimately to industry move up in innovation ladder to become leading exporter. he Defence Ministry has set a target of 70% self-reliance in weaponry by 2027, creating huge prospects for industry players.
The Modi government has already approved setting up of one defence corridor each in Uttar Pradesh and Tamil Nadu to promote indigenous defence production. Private and public sector defence manufacturers have already committed investment of over Rs 3,700 crore during the meeting of Uttar Pradesh Defence Industrial Corridor held in Aligarh in August 2018. Similarly, during the launch of Tamil Nadu Defence Industrial Corridor held at Tiruchirappalli in January 2019, an investment of over Rs 3100 crore was announced by public sector defence undertakings, ordnance factory board and private Indian defence manufacturers for Tamil Nadu Defence corridor.
To modernise its armed forces and reduce dependency over external dependence for defence procurement, several initiatives have been taken by the government to encourage ‘Make in India’ activities via policy support initiatives.
To encourage more participation from start-ups and micro, small & medium enterprises (MSMEs) in Defence Research & Development (R&D) in achieving the ‘Atmanirbhar Bharat’ goal, the Defence Minister Mr. Rajnath Singh released a new version of ‘Defence Research and Development Organisation (DRDO) Procurement Manual 2020’ on October 20, 2020. There are plans to establish new infrastructure including a defence park in Kerala to manufacture defence equipment for the armed forces. The project is aimed at promoting MSMEs and boosting the ‘Make in India’ initiative. In November 2020, the Department of Defence, in partnership with the DGDE and Armed Forces, established a land management system (LMS) as part of efforts to enhance the overall defence land management.
As India, and indeed the world, battles the Chinese virus pandemic, the Ministry of Defence (MoD), like every other arm of the government is contributing its resources in combating the unprecedented situation. The MoD is trying to lessen the possible financial stresses that the Indian defence sector–especially SMEs and MSMEs–are likely to experience in the immediate aftermath of the current crisis. As far as Ministry of Defence is concerned, right from rescuing stranded Indians from COVID-19 affected areas, such as China, Iran, Italy, Malaysia etc., to providing relief materials all across the country, Armed Forces have put in place all its medical and manpower resources. Force’s Hospitals and Medical Facilities have been dedicated to treating COVID-19 patients and some of its bases have been turned into quarantine centres, says Defence Secretary Ajay Kumar.
Government formulated the ‘Defence Production and Export Promotion Policy 2020’ to provide impetus to self-reliance in defence manufacturing under the ‘Aatmanirbhar Bharat’ scheme. The ministry aims to achieve a turnover of Rs. 1 lakh 75 thousand crore (US$ 25 billion), including an export of Rs. 35 thousand crore (US$ 5 billion) in the aerospace and defence goods and services by 2025.
Defence ministry plans to put 101 defence items (artillery guns and assault rifles) under import embargo to offer potential military hardware manufacturing opportunities to the Indian defence industry. The defence ministry estimates potential contract worth ~Rs. 4 lakh crore (US$ 57.2 billion) for the domestic industry in the next 5–7 years (2025–2027).
To increase defence manufacturing in India and make the country a reliable weapon supplier to friendly countries, the Indian government allowed the following FDI limits in September 2020. For new licensees – FDI allowed up to 74% through automatic route; FDI beyond 74% would need to be permitted under the Govt. route. For existing Licensees – Infusion of new foreign investments up to 49% can be added by making declarations of change/transfer within 30 days.
Several new technologies have also been offered by companies and startups. For example, a startup in Kochi has come up with N95 masks which is totally new technology and was not there earlier in the country. A startup in Delhi in collaboration with IITK has come up with new ventilator system. Sree Chitra Tirunal Institute of Medical Sciences and Technology, Thiruvananthapuram has found a new testing kit which is much faster and more cheaper. If necessity is the mother of invention, we have seen this truly happen in this COVID-10 crisis. The innovation eco-system has grown over last few years has been very active especially in terms of medical devices and equipment. But this development of innovation ecosystem augurs well for defence and aerospace sectors as well.
Defence Acquisition Council (DAC) proposals give boost to Indigenization
In Feb 2021, India’s Defence Acquisition Council (DAC) headed by defence minister Rajnath Singh on Tuesday approved arms purchases worth ₹13,700 crore as the government continues steps to modernize the military. “All these acquisition proposals will be indigenously designed, developed and manufactured. These will include inter-alia platforms and systems designed and developed by Defence Research and Development Organisation (DRDO),” according to a government statement.
The approvals included the acquisition of 118 Arjun Mk-1A main battle tanks for the Indian Army worth more than ₹8,000 crore. The tank has been developed by the DRDO. Meanwhile, the defence ministry separately placed an order worth ₹177.95 crore with Bharat Forge Ltd for the supply of Kalyani M4 armoured personnel carriers, the Pune-based company said in a statement. The size of the order was not disclosed. Bharat Forge on Monday also signed a pact with South African aerospace and technology firm Paramount Group to build armoured vehicles in India.
“To meet the Atmanirbhar Bharat goals of the Government on time-bound defence procurement process and faster decision making and to systematically work towards reducing the time taken for capital acquisition, the DAC also approved that all capital acquisition contracts (delegated and non-delegated) …. shall be concluded in two years,” the defence ministry said in its statement.
This comes a day after defence minister Singh told an industry meeting that the government has earmarked about ₹70,000 crore of the capital allocation of ₹1.35 trillion for the defence sector for local procurement. He said the government will issue a new list of military hardware that won’t be imported. The current list contains 101 items. Speaking at the same event, Prime Minister Narendra Modi assured industry that military hardware that can be designed and developed locally won’t be imported.
Self-reliance in critical technologies
National Security Adviser Ajit Doval also called for the development of “need- based” niche technologies that can cater to the specific requirements of Indian armed forces. Highlighting the emerging security challenges, the NSA said “India’s security vulnerabilities are much greater today, and they are going to be much greater in times to come.” While elaborating about niche technology, Doval, observed that it was not about the best technology in the world but it was something which could make India more potent. So it has got to be need-based which can give India an edge over its adversaries and is affordable. “Development of technology should not overrun timeline that is not acceptable” the NSA stated.
Indian Army Chief General Bipin Rawat said the DRDO needed to look at systems for future warfare. He called upon scientists to start looking at development of cyber, space, laser, electronic and robotic technologies and artificial intelligence. Lauding indigenous technology and weapon systems General Rawat said “We will win the fight the next war with homegrown defence technologies.”
Subhash Bhamre, Union Minister of State for Defence, said India would invest huge resources on modernisation of the defence sector and boost local manufacturing of defence equipment, PTI reported. The minister added that a lot of defence equipment is currently being imported. He called for better collaboration between the defence sector and the industry to reverse this trend, and encourage small businesses to become more involved. He also urged industry leaders to invest in the country’s defence sector.
In August 2018, India’s defence acquisition committee approved $3bn for the purchase of 111 utility helicopters for the navy, which will be provided under a new programme that allows foreign defence contractors to work with Indian private sector companies to make defence equipment. Russia’s Kamov is expected to offer its Ka-226 model, which it is producing with India’s state-owned Hindustan Aeronautics, for the naval helicopter tender, vying with companies such as Airbus, the European aerospace group, for the contract.
Public sector is a huge asset, only in need of optimisation. Public sector is a repository of significant amount of technology transfers, has huge infrastructure in terms of plant, equipment, experience and skilled human resource. Great potential, that best practices can optimise well. We would do well to move seriously on corporatisation of ordnance factories, making defence PSUs competitive, and try PPP models like government owned company operated (GOCO).
Transformational reforms are required to get private industry to participate as an equal not only in defence manufacture but in R&D as well. This will mean incentivising R&D by private sector. Even after conditions are made favourable for private sector’s participation in defence sector, they will need technology, which is a serious shortcoming in our country. To bridge this technology gap, a ‘Strategic Partnership’ scheme has been launched for big platforms, so that private sector can leapfrog to better technology by collaborating with defence majors in the world, the original equipment manufacturers (OEMs).
Similarly, in low tech manufacturing segment too, we could adopt more of a joint venture (JV) approach with foreign manufacturers, where required. A good example is manufacture of rifles in India as a JV with Kalashnikov. Although that is a JV with ordnance factories, similar model can be followed by private industry for low tech- high population weapons, equipment or even ammunition. These have huge scope for export as well. The ‘Buy Global – Manufacture in India’ category introduced in DPP 2020 should be able to address that.
The Indian government is focussing on innovative solutions to empower the country’s defence and security via ‘Innovations for Defence Excellence (iDEX)’, which has provided a platform for start-ups to connect to the defence establishments and develop new technologies/products in the next five years (2021–2026).
Indian defence manufacturing industry growth
India’s defence manufacturing sector has been witnessing a CAGR of 3.9% between 2016 and 2020. The Indian government has set the defence production target at US$ 25.00 billion by 2025 (including US$ 5 billion from exports by 2025). Export business contributed ~US$ 1.00 billion to the total value in 2019. Defence exports in India were estimated to be at US$ 2.0 billion in 2019-20. India’s defence import value stood at US$ 463 million for FY20 and is expected to be at US$ 469.5 million in FY21. Defence exports in the country witnessed strong growth in the last two years. India targets to export military hardware worth US$ 5 billion (Rs. 35,000 crore) in the next 5 years. As of 2019, India ranked 19th in the list of top defence exporters in the world by exporting defence products to 42 countries.
The COVID-19 cloud has also had a silver lining for the industry. There have been new opportunities which several companies have come forward and taken advantage of. We are supporting the efforts of these companies. Several defence companies have come forward to produce COVID-19 related equipment and supplies. Some of our Defence PSUs like BEL, OFB and now BDL are taking up COVID related manufacturing. This is a big global opportunity and should enable them to maximize their production in these areas, both for India’s internal requirement but also for the global requirement. For example, BEL is making ventilators and OFB is making sanitizers, PPEs, coveralls and masks. OFB has also started making test equipment for PPEs. These are additions to their planned production plans and should help their bottom line.
Some of the Key Companies that are Operating in the India Aerospace & Defense Market. They are as follows:
Developer & Manufacturer Profiles, ADT LLC, ASSA ABLOY Group, Auto Clear LLC, Axis Communications, BOSCH Security Systems, Brivo Systems, LLC., Fisher Research Laboratory, FLIR Systems, Inc., Frontier Pitts, Ltd., Future Fibre Technologies, G4S PLC, Hitachi Ltd, Honeywell International Inc., Johnson Controls International Plc., L-3 Communications Security & Detection Systems, MilliVision Technologies, Napco Security Technologies, Inc., OSI Systems, Inc., OT-Morpho, RedXDefense LLC, Scanna MSC Ltd., Siemens AG, Schneider Electric, SDMS Security Products UK Ltd., Smiths Detection LLC, Thales Group, Vanderbilt Industries LLC, Victoria Alarm Services Ltd., Westminster Group PLC, Zod Security,
Recent development/Investments
Foreign Direct Investment (FDI) equity inflow in the defence sector for April 2000 – June 2020 stood at US$ 9.52 million (Rs. 56.88 crore) as per data released by the Department for Promotion of Industry and Internal Trade (DPIIT).
In December 2020, The Economic Times reported that India is planning to develop an air-launched swarm drone system to overwhelm Chinese air defenses, giving their fighter jets an edge in any potential conflict. The development process of the project is expected to take four years. State-owned aerospace and defense manufacturing company Hindustan Aeronautics Ltd. is partnering with two start-ups to work on the project, according to The Economic Times.
In December 2020, India and Vietnam agreed to collaborate on numerous domains such as shipbuilding, surface and subsurface capacities such as submarines at sea. Both sides also signed the agreement on Hydrographic cooperation that will enable sharing Hydrographic data and assist in the production of navigational charts.
In December 2020, The Economic Times reported that India is developing very high altitude and long endurance unmanned aircraft for surveillance and reconnaissance purposes. The vehicle is being designed to fly 70,000 feet for a period of days, providing real-time feedback to controllers while remaining beyond the range of most air defense systems.
In December 2020, Advanced Towed Artillery Gun System (ATAGS) development reached the last stages of its trial and reportedly, could soon be inducted into the Indian Army. ATAGS is being developed by the Defence Research Development Organisation’s (DRDO) Armament Research Development Establishment (ARDE) Pune, Defence Electronics Application Laboratory, Dehradun, and the Centre for Artificial Intelligence and Robotics, Bengaluru, along with major corporates such as Bharat Forge, TATA Power SED, Ashok Leyland and Cummins.
In November 2020, the fifth Scorpene submarine of Project-75 ‘Vagir’ was launched at Mazagon Dock Shipbuilders Limited (MDL) in Mumbai, positioning India as a submarine building country and contributing to the government’s ‘Make in India’ and ‘Aatmanirbhar Bharat’ initiatives.
On October 29, 2020, the Indian Army developed a ‘Secure Internet Application (SAI)’, a simple and secure message framework, which supports stable end-to-end voice, text and video calling services on an android platform.
On October 28, 2020, the Indian Army introduced the ‘Infrastructure Management System (IMS)’ software to empower defence stakeholders, make operations more efficient and transparent, and enhance accountability.
Indian Joint ventures
Many defence offset JVs are already underway or on the anvil in India: between HAL and SNECMA of France; Lockheed Martin (USA) and Wipro Technologies; Boeing and Tata; Thales and Samtel Group (France) with an Indian company; TCS and SAAB; L&T and DRDO; Dassault Systems (DS) and Cummins Info Sys Ltd; Wipro and GE Security (USA); Taneja Aerospace and TIDCO; HAL and CAE (Canada); SAERTEX and KEM – ROC; Sikorsky and Tata Advanced Systems; Airbus, Airspace Infrastructure Ltd and Airlogic Ltd; Wipro and CAE (Canada); BEL and Surinam Armed Forces; Rolls Royce and HAL; M&M Ltd and BAE; L&T and Cassadian; Augusta Westland and Tata Sons Ltd, and: between L&T and Europe’s EAD.
In the third quarter of 2014, Tata Power SED had collaborated with the Honeywell International Corporation to develop defense navigators for the Indian army. After a few days, Tata advanced systems declared its joint venture with Airbus to manufacture fifty-six aircrafts for the defense wing in India.
In a major move witnessed across India aerospace & defense market, in year 2012, Reliance industries made inroads into the Indian defense sector through its collaboration with Boeing, a U.S. based multinational firm involved in the production and sale of rockets, aircrafts, & satellites, to develop P81 naval reconnaissance airplane for the naval forces.
After a year, Reliance Industries joined hands with Dassault Aviation SA, to further strengthen its position in India aerospace & defense industry, for supplying aircraft parts to the latter. Dassault had earlier declared its plans to manufacture MRCA (medium multi-role combat aircrafts) for air force – a major wing of Indian defense & combat force. In 2015, Reliance Infrastructure, had acquired Pipavav Defense and Offshore Engineering Company, a largest firm in India producing ships for naval forces in India, for Rs 2,082 crores.
Earlier in 2015, Bharat Forge, an India aerospace & defense industry giant, had declared a strategic alliance with Rafael Advance Defense Systems Limited, a key participant involved in the production of defense equipment & technology in Israel. The 51:49 partnership, with the former holding a major share in the deal, was expected to manufacture spike anti-tank guided missiles for the Indian army. Bharat Forge had also decided to build USD 100 million defense manufacturing unit in Gujarat and discussed the production of artillery weapons and ultra-light arms with the Indian Army.
The London based Hinduja Group, which manufactures Ashok Leyland trucks & buses, had been having cordial relations with aerospace & defense industry in India over the past few decades. In 2015, the firm had entered into a strategic alliance with Larsen & Toubro Limited to develop mounted guns artillery for the Indian naval forces.
Ray Challis, Head of Sales and Marketing for UK-based Ultra Electronics, says the company has already signed an MoU with Mahindra Defense for manufacturing systems for the Indian Navy. “Ultra is a pioneer in precision control system and has a global supply chain. We are willing to bet on a 100-percent transfer of technology if need be. India has problems that we have already solved in Brazil and the US and it is our endeavor to partner with local companies here in India,” Challis told at Aero India 2017 UK Pavilion.
India has so far approved more than 40 joint ventures and foreign direct investment proposals with foreign companies to manufacture defence equipment in the country. These joint ventures include both public and private sector Indian defence manufacturer. Government policies and initiatives encourage all foreign companies including Russian companies to set up their manufacturing facilities in the country through partnerships and joint ventures with Indian companies, Shripad Naik, minister of state for defence, informed the Lok Sabha in Nov 2019.
