Indian Defense Industry

Indian Defense Industry

The Indian defense industry is one of the fastest-growing global defense markets. India‟s defense capital expenditure, which refers to the part of the defense budget that is spent on the acquisition of all types of military hardware and technology, has grown at a CAGR of 12.25% over the review period. In 2010, India was allocated US$13.1 billion for defense capital expenditure in the budget. Defense expenditure is expected to record a CAGR of 13.08% during the forecast period, to reach an annual expenditure of US$67.8 billion by 2016. This is primarily due to the country‟s ageing military hardware and technology which is in need of replacing, and demands for defense against domestic insurgencies and hostility from neighboring countries. The strong growth in the industry is attracting foreign original equipment manufacturers (OEMs) and leading companies from the domestic private sector to enter the market. Moreover, terrorism is leading to sharp increases in the defense budget and a shorter sales cycle, which offers an attractive market for defense manufacturers. The country is especially expected to demand unmanned combat aerial vehicles (UCAVs), advanced electronic warfare systems, combat systems, rocket and missile systems, fighter and trainer aircraft, stealth frigates, and submarines during the forecast period. In addition, its expenditure on IT and communications is expected to increase significantly, with a strong focus on enterprise applications, systems integration, and real-time mobile communications. The country relies upon imports to procure defense equipment with advanced technology, and, since most of the equipment India is seeking use advanced technology, there will be a significant prospect for foreign OEMs to enter the Indian defense market. The Indian homeland security budget reached US$5.8 billion in 2010 Government spending on India's homeland security market has increased significantly as a result of terrorist attacks, the smuggling of arms and explosives, and domestic insurgency. In 2010, the country's homeland security budget registered an increase of 12.8% over the previous year, with the Central Reserve Police Force (CRPF) receiving the largest share of the budget. Due to the nature of the security threats which the country faces, the main opportunities for growth in homeland security are expected in the aviation, mass transportation and maritime security markets. Following the increase in both domestic and foreign terrorist attacks, spending is expected to increase in surveillance technology, global positioning systems, radars and biometric systems. Russia is the largest arms supplier to India India is one the world‟s largest importers of military hardware, with an estimated import spending of over US$9 billion in 2009–2010. The country relies on imports to meet 70% of its defense requirements, with the remaining 30% met through domestic companies, of which the public sector fulfills 21% and the private sector fulfills 9% of the defense procurement requirements.

During the review period, Indian defense procurement policy has seen a strategic shift from Russia in favor of Israel and the US. There are other countries entering the market however, Russia is expected to dominate the arms market of India. The improving bilateral ties with US have led to the strengthening presence of American OEMs in the country. During forecast period, Israel and the US are expected to further strengthen their marketpositions, reducing the market share of Russian and other European suppliers such as the UK, Germany and France. Foreign OEMs are participating in joint ventures in order to enter the Indian defense industry Despite the country‟s foreign direct investment (FDI) limit of 26%, the number of foreign companies entering the Indian defense industry through joint ventures has increased. An outlook of steady growth is driving foreign OEMs to change their strategy in order to adopt a long-term market view. The primary focus of these companies is to establish a presence in the market to enable them to take advantage of opportunities as they arise in future years. In addition to this, foreign OEMs are setting up export and outsourcing bases that can cater to global markets in the future. Restricted FDI, lack of transparency and bureaucracy are the key challenges for the industry Despite expanding opportunities in the Indian defense industry, the government‟s comparatively strict regulatory regime poses challenges for foreign investors who are keen to enter the country. With an FDI limit of just 26%, foreign OEMs are unwilling to extend sensitive technologies to their Indian joint venture partners. The critical area of concern is the offsets in defense, which have been placed at 30%, and in some cases, such as in the development of Medium Multi-Role Combat Aircraft (MMRCA), offsets rise to 50%.

Managing their offset obligations will continue to be the biggest challenge for foreign companies, especially due to the restricted FDI limit. However, the recent changes in offset policy indicate that the regulatory regime may ease during the forecast period, making the Indian defense market more competitive. With continued pressure on the government from Indian industry bodies and key corporate companies, the FDI limit as part of joint ventures is expected to increase to 49% during the forecast period.

In the Indian defense budget the army receives the largest share of the total defense budget expenditure. The main reason for the army‟s large budget allocation is the large size of the army. During the review period, the army was allocated an average of 50% of the total defense budget, while the air force which was allocated 26%, the navy was allocated 17%, and the of the department of defense production and research and development received 7% of the total defense budget. During the forecast period, the army is expected to receive the largest allocation of the Indian defense budget. The average allocation for army is expected to be 49% of the total defense budget in India. The expenditure for army, which is estimated at US$18.5 billion in 2011, is expected to grow at a CAGR of 12.46% over the forecast period, to reach US$33.2 billion by 2016. The total expenditure for army during the forecast period is estimated at US$149.8 billion. During the forecast period, the Indian air force is expected to receive an average allocation of 27% the Indian defense budget. The expenditure for air force is estimated at US$10.3 billion in 2011, and is projected to grow at a CAGR of 12.18% over the forecast period, to reach US$18.3 billion by 2016. The total expenditure for air force during the forecast period is estimated at US$82.7 billion. During the forecast period, the navy is expected to continue receiving an average allocation of 17% the Indian defense budget. The expenditure for navy is expecting to reach at US$5.6 billion in 2011. Naval expenditure is expected to grow at a CAGR of 15.40% over the forecast period, to reach US$11.5 billion by 2016. The total expenditure for navy is estimated at US$51.2 billion during the forecast period. While the US and China dominate the global defense industry with defense budgets of US$722 billion and US$78 billion respectively in 2010, India maintains significant presence in the international arms market. The Indian defense budget is expected to grow at a CAGR of 13.08% during the forecast period and, as a result, it will surpass the defense expenditure of Germany and Saudi Arabia. The Indian defense budget is expected to value US$68 billion by 2016. During the review period, Russia dominated the Indian defense market by providing the largest share of the country‟s defense imports. Russia accounted for 80% of the total defense market in India, while the UK accounted for 6% of the total arms market in India during the review period. By 2010, the import market share of Russia increased to 85% and the market share of UK reduced to 4%. Other countries which cater to Indian market for arms are Israel, France, Uzbekistan, Germany and US. Russia is expected to continue to dominate the Indian arms market during the forecast period. However, Russia‟s import share is expected to decrease as Israel and the US are expected to delivery more imports to India.