Prospects for Global Defence Export Industry in Indian Defence Market

Prospects for Global Defence Export Industry in Indian Defence Market

CII Indian Defence Industry Mission EUROSATORY 2010

Confederation of Indian Industry Since 1895

2 | CII Indian Defence Industry Mission EUROSATORY 2010

Contents

Prospects for Global Defence Export Industry in Indian Defence Market | 3

1. ForewordfromCII 4

2. PrefacefromDeloitte 5

3. Executivesummary 6

4 Indiandefencerequirements 14

5 Domesticcapacity 37

6 Financialimplications 46

7 BenefitsinIndiandefenceindustry andbarriersthereto 50

8 StrategicAlliances 56

9 Conclusion 64

10 AbriefaboutCII 67

11 AbriefaboutDeloitte 68

12 Annexure 69

13 Abbreviations 73

14 Acknowledgement 76

15 Contacts 77


1. Foreword from CII

TheopeningupoftheIndianeconomyduringtheearlyninetiesheraldedaneraofunprecedentedindustrialgrowthinIndia.Thegrowthratesseenmatchthoseofthefastestgrowingeconomies.AconfidentandresurgentIndianIndustryismakingforaysintoalmostallthesectorsofmanufacturing.Lately,thehugeoppor-tunitiesforgrowthwithinthedomesticandglobaldefenceandaerospaceindustrieshaveattractedtheattentionofIndianindustry.

Indiaisoneofthelargestglobalmilitaryspenders.IntheUnionBudget2010-11,expenditureisofaboutUSD32.03billionhasbeenearmarkedfornationaldefence,whichhasbeenincreasedfromUSD29.62billionrevisedestimatesforthelastyear.Thetotaldefencebudgethasincreasedby8.13%andoutofwhichbudgetforcapitalacquisitionofUSD13.04billionhasbeenincreasedby25.46%fromlastyear.Outrightpurchaseandupgra-dationandmaintenanceoftheexistingequipmentformodernisationwillcontinuetoprovideimmenseoppor-tunitiestotheindustryinthecomingfutureaswell.

TheIndiandefenceindustryhasevolvedandhasbeendevelopingcapabilitiesinland,navalandairsystems.AftertheintroductionofdefenceOffsetPolicy,Indiaisgraduallybecomingakeyoutsourcinghubfortheglobaldefenceindustry.ThecontinuousrevisionsoftheDefenceEquipmentProcurementProceduresintherecentpastsuggesttheintentoftheIndianGovernmenttostreamlinetheproceduresandmakethesystemmoretransparent.ConfederationofIndianIndustry(CII)views

theintroductionof“Buy&Make(Indian)”categoryinDefenceProcurementProceduresinNovember2009asaverypositivestep.ItwouldencouragetheparticipationoftheIndianprivateindustryindefenceacquisitions.

CIIhasbeenplayinganactiveroleintheareasofsteeringdefencepolicyformulation,marketdevelop-ment,tradepromotionandformulationofinternationaljointventuresandtechnologytransfers.ItiswiththisobjectivethatCIIinpartnershipwithDeloitteispublishingthisreporttobringtothenoticeofglobalanddomesticdefenceindustryoftheopportunitiesforthemforthedefencerequirementsinIndia.

IhopethatthisreportwillenablethedomesticandtheglobaldefencecompaniestounderstandtheemergingbusinessopportunitiesintheareasofdefenceandtounderstandthedefenceecosysteminIndia.Further,thiswillhelpforeignOEMsanddefencemajorcompaniestounderstandtheIndiancapabilitiesformakinginvest-mentsinIndiainthissector.

Gurpal SinghDeputyDirectorGeneral&Head-Defence&AerospaceConfederationofIndianIndustry

Amit Kumar SinghDirector(DefenceandAerospace/Security/Space)ConfederationofIndianIndustry


2. Preface from Deloitte

TheglobalDefenceindustryistrulyataninflectionpointandweseeitcontinuingtomoverapidlyeast—towardChina,India,andtheMiddleEast.ThesecountriesareexpectedtobelargemarketsforA&Dindustryproductsandservices,aswellasparticipantsinthesupplychain.

InIndia,theaerospaceanddefencesectorisgrowingatanunprecedentedrateandemergingasakeyparticipantintheAsiaPacificregion.UnitedStatesandEuropeanaerospacecompaniesarenowrecognizingIndiaasacriticalmarketaswellasapotentialmanu-facturingpartner.Indiaisbecomingoneofthelargestmilitaryspendersintheworldandcatchingworldwideattention,withthethird-largestdefenseprocurementbudgetinAsia.In2010-11,USD32.03billionhasbeenearmarkedfornationaldefense.Ofthis,USD13.04billionistobespentonacquisitionsfornewweaponssystemsequipmentandservices.ItisestimatedthatIndiandefenceprocurementwillrisetoanestimatedUSD42billionby2015(includingUSD19.20billionforcapitalacquisitions)whichcouldmakeitoneofthemostattractivedefensemarketsintheworld.Inotherwords,IndiaislikelytospendnearlyUSD100billiononmilitaryprocurementduringthecurrentfiveyearplan(2007-12)andUSD120billioninthenextplanperiod(2012-17),thelattercoincidingwiththelastphaseofIndia’sambitiousmilitarymodernisationplan.TherearegreateropportunitiesforIndiandefenceindustrytoworkwithpartnershiporincollaborationwithoverseascompanies,thusenablingthemtohavebroadermarketaccess.

InlightoftheMumbaiattacksaswellastheoverallneedtomodernizeitsdefensivecapabilities,India’s

armedforcesareexpectedtoincreasetheirpurchasesofnewequipmentandtechnologyforthenext20to25years.LiberalizationofIndia’sdefenseprocurementpolicyoffersauniqueopportunityforIndiancompaniestoprovideservicesforthearmedforces.Currently,about70percentofprocurementinvaluetermsisfromforeignsources-withIndiancompaniessupplyingonlyaround30%indigenousitems(including25percentofcomponentsandsubassemblies)tostate-ownedcompanies.Inthenearterm,foreigncompanieswilllikelycontinuetohaveanedgeinthesupplyofdefencearmamentsandtransferoftechnology.

InIndia,foreignacquisitionsareexpectedtobemoreaffordableatthistime.IndustryconsolidationinIndiamaybeontheupswingforlargercompaniesthathavedesiretoentermanufacturingbusinesses.ThiswouldgivethemapresenceabroadtointeractanddobusinesswithOEMsandsuppliersdirectly,whilesimultaneouslyharnessingtheadvantagesthatIndiaasamanufacturingdestinationprovides.1

ThekeydriversofIndianaerospaceanddefenceindustryarehighdomesticdemand,offsetpolicy,costadvantages,talentbaseandleveragingITcompetitive-ness.Therearechallengestoo,suchasinfrastructure,customsclearances,complextaxlaws,certifications,qualityassurance,settingupmeasureslikesupplychainmanagement,security,taxesandvariouslegislationsetc.

Kumar KandaswamiSeniorDirector,DeloitteIndia

Nidhi Goyal

1 Deloittecompilation:Compass2010GlobalAerospace&Defensesectoroutlook


3. Executive summary

3.1 BackgroundOverthepastdecade,theIndianMinistryofDefencehasputintomotionplansforanunprecedentedmodernisationprogramofitsdefencecapabilities.

FollowingtheKargilconflictin1999,IndiawasconfrontedwiththerecognitionthatmuchofitsSoviet-eraequipmentwasoutdatedandobsolescentcomparedwithitsregionalrivals.Indiafacesthetheoreticalprospectofawarontwofronts,onewithamajorpowerrival(China)andtheotherwithapowerfully-armedmiddlepowerthatposespotentialthreatstoitshomelandsecurity(Pakistan).BothChinaandPakistanhavesignificantlyexpandedtheirmilitarycapabilitiesinthepastdecade.

Inthiscontext,Indiahasembarkedonamajordefenceacquisitionprogram,aimedatincreasingthesize,capabilityandself-relianceofitsDefenceArmedForces.

Thescaleoftheplannedinvestmentsreflectsbothitsneedtomakeupforlosttimeaswellasitsexpandingeconomicpower.Indiahasseenitseconomiccapacitytofunditscapabilitymodernisationexpandalmostexponentiallyoverthepasttwodecades.DuringthistimeIndiahasbeenincreasinglymovingtowardsamoreopen-marketeconomy,reducinghistoriccontrolsonforeigntradeandinvestmentandprivatisingarangeofgovernment-ownedcompaniesacrossarangeofsectors,fromairportstoelectricitygenerationtotelecommunicationfirms.ThishascatalysedIndiatobeoneofthefastestgrowingemergingmarkets,withitsGDPgrowingbysevenpercenteachyearonanaveragesince1995.India’s‘economicmiracle’hasbeenunderpinnedbyasignificantexpansioninitsadvancedmanufacturing,engineeringandICTindustriesandisforecasttocontinue.TheIMFin2009projectedIndia’sGDPwouldgrowinrealtermsbymorethan7.5percentonanaveragefrom2010to2014.India’seconomyisprojectedtobe60percentofthesizeoftheUnitedStateseconomyby2025andsecondonlytoChinaby2050.

ItsacquisitionplansincludeasubstantialprocurementprogramfortheArmy,NavyandAirForce.RealisingthattheRevolutioninMilitaryAffairs(RMA)effectivelypassedIndiabyinthe1990s,thegovernmentisseekingtodevelopaflexible,mobileandnetworkeddefenceforcewithsubstantialpowerprojectioncapabilities.ManyoftheassetsIndiaisacquiringareattheleading



edgeoftechnology,including180SukhoiSu-30MKIaircrafts,Scorpèneclasssubmarines,advancedRussianT-90mainbattletanksandstate-of-theartinformationandcommunicationsystems.MorethanUSD42billionintotaldefenceexpenditureistargetedby2015,ofwhichapproximatelyUSD19.20billionwouldbeexpectedtobespentoncapitalequipmentfortheDefenceArmedForces.

TheparallelchallengeforIndiainmeetingitspolicyobjectiveswillbeexpandingitsindigenousproductioncapabilitiesatthesametimeasmeetingitsambitiousacquisitionagenda.Historically,Indiahasimportedmorethan70percentofitsdefenceassets,mostnotablyfromRussia,onwhichitcontinuestohaveastrongreliance.OverthepastdecadetheMinistryofDefencehasimplementedaseriesofreformstoitsprocurementpolicyframeworkwiththeaimofreversingthishistoricalspendingpattern,includingthroughtheintroductionofoffsetsrequirementsfordesignatedequipment.

Thesheervolumeofplannedexpenditureisexpectedtocreatenewopportunitiesforforeignfirms,astotalspendingwillgrowinabsoluteterms.Moreover,India’sdomesticdefencesector,whichwillbenefitfromincreasingrequirementsto‘buylocal’aswellastaxationarrangementsthatadvantagedomesticfirms,willalsolikelyrequirespecialistinputsintobothplatformandsystemsdevelopmentthatcanbemetbyforeignfirms.

3.2 ObjectivesTheprimaryobjectiveofthisstudyistoprovidetheGlobalDefenceIndustrywithinformationonIndia’sdefencerequirementsacrossfourkeydomains:• Maritime(NavyandCoastGuard)• Land• Aerospace• Electronics

Inaddition,thereportseekstohighlightbothpotentialopportunitiesforglobaldefenceexportersaswellaspotentialriskstotheseopportunities,suchasrisksoftheIndianGovernmentbeingunabletocommittotheidentifiedplans(fiscalcapacityassessment),potentialregulatorybarrierstoforeignfirmsandindigenousproductionadvantages.

3.2.1 Key findings: acquisition plans by each domainIndia’sbudgetedacquisitionplansareexpectedtoseeanoverallexpansionofcapitalexpenditurefromapproximatelyUSD19.20billionby2015(Table1).

TheDefenceService’scapitalexpenditurebudgetisexpectedtoachieveacompoundannualgrowthrate(CAGR)of10percentfrom2011to2015.Thisrepresentsamarginalslowdowninbudgetedexpenditurefromthepastdecade(CAGRofbudgetedexpenditureof13.8percentfrom2003-2010).

Takingaccountofinflation,however,temperstheestimateoftheoverallopportunity;whenaccountingforIndia’sinflationrate,therealgrowthinDefenceServicecapitalexpenditureisexpectedtobemarginaloverthenexttwoyearsbeforeincreasingtoarealgrowthrateofabout5.3percentfrom2012to2015.

Navy and Coast Guard acquisitionsTheIndianGovernmenthaspubliclyrecognisedthatIndia’sexpandingmaritimeresponsibilitiesandinterestsnecessitateenhancementinnavalandcoastguardforcelevels.By2022,theIndianNavyhasplanstohavea160-plusshipsNavy,includingthreeaircraftcarriers,60majorcombatants(includingsubmarines),andcloseto400aircraftsofdifferenttypes.TheIndianCoastGuardisallsettodoubleitsforcelevelsandmanpowerinthenextfewyearsandtripleitinthenextdecadeinordertoprotectthecountry’smaritimezonesandassets.

Table 1 : Projected expenditure by each Service Division (USD million)

2010-11 2011-12 2012-13 2013-14 2014-15 Total 2011-2015

CapitalExpenditure(USDmillion) 13110 14421 15863 17450 19195 80039

Army(53%) 6948 7643 8407 9249 10173 42421

Navy(16%) 2098 2307 2538 2792 3072 12806

AirForce(31%) 4064 4471 4918 5410 5950 24812

Source:IndianThirteenthFinanceCommisionReport,Dec2009;UnionBudget(s)&EconomicSurvey2003-2011;andDeloitteAnalysisofallocationsbyServiceDivision.


WhilethesmallestofthethreeIndianDefenceForceServices,theIndianNavyisalreadyarapidlyexpandingmaritimeforcewith36shipsandsixScorpènesubmarinescurrentlyonorder.TwoaircraftcarriersarealsocurrentlyinvariedstagesofconstructionalongsideeightBoeingP8-IMaritimeMulti-MissionAircraftsand16Mig-29KswhichareunderproductioninRussia.

Inadditiontotheconstructionalreadyunderway,theNavyhasfurtherplanstoacquire:• Submarines,includingbothfournuclearandtwenty

fourdiesel-poweredvessels• Arangeofadditionalwarships,includingadditional

frigates,destroyers,corvettes,offshorepatrolvessels,andothersurveyvessels

• Navalisedhelicoptersandaircrafts• Marineequipmentsandweaponsystems

India’sMinistryofDefencerecentlyissuedatenderfor16advancedmultirolehelicoptersandthisrequestislikelytolaterexpandbyafurther44aircraftswithinthenextfewyears.TheNavyalsorequiresunspecifiednumbersofunmannedaerialvehicles(UAVs),airdefencemissiles,twinenginehelicopterfighters,AEWaircraft,heavyweighttorpedoesforsubmarinesandadditionalwarships.UponcompletionofthesixScorpèneclasssubmarinescurrentlyinproduction,Indiaexpectstofloatatenderonsixmoredieselsubmarines.Italsoplanstoindigenouslybuildbetweenthreeandfiveadditionalnuclear-poweredArihantclasssubmarines.

AkeypotentialopportunityalsoexiststosupportthemodernisationofIndianshipyardswhichlackbothcapacityandmoderntechnologytoundertakeadvancedproductiononsuchalargescale.AsnotedbytheIndianDefenceReviewin2010:

“In both the naval and commercial sectors, however, a mere increase in infrastructure will not ensure achievement of desired results. For integrated growth of the industry, there is also a need to create an R&D base, develop in-house design capability, infuse new technology, develop skilled workforce, adopt appropriate fiscal measures and remove administrative hurdles, so that Indian shipbuilding can achieve

credibility as a source for delivering quality ships in time.

… It would, however, not be in our interest to re-invent the wheel; therefore strategies to incorporate the results of such research in indigenous shipbuilding need to be evolved. The JV route, with a larger share of FDI offers an avenue to meet this objective. [Emphasis added] If we are able to produce ships which offer greater operational efficiencies i.e. lower running costs and longer service life, as well as lower acquisition costs than their peers, we would be able to attract international customers.”

TheMinistryofDefence(Navy)IndigenisationPlan(2008)listsforecastrequirementsoftheNavyformarineengineeringequipment,weaponsystemsandsubmarineequipmentandsystemsfrom2008-2022.Examplesofequipmentcontainedwithinthisplanincludegasturbines,dieselengines,pressurecylinders,hydraulicmanipulators,andmotors.

Navalacquisitionshavebeenearmarkedforthegreatestdegreeofindigenisationacrosseachofthefourdomains.Indiaalreadyproducesmorethanhalfofitsacquisitionsinthisspace,andithashadthebesttrackrecordamongtheservicesfordeliveringprojectstobudgetandtimelines.Indiahasdevelopedstrongrela-tionshipswithFrenchfirms,whichhavebeentransfer-ringtechnologytolocalfirmsthrougharangeofrecentcontracts.

India’s Ministry of Defence recently issued a tender for 16 advanced multirole helicopters and this request is likely to later expand by a further 44 aircrafts within the next few years.

2 Mana’sDefenceyearbook2010-11


2TheIndianCoastGuardis70%shortofitsrequirementsandthereforemodernizingofthecountry’smaritimeforceswasthetoppriority.Thecoastguardisreportedlyeyeinguponmaritimeambitiousrampingupofitsassetsto217shipsand74aircraftsinnextfiveyearsfromthepresentstrengthof76shipsand45aircrafts.Thecoastguardishopingtoinducttheseassetsduring11thfiveyearplanperiod(2007-12),ofthenewships,some70wouldbebiggervesselslikeAOPVs,interceptorboatsandinshorepatrolvessels,sixmultimission-maritimepatrolaircraftandtwin-enginehelicopters.

ToaugmenttheforceleveloftheCoastGuard,thegovernmenthassanctioned40ships,20boatsand42aircrafts,7offshorepatrolvessels,20fastpatrolvesselsand12Domieraircrafts.

Land acquisitionsIndianArmyacquisitionplansincludeupgradesandpurchasesofartillery,tanksandvehicles,missilesandotheritemssuchasinfantryupgrades.Theintentionistocreateeightdivisional-sizedarmouredbattlegroups,comprisingartillery,armourandmotorisedinfantry,withstateoftheartcommunicationsequipmentandcoordinatedairsupport.

ManyacquisitionsoutlinedappeartobepartoftheUSD8billionartillerymodernisationprogram,FARP,originallyformulatedin1999.Theprogramaimstoinductaround2,184gunsover20years,ataminimumrateof100unitsperannum.Inits11thDefencePlan,spanning2007-2012,theIndianArmyhasdesignatedaround600modernisationschemes,amountingtoaroundUSD1.44billion.

TheFARPisexpectedtorequirethepurchaseofbetween2,700and3,600guns,involvingacquisitionsofbetweenUSD4.77billionandUSD6.48billionoverthenext15to20years.KeyacquisitionsplannedundertheFARPinclude:• AirMobileUltralighthowitzers• Towedandwheeled155mmguns• Self-propelledtrackedandwheeledguns• Mountedgunsystems.

GiventheurgentrequirementforultralighthowitzersattheLineofActualControl(LAC)–theeffectiveborderbetweenIndiaandChina–theForeignMilitarySalerouteforexpeditingsaleshasbeenclearedbytheDefenceAcquisitionCouncil.TheIAFiscurrentlyinthe

finalstagesofnegotiationsforpurchaseofUSD2.2billionworth10C-17aircraftandtheArmyisfinalizingthepurchaseof145ultralighthowitzersworthaboutUSD647million.

Inrelationtotanksandvehicles,themainplannedacquisitionsincludeupgradesandacquisitionsofmainbattletanks,UAVsandinfantryfightingandlightstrikevehicles(toreplaceageingBMP-1andBMP-2infantrycombatvehicles).

Armyaviationwouldalsobeinductingabout300helicopterstogetherwiththeIndianAirForcetrialsforwhichareinthefinalstages.

Thefinalmainareaisinupgradestoairdefencesystems.India’smainairdefencesystemsincludetheSAM-6(Kvadrat),SAM-8OSA-AKandTungushkasystems,allofwhichareatornearobsolescence.

Productiononlandacquisitionshassufferedaseriousslowdownin2009andconsequentlyIndiaiswellbehindplaninthissectorrelativetobudget.

Aerospace acquisitionsThemajoracquisitionsoftheAirForceoverthenextdecadewillbe:• 180SukhoiSu-30MKIaircraftsatavalueofmore

thanUSD9.9billion• MMRCAatavalueofmorethanUSD9.09billion

(mainlytoreplaceageingMiG21s),forwhichcompetitivefieldtrialsareunderwaybetweensixinternationalcompanies

• 120indigenouslyproducedTejasfighters,forwhichthegovernmentrecentlyannouncedanadditionalUSD1.71billioninfunding

In defence acquisitions, this is perhaps the sector where there are significant opportunities for firms with specialised knowledge looking to enter the Indian market.


• AdditionalAdvancedandIntermediateJetTraineraircrafts

• TheFifthGenerationFighter,thevalueofwhichisunknown,buthasbeenestimatedtobeintheorderofUSD9.9billion

• Upgradesofmorethan60MiG29fighters,JaguarsandMirageaircrafts

• AirborneEarlyWarningAircraft• AdditionalAerostats

WhiletheAirForceplansforexpansionandreplacementoftheageingMiG21sarewellunderway,akeyriskfortheAirForceisthatdelaysandcostoverrunsinthenewfighterprograms(inparticular,theMMRCAandTejasprograms)willmeanthattheexistingbutagedMiGswillneedtobekeptinserviceforalongerperiodthaninitiallyplanned,withtheMiG’sincreasinglyobsoletesystemsneedingtobeupgradedandsafetyfeaturesimprovedtomaintaincurrentsquadronnumbers.

AerospacecontinuestobeasectorwhereIndiastrugglestoindigeniseproduction.IndiahashistoricallysourcedmuchofitsaircraftfromRussia,butisincreasinglyseekingtodiversifythevendorbase,withUnitedStates,EuropeanandIsraelfirmsinparticular.ShortlistedfirmsinbidfortheMMRCAproductionincludeLockheedMartinandBoeing(UnitedStates–theF16andF/A18fighters,respectively),Dassault(France–Rafale),SAAB(Sweden–Gripen),EADS(EuropeanConsortium–EurofighterTyphoon),andRACMiG(Russia–MiG-35).

Electronics acquisitionsElectronicsacquisitionsaresubsumedundereachServiceDivision(Army,NavyandAirForce)inIndia’sforwardbudgetplans.KeyacquisitionsbyServiceinclude:

• Navy systems – TheIndianNavyisseekingsonars,navigationalradarswithLowProbabilityofIntercept(LPI)capability,multi-functionalradarswithcapabilitytointegratevarioussurveillance/weapondelivery

systems,newgenerationgyros,newgenerationlogsandnewgenerationechosoundersbetween2008and2022.TheCoastGuardisseekingcoastalsurveil-lanceradarsandsophisticatedlongrangeelectro-opticsolutionsforoffshoresecurity.

• Army systems – TheIndianArmyhasplanstoacquirehandheldbattlefieldsurveillanceradars,handheldthermalimagingdevicesfornightvision,standaloneinfraredseismicandacousticsensors,integratedobservationequipmentandshortrangesecureradiosetsinsignificantquantities.Modernstrategicandtacticalcommandandcontrolsystemsarealsorequired.TheChiefoftheDefenceResearchandDevelopmentOrganisation(DRDO)hasrecentlystatedthattheyarealsoseekingindustrypartnerstoco-developtechnologyrelatedtogalliumnitridesemi-conductorsandnanotechnologiesrelatedtostructures,sensors,propulsionsandcommunication.Further,theDRDOhasdisclosedthattheyareseekingtobuildIndiancapabilitiesinthemanufactureofinfraredseekertechnologyandimagingfacilitatedthroughworkingrelationshipswithothercountries

• Air Force systems – TheAirForceiscurrentlygoingthroughaperiodofmodernisationandhasrecentlyinductedmid-airrefuellers,aerostats,airbornewarningandcontrolsystemsandnewgenerationairdefencesystems.Recently,ithasbeenannouncedthattheAirForcewouldalsoliketoupgradeavionicsintheCheetakhelicopterandinMiG-29s.AmajormodernisationoftheSu-30MKIaircraftisalsoplannedincludingtheinstallationofamorepowerfulradarandneweravionics.TheAirForcewouldalsobemodernizingitsairfieldswithsophisticatedradars,DFandcommunicationandequipmentandwithenhancedperimetersecurityarrangements.

AlthoughIndiahasastrongengineeringskillsbaseandgrowingICTindustry,andsomesignificantdomesticcompetitors(e.g.,Tata),giventhelegacydistortionsinthemarketsfromcontrollingprivatesectorparticipationindefenceacquisitions,thisisperhapsthesector


wheretherearesignificantopportunitiesforfirmswithspecialisedknowledgelookingtoentertheIndianmarket.

3.2.2 Challenges and risksWhilethemarketsizeislargeandgrowing,marketentryisnotwithoutchallengesandrisksforexporters.

Regulatory barriers and risksCurrentlythereareanumberofregulatorybarrierstoentry,includinginthemainforeigndirectinvestmentrestrictions(26%),taxationadvantagesaffordedtoDPSUsascomparedtodomesticIndiancompaniesandoffsetrequirements(rangingfrom30%to50%dependingonDPPrestrictions).Industriallicensing,protectionofintel-lectualpropertyrights,capabilityofIndianjointventurepartners,customerclearancerequiredforbothImportandExport,etc.Potentialopportunities,suchasFastTrackProcedures,appeartobeappliedtoacquisitionsthatarebehindscheduleorforwherethereisonlyonelikelysolesupplier(whichtendtobelargeprimesfromothercountries),andthereforehavelimitedbenefittoforeignexporters.OneofthebenefitsthathaverecentlybeenaccordedistheabolitionofcontrolsonforeignremittancesunderForeignTechnologyCollaborationAgreementsunderPressNote8/2009.

Thecurrenttimelinesforprocurement,whicharedescribedbytheDPPtobe2-3yearsbuthavebeenreportedtotakemorethan4-5years,alsomakeitdifficultforsmalltomediumenterprisestoenterthemarket.Thisislargelyduetotheoftenhighcostsoftenderingprocesses,suchasin-countrytrialsandtherequirementstodemonstratehowoffsetandTransferofTechnologyobligationswillbemet.OneofthemajorimpedimentsisthenecessityforNoCostNoCommitmentTrialswhichcantakeseveralyearsandconsequentlysmallplayerswithsophisticatedexpertisedonothavetheresiliencetosurvivethismammothrisk.

ItalsoappearsthatthetenderingprocessfordefenceequipmentinIndiaisnothighlytransparent.Theprocesscanbeextremelylongandthebasisonwhichtendersareeventuallyawardedisoftennotatallclear.Thereiseveryprospectthatforeigncompaniescouldspendagreatdealoftimeandmoneyworkingupabidonlytobeadvised,muchlater,thattheywereunsuccessfulforreasonsthatarenotapparent.

Consistent underspending Givenitsstrongeconomicgrowthprojections,themodestratioofdefenceexpendituretoGDPanditsmandateto

moderniseitsmilitary,overallitwasassessedthatitwasunlikelythatbudgetedoutlayswouldcomeunderpressureinthefutureduetofiscalcapacityconstraints.

Thechiefrisk,rather,wastheinabilityofdomesticandforeignfirmstokeepupwiththerateofgrowth.AlthoughbudgetsforcapitalexpenditureonDefenceForceServiceshaveconsistentlybeenincreasing,therehasalsobeenatrendofsignificantunderspendingbytheIndianDefenceService.Overtheperiodof2003to2010thedefenceservicehasunderspentaboutUSD6.75billionofitscapitalexpenditurebudget;from2003-2010:• theNavyunderspent21percentofallocatedcapital

expenditure• theArmyunderspent31percentofallocatedcapital

expenditure• theAirForceunderspent47percentofallocated

capitalexpenditure

Importantly,however,thiscanbeseenasbothariskandanopportunityforforeignfirms.TheIndianGovernmentisseekingtoexpandindigenousproduction,particularlywithinthemaritimeandlanddomains;however,domesticprivatefirmswillneedtoaccessspecialistinputstomeettheseuplifttargetsinthecontextofanacquisitionsbudgetthatisgrowinginabsoluteterms.IftheIndianDefenceForcesincreaseitsindigenousprocurementfromthecurrent30percenttothetarget70percentoverthenextfiveyears,theoutputofIndianfirmswouldneedtomorethandoubleeachyear.Totalindigenousproduc-tionoverthe2011-2015periodwouldneedtoexpandfromapproximatelyUSD30billiontomorethanUSD70billioninthespaceoffiveyears.Thiswouldtranslatetoanaveragegrowthrateofthelocalindustryof30percentayearoverthenextfiveyears.Inanymarket,thisishighlyunlikelytooccur.

CompetitionLikemanycountries,Indiaconfersonitsdomesticfirmsregulatoryandtaxationadvantagesthatimprovetheircost-competitivenesscomparedtotheirinternationalcounterparts.Indiaisalsohosttoamaturemanufacturingsector,whichmeansitwilloftenbeabletooffermorecost-competitivetermsforlargeplatformbuilds.Foreignfirmsarebestabletocompetewheretheyhavespecialisedknowledgeorinputs.

Insomesectors,too,thereareverystrongincumbentpositionssuchastheDPSUs-HindustanAeronauticsLimited(aerospace)andBharatElectronicsLimited(elec-


tronics)thatwillprovidestrongcompetitiontoexportersseekingtoenterthemarket.

Moreover,globalexporterswillfacefiercecompetitionfromtransnationalcorporationsofferingstateofthearttechnology.

Competitioninmarketsfordefenceequipmentalsodoesnottakeplaceonalevelplayingfield.Governmentsupport,particularlywithrespecttomarketentryinIndia,isimportant.Thisdoesnothavetobefinancialsupport;oftenbackingforthebidfromthedefenceforceintheexportingcountrycanbeinfluentialinitsownright.

3.2.3 Key opportunities for foreign suppliersThechallengesinvolvedinparticipationintheIndiandefencemarketshouldnotbeunder-estimated.Yetthepotentialrewardsforforeigncompaniesaresignificant.

WhileitisclearthatIndiaisseekingahighlevelofself-sufficiencyindeliveringitsambitiousdefencere-equipmentandexpansionprogram,itisalsoevidentthattherewillbeahighlevelofrelianceonoverseasintereststosupplythenecessarytechnologyinanumberofareas.Theexportcountrieswhichalreadydominatetheglobalmarketcansupplycompleteplatformsorsystems.OtherCountries

willnecessarilybeanicheplayerhere.YetinthecontextofIndia’saspirationsintermsofself-reliance,beinganicheplayermaybenobadthing.Bytheirverynature,nicheplayersarenotthreateningoroverbearingandaremorewillingthanthebigtransnationalcorporationstoworkcloselywithlocalindustry.TheyalsotendtobemoreawareofthereciprocalbenefitsofworkingoverseasandmaybemorewillingtoincorporateIndianfirmsintotheirsupplychains.

If the Indian Defence Forces increase its indigenous procurement from the current 30 per cent to the target 70 per cent over the next five years, the output of Indian firms would need to more than double each year.


4 Indian defence requirements

4.1 Basis for requirements

4.1.1 Overview of the Indian economyPercapitaincomeofIndiahasreachedUSD1016billionintheyear2008(morethandoubledinthelast7years).ThelastfiscalandthefirsthalfofthecurrentfiscalsawIndiadealingwiththeimpactoftheglobalslowdownthatresultedintheGDPgrowthrateslowingdownfromanaverageof9%achievedinthelast5yearsto6.7%.Theslowdownalsoresultedinplummetingexports,aboomingfiscaldeficitandanalarmingfallintheindustrialproduction.Capitalflowsshrinkedandthestockmarkettumbledintoanabysslandingablowtothe“decoupling”hypothesis.Despitethesenegativeimpacts,whencomparedtotherestoftheworld,Indiastoodoutasoneofthebetterperformersandcontinuestoremainaprimaryfocusformanybusinesses.

Therecentlyreleasedeconomicsurveyforfinancialyear2009-10revealsthatsomeofthekeymacroeconomicfundamentalsoftheeconomyhaverevivedoverthepastfewmonths.Aidedbythefiscalstimuluspackageandaliberalmonetarypolicy,thecountry’sGDPgrowthrateforFY2009-10isexpectedtobe7.2%.Inaddition,industrialproductionhasseenrecordlevels(touching11.7%inNovember2009),exports(USD81.14billionasonSeptember2009)haveregainedthelostmomentum,domesticprivateconsumptionhaveincreasedfromlastyearlevelandthecapitalmarketshaveremainedstrongandrobust.Thepolicymakersdeserveforthewellcalibratedandsynchronizedpoliciesthathavehelpedrestorethelostoptimisminthefutureprospectsoftheeconomy3.

• Indiaishighlyconsumerdrivenwithconsumptionforecastedtocontribute63%toGDPgrowth.• Indiawouldemergeasthesecondlargesteconomyintheworldbytheyear2050.• By2025India’seconomyisprojectedtobeabout60%ofthesizeoftheUSeconomy.

3 Deloitte’sBudget2010:SnapshotsfortheAerospaceandDefenceSector

Figure 2: Export and ImportPrincipal export 2007/08 (USD billion fiscal year Apr-May) Principal import 2007/08 (USD billion fiscal year Apr-May)

Figure 1: GDP shared, GDP growth rate and Industrial production

Source:EconomistIntelligenceUnit

Agriculture17%

Services62%

Industry21%

Share of GDP

7.5%

9.5% 9.7%

GrowthinRealGDP

Source:TheEconomicSurvey2009-10

GDP Growth rate of India

9.2%6.7% 7.2%

GD

P(%

)

12

10

8

6

4

2

02004-05 2005-06 2006-07 2007-08 2009-102008-09

GDP LinearSource:EconomicSurvey

IIPG

row

th(%

)

Industrial production 2009-10

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

14%12%10%8%6%4%2%0%

7.0%8.4% 8.2%

11.6%

8.5%2.6%

8.6%

IIP(Y-o-Y)

Others,65

Others,40.8

EngineeringGoods,36.6

PetroleumProducts,24.9

TextileandClothing,19.0

GemsandJewellery,19.7

AgricultureandAppliedProducts,18.1

PetroleumProductsandPetroleum,79.6

CapitalGoods,37.3

ElectronicGoods,20.3

Gold&Silver,17.8

Chemicals,18.6


10

8

6

4

2

0

-2

Figure 3: Growth Rate of various sectors

Source:EconomicSurveyofIndia,2009-10Growthrate

Services Manufacturing Industry Agriculture

8.7 8.98.2

-0.2

Sector Performance: Recovery is evident!Manufacturingsectorhasgrownat8.9%inFY2009-10,higherthanthatofservices(8.7%)andindustry(8.2%)

Severalothersectorshavemadeastrongrecovery-Auto,BFSI,cement&steel,rubber,plastic,textile,woodproductsandchemicalindustries.

PopulationandIndiancities:Populationisestimatedat1,129millionandgrowingat1.38%.

Theclassificationbasedonpopulationdensityisasfollows• Tier1—Population>4million• Tier2—Population>1million• Tier3—Population>500thousand• Tier4—Population<500thousand

Mostmulti-nationalsoperateineighttier1citiesastheyaccountedfor40%ofdisposableincome.DelhiandMumbaihasexperiencedrapidgrowthintheirsuburbsandthemushroomingofsatellitetowns.

Tier1andTier2citiestogetheraccountfor44%ofurbanpopulationand53%ofurbandisposableincome.Themanpower(labour)availableinIndiacanbeestimatedthroughthegraphbelow.LabourbeingthemostimportantresourceinmanufacturingsectorcancontributegreatdealtotheproductivityandGDPofthecountry.

TheindustrialisationinIndiahasturnedtowardssmalltownsandtheyhavebecomethekeytoincreasedproductivityandenhancedstandardsofliving.

ThepurchasingpowerofIndianmiddleclassisexpectedtoattractglobalproducerstofindattractivenessinIndianmarkets.

(0-4)106.5

(55+)101.7

(45-54)85.7

(35-44)122

(25-34)156.6

(15-24)199

(5-14)239

Figure 4: Population (million) Vs age group (2001)Mumbai,Kolkata,

Chennai,Delhi,Bangalore,Pune

Hyderbad,Ahemdabad

Surat,Kanpur,Nagpur,Lucknow,Jaipur,Kochi,Madurai,Meerut,Kozhikode,Nasik,Agra,Rajkot

Trichy,Amritsar,Faridabad,Goa,Aligarh,Moradabad,Pondicherry,Bhavnagar,Jodhpur

Rohtak,Rourela,Anand,Hassan,Villupuram,Gurgaon,Shillong,Faizabad,Palghat,Shimla,Kolar

Tier1—8MajorCities

Tier2—26MainstreamCities Tier4—5094SmallTowns

Tier3—33Cities

Source:NCAER

Figure 5: Tier distribution of cities


4.1.1.1 Impact of defense on Indian Economy IntheUnionBudget2010-11,expenditureofaboutUSD32.03billionhasbeenearmarkedfornationaldefencewhichhasbeenincreasedfromUSD29.62billionrevisedestimatesforthelastyear.Thiswillaccountforabout2.43%ofGDP.Thebudgetedallocationkeepsgrowingby7-8%everyyear.Thetargeteddefenseexpendituretill2015is100billiondollars.Indiaisexpectedtobeoneofthelargestbuyersofdefenseequipmentandservicesintheworld.Thetotaldefencebudgethasincreasedby8.13%andoutofwhichcapitalacquisitionofUSD13.04billionhasbeenincreasedby25.46%fromthelastyear(seefigure6).Thetotaldefencebudgetaccountsforabout13.29%ofthetotalCentralGovernmentexpenditure.Ifthescopeofnationaldefenceisenlargedtonationalsecurity,itwouldincludeexpensesforcivildefence,securityaspectsoftheDepartmentofspace,expenditureoftheMinistryofHomeAffairs,researchanddevelopment,whichroughlyaccountforabout20%oftotalGovernmentbudget.4(seetable3)

Table3belowprovidesasummaryoftheGovernmentofIndiabudgetfordefence,HomeAffairs,Space,CivilAviationetc.

Table 3: Government of India Budget — 2010–11 (1 USD=INR 46) (figures in USD billion)

Ministries/Departments

Revenue Capital Total

Defence 18.99 13.04 32.03

HomeAffairs 6.09 1.55 7.64

Space 0.67 0.59 1.26

CivilAviation 0.32 0.31 0.63

DepartmentofScienceandTechnology

0.51 0.01 0.52

ScientificandIndustrialResearch

0.65 0.01 0.66

4.1.1.2 Growth in the Manufacturing MarketThegrowthindefenceproductionisagrowthinmanu-facturingsector.

Growth of Defence Public Sector Undertakings (DPSUs): TheDPSUsinIndiahavehistoricallydominatedIndianaerospace,shipbuilding,communicationsandelec-tronics..Theyhavegrowntremendouslythroughprotec-tion,monopolyandhavedevelopedandhavepassedoffoutdatedtechnologiestotheservices.Onapositivenotetheyhavealsosucceededinbuildingfinewarshipsandaircraftsalbeitatsubstantialcostandtimeoverruns.

Growth of IT/Engineering Companies:Indiansoftwarecompaniesareactiveinthefieldofavionicsandareaggressivelytryingtoincreasetheirshareoftheengi-neeringservicesoutsourced(ESO)market.Allbigplayershavealreadysetupaseparateaerospacevertical.ThereareafewstandaloneESOcompaniesaswell.

Table 2: Urban population and urban disposable income demographics 2001

Classification Urban population tier wise (million)

Urban population tier wise as a % of total population

Urban disposable income (USD Billion)

Urban disposable income as a % of total disposable income (USD Billion)

Tier1 83.73 8.14% 75.85 16.23%

Tier2 43.31 4.21% 26.6 5.69%

Tier3 25.99 2.53% 16.75 3.58%

Tier4 135.7 13.19% 75.23 16.09%

Figure 6: Expenditure on Defence by GOI

4 Deloitte’sBudget2010:SnapshotsfortheAerospaceandDefenceSector. (figuresinUSDBilliondollars)

2009-10 2010-11

18.9917.5

11.5 13.04

Revenue Capital


Growth of Other Private Players: TherearemanySMEswhoenteredpostliberalization.KeydriversfortheirgrowtharesubcontractingforDPSUs,liberaliza-tionandtheoffsetpolicy.Forexample,bighouseslikeTata,L&T,M&MandotherdomesticprivateplayerslikeDynamaticAerospacehavebeenaggressivelybuildingcapabilitiesindifferentspheres.5

Growth of Auto Component Manufacturers: Indianautomotivecompanieshavebeentherecententrantsinthissectorprimarilyduetosynergyofoperationsandbusinessprocesses.Theprimarydriversforenteringthissectorisriskdiversification,processsimilarities,slowdowninautosector,highermarginsandoffsetopportunities.Alsotheautomotiveindustrywasintheforefrontinadoptionofbestpracticesparticularlyinmanufacturingandsupplychainprocesses.ThereforethepenchantofseveralautomotiveplayersforA&Dsectorisalogicalchoicethanotherindustries.

4.1.2 Defense acquisitions : Strategic imperatives and economic context

4.1.2.1 Indian defence strategic directions and prioritiesIndia’soverallmilitarystrategyisshapedbyarangeofongoingandemergingissuesintheregion.ThisincludesconventionalthreatsandborderdisputeswithChinaandPakistan,growingconcernsaboutterrorismfromnon-stateandstate-sponsoredgroups,andtheongoingMaoistNaxalianinsurgency.

IndiahasbeenengagedinanongoingdisputewithPakistanalongtheLineofControl(LoC)inKashmirfordecades.Inadditiontodirectconfrontations,thisencompassesthreatsfromarangeofnon-stategroups,whichIndiahasfrequentlyblamedforterroristactivities.6

ReportsofthegrowingstrategicrelationshipbetweenChinaandPakistan(forexample,theChineseproposaltoestablishforeignmilitarybasesinPakistan)arealsoacauseforconcern.TheseissuesarefurthercomplicatedbytheongoingrelationshipbetweenPakistanandtheUnitedStates,primarilyduetotheongoingUnitedStatesmilitarypresenceinAfghanistan.7

Furtherdevelopmentofthisstrategyremainsfocussedonavoidinganuclearresponse,butmaintainingtheabilitytoengageinrapidretaliatoryresponsestoanyattacks.ThiswouldincludetheabilitytorespondondualfrontstoPakistaniandChineseincursions.Theresultingdoctrineisfocussedoneightintegratedbattlegroupsofdivisionsize,whichwouldcombinemobilegroundforceswithairpower,andbeconnectedviaadvancednetworkingandcommuni-cationsystems.

4.1.2.2 Rapidly expanding economic powerIndiahasseenitseconomyexpandalmostexponentiallyoverthepasttwodecades(Figure7).Duringthistime,Indiahasbeenincreasinglymovingtowardsamoreopen-marketeconomy,reducinghistoriccontrolsonforeigntradeandinvestmentandprivatisingarangeofgovernment-ownedcompanies.ThishascatalysedIndiatobeoneofthefastest

5 DeloitteA&DPresentationforBelgiumEconomicMissionMarch26,2010

6 MiredinRedTape’inSP’sLandForcesDefenceMagazine,contributedbyBrigGurmeetKanwal(Retd),FebMar2010,Vol7,Number1,pp.1-6&13-14

7 Katoch,LieutenantGeneral(Rtd)(2010)RestructureCapabilities’inSP’sLandForces,January,pp.32-33Source:IMF(2009)WorldEconomicOutlookDatabase(LastRelease–October)

Figure 7: Indian GDP – 1980-2014 (%, INR)

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

GD

P(IN

R,D

200

0)

%c

hang

ein

GD

P

120,000

100,000

80,000

60,000

40,000

20,000

0

12%

10%

8%

6%

4%

2%

0%

GDP(INR,realterms)GDP(INR,nominalterms)GDP%change(realterms)


growingemergingmarkets,withitsGDPgrowingbysevenpercenteachyearonaveragesince1995.India’s‘economicmiracle’hasbeenunderpinnedbyasignificantexpansioninitsadvancedmanufacturing,engineeringandICTindustries.

Moreover,India’seconomicgrowthforecasttonotonlycontinuebutaccelerate.TheIMFprojectedinOctober2009thatIndia’srealGDPgrowthratewouldexceed7.5percentonaveragefrom2010to2014(Figure7).TheincreasedfocusonprivatisationofgovernmentcontrolledfirmsandengagementwiththeprivatesectorhasalsoimpactedonIndia’sdefencesector.Thegovernmentisseekingtoestablishanewclassofdomesticprivateenterprise,theRakshaUdyogRatnas(RURs),whichwouldenjoythesametaxtreatmentsasincumbentpubliclyownedfirms(theDefencePublicSectorUndertakings).Ithasalsoagreedtoprovidegreaterdetailtotheprivatesectoraboutfuturedefenceacquisitionplans;historically,theprivatesectorhasonlybeenprovidedone-yearforwardestimates.

4.1.2.3 Defence spending and acquisitionsItisintheabovemilitaryandeconomiccontextsthatIndiahasmovedoverthepastdecadetoimplementatransforma-tionalcapabilityupgradeacrossalldefenceservicedivisions.Inimplementingthemodernisationplans,theMinistryofDefenceisseekingto:• Correct legacy underspending –Followingthe

Boforsacquisitionscandalin1986,India’sexpenditureondefencewasreduced,whichcontributedtoadecadeofunderspendingthatbecameapparentin1999duringtheKargilconflict.TheKargilconflicthighlightedarangeofdeficienciesinthecapabilitiesoftheIndianArmedForces.Eventodayitisstillestimatedthataround50percentoftheIndianArmedForces’existingequipmentisobsolete.8Accordingly,modernisationisakeypriorityforfuturedefenceacquisitions.

• Establish self-reliance – TheIndianGovernmentalsohasaspirationstosignificantlyenhanceindig-enousproductioncapabilities(particularlyinrelationtoadvancedtechnologies).Thiswouldrepresentashiftfromhistoricalpatternsofdefenceprocurement,whichhavetypicallyinvolvedforeignsupplyofcriticalcomponents,withsomelicensedindigenousproduction.Supportingthisobjective,andinkeepingwithbroadermovestoopenuptheIndianeconomy,theMinistryofDefencehasimplementedaseriesofchangestothegovernanceandplanningprocessesfordefenceacquisi-tionstoimprovethetransparencyoflongtermdefenceacquisitionplanstotheprivatesector.

• Improve value for money – Revisionstoprocurement

procedureshavebeenfocusedonincreasingthenumberofvendorsfromwhichIndiasourcesitscapabilities.Inparticular,Indiaislookingtoothercountriesforacquisi-tionsassofartraditionallyIndiahasbeenrelyingonRussianequipments.

4.1.3 Defense expenditure: Historical trends, future plans & fiscal capacity4.1.3.1 Acquisition governance and planningResponsible agenciesTheIndianMinistryofDefenceisresponsibleforalldefence-relatedactivitiesinIndia,spanningtheArmy,NavyandAirForce.TheprincipaltaskoftheDefenceMinistryistoframepolicydirectionsoftheGovernmentonalldefenceandsecurityrelatedmattersforcommunicationtotheServicesHeadquartersandotherrelevantorganisations.TheMinistryofDefenceiscomprisedoffourDepartments:• Department of Defence – responsibleforthedefence

budget,establishmentmatters,defencepolicy,mattersrelatingtoParliament,defenceco-operationwithforeigncountriesandco-ordinationofalldefencerelatedactivities

• Department of Defence Production–responsibleformatterspertainingtodefenceproductionandindigenisa-tionofimports

• Department of Research and Development –responsibleforadvisingtheGovernmentonscientificaspectsofmilitaryequipmentandlogistics.TheDefenceResearchandDevelopmentOrganisation(DRDO),whichworksinarangeofareasofindigenousmilitarytech-nologydevelopment

• Department of Ex-Servicemen Welfare – dealswithresettlement,welfareandpensionsmattersofEx-Servicemen.

TheMoDalsohasaFinanceDivisionwhichisfullyintegratedwiththeMinistry&performsanadvisoryrole.TheDefenceAcquisitionCouncil(DAC)wasestablishedin2001andischargedwiththeapprovalofcapitalacquisitions.TheDACistheresponsibleauthorityfordeterminingthecategoryofproposedacquisitionsundertheDPP,andisassistedinthisroleby:• ServiceHeadquarters(SHQ)• ServiceCapitalAcquisitionPlanHigherCommittee

(SCAPCHC).

Planning framework and proceduresPlanningforcapitalacquisitionsisundertakenonashort,mediumandlong-termbasis,bywayofthefollowingdocuments:

8 OpportunitiesintheIndianDefenceSector,ReportpreparedbytheConfederationofIndianIndustryinpartnershipwithKPMG


• AnnualAcquisitionPlan(AAP)• 5-yearServicesCapitalAcquisitionPlan(SCAP)• 15-yearLongTermIntegratedPerspectivePlan(LTIPP).

TheplanningprocessisundertheoverallguidanceoftheDAC.TheDACisresponsibleforapprovingtheLTIPPandSCAP.TheAAPisasubsetoftheSCAP,andissubjecttotheapprovaloftheDefenceProcurementBoard(DPB).

TheDefenceProcurementProcedures2008(DPP-2008)isapolicydocumentprovidingformalisedguidelinesforcapitalacquisitions.InNovember2009,theDPP-2008(Amendment2009)wasreleased,comprisingthefollowingkeyreforms:• SupportingthedevelopmentofindigenousDefence

industrythroughtheintroductionofnewcategoryforacquisition—‘BuyandMake(Indian)’

• Encouragingcompetitionbybroadeningthevendorbase,includingthroughincreaseddomesticprivatesectorinvolvementandcontinuedforeignfirmequipment,hardwareandservicesprovision

• Implementingpoliciesandprocedurestoincreasethequality,reliabilityandtransparencyofprocurementprocesses

• EnhancingthedelegationoffinancialpowerstotheServices.

UnderoneofthekeyamendmentstotheDPP-2008,theLTIPPwillbemadepubliclyavailableforthefirsttimeinJune2010,reflectingIndia’sstrongdesiretoincreaseengagementwiththeprivatesector.Thisamendmentisdesignedtoassisttheprivatesectorinmoreeffectivelyundertakingplanning(includingR&Dandcollaboration)fortenderproposals.

4.1.3.2 Defence Expenditure: key definitions and areas of focusThe2010budgetfordefencespendinginIndiaisINR175,772croreorUSD38.21billion,whichwillaccountforabout2.53%ofGDP.9,10

Defenceforceexpenditureissplitinto‘Revenue’and‘Capital’expenditure.Table4belowgivesgeneraltermsandtheirdefinitions.

9 Atanexchangerateof46INRto1USD

10 OnecroreisaHindimeas-urementequivalentto10million.

11 ExpenditureBudget2010-2011,Vol1,p12.

12 Ibid.

Table 4: Expenditure definitions

Expenditure type Definition

General budget terms

Budget Thebudgetforthedefenceforceispreparedpriortoeachfinancialyearandestimatesthecapitalandrevenueexpenditurethatwilloccurinthatyear.

RevisedEstimatesBudget

TheRevisedEstimatesBudgetiscalculatedattheendoftheyearandcapturestheactualrevenueandcapitalexpend-iturespentduringthefinancialyear.

PlanExpenditure PlanExpenditureisexpenditurerequirementsidentifiedanddiscussedbyrespectiveministersordepartmentsanddiscussedwiththeMinistryofFinance.IndianGovernmentPlanExpenditureincludeshealthandeducation.Itcomprises34%ofthetotalCentralGovernmentbudget.11

Non-PlanExpenditure

Non-PlanExpenditureisallexpenditurethatwasnotidentifiedintheplanexpenditure;inspiteofitsname,mostofthebudgetpreparedbythePlanningCommissioniscategorisedasnon-Plan(66%oftotalbudget).12Thisexpenditureincludessalariesforgovernmentemployees,loanstoprivateenterprises,States,UnionTerritories,localgovernmentsandforeigngovernment,taxcollectionandsocialservices.*TheIndianDefenceForce’sExpenditurebudgetispredominantlyNon-Planexpenditure.

Defence-specific categories of spending

CapitalExpenditure TheCapitalExpenditureBudgetisprimarilyusedbytheDefenceForcetoconstructinfrastructure,andprocureland,armaments,andotherequipmentrequiredbythedefenceservices.

RevenueExpenditure

TheRevenueExpenditureBudgetisusedfortheeverydayoperatingexpensesoftheDefenceForce.SalaryandwagesfortheDefenceForcePersonnelaccountsforabouthalfofthisbudget.

Defence-ServicesExpenditure

DefenceServicesexpenditureiscomprisedofdirectdefencespending,including:capitaloutlayonmachinery,constructionandland(capitalexpenditure),otherworksexpenditure(revenue);payandallowancesforthearmedforcepersonnel(revenue);storespurchases(revenue)andtransportationandmiscellaneousexpenditure(revenue).

Defence-CivilExpenditure

DefenceCivilexpenditureisspendingthatisconsideredtobeauxiliarytothedefenceservices.Itincludes:secretarialandgeneralservices;thecoastguard;canteenstoresdepartment;housing;publicworks;investmentinpublicenter-prises;anddefencepensions.


Forthepurposesofthisanalysis,theprimaryfocusisoncapitalexpenditureinDefenceServices.In2009-2010,DefenceServicescapitalexpenditurewillaccountforapproximatelyonethirdofIndia’stotalspendingondefence(Figure8).13

4.1.3.3 Historical defence spending

Trends in defence acquisition spending Totalbudgeteddefencespending(includingServicesandCivil,RevenueandCapitalexpenditures)inIndiaintheperiodfrom2003to2010hasbeenincreasingbyanominalCompoundAverageGrowthRate(CAGR)ofabout11.7percentperyear.14Whilethisisahighrateofgrowth,itdoessignalthatdefencespendinghasbeenfallingasapercentageofGDP,whichhasachievedanominalCAGRofabout13.8percentforthesameperiod(8percentinrealterms).15

Notallareasofdefencebudgetedexpenditure,however,havebeenfallingasaproportionofGDP.BudgetedcapitalexpenditureacrossbothDefenceServicesandCivilExpenditurecategorieshasbeenkeepinginlinewithGDPwithaCAGRofabout13.8percent,comparedtoaCAGRof9.1percentforrevenueexpenditure.16

Figure 9: Defence Expenditure as % of GDP – Budgeted Expenditure

Source:UnionBudget(s)&EconomicSurvey2003-2011.Availableat:www.indiabudget.nic.in,accessedon23thMarch2010.DeloitteAnalysis

Reflectingthehighproportionoftheoverallcapitalexpenditurebudget,capitalexpenditureonDefenceServiceshasalsoincreasedbyaCAGRof13.8percent(inlinewithoverallcapitalexpendituretrends).BudgetedcapitalexpenditureonDefenceServiceshasincreasedfromUSD5billionin2003toabudgetofUSD14billionin2011.

Consistent underspendingAlthoughbudgetsforcapitalexpenditureonDefenceServiceshaveconsistentlybeenincreasing,therehasalsobeenatrendofsignificantunderspendingbytheIndianDefenceService.Figure10showsthehistoricaldifferencebetweenthebudgetandtherevised

13 UnionBudget(s)&EconomicSurvey2003-2011.Availableat:www.indiabudget.nic.in,accessedon23thMarch2010.

14 UnionBudget(s)&EconomicSurvey2003-2011.Availableat:www.indiabudget.nic.in,accessedon23thMarch2010.

15 Ibid16 Ibid17 Therewasnochangein

2005betweenthebudgetsforrevenueandcapitalexpenditure.Consideringthepriorandfollowingyeardifferences,itseemsunlikelythatallexpendi-tureoccurredasplannedduringthisoneperiod.Thisaberrationinthedatacouldhaveseveralcauses,suchasachangeinaccountingmethods.

18 Innominalcurrencyamounts.

Total budgeted defence spending (including Services and Civil, Revenue and Capital expenditures) in India in the period from 2003 to 2010 has been increasing by a nominal Compound Average Growth Rate (CAGR) of about 11.7 per cent per year.

Figure 8 : Expenditure breakdown

Service Expenditure (USD, billions)

Civil Expenditure (USD, billions)

Total Expenditure (USD, billions)

CapitalExpenditureBudget(USD,billions)

$13.04b(34.13%) $0.26b(0.68%)$13.30(33.8%)TotalCapitalExpenditure

RevenueExpenditureBudget(USD,billions)

$18.99b(49.70%) $5.92b(15.49%)

$24.91(66.2%)TotalRevenueExpenditure

TotalExpenditure(USD,billions)

$32.03(83.83%)TotalServicesExpenditure

$6.18(16.17)%TotalCivilExpenditure

$38.21billion(100%)TotalDefenceExpenditure

DefenceRevenue/GDPDefenceCapital/GDPTotalDefence/GDP

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%2003 2005 2007 2009 2011


estimatesbudget.Ithighlightsthedefenceserviceconsistentlyunderspendstheirmoniesallocatedtocapitalexpenditure.17

Overtheperiodof2003to2010thedefenceservicehasunderspentaboutRs31,135croreorUSD6.75billion18ofitscapitalexpenditurebudget.Thisisaboutequivalentto57percentofthe2011budgetforcapitalexpenditure.

Figure 10: Unspent funds – Total Defence Budget (in both % and USD terms)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2003 2004 2005 2006 2007 2008 2009 2010

Defence Revenue

Defence Capital

Total Defence

Unspent funds as % of Budgeted Expenditure

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

2003 2004 2005 2006 2007 2008 2009 2010

USD

Bill

ions

Unspent funds in USD

Underspending relative to budget

Overspending relative to budget

% O

vers

pend

% U

nder

spen

d



Trends in acquisitions by each Defence Force divisionTheIndianDefenceForceincludestheArmy,NavyandAirForce.Budgetedcapitalexpenditureforthethreeservices,showninFigure11,hasremainedrelativelyconstantasaproportionofGDPsince2003.EachServiceundertakestheirownsystemsprocurementwhichfallsunder‘otherequipment’withinthedefencebudgets.

ThespikeinbudgetedexpenditurefortheAirForcein2005isduetodoublinginexpenditureon‘aircraftandaero-engines’,andanincreaseinexpenditureon‘otherequipment’,whichrelatedtosystemsacquisitions,ofabout50percentfrom2004.The2005financialyearwasthe‘abnormal’yearwhereallspendingtargetsweremetwithinthedefenceforce.

Table5identifiessomeoftheareaswithinthedefenceservicethathavebeenreceivinglargeproportionsoftheservice’scapitalexpenditureallocationorhavebeengrowingatarategreaterthanthatofthecapitalexpenditurebudgetwhichhasaCAGRof13.8percent.

Table 5: Expenditure by Service division (in both % and USD terms)

Proportion of total capital expenditure (2003-2011) CAGR (2003-2011)

AirForce-aircraftandaero-engine 26.7% 13.8%

Army–systems 18.3% 7.4%

AirForce–systems 10.6% 21.5%

Navy–navalfleet 14.1% 13.8%

ResearchandDevelopment 6.4% 21.6%


Figure 11 : Expenditure by Service division (in both % and USD ($) terms)


0.45%

0.40%

0.35%

0.30%

0.25%

0.20%

0.15%

0.10%

0.05%

0.00%

200320042005200620072008200920102011

Expenditure by Division as % GDP

ArmyNavyAirforce

$14.0

$12.0

$10.0

$8.0

$6.0

$4.0

$2.0

$0.0

200320042005200620072008200920102011

USD

Bill

ions

Expenditure by Service Division


Underspending by Service Division

Excludingthe2005year,however,alldivisionsofthedefenceservicewereconsistentintheirunderspendingofbudgetedcapitalexpenditure.Theconsistentunderspendingbyallthreedivisionsmayindicatethatprocurementissuesregularlyarisewithinthewholedefenceserviceasopposedtowithinjustonedivision(Figure12).TheAirForcehasbeenthemostconsistentareaofunderspendrelativetobudget,althoughrecentindigenousproductiondelayshavealsoresultedinasignificantunderspendbytheArmyaswell.

Trends in indigenous versus imported acquisitionsIn2005,theIndianStandingCommitteeonDefencereviewedthedefenceforceprocurementpolicyandproce-dures.19ThisreportidentifiedthatalthoughIndiahadbeenindependentfor55years,cuttingedgemilitarytech-nologieshadnotbeenlocallydevelopedandtheprocurementofcapitalequipmentremainedreliantonimports.Productionofdefenceequipmentwasapurelygovernmentfunctionupuntil2001,whenthesectorwasopenedtoprivateindustry.

Figure 12: Unspent funds – Service Division Capital Budgets (in both % and USD terms)


19 ProcurementPolicyandProcedure.StandingCommitteeonDefence(2005-06)SixthReport.

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2003 2004 2005 2006 2007 2008 2009 2010

Army

Navy

Airforce

Unspent Funds as % of Budgeted Expentiture

-200

0

200

400

600

800

1,000

1,200

1,400

2003 2004 2005 2006 2007 2008 2009 2010

USD

Mill

ions

USD underspent by Service

Underspending relative to budget


Achievingself-relianceindefenceproductionhasbeenagoalofIndianpolicy-makerssincetheattainmentofindependencein1947.Atthattime,India’sproductivecapabilitieswerelimitedtosmall–runarms,ammunition,minesandexplosives,allofwhichwereundertakenby16ordnancefactories.Developingindigenousdefencecapabilitieswasseenasakeymeansofmaintainingforeignpolicyindependence.TheIndustrialPolicyResolutionof1948decreedthatthepublicsectorwouldbethemainsourceofproductioninarangeofareas,includingdefence.Policyrevisionsin1956explicitlyexcludedtheprivatesectorfromtakingpartinthemunitions,aircraftandshipbuildingindustries.

Inthefollowingdecades,anumberofnewpublicsectorordnancefactorieswerebuilt,sothatbythemid1980stherewere35factoriesmanufacturingtanks,armouredvehiclesandtrucksinadditiontothepreviousproducts.Currently,thereare40state-runordinancefactorieswhichfocusprimarilyonland-basedsystemsandoperateundertheguidanceoftheOrdnanceFactoriesBoard.

Inadditiontotheordnancefactories,thereareeightDefencePublicSectorUndertakings(DPSUs)controlleddirectlybytheMinistryofDefence.TheDPSUsproducecombataircraft,helicopters,warships,missiles,defenceelectronics,heavyearthmovingequipmentsandspecialistalloys.TheDPSUshavebeentherecipientsofsignificant

supportfromtheGovernmentintermsofresearchanddevelopmentassistance(particularlythroughtheworkoftheDefenceResearchandDevelopmentOrganisation),investmentsinproductivecapacity,taxbreaksandprioritisationfortenders.However,theperformanceoftheDRDOhasbeensubjecttoarangeofcriticism,andassuch,theproductionactivitiesoftheDPSUsinrelationtocomplexsystemshavetypicallybeenbywayoflicensedproductionbasedonforeign-developedtechnology.

Industrialpolicymeantthattheprivatesectorwaslimitedtoproducingelementaryandintermediateproducts,componentsandsparepartsuntil2001,whenthedefencesectorwasopenedtoprivatesector,withcompleteprivateownershipofdefenceproductionandupto26foreigndirectinvestmentpermissible.Thesepolicychangeswereintendedtoopenthewayfortheprivatesectortobecomemoreinvolvedintheproductionofadvancedweaponssystemsandequipment.

InadditiontomajorindustrialcompaniessuchasTataAdvancedSystemsandMahindra,therearealsoalargenumberofsmallandmedium-sizedbusinessesthatassisttheDPSUsandprivatecompanieswiththeprovisionofcomponents.

Box 1: Overview of India’s indigenous defence production

Source:(2010)‘ChapterTen:ReformingIndia’sDefenceIndustries’inTheMilitaryBalance,February,pp.473-478

TheprivatedefenceindustryinIndiaisstillrelativelyyoungwiththeMinistryofDefence,notingthattheprivatedefencesectorisstill‘embryonic’andthatitwilltaketimeto‘comeofage’.Further,theprivatedefenceindustrywillhaveanumberofbarrierstoovercomebeforeitreachesmaturity,including:• Prohibitiveindustryentrycosts• Barrierstotheexportofdefenceintellectualproperty

fromforeigncountries• Integrationdifficultieswhencombiningcomplex

weaponsystems.• UnderstandingoftheDefenceDomainrequirements

Thesebarrierstothegrowthofthedefenceindustryarepredominantlyforthesectorsthatproduceequipmentthatmaybeconsideredtofallunderthetitleof‘complexweaponsystems’.Althoughrelativelysimplesystemssuchasminesandriflesaccountforthebulkoffatalitiesincurrentconflicts,complexweaponsystemsaccountforamajorityofadefenceforce’scapitalexpenditure.Complexweaponsystemsrangefrom

fighters,frigatesandtankstotheelectronicsystemsthatsupportthemandevenmanyofthemunitionscarriedbythesevehicles.20

Complexweaponssystemsaredifferentiatedfromotherdefenceweaponsystemsbythetechnicaldifficultiesthatoccurattheconception,developmentandproduc-tionstages,inadditiontouncertainoutcomeswhichincreasetherisktothebuyerandsellerofacomplexweaponsystem.Addingtothecomplexityofcreatingthesesystems,complexweaponsystemsoftenrequiretheintegrationofmanysystems,eachofwhichmaybeproducedbyadifferentsupplier.21

Undertheseconstraints,entryintomanypartsofthedefenceindustryrequiressignificantinvestmentintoR&Dbefore,duringandafteracomplexweaponsystemhasenteredproduction.AndinadditiontolongtermcommitmentstoR&D,organisationswishingtoenterintothedefenceindustryfacesignificantinfrastructureandproductionfacilitycosts.

20 Singer,P.W.(2003)CorporateWarriors:TheRiseofthePrivatizedMilitaryIndustry,CornellUniversityPress,IthacaandLondon.

21 ProcurementPolicyandProcedure.StandingCommitteeonDefence(2005-06)SixthReport.

22 ibid


Theissuessurroundingcomplexweaponssystemsarecompoundedbythefactthattheeffectivenessofaweaponsystemisrelativetootherlikeoradversarialsystems.Forthisreason,governmentswhichfundtheinventionanddevelopmentofthesesystemshaveaninterestinrestrainingthetransferofcuttingedgeweaponsystemstoothercountriesandthereforecreateexportbarriersordenialregimesforsomesystems.

OneexampleofanexportingbarrieristheUSA’sInternationalTrafficinArmsRegulations(ITARS).ITARSisasetofregulationsthatcontrolsdefence-relatedequipmentandserviceswhichareontheUnitedStatesMunitionsList.Inpractice,ITARSregulationsdictate

thattechnologyandinformationusedbyorforthemilitarycannotbesharedwithanynon-USindividualunlessproperauthorisationhasbeenprovided.TheUSAthereforerestrictsknowledgethatisusedintheproduc-tionoftheircomplexweaponssystems.Mostcountriesimplementsimilardenialregimestoprotecttheirtech-nologicalcompetitiveadvantageinweaponsystems.22Indiawillnecessarilyneedtodevelopthecapabilityoftheirdefenceindustrypriortomakingseriousadvancesinproportionofcapitalequipmentthatismanufacturedlocally.

Upuntil2005,Indiastillprocuredmostofitsdefenceforceequipmentfrominternationalsuppliers(Table6).

EveninrecenttimesIndiahasstruggledtoliftindigenousproductionabove50percentofthetotalcostoftheacquisition.Ithashadthegreatestsuccessinnavalandlandacquisitions,wherelargeplatformbuildshaverequiredlessadvancedtechnologicalknow-howandIndia’smaturemanufacturingandengineeringsectorisabletostronglycompete.

WhiletheprivatedefenceindustrymaybegrowinginIndia,thehighbarrierstoentrywillprobablymeanthattheIndianDefenceforcewillstillneedtoprocuremuchofitsdesiredequipmentfromoutsideofthecountries.Thisislikelytobeparticularlytrueforitemsthatrequirehighlevelsoftechnologicalsophistication.Forexample,navalproductioniscurrentlyfocusedonheavyengineeringratherthatthecomplexelectronicsystemsdesignandintegration.

Table 6: Imported vs indigenous production

Year Navy Army Air Force Total

Imports Indig. Imports Indig. Imports Indig. Imports Indig.

2000-01 36% 64% 46% 54% 81% 19% 54% 46%

2001-02 49% 51% 34% 66% 74% 26% 52% 48%

2002-03 50% 50% 65% 35% 70% 30% 62% 8%

2003-04 58% 42% 52% 48% 76% 24% 62% 38%

2004-05 58% 42% 42% 58% 62% 38% 54% 46%

2006-07 5% 95% 22% 78% 11% 89% 5% 95%

2007-08 23% 77% 42% 58% 42% 58% 23% 77%

2008-09 46% 54% 34% 66% 27% 73% 46% 54%

Average 41% 59% 42% 58% 55% 45% 45% 52%

Source:ProcurementPolicyandProcedure.StandingCommitteeonDefence(2005-06)SixthReportandStandingCommitteeonDefence(2009-10)SixthReport.


4.2 Defence requirements

4.2.1 Future defence spendingTable7presentsIndianGovernmentforecastsforfuturedefenceserviceexpenditure.

TheaboveTableshowsthattheDefenceService’scapitalexpenditurebudgetisexpectedtogrowinnominalterms,withcapitalexpenditureachievinga10percentCAGR.Thisrepresentsamarginalslowdowninbudgetedexpenditurefromthepastdecade(CAGRofbudgetedexpenditureof13.8percentfrom2003-2010).However,consideringthedegreeofunderspendandinturnthelevelofactivitythatisyettooccurforwhichbudgetshavealreadybeenallocated,thismaybeamorerealisticgrowthrateoftheIndiandefencebudget.

Moreover,itisimportanttoconsidertherealgrowthrateofexpenditurewhenevaluatingforwardprojec-tions.WhenaccountingforIndia’sinflationrateinthenearfuture,whichisexpectedtopeakthisyeararound9.0percentin2010,beforefallingto7.3percentin2011andsubsequentlystabilisinginthelongrunataround4.7percentby2015,therealgrowthinDefenceServicecapitalexpendituregrowthwillbemarginaloverthenexttwoyearsbeforeincreasingtoabout5.3percentfrom2012to2015.Thismaymeanthatcompetitionfornewopportunitiesishigherthanthenominalfiguressuggest. The future balance of indigenous vs imported procurement: defence policy objectivesIndiahasestablishedanotionaltargetfor70percentofnewacquisitionsinthefuturetobesourcedfromindig-enousproduction;theNavyhasaslightlyhighertargetof85percentbutthisislikelytobeoffsetbylowerlevelsofindigenisationinotherdomains.Thiswouldrepresentaneffectivereversalofhistorictrends.

InveryrecenttimesIndiahasstruggledtolifttheindigenousshareofitsbudgetedacquisitions;in2010,capitaldefenceprocurementthatoriginatesinIndiafelltoabout30percent.23IftheIndianDefenceServicewishedfortheirindigenousindustrytosupply70per

Table 7: Forecast expenditure on defence services

Year 2011 2012 2013 2014 2015

CapitalExpenditure(USDmillion) 13110 14421 15863 17450 19195

Army(53%) 6948 7643 8407 9249 10173

Navy(16%) 2098 2307 2538 2792 3071

AirForce(34%) 4064 4471 4918 5410 5950

Source:IndianThirteenthFinanceCommissionReport,Dec2009;UnionBudget(s)&EconomicSurvey2003-2011;andDeloitteAnalysisofallocationsbyServiceDivision.


centofthearmedforcescapitalgoodsby2015,thenthelocalindustrywouldneedtomorethandoubleinsizeinfiveyears.Thisishighlyunlikelytooccur,duetothecombinationoftheaspirationalgrowthratesfortotalspendandtheproportionofdefenceequipmentthatismanufacturedwithinIndiatoday.Table8highlightsthegrowthraterequiredfortheindigenousdefenceindustrytoprovide70percentofthecapitalgoodstothedefenceserviceby2015.Asshowninthetable,indigenousproductionwouldneedtoexpandbyanaverageof30percentayearoverthenextfiveyears.

ItwouldbeverydifficultfortheIndianindigenousdefenceindustrytoachievethegrowthrateabovewithoutsignifi-cantgovernmentintervention.

4.2.2 Fiscal capacity considerationsIndianGDPhasachievedaveryhighgrowthrateinthepasttenyears.ThiscontrastswithIndia’sdevelopednationcounterparts,whichareexpectedtoachievemuchslowerGDPandrevenuereceiptsgrowth,combinedwithharderspendingchoicesdrivenpredominantlybyageingpopulations.

Asaconsequence,althoughtheIndianGovernmenthasbudgetedsubstantialincreaseinnominalcapitalexpenditure(andmoremodestgrowthinrealtermsto2015),overallexpenditureisexpectedtoremainamodestproportionofGDP(andsteadycomponentofgovernmentbudgets).DefenceExpenditure,includingrevenueexpenditureandcapitalexpenditurewithinthis,isforecasttodeclineasaproportionofGDPoverthenextfiveyearsto2015(Table9).24

Ingeneral,thestrongeconomicgrowthprojectedbyIndiawouldbeexpectedtobuildconfidenceinIndia’scapacitytocommittoitsbudgetedoutlaysfordefence.However,withthemajorityofDefenceExpenditurecategorisedasNon-Planexpenditure,thereisapotentialriskthatexpectedgrowthinPlanExpenditurecouldputpressureonproposedacquisitions.Thispressurecouldbeexacerbatedintheeventofa‘doubledip’recession,whichcouldbemoreprotractedgiventhecurrentdebtpositionsofgovernmentsfollowingtheGlobalFinancialCrisis(GFC).

Inaddition,India’spublicdebtasaproportionofGDPiscurrentlyhighbyworldstandards(Figure13).Indiaranks31stintermsoftheproportionofdebttoGDP,andexceedstheworldaverageof53percent.Critically,italsooutpacesitsemergingmarketpeers:Brazil’spublicdebtasapercentageofGDPis47%,China’spublicdebtasapercentageofGDPis18%andRussia’sisonly7%.Totheextentthata‘doubledip’recessionweretooccur,India’s

Table 8 : Forecast Growth of Imported vs indigenous production, if targets are met

Year 2011 2012 2013 2014 2015

CapitalExpenditure(USDmillion) 13,110 14,421 15,863 17,450 19,195

Indigenousgrowthrate 39.33% 33.16% 29.13% 26.30% 24.19%

Importedgrowthrate -2.57% -4.19% -6.30% -9.13% -13.16%

Source:IndianThirteenthFinanceCommissionReport,Dec2009;Deloitteanalysis–nominalprojections.

Table 9: Forecast Expenditure on Defence Services

Year 2011 2012 2013 2014 2015

ForecastGDPNominalGrowthRate 12.50% 13.00% 13.50% 13.50% 13.50%

ForecastGDPNominal(INRbillion) 76,898 86,895 98,625 111,940 127,052

ForecastGDPNominal(USDbillion) 1660.5 1876.5 2130.3 2417.4 2744.1

TotalDefExpenditureas%ofGDP 2.12% 2.03% 1.94% 1.85% 1.76%

DefRevExpenditureas%ofGDP 1.20% 1.14% 1.07% 1.01% 0.95%

DefCapExpenditureas%ofGDP 0.92% 0.89% 0.87% 0.84% 0.81%

Source:EconomicsIntelligenceUnit,CountryMonitor—India.IndianThirteenthFinanceCommissionReport,Dec2009.

23 MilitaryBalance(2010),‘ChapterTen:ReformingIndia’sdefenceindustries’,110(1),pp437-478

24 IndianThirteenthFinanceCommissionReport,Dec2009.


debtpositionwouldbeexpectedtopotentiallyweakenitsabilitytocommittoitsproposedacquisitionplans.

Offsettingitshighdebtposition,however,isthemorebalancednatureofitsgrowth.IncontrasttoChina,whichreliesheavilyonexportsforitseconomicgrowth,Indiaenjoysastrongdomesticdemandcomponent.AsaresultIndiaweatheredtheGFCwell,postingthesecondhighestrealgrowthrateglobally.In2009-10,itsdeficitwasreportedtobe6.8%ofGDP.

ThissuggeststhatalthoughIndia’sfiscalpositionisnot‘bulletproof’thereareoveralllowriskstoitscapacitytocommittofuturespending.

EvenintheeventthatPlanExpendituregrowsinthenearfuture,itisgenerallyconsideredthat,giventhesecurityenvironmentinandaroundIndiawithboarderdisputeswithPakistanandChina,thegovernmentwouldcontinuetoexpandDefenceServicecapitalexpenditureinlinewiththeirdesiretomodernisethedefenceforce.Itislikelythatpressurewouldfirstbefocusedonreigninginthedefenceforce’srevenueexpendituregrowth.25

Figure 13: Public Debt to GDP – Key country comparisons (2009 estimates)

Source:CIAWorldFactbook,2009estimates,accessedonlineat:https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html?countryName=India&countryCode=in&regionCode=sas&rank=31#in

Japa

n

200%

180%

160%

140%

120%

100%

80%

60%

40%

20%

0%

Deb

t%o

fGD

P

Sing

apor

e

Italy

Gre

ece

Icel

and

Isra

el

Fran

ce

Ger

man

y

Can

ada

Uni

ted

King

dom

Irela

nd

Nor

way

Indi

a

Wor

ld

Spai

n

Braz

il

Thai

land

Swed

en

Uni

ted

Stat

es

Sout

hA

fric

a36

7%

18%

47%53%

60%

New

Zea

land

Saud

iAra

bia

Aus

tral

ia

Chi

na

Russ

ia


Table 10 : Indian defence acquisition plans in the Navy domain

Category Indicative Items (Quantity) Timing USD Source

Submarines

DieselSubmarines(6)Tendersreleased2010-20112010-2015

USD3.42beach(USD20.7billion)

4,25,26

ATVs(nuclearsubs)(3-5) From2010-2015>USD1.8b(USD5.4b-USD9billion+)

9,25,26

Warships

IndigenousAircraftCarriers(2) 2010-2017 USD450million 17,21,23,25,26

ASWCorvettes(8) 2010-2020 >USD1.8billion 10,11,18,19,26

Off-shorePatrolVessels(4) Over15years 22,26

SailTrainingShip(1) Over15years 25,26

Surveyvessels(6) Over15years 25,26,27

Destroyers(4) Over15years USD3.33billion 25,26,28,29

Frigates(7) Over15years USD8billion 24,25,26

Mid-LifeUpgradesoftheKirchClassCorvettes(5) 2010-2022 25

LandingPlatformDock(2) 25

Mid-LifeUpgradesoftheBrahmaputraFrigates(3) 2010-2022 25

Navalised aircraft

FightersforIAC2 2015+ 12,25,26,30

MiG-29K(29) 2010-2015 USD2.25billion 12,20,25,26,30

AlternativesforsixNavalTejas 2010-2015 USD1.17billion 12,13,30,31

LongRangeMaritimePatrolAircraft-BoeingP8-I(20) 2010-2022 USD2.07billion 1,2.25,26,30

LongRangeMaritimePatrolAircraft–IL-38(5)2007(projecthasbeendelayed)

14,15,25,26,30

Medium-rangeMaritimeReconnaissanceAircraft(6) 2010-2022 USD1billion 16,25,26,30

Short-rangeMaritimeReconnaissanceAircraft(11) 2010-2022 25,26,30

Helicopters

AdvancedLightHelicopters(47) 2010-2022 25,26,30

MaritimeHelicopters(16) 2010-2022 US$1billion 5,25,26

Trainingaircraft–17AdvancedJetTrainers(17) 25,26

Equipment

Weapons–Missiles 2010-2022 6

Weapons–other 2010-2022 6

Marineengineeringequipment 2010-2022 6

Marineengineeringequipment–propulsionsystems 2010-2022 6

SSK/EKMSubmarineEquipment 2010-2022 6

4.2.3 Future acquisition plans4.2.3.1 Navy AcquisitionsTheIndianGovernmenthaspubliclyrecognisedthatIndia’sexpandingmaritimeresponsibilitiesandinterestsnecessitateenhancementinnavalandcoastguardforcelevels.By2022,theIndianNavyhasplanstohavea160-plusshipNavy,includingthreeaircraftcarriers,60majorcombatants(includingsubmarines),andcloseto400aircraftofdifferenttypes.TheIndianCoastGuardisallsettodoubleitsforcelevelsandmanpowerinthenextfewyearsandtripleitinthenextdecadeinorder

toprotectthecountry’smaritimezonesandassets.WhilethesmallestofthethreeIndianDefenceForceServices,theIndianNavyisalreadyarapidlyexpandingmaritimeforcewith36shipsandsixScorpènesubma-rinescurrentlyonorder.TwoaircraftcarriersarealsocurrentlyinvariedstagesofconstructionalongsideeightBoeingP8-IMaritimeMulti-MissionAircraftand16Mig-29KswhichareunderproductioninRussia.

Inadditiontotheconstructionalreadyunderway,theNavyhasfurtherplanstoacquire:

25 ArvindKadyan,India’sDefenceBudget(2010-2011):Wakeupcallfordefencemanagers.InstituteforDefenceStudies&Analysis.


Table 11: Indian defence acquisition plans in the land domain


Tanks and Vehicles

Mainbattletanks(1500) 2010-2015 1,2,8

InfantryfightingvehiclesDRDOproductionplansarefor2020-2025

1,2,12

LightstrikevehiclesandBulletproofvehiclesOngoing,withDRDOproductionplannedfor2020-2025

1,2,10

Mineprotectedvehicles(600) Ongoing 1,7,9,10,11

Unarmed/unmannedaerialvehicles(200) DRDOtrialsareongoing 1,3,13

Unmannedcombatairvehicles DRDOtrialsareongoing 1,4,13

Artillery

FieldArtilleryRationalisationPlan Upto2020USD4.77billiontoUSD6.57billion

5

155mmself-propelledguns(400) Upto2020 1,2

155mmmediumguns 2010-2020 5

AirMobileUltralighthowitzers(ULH)(140) 2007-ongoing USD1.35billion 1,2,5

Towedandwheeledguns 2007-2012 5

Self-propelledtrackedguns-155mm/52calibreguns

2007-2012CostofUSD792million

2,5

Self-propelledwheeled155mm/52calibregunswitharmourprotection(mountedonasix-wheeledvehicle)

2007-2012 USD0.99billion 2,5

Towed155mmGun-howitzers(400) USD0.9billion 3,5

Mountedgunsystem(200) 2010 USD1.89billion 5

155mmprecisionguidedmunitions(50,000) 1,2

155mmammunition–alltypes(150,000rounds) 1,2

Missiles

Trackedmediumrangesurfacetoairmissilesystems(100)

1,2

Replacementofairdefencesystems 1,4

ZU-23-2anti-aircraftupgrade(468) 2010 USD522million 2

40mmAnti-aircraftGun(115) 2010 USD270million 2

Hand-heldanti-tankguidedmissiles(5000) USD393.3million 1

ICV-mountedanti-tankguidedmissiles(1000) 2009-2012 1

Other Bulletproofjackets(59,000) Ongoing 1,15,16

4.2.3.2 Land AcquisitionsIndianArmyacquisitionplansincludeupgradesandpurchasesofartillery,tanksandvehicles,missilesandotheritemssuchasinfantryupgrades.Theintentionistocreateeightdivisional-sizedarmouredbattlegroups,comprisingartillery,armourandmotorisedinfantry,withstateoftheartcommunicationsequipmentandcoordi-natedairsupport.

ManyacquisitionsoutlinedappeartobepartoftheUSD8billionartillerymodernisationprogram,theFARP,originallyformulatedin1999.Theprogramaimstoinductaround2,184gunsover20years,ataminimumrateof100unitsperannum.Inits11thDefencePlan,spanning2007-2012,theIndianArmyhasdesignedaround600modernisationschemes,amountingtoaroundUSD1.44billion.

TheIndianarmyhasfurtherplansforacquisition.


Table 12: Indian defence acquisition plans in the aerospace domain


Fighter Aircraft

MiG-29Upgrade(63) 2013 USD0.99billion 1,2,3,4

Mirage2000Upgrade(51) USD2.187billion 5,6

Su-30MKI80(40+40) 2008onwards USD1.593billion 7,8

Su-30MKI(140) 2015OriginalagreementUSD8.46billion

7,9,10

MediumMultiRoleCombatAircraft(MMRCA)(126withanoptionfor64-74more)

USD9.09billion 11,12

LCA(Tejas)(120) 2013-2014USD434.7million+USD1.71billion

13,14

FifthGenerationFighterAircraft(FGFA)(number) 2017EstimatesofuptoUSD9.9billion

15,16,24

Helicopters

MediumliftHelicopters(80) 2013 USD1.17billion 17

CombatandHeavyLifthelicopters(22+15) USD1.98billion 17,33

VVIPhelicopters(12) 2013 USD810million 17,25

Dhruvhelicopters(245) Deliveriesongoing 7,17

CheetalHelicopters(10) DeliveriesOngoing 17

ObservationHelicopter(187) 2017 17,34

Transport and Other Aircraft

Multi-RoleTankerTransport(6) 18,22,23

AN-32Upgrade(105)Upgradeunderway,tobecompletedby2013

USD397.8million 32

C130JHerculesaircraft(6) 2012 USD869.4million 7,19

StrategicTransports/AdvancedAirlifters Notspecified USD2.52billion 20

HawkMk132AdvancedJetTrainer(66) Finaldeliverydue2011 USD1.9billion 7

Basictraineraircraft(181) USD5.8billion 21

EmbraerJets(3) 2011 USD232million 7

Missile SystemsShortRangeSurfacetoAirMissileSystem(SRSAM) 2011 26,29

MediumRangeSurfacetoAirMissileSystems(MRSAM) Inductionduein2012 USD2.44billion 26,27

UAVs IsraeliHarop‘killer’UAVs(10) 2011 USD110million 30,31

Other Airfieldsforinfrastructureupgrade(30) 28

4.2.3.3 Aerospace acquisitionsAerospacecontinuestobeasectorwhereIndiastrugglestoindigenizeproduction.Howeverduetourgentrequire-mentofnewtechnology,highdemandfromtheIndianAirforceandlimitedindigeneouscapacity.theAirforcehasplannedformajoracquisitions.


Table 13 : Indian defence acquisition plans in the electronics domain


Land

Short/mediumrangebattlefieldsurveillanceradars 2010-2020 USD0.99billion 1,8,20,21

Weaponlocatingradars(40-50) Ongoing USD198million 1,2,22,23

Hand-heldthermalimagingdevices(upto5,000) 2010-2020 USD144million 1,9,24

Integratedobservationequipment(1,200) 2010-2020 USD0.99billion 1,10

Standaloneinfrared,seismicandacousticsensors 2010 1,3,27

InfantryupgradesundertheFutureInfantrySoldierasaSystem(F-INSAS)project

2010-2020 USD0.99billion 3,25,26

Networkedcommunicationsandmodernstrategicandtacticallevelcommandandcontrolsystems

2010 3,16,29

Technologyrelatedtogalliumnitridesemi-conductors 4,12

Nanotechnologiesrelatedtostructures,sensors,propulsionsandcommunication

4

DetectionDevices,NBCsystems,remotelyoperatedrobotsandmicro-UAVsbasedonDRDOtechnologies

4

Navy

Variousgeneralelectronicsincludingrectifiers(70)androtaryconverters(35).

2008-2022 5

Radars(130) 2008-2022 5,29

Sonar 2010-2014 33,35

Gyros(100) 2008-2022 5

Logs(100) 2008-2022 5

Echosounders(40) 2008-2022 5,28

Integrationofvarioussurveillance/weapondeliverysystems(25). 2008-2022 5

Aerospace

UpgradeofCheetah/Cheetakhelicopters 13,30

UpgradeMIG-27s 13,14,31

UpgradeofavionicsinSukhois 2010-2015 13,15

Surface-to-airGuidedWeaponSystem(SAGW) 2010-2020 17

MediumRangeSurfacetoAirMissileSystems(MRSAM) 2010-2020 USD2.16billion 17

ShortRangeSurfacetoAirMissileSystem(SRSAM) 2010-2020 18

AirDefenceGroundEnvironmentSystem(ADGES)modernisation Ongoing USD1.6billion 32

4.2.3.4 Electronics AcquisitionsElectronicsacquisitionsaresubsumedundereachservicedivision(Army,NavyandAirForce)inIndia’sforwardbudgetplans.Keyacquisitionplansaregivenbelow.


Table 10 sources 1. Rai,R.B.,Luthra,G.R.(2009),‘IndianNavy:PowerPackedforaStrongNation’,

IndianStrategic,accessedonline:www.indianstrategic.in/topstories454.htm,lastaccessed22March2010

2. Boeing(2010),‘BoeingDefence,SpaceandSecurity’,accessedonline:www.boeing.co.in/ViewContent.do?id=3264,lastaccessed22March2010

3. Garg,B.(2008),‘ArticleIndiannavalAviation:ModernisationandOpportunities’,IndiaStrategic

4. NTI(2010),‘India’scurrentcapabilities’,accessedonline:www.nti.org/db/submarines/india/index.html

5. Roa,R.(2008),‘SPNavalForces‘,3(5)pg116. DirectorateofIndigenisation(2008)’15YearIndigenisationPlan’,accessed

online:http://indianNavy.nic.in/New15year_Indigenisation_Plan_of_the_Indian_Navy.pdf,lastaccessed22.March.2010

7. IndianNavyToday,‘TupolevTU-142Bear-F’,accessedonline:http://www.bharat-rakshak.com/NAVY/Tu-142.html,lastaccessed24March2010

8. IndiaDefence,2007,INSVikramaditya:AircraftCarrierAcquisitionfromRussiaDelayed,CostOverrunsExpected,accessedonline:http://www.india-defence.com/reports/3084

9. TechSpace,2009,“INSARIHANT”INDIA’sFirstNuclearSubmarine,accessedonline:http://techspaceofatul.wordpress.com/2009/08/03/ins-arihant-indias-first-nuclear-submarine/

10. OutlookIndia(2007),‘Fortynewshipstobecommissionedincomingyears:Mehta’,accessedonline,http://www.bharat-rakshak.com/NEWS/newsrf.php?newsid=8611,lastaccessed25March2010

11. TheIndianNews(2009)’40warships,newjetsonIndianNavy’s‘Buy’list’,accessedonline:http://www.thaindian.com/newsportal/uncategorized/40-warships-new-jets-on-indian-navys-buy-list_100283320.html,lastaccessed25March2010

12. TheTimesofIndia(2009),‘Hungonforfightersforaircraftcarriers’,accessedonline:http://timesofindia.indiatimes.com/india/Hunt-on-for-fighters-for-aircraft-carriers/articleshow/5265661.cms,lastaccessed25March2010

13. IndiaDefence(2009),‘IndianNavyorderssixNavalTejasLCAFighters;InfusesRs900CroreinProgramme’,accessedonline:http://www.india-defence.com/reports-4480,lastaccessed25March2010

14. Rao,R.(2008),‘DefencetieswithRussia–whyIndiaprefersIsrael’accessedonline:http://www.sarkaritel.com/news_and_features/infa/february08/29def_tie_russia.htm,lastaccessed6April2010

15. Zhukov,A(2006),‘ExternalDriversforOPKSuccess:ArmstransferstoIndia’,accessedonline:http://epress.anu.edu.au/apps/bookworm/view/Phoenix+from+the+Ashes%3F/97/ch05.xhtml,lastaccessed6April2010

16. IndiaStrategic(2010),‘CoastGuardpreparesforthebiggerbattle’,accessedonline:http://www.indiastrategic.in/topstories486.htm,lastaccessed6April2010

17. Unnithan,S.(2009),‘Firstindigenousaircraftcarriertobelaunchednextyear:Navychief’,IndiaToday,December,accessedonline:http://indiatoday.intoday.in/site/Story/73256/Top%20Stories/First+indigenous+aircraft+carrier+to+be+launched+next+year:+Navy+chief.html

18. BharatRakshak(2007),Project28,accessedonlineat:http://www.bharat-rakshak.com/NAVY/Project28.html

19. GlobalSecurity(2010),Project28ASWCorvette,accessedonlineat:http://www.globalsecurity.org/military/world/india/p-28.htm

20. Pandit,R.(2010),‘India,Russiatoink$1.2bndealfor29moreMiG-29Ks’,TheTimesofIndia,Jan18,accessedonlineat:http://timesofindia.indiatimes.com/india/India-Russia-to-ink-12-bn-deal-for-29-more-MiG-29Ks/article-show/5460879.cms

21. Anandan,S.(2008),‘Keel-layingofindigenousaircraftcarrierinDecember’,TheHindu,September29,accessedonline:http://www.hindu.com/2008/09/29/stories/2008092955681400.htm

22. BharatRakshak(2009),SaryuClass,accessedonline:http://www.bharat-rakshak.com/NAVY/Saryu.html

23. BharatRakshak(2009),VikrantClass,accessedonline:http://www.bharat-rakshak.com/NAVY/Vikrant.html

24. BharatRakshak(2009),Project17ShivalikClassfrigate,accessedonline:http://www.bharat-rakshak.com/NAVY/Project17A.html

25. Manas(2010),ManasDefenceYearbook2010-1126. SPSNavalForces(2009),IndianNavyhand-outforNavyDay2008,accessed

onlineathttp://www.spsnavalforces.net/pdf/Media_handout_2009.pdf27. ProjectMonitor(2010),AlcockAshdownbuildssurveycatamaransfor

IndianNavy,accessedonlineathttp://www.projectsmonitor.com/PORT/alcock-ashdown-builds-survey-catamarans-for-indian-navy

28. IndianMilitary(2010),Type15/Project15DelhiClassGuidedMissileDestroyer,accessedonlineat:http://indian.military.org/navy/ships/destroyers/262-type-15project-15-delhi-class-guided-missile-destroyer.html

29. IndianMilitary(2010),Type15A/Project15AKolkattaClassGuidedMissileDestroyer,accessedonlineat:http://indian.military.org/navy/ships/destroyers/143-type-15aproject-15a-kolkatta-class-guided-missile-destroyer.html

30. DefenceIndustryDaily(2009),India’sNavyPicksitsfutureMaritimePatrolAircraft,accessedonlineathttp://www.defenseindustrydaily.com/indias-navy-holding-maritime-patrol-aircraft-competition-updated-01991/

31. IndiaDefence(2009),IndianNavyOrdersSixNavalTejasLCAFighters;InfusesRs.900croreinprogramme,accessedonlineathttp://www.india-defence.com/reports-4480

Table 11 sources1. Kanwal,G.B.(2010),‘IndianArmymodernisationneedsamajorpush’,Indian

strategicdefencemagazine,5(2),accessedonline:www.indiastrategic.in/topstories482.htm,lastaccessed22March2010

2. ReligareStrategicAdvisoryServices(2010)‘ACommentaryontheIndianArmy—artilleryupgrades’,accessedonline:http://www.scribd.com/doc/26500931/Commentary-Artillery-Projects-Jan-2010-Guns-Howitzers-ULH-INDIA-DPP-Procurement-MOD-Defence-Ministry-Religare-Strategic-Advisory-prog,lastaccessed22March2010

3. Kanwal,G.B.(2010),‘MinedinRedTape’,SP’sLandForcesDefenceMagazine,7(1),pp1—6&13-14,accessedonline:http://www.spslandforces.net/ebook.asp?id=100212145153-66d09a480f7d45a690df68981bccd702&Name=sps-land-forces-feb-mar-2010&Info=SP’s%20Land%20Forces%20Fab-Mar%202010&t=1266237474406&r=6,lastaccessed22March2010

4. Katoch,P.C.(2010),‘RestructureCapabilities’,SP’sLandForcesDefenceMagazine,7(1),pp32—33,37,accessedonline:http://www.spslandforces.net/ebook.asp?id=100212145153-66d09a480f7d45a690df68981bccd702&Name=sps-land-forces-feb-mar-2010&Info=SP’s%20Land%20Forces%20Fab-Mar%202010&t=1266237474406&r=6,lastaccessed22March2010

5 .Anand,B.V(2010),‘Modernizingartilleryretrospectandprospect’,IndianStrategicDefenceMagazine,5(2),accessedonline:http://www.indiastrategic.in/topstories483.htm,lastaccessed22March2010

6. Kanwal,B.G(2010),‘ModernisationofIndianArmy,Part2’,VayuDailyDefenceMagazine,accessedonline:http://www.vayuaerospace.in,22March2010

7. Misquitta,S.(2009),‘DefencecontractorstargetbigjumpinIndia’smilitaryspending’,TheWallStreetJournal,July17

8. StandingCommitteeonDefence(2007),MinistryofDefence–DefenceResearchandDevelopmentOrganisation(DRDO):FourteenthReport,March

9. DefenceLandSystemsIndia(2010),DefenceLandSystemsIndia-AMahindra&BAESystemsCompany-UnveilsMineProtectedVehicle[MPV-I]forIndianArmedForces,pressrelease,15February2010,accessedonline:http://www.mahindra.com/Admin/tmpupload/Defense%20Land%20Systems%20India%20Unveils%20Mine%20Protected%20Vehicle.pdf,lastaccessed31March2010

10. (2010),‘ThreeIndianTeamsUnveilMineProtectedVehicles,AnticipatingaGrowingLocalMarketforArmouredVehicles’,DefenceUpdate–onlinedefencemagazine,accessedonline:http://defense-update.com/features/2010/february/mpv_india_defexpo2010_170210.html#more,lastaccessed1April2010

11. Unnithan,S.(2010),‘ComabatUnready’,IndiaToday,21January,accessedonline:http://indiatoday.intoday.in/site/Story/80318/Combat+unready.html?complete=1,lastaccessed1April2010

12. (2010),‘BMP-2’,Wikipedia,accessedonline:http://en.wikipedia.org/wiki/BMP-2,lastaccessed1April2010


13. ReligareStrategicAdvisoryServices(2010)‘ACommentaryonUnmannedSystems–unmannedcapability’,March,NewDelhi

14. (2010),‘WhyTheIndianInfantryAreIrritated’,StrategyPage,18February2010,accessedonline:http://www.strategypage.com/htmw/htinf/20100218.aspx,lastaccessed1April2010

15. MinistryofHomeAffairs(2009),ProcurementofBulletProofJacketsforPMFs–PressRelease,December82009,accessedonline:http://pib.nic.in/release/release.asp?relid=55432&kwd=,lastaccessed6April2010

16. Sood,M(2010),‘MHAasksforfreshbidafterscaminbulletproofprocure-mentexposed’,8AK–IndianDefenceNews,15January2010,accessedonline:http://www.8ak.in/8ak_india_defence_news/2010/01/mha-asks-for-fresh-bid-after-scam-in-bullet-proof-procurement-exposed.html,lastaccessed6April2010

Table 12: Sources1. IndianGovernmentPressRelease,July152009.http://pib.nic.in/release/

release.asp?relid=50414&kwd=2. IndianGovernmentPressRelease,10March2010.http://pib.nic.in/release/

release.asp?relid=59336&kwd=3. ‘RebuildandRejuvenate’,ContributedbyAirMarshal(Retd)V.K.Bhatia,SP’s

AviationDefenceMagazine,Issue2,2010,page13.4. ‘IndianAirForceMiG29FightersUpgradationtobeCompletedby2013’

IndianDefence,http://www.india-defence.com/reports/44785. IndianGovernmentPressRelease,7March2007.http://pib.nic.in/release/

release.asp?relid=25537&kwd=6. ’India,FrancetosignMirageupgradedeal’IndianExpress,http://www.indian-

express.com/news/india-france-to-sign-mirage-upgrade-deal/585684/7. TheInternationalInstituteforStrategicStudies(2010)TheMilitaryBalance,

Basingstoke,England:TaylorandFrancis,page375.8. ‘VladimirPutintovisitIndiatosigndefencedeals’10March

2010,DailyNewsandAnalysis,http://www.dnaindia.com/world/report_vladimir-putin-to-visit-india-to-sign-defence-deals_1357661

9. HAL2008-09AnnualReport,page11.10. ‘HALtosupplycomponentsforSukhoifighterstoRussia’DailyNews

andAnalysis,August202009.http://www.dnaindia.com/money/report_hal-to-supply-components-for-sukhoi-fighters-to-russia_1283882

11. ‘MMRCAtobepoliticaldecision:Eurofighter’Strapost,16March2010.12. ‘IndiaConsidersMMRCARadarCompetition’Jane’sDefenceWeekly,10March

2010.13. ‘Onfor27yrs,LCAprojectgetsRs8,000croremore’,TheTimesofIndia,Feb

32010.http://timesofindia.indiatimes.com/india/On-for-27-yrs-LCA-project-gets-Rs-8000-crore-more/articleshow/5529518.cms.

14 ‘IndiaCanManufactureOnly8LightAircraftaYear’,ThaindianNews,December2008(TheTribune),http://www.thaindian.com/newsportal/uncategorized/india-can-manufacture-only-8-light-combat-aircraft-a-year_100286169.html

15. Pyadushkin,M.andMathews,N.(2009)’RussiaandIndiaDiscussDecadeofDefenseTies’’,AerospaceDailyandDefenseReport,16October2009.

16. Luthra,G.andAirMarshalAshokGoel(retd)‘IAF:Apeepintothefuture’December2008(TheTribune)http://www.indiastrategic.in/topstories218.htm

17. ‘ExploringNewHorizons’ByAirmarshal(Retd)V.K.Bhatia,SP’sAviationmagazine,February2010edition,page16http://spsaviation.net/ebook.asp?id=100208055126-53475cae39534498830c1c5c375c41a8&name=sp_s_aviation_february_2010&info=SP’s%20Aviation%20February%202010&t=1265609621953&r=92

18. ‘IndiaissuesRFIforrefuellingtankers’,Flightgobal.com,21January2010.http://www.flightglobal.com/articles/2010/01/21/337388/india-issues-rfi-for-refuelling-tankers.html

19. LockheedMartinpressrelease,‘India’sLockheedMartinC-130JSuperHerculesAirlifter’http://www.lockheedmartin.com/products/c130/india/index.html

20. BoeingNews,Jan82010.http://boeing.mediaroom.com/index.php?s=43&item=1025

21. ‘IAFtoprocure181basictrainerjets’EconomicTimes,24February2010,http://economictimes.indiatimes.com/news/politics/nation/IAF-to-procure-181-

basic-trainer-jets/articleshow/5611816.cms22. Centrecancelscontractformidairrefuellersforfighteraircraft’,DailyNewsand

Analysis,‘http://www.dnaindia.com/india/report_centre-cancels-contract-for-midair-refuellers-for-fighter-aircraft_1331383

23. ‘FinMinopposesIAFchoiceforrefuellingaircraft’Indianexpress.com,Sept282009http://www.indianexpress.com/news/finmin-opposes-iaf-choice-for-refuelling-aircraft/522160/0

24. ‘FirstRussia-Indiaagreementsonnewfighterjetdueshortly.’ITAR-TASSWorldService,9March2010.

25. ‘Indiasigns12VVIPhelicopterdealwithBritish-Italianfirm’PressTrustofIndia,12March2010.

26. ‘Massiveair-to-airandairdefencemissilesmodernisationoftheIndianAirForce’,contributedbyChiefofstaffoftheIndianAirForce(IAF),AirChiefMarshalP.V.Naik,Vayuaerospacedefencemagazine.http://www.defense-world.net/go/detailinterview.jsp?id=26&h=Massive%20air-to-air%20%20defence%20missiles%20modernisation%20%20Indian%20

27. ‘MediumRangeSurfacetoAirMissile(MRSAM)’GlobalSecurity.org,http://www.globalsecurity.org/military/world/india/mr-sam.htm

28. ‘IndianAirForceplansmodernisationprogramme’,January182009.http://www.thaindian.com/newsportal/lifestyle/indian-air-force-plans-modernisation-programme_100143979.html

29. ‘MBDALookstoIndiaforNewAirDefenseMissile’http://www.defensenews.com/osd_story.php?sh=VSDI&i=3944771

30. RajatPandit,’IndialinesupIsraelidronesinracewithPak’TheTimesofIndia,March262010.http://timesofindia.indiatimes.com/india/India-lines-up-Israeli-drones-in-race-with-Pak/articleshow/5724232.cms

31. ‘IAFplanstoinductHaropUCAVby2011’EconomicTimes,30September2009,http://economictimes.indiatimes.com/news/politics/nation/IAF-plans-to-induct-Harop-UCAV-by-2011/articleshow/5073678.cms

32. ‘UkraineToExecuteIndianAirForces’sAN-32Upgrade’,IndiaDefenceOnline,March2010,http://indiadefenceonline.com/1717/ukraine-to-execute-indian-air-forcess-an-32-upgrade/

Table 13: Sources1. Kanwal,G.B.(2010),‘IndianArmymodernisationneedsamajorpush’,Indian

strategicdefencemagazine,5(2),accessedonline:www.indiastrategic.in/topstories482.htm,lastaccessed22March2010

2. Kanwal,G.B.(2009)‘Artillerymodernisationisgatheringmomentum’,IndiaStrategicDefenceMagazine,accessedonline:www.indiastrategic.in/topsto-ries240.htm,lastaccessed22March2010

3. Kanwal,G.B.(2010)‘MinedinRedTape’,SPsLandForcesDefenceMagazine,accessedonline:www.spslandforces.net/ebook,lastaccessed22March2010

4. ThaparV,(2010),‘DRDOseeksJVinCriticalTechnologies’,SPShowNews,www.spshownews.com,lastaccessed22March2010

5. DirectorateofIndigenisation(2008)’15YearIndigenisationPlan’,accessedonline:http://indianNavy.nic.in/New15year_Indigenisation_Plan_of_the_Indian_Navy.pdf,lastaccessed22.March.2010

6. Barbora,P.K,(2010),ForceDefenceMagazine,7(6),pg487. Luthra,G.,Goel,M,(2008),IndiaStrategicDefenceMagazine,accessed

online:www.indiastrategic.in/topstories218.htmlastaccessed22March20108. Joseph,C.P,(2007),‘BharatElectronicsanddefenceproduction’,accessed

online:http://frontierindia.net/bharat-electronics-and-defence-production,lastaccessed22March2010

9. IndianDefenceOnline(2010)‘BSFBuysThermalDetectors’,accessedonline:http://indiadefenceonline.com/1737/bsf-buys-thermal-detectors/,lastaccessed25March2010

10. IndianDefenceOnline(2009),‘BELAchievesTurnoverof$923.6million’,accessedonline:http://indiadefenceonline.com/555/bel-achieves-turnover-of-9236-million/,lastaccessed25March2010

11. DefenceElectronics(2007),‘ItalianandIndianteamtosupplyIndianArmyradios’,accessedonline:http://rfdesign.com/military_defense_electronics/news/indian_Army_radios_0228/,lastaccessed25March2010

12. EETimesAsia(2009),‘DODextendsGaNcontractwithRFMD’,accessedonline:http://www.eetasia.com/ART_8800552470_499488_NT_5ca4fcc3.


HTM,lastaccessed25March201013. Bhatia,V.K(2010),‘Exploringnewhorizons’,SP’sAviationMagazine,accessed

online:http://spsaviation.net/ebook.asp?id=100208055126-53475cae39534498830c1c5c375c41a8&name=sp_s_aviation_february_2010&info=SP's%20Aviation%20February%202010&t=1265609621953&r=92,lastaccessed24March2010

14. Fidsns(2006)‘MiG-27Avionicsupgrade’,accessedonline:http://frontierindia.net/album/main.php?g2_itemId=928,lastaccessed22March2010

15. Pubby(2009)‘SukhoiupgradeonAntonyRussiaagenda’,accessedonline:http://www.indianexpress.com/news/sukhoi-upgrade-on-antony-russia-agenda/527875/,lastaccessed22March2010

16. Institutefordefencestudiesandanalyses(2010),‘Theimperativeofmodern-isingmilitarycommunicationsystems’accessedonline:http://www.idsa.in/idsacomments/TheImperativeofModernisingMilitaryCommunicationsSystems_gkanwal_160210lastaccessed24March2010

17. ‘Massiveair-to-airandairdefencemissilesmodernisationoftheIndianAirForce’,contributedbyChiefofstaffoftheIndianAirForce(IAF),AirChiefMarshalP.V.Naik,Vayuavailableonlineat:http://www.defenseworld.net/go/detailinterview.jsp?id=26&h=Massive%20air-to-air%20%20defence%20missiles%20modernisation%20%20Indian%20Force

18. ContributedbyVicechiefofAirStaff,AirMarshalP.K.BarboraPVSM,VM,Force,Volume7No.6February2010,Pg48

19. Airmarshal(Retd)V.K.Bhatia,SP(2010),‘ExploringNewHorizons’,Aviation,February2010edition,pgNo.16availableonlineat:http://spsaviation.net/ebook.asp?id=100208055126-53475cae39534498830c1c5c375c41a8&name=sp_s_aviation_february_2010&info=SP's%20Aviation%20February%202010&t=1265609621953&r=92

20. (2004),‘BharatElectronicseyes15pcsalesgrowth’,TheHindu,13April2004,accessedonline:http://www.thehindubusinessline.com/2004/04/13/stories/2004041301810200.htm,lastaccessed6April2010

21. DRDOwebsite–LDREAchievements,accessedonline:http://www.drdo.org/labs/lrde/achieve.html,lastaccessed6April2010

22. MinistryofDefence(2003),Pressrelease–weaponlocatingradar,30July2003,accessedonline:http://pib.nic.in/archieve/lreleng/lyr2003/rjul2003/30072003/r3007200336.html,lastaccessed6April2010

23. (2004),‘Indiatotestlong-rangeAgnimissilenextyear’IndiaDigest,15January2004,accessedonline:http://www.indianembassy.org/i_digest/2004/jan_15/agni.htm,lastaccessed6April2010

24. Sharma,R(2010),‘BSFacquiresadvancedthermaldetectors’,HinduTimes,9March2010,accessedonline:http://beta.thehindu.com/news/states/karnataka/article223678.ece,lastaccessed6April2010

25. DefenceElectronics(2010),‘RockwellCollinsShipsECCMModulesToIndia’,accessedonline:http://www.rfdesign.com/military_defense_electronics/supple-ment/rockwell-collins-ships-eccm-modules-201003/index.html,lastaccessed6April2010

26. MinistryofDefence(2003),Pressrelease–F-INSASprojectofArmy,22July2010,accessedonline:http://www.bharat-rakshak.com/NEWS/newsrf.php?newsid=11001http://pib.nic.in/archieve/lreleng/lyr2003/rjul2003/30072003/r3007200336.html,lastaccessed6April2010

27. TendersIndia(2010),RFIforProcurementofSoundRangingSystembyMinistryofDefence,India,11February2010,accessedonline:http://tenders.gov.in/innerpage.asp?choice=tc5&tid=del277200&work=1,lastaccessed6April2010

28. IndiaDefence(2007),‘IndianNavyDefenseDealsUnderAntiCorruptionGroupScanner’,10July2007,accessedonline:http://www.india-defence.com/reports/3418,lastaccessed7April2010

29. Tyagi,P.(2010),‘Aerospaceanddefencenews’,IndianDefenceReview,vol25,1Jan-Mar2010,accessedonline:http://www.indiandefencereview.com/2010/02/aerospace-and-defence-news.html,lastaccessed7April2010

30. BharatRakshak(2005),HALChetak(AlouetteIII),5May2007,accessedonline:http://www.bharat-rakshak.com/NAVY/Chetak.html,lastaccessed7April2010

31. (2010),‘IndiagroundsMiG-27fleetforinvestigationaftercrash’,RIANovosti,24February2010,accessedonline:http://en.rian.ru/world/20100224/157990329.html,lastaccessed7April2010

32. Maharaj,DrS.B.(2009),‘BallisticMissileDefenceforIndia’,BharatRakshak,2July2009,accessedonline:http://www.bharat-rakshak.com/IAF/Today/Contemporary/328-BMD.html,lastaccessed7April2010


4.2.4 Conclusion on Defence RequirementsIndiahasthetenthlargestdefencebudgetintheworld.CountriesthatspendmoreondefencethanIndiaincludedevelopedcountrieswhichcurrentlyhavemuchlowerGDPgrowthincludingAmerica,France,UnitedKingdom,Japan,GermanyandItaly.Indiathereforepresentsanoverallsignificantopportunityfordefenceequipmentexportingcompaniesfromaroundtheworld.Inadditiontotherapidlyexpandingdefencebudget,India’sdefenceforceiscurrentlyundergoingamodernisationprogramacrossthethreeservicesoftheArmy,NavyandAirForce.

TheIndianGovernmenthasbudgetedforasubstantialincreaseinnominalDefenceServicescapitalexpenditure.TotalexpenditureisexpectedtogrowataCAGRof10percentfrom2011to2015,withcapitalexpenditureonDefenceServicesexpandingfromUSD15.3billionin2001toUSD19.20billionby2015.

ByandlargetheanalysisindicatesthattherearelowriskstotheIndianGovernmentbeingabletocommitthemoneyithasbudgeted.ExpenditureasaproportionofGDPisexpectedtoremainlow,andalthoughDefenceExpenditureisclassifiedasNonPlanexpenditureitislikelythatotheraspectsofthebudgetwouldcomeundergreaterpressurebeforethecapitalexpenditurebudgetduetotheCentralGovernment’sfocusonmodernisingthearmedforces.

Themajorriskliesnotinfiscalcapacitybutthechallengeofmeetingsuchahighrateofgrowth.Althoughtheprojected

growthinexpenditureishigh,eachofIndia’sServiceshaveshownaconsistentinabilitytokeepupwiththemassiverateofgrowthinoutlays,withanaverageof57percentunder-spendinbudgetedcapitalexpendituresince2003.

Moreover,whileIndiahasastatedgoaltotransitiontoahigherproportionofindigenousproduction(withanotionaltargetof70percentidentified),theprivatedefenceindustryinIndiaisrelativelyimmature,comparedtothesizeofthedefenceforce’sbudgetandcomparableindustriesworldwide.Thishasbeenaneffectofthegovernment’srefusaltoallowanindustrytodeveloppriorto2001andthestateoftheIndianeconomypriortothe1990’swhichconstrainedpublicfundingintechnologicallysophisticatedweaponsandsystemsdevelopment.Thefuturegrowthofthedefenceindustrywillcontinuetofacebarrierstogrowthbecauseofthehighinfrastructureandinvestmentcoststhatnecessarilyaccompanystateoftheartdevelopmentandmanufacturingofdefenceequipment.TheIndiandefenceindustryalsofacesexportbansbycountrieslimitingthetransferofknowledgeandtechnologytoforeigncountries.

Asaconsequence,relianceonimportsisstillexpectedtocontinue,particularlywheretheequipmenthasahighleveloftechnologysophistication.Itwouldbeexpectedthatevenifindigenousprocurementsareabletobeincreasedasapercentageofthedefencebudget,theabsoluteamountspentonimportsofequipmentwillstillgrowasthegrowthincapitalexpenditureholdsupimports,creatingpotentiallysignificantopportunitiesforForeigndefenceexporters.


Table 14 : Major Navy production currently occurring in India

Production Agency Production

MazagonDockyardsLtd,Mumbai ThreeKolkota(P-15A)destroyers;twoShivalik(P-17)stealthfrigates;sixScorpènesubmarines

GardenReachShipbuilders&EngineersLtd,Kolkata Landingshiptanks–large;fastattackcraft;fourP-28Corvettes

GoaShipyardLtd,Mormugao Patrolvessels;fastattackcraft

CochinShipyardLtd,Cochin Twoair-defenceships(P-71)

ShipBuildingCentre,Vishakapatnam ThreeArihantnuclear-poweredsubmarines

Source:TheMilitaryBalance(2010),‘ChapterTen:ReformingIndia’sdefenceindustries’,110(1),pp437-478

5 Domestic capacity

5.1 Indian manufacturing capabilities

Navy capabilities

Domestic capacityIndigenousproductionhashistoricallyaccountedforroughlyhalftheIndianNavy’sprocurements.Figure14showstheshareofimportsandindigenousproductionforIndianArmycapitalacquisitionsfrom2000to2005.26

In2006,apositionforaDirectorateofIndigenisationwascreatedwiththechartertopursueindigenisationandimportsubstitutionfornavalrequirements.In2008theIndianNavycommittedtoa15yearprogramtoachieve85percentindigenisationofhardware.27

Examples of India’s current capabilities in Submarine productionIndiaiscurrentlyintheprocessofconstructingsixScorpène-classboatsthatarebeingindig-enouslybuiltattheMazagonDockinMumbai,underthesupervisionofFrenchtechnicians.Theprocesshasfacedchallengesoftimeandcostoverruns.Indiaexpectstotenderfortheprocurementofsixmoredieselsubmarinesinthenearfuture.

Inadditiontoitsfleetofdiesel-electricsubma-rines,Indiaisalsointheprocessofdevelopinganindigenouslybuiltnuclear-submarinecapa-bility.IndiabrieflyusedanuclearsubmarineonleasefromtheRussiansfrom1988to1991(theChakra),buthasfacedmanychallenges

indevelopingitsownindigenously-producedsubs.

TheAdvancedTechnologyVessel(ATV)submarine,workonwhichbeganinthe1970s,isacomplexprojectthathasfacedmultipledifficulties.PrivatesectorIndianfirmLarsenandToubrobeganworkfrom1985.AlthoughLarsenandToubrowereabletomanufacturethehullsanddeveloporacquirenecessarysystemsforthesecretproject(codenameS2),itfacedanumberofchallengesrelatingtosystemsintegrationandreactordesign.Ultimately,IndiawasforcedtopurchasethereactordesignsfromRussiaaround1998.InJuly2009,IndialauncheditsfirstATV

submarine,theINSArihant,attheShipBuildingCentreinVishakapatnam.ItisexpectedthatthevesselwillundergoatleasttwoyearsofextensiveseatrialsbeforeitcanbecommissionedintotheIndianNavy.

TheArihantisthefirstofthreeATVscurrentlybeingbuilt,withplansforaneventualfleetof5-6nuclear-propelledsubmarinesthatwillperformastrategicnuclearrole.Thevesselsarelikelytocarry12Sagarikasubmarinelaunchedballisticmissiles(SLBM)witharangeofaround700km.TheconstructionprojectisbeingconductedjointlybytheDRDO,theDepartmentofAtomicEnergy(DAE),privatecontractorLarsenandToubro,andtheIndianNavyatVisakhapatnam.

Source:NTI(2010)‘India’scurrentcapabilities’,accessedonline:http://www.nti.org/db/submarines/india/index.html;IndiaDefence(2007)‘INSVikramaditya:AircraftCarrierAcquisitionfromRussiaDelayed,CostOverrunsExpected’,accessedonline:http://www.india-defence.com/reports/3084;TechSpace,(2009)‘INSARIHANTINDIA’sFirstNuclearSubmarine’,accessedonline:http://techspaceofatul.wordpress.com/2009/08/03/ins-arihant-indias-first-nuclear-submarine/

Figure 14: Indian Navy procurements through imports versus indigenous production (2000-2005)

Source:StandingCommitteeonDefence(2005-06)‘ProcurementPolicyandProcedure’

70%

60%

50%

40%

30%

20%

10%

0%

2000-012001-022002-032003-042004-05

ImportedIndigenous

26 MinistryofDefence(2006)StandingCommitteeonDefence—ProcurementPolicyandProcedure’

27 Vishakhapatnam(2008),‘Navyorders30shipsfromIndiandockyards’,accessedonline:http://newsx.com/story/5657,lastaccessed22.March.2010


WhiletheIndianNavyhasthehighestnumberofindig-enousprincipalplatformsamongthearmedservices,timeandcostoverrunspersist.InJuly2009,theDefenceMinistryacknowledgethattheScorpèneproductionwasrunningatleasttwoyearsbehindscheduleduetodifficultieswiththe‘absorptionoftechnologies’.TheconstructionofsiximprovedProject17Afrigates,whichwereorderedin2009,isalsoexpectedtobedelayedduetothelackofsufficientconstructioncapacityandthemodernisationthatisrequiredinIndiandefenceshipyards.28Asreportedin2010bytheIndianDefenceReview:

Army Capabilities:IndigenousproductionhashistoricallyaccountedforaroundhalfofIndia’sArmyprocurements.Figure16showstheshareofimportstoindigenousproductionforIndianArmycapitalacquisitionsfrom2000to2005.

Indian shipbuilding is mainly concentrated in 27 shipyards. Of these, eight are in the Public Sector, six yards being under the Central Government and two under State Government with a capacity of 2.54 lakh Dead Weight Tonnage (DWT). In addition, there are 19 Private Sector yards with an established capacity of about 27000 DWT, to which are being added the large capacities of three green field projects. The major share of the present capacity is held by eight public sector yards, with Cochin Shipyard Limited and Hindustan Shipyard Limited having capacity and infrastructure to built vessels of 1.1 lakh DWT and 80,000 DWT respectively. Barring two notable exceptions, the majority of private sector shipyards are limited in respect of capacity and size of the vessels they can presently build. India’s capabilities

in respect of technologically advanced ships, notably LNG carriers are non-existent, which is a strategic shortcoming. The Indian shipbuilding industry has been characterized by low capacity, poor productivity and obsolescent infrastructure.

In both the naval and commercial sectors, however, a mere increase in infrastructure will not ensure achievement of desired results. For integrated growth of the industry, there is also a need to create an R&D base, develop in-house design capability, infuse new technology, develop skilled workforce, adopt appropriate fiscal measures.

Skilled workforce, adopt appropriate fiscal measures and remove administrative hurdles, so that Indian shipbuilding can achieve

credibility as a source for delivering quality ships in time. Advances in ship design and in construction technology are derived from extensive, long-term research in wide ranging fields, which involves substantial financial support, far more than is available in India. It would, however, not be in our interest to re-invent the wheel; therefore strategies to incorporate the results of such research in indigenous shipbuilding need to be evolved. The JV route, with a larger share of FDI offers an avenue to meet this objective. [Emphasis added] If we are able to produce ships which offer greater operational efficiencies i.e. lower running costs and longer service life, as well as lower acquisition costs than their peers, we would be able to attract international customers.

Source:IndianDefenceReview(2010)IndianShipbuildingKeytoMaritimeandEconomicSecurity,accessedonlineat:http://www.indiandefencereview.com/2010/03/indian-shipbuilding-key-to-maritime-and-economic-security.htmlMarch2010

Figure 15 – Indian Army procurements through imports versus indigenous production (2000-2005)

Source:StandingCommitteeonDefence(2005-06)‘ProcurementPolicyandProcedure’

70%

60%

50%

40%

30%

20%

10%

0%2000-012001-022002-032003-042004-05

Imported Indigineous

28 TheMilitaryBalance(2010),‘ChapterTen:ReformingIndia’sdefenceindustries’,110(1),pp437-478


TheredoesnotappeartobeanyIndianindigenouscapacityinrelationtoartilleryproduction.Thisissupportedbythefactthatnosignificantacquisitionshaveoccurredforover20years.However,theredoesappeartobeindigenouscapacitytodeveloptanksandothervehicles,andairdefencemissiles.

Indigenousfirmshavebeeninvolvedinarangeoftankandvehicleproductionactivities,includingthefollowingactivitiesbytheDRDO:

• DevelopmentoftheArjunMBTbytheDRDO(withassistancefromGermandefencefirms),whichenteredserialproduction,buthadrecurringtechno-logicalproblemsandcostover-runs,withonly124beingorderedasafinalconsequence

• InDecember2007,acontractwassignedfor347T-90tankstobeassembledunderlicencebytheHeavyVehicleFactory(HVF),Avadi

• 1,700T-72M1shavebeenmanufacturedunderlicence,alsobytheHVF.

WhiletheT-90andT-72sareRussiandesignsproducedunderlicence,theArjunMBTisanindigenousdesign.Assuch,itwasahighlyambitiousprojectthatorigi-natedinarequirementin1972.Therequirementincludedindigenousdesignandproductionofagasturbinepowerplant(latercancelledinfavourofadieselengine),compositearmour,hydro-pneumaticsuspen-sionanda120mmrifledgun.Thefailureoftheproject

tocomeinwithintherequiredtimelinesledtotheacquisitionoftheT-72tank.Nevertheless,ArjuntanksarecurrentlybeingbuiltandthedevelopmentofthisMBThasleadtothecreationofconsiderablecapabilityintheIndiandefenceindustry.

TheDRDOhascommencedconceptualstagedevelop-mentofFutureMainBattleTankandFutureInfantryCombatVehicle,expectedwithinthe2020-25timeframe.29

Theprivatesectorhasalsobeeninvolvedintheproduc-tionofmilitaryvehicles,inparticularMahindraDefenceSystemsandAshokLeyland.MahindraDefencesystemsannouncedajointventurewithBAE(valuedatUSD20m)inJanuaryfortheproductionofland-basedweaponssystemsincludingmine-protectedvehicles.

Indiahasastronghistoryofmissiledevelopment,derivedfromtheDRDO’sIntegratedGuidedMissileDevelopmentProgram(IGMD),whichwasoperationalfromthe1980sto2009.ProjectsundertakenaspartoftheIGMDmetwithvaryinglevelsofsuccess,forexample:• TheAkashSAMdevelopedincollaborationwith

BharatElectronicsLimited(BEL).TheAkashwassubjecttosignificantdelaysbutisnowoperational

• TheTrishulSAMproject,whichwasshutdownafterunsuccessfultrials.30

29 Kanwal,G.B.(2010),‘IndianArmymodernisa-tionneedsamajorpush’,Indianstrategicdefencemagazine,5(2),accessedonline:www.indiastrategic.in/topstories482.htm,lastaccessed22March2010

30 Kanwal,G.B.(2010),‘IndianArmymodernisa-tionneedsamajorpush’,Indianstrategicdefencemagazine,5(2),accessedonline:www.indiastrategic.in/topstories482.htm,lastaccessed22March2010and“IndiashutsdownTrishulmissileproject”,inRediffIndiaAbroad,Feb27,2008,availableathttp://www.rediff.com/news/2008/feb/27trishul.htm


Inearly2009theIGMDwascloseddown,withtheDRDOannouncingthatwhilemostfutureweaponsystemswouldbedevelopedincollaborationwithforeignpartners,someitemssuchaslongerrangemissileswouldbedevelopedindigenously.31

ArangeofindigenousUAVsareinthedesignanddevelopmentpipeline,includingtheGagan,Pawan(ajointprogrambetweentheDRDOandIsraelisAerospaceIndustries)andRustom(amediumaltitudelongenduranceUAV).32

Air Force Capabilities :Domestic capacity: Hindustan Aeronautics Limited (HAL)ThestateownedHALisIndia’sonlymilitaryaircraftproducer,andisasignificantplayerinthedefenceindustryasawhole.HALisoneofIndia’sDPSUs.ToputHAL’ssizeinperspective,during2007-08thevalueofproductionbyallIndiandefencepublic-sectorundertakingstotallednearly19,200crorerupees(USD4.14billion),whichwasanincreaseofmorethan20percentcomparedtothepreviousyear;thestaterunHALmanufacturescombataircraftandhelicopters,has12divisions,andaccountedforaroundhalfoftotalDPSUproductionbyvaluein2006-07.33Thecompany’scurrentorderbookhasavalueofmorethan60,000croreRs(USD13.05billion).Table15belowshowsthatHALhasalsorecentlyexperiencedrapidgrowth(28percent)inexportearnings.

Table 15: HAL Key Financial Performance Indicators, 2007-08 and 2008-09

Year 2007-08 (Rupees in crore) 2008-09 (Rupees in crore) % Growth 2008-09 (USD million)

Turnover 8,625 10,373 20.27 2255.4

Exports 341 437 28.00 94.5

ProfitBeforeTax 2,164 2,335 7.88 507.6

ProfitAfterTax 1,632 1,740 6.62 378

R&DSpending 662 675 1.91 146.7

Source:HAL2008-09AnnualReport,page10.Note:Onecrore=10millionRupees,and1USD=46Rupees.

31 “Indiascrapsintegratedguidedmissileprogramme”intheHinduTimes,January9,2008availableathttp://www.hindu.com/thehindu/holnus/000200801090301.htmlastaccessed24March2010

32 Kanwal,G.B.(2010),‘MinedinRedTape’,SP’sLandForcesDefenceMagazine,7(1),pp1–6&13-14,accessedonline:http://www.spslandforces.net/ebook.asp?id=100212145153-66d09a480f7d45a690df68981bccd702&Name=sps-land-forces-feb-mar-2010&Info=SP’s%20Land%20Forces%20Fab-Mar%202010&t=1266237474406-&r=6,lastaccessed22March2010

33 SpeechbyDefenceMinisterShriAKAntonyattheNationalSeminaronDefenceIndustry,NewDelhi,January2009.http://www.defense-aerospace.com/article-view/verbatim/101644/indian-minister-speech-on-defense-industry.html

The state owned HAL is India’s only military aircraft producer, and is a significant player in the defence industry as a whole. HAL is one of India’s DPSUs.


AsTable15shows,in2008-09HALhadturnoverofUSD2.5billion.HALisalsoIndia’smainbeneficiaryofoffsetpolicies.34Underthecurrentrules,foreigncompaniesthatreceiveimportordersworthoverUSD64.6millionmustdrawatleast30percentofthatorderfromdomesticsuppliersormakeasimilarsizedinvest-mentwithinIndia.35SinceHALisIndia’sonlymilitaryaircraftmanufacturer,foreigncompaniesoftenturntoHALtomeetthisoffsetrequirement,eitherthroughdirectsupplyorbysettingupjointventurearrange-ments.TheseinvestmentsdirectlybenefitHAL.Figure16belowillustratesHAL’sdominanceoftheIndianmilitaryaircraftmarket.TheIndian2008-09Budgetallowedfor11,986.7crorerupeesforAirForcecapitaloutlayson‘Air-CraftandAeroEngines.’36Incomparison,HAL’sinlandsalesforthe2008-09financialyeartotalled9,936.80crorerupees,over80percentofthetotalgovernmentcapitaloutlayinthatyear.37

Intermsofproductlines,HALhasproducedMiG21s,Jaguars,theHawktraineraircraft,theDhruvadvancedlighthelicopter(ALH).ThecompanyiscurrentlybuildingtheSukhoiSu-30MKIaircraft,andhasaone-for-onematchingprogramforproductionofthisaircraftwithRussia.UnderdomesticproductionrequirementsHALwillalsolikelybuildmost(108outof126)oftheMMRCAaircraft,eventhoughthecontractwillbeawardedtoaforeignsupplier.Thecompanywilljointlydevelopthefifthgenerationfighteraircraft(FGFA)withtheUnitedAircraftCorporation(UAC)ofRussia,andthereareplansforajointventure(alsowithUAC)toproduceamediummulti-roletransportaircraft(MTA).DespitethedelaysintheLCA/Tejasprogram,in2008theIndiaDefenceMinisterruledoutaforeignpartnershiptoacceleratetheprogram.

Electronics Manufacturing Capabilities:

Domestic CapacityThestrategicelectronicsmarketisarapidlyexpandingindustrywithinIndia.TheDepartmentofInformationTechnologyreportedthatin2007-08,theproductionofstrategicelectronicswithinIndiawasapproximatelyINS61billion,withanannualgrowthrateofaround35percent.Indiahasadoptedatwolayeredapproachtoachievingincreasedtechno-economicdevelopmentintheIndiandefencesector.Thefirstrelatestocreatingaclimatefortheindigenousdevelopmentoftechnologyinthecountryandtheseconddealswiththetransferandadaptationoftechnologyfromadvancedcountries.OpportunitiesintheDefenceIndustryincludethemajormodernisationofexistingelectronicsequipment,indi-genisationofmajorassemblyandspareparts,innova-tionandproductimprovement,ToTfromadvancedcountries(suchasUnitedStatesandIsrael)andResearchandDevelopmentandTechnicalsupporttothefieldArmy.38

Bothprivatecompaniesandpublicunitsarerapidlyenteringintothedefenceelectronicsdevelopmentandmanufacturingmarket.TataPowerSEDistheleadingdomesticplayerinstrategicelectronics,recognisedforitsvastengineeringcapabilities.ItisfastemergingasaprimecontractortotheMinistryofDefenceforindigenousdefenceelectronicsproduction.39Anotherexampleofasuccessfulpublic-privatepartnershipisSamtelDisplaySystems“SDS-HALJV”.UnderthisJV,SamtelistoprovideMFDs(MultifunctionalDisplays)fortheS-30MKIandLCAaircraftbeingproducedbyHAL.40

Figure 16 : HAL Domestic Sales and Indian Government IAF Aircraft and Aeroengine Capital Outlays,1997-2008

Source:IndianGovernmentBudget,variousissues;HALAnnualReport2008-09.

34 Govindsamy,S.(2010)‘HALSetsSitesonGlobalPresence’,FlightInternational,March.http://www.flightglobal.com/articles/2010/03/01/338726/hal-sets-sights-on-global-presence.html

35 http://www.financialexpress.com/news/boeinghal-ink-4.5m-deal-for-reconnaissance-aircraft/578734/36 http://indiabudget.nic.in/ub2008-09/eb/sbe26.pdf37 HAL2008-09AnnualReport,page3.38 EETimesIndia(2010)‘DefenceoffersopportunitiestoIndianElectronics’,accessedonline:http://

www.eetindia.co.in/ART_8800599239_1800003_NT_2bd24a4d.HTM,lastaccessed23.March.201039 Das,S.(2010)‘DefenceElectronicsGrowingFast’,ElectronicsforYou,May2009pp111,accessed

online:www.efymag.com,lastaccessed22.March.201040 http://www.indiaprwire.com/pressrelease/defense/2010020943158.htm,accessedon01Jun2010

0

2000

4000

6000

8000

10000

12000

14000

Cro

re o

f Rup

ees

Year

Indian Government Budgeted Capital Outlays on IAF Aircraft and Aeroengine Capital Outlays

Value of HAL Domestic Sales


TheDRDOhasanetworkofmorethan50laboratoriesinIndianengagedindevelopingdefencetechnolo-giescoveringvariousdisciplines.Thelaboratoriesareinvolvedintheproductionofsurveillanceandrecon-naissanceequipment,communicatingandnetworkingtechnologiesanddetectiontechnologies.41

TheLRDEisIndia’sforemostradardesignanddevelop-mentestablishment.DPSUBharatElectronicsLimited(BEL)istheLRDEsprimaryproductionpartner,howeveritalsoworkswithvariousprivatefirms.TheLRDEhasbeenresponsibleforthedevelopmentofarangeofradarsystemsincluding:• INDRA-IandINDRA-IIvehicle-mountedsurveillanceradars,

andtheBattleFieldSurveillanceRadar-ShortRange(BFSR-SR)(amanportable,batteryoperatedsurveillanceradar),producedbyBELandusedbythearmy

• Rajendraand3D-CARradarsfortheAkashsurfacetoairmissilesystem

• SuperVisionMaritimePatrolRadar(SV-2000MPAR),designedanddevelopedfortheAdvancedLightHelicopter

• AvalancheVictimDetector(AVD),manufacturedbyprivateindustryandinwideuseinthedefenceservices.42

5.2 Domestic competitionIncreasingself-sufficiencyinthesupplyofdefencerequirementsthroughthesupportanddevelopmentoftheindigenousdefenceindustryhaslongbeenanobjectiveoftheIndianGovernment.However,duetolimitationsofindigenouscapabilities,Indiahashistori-callyreliedheavilyonforeignsupplyforitsdefenceneeds,consistentlyimportingover70percentofitsequipment.43

Defence Public Sector UndertakingsIndigenousdefenceproductionisheavilyweightedtowardsthepublicsector,whichaccountsforaround86percentoftheindigenousmarket.TheeightDefencePublicSectorUndertakings(DPSUs)areresponsibleforover65percentofthetotalvalueofpublicsectorproduction.44Table16setsoutthemainproductsandservicesprovidedbyeachDPSU.

Table 16 : Defence Public Sector Undertakings

DPSU Product areas

HindustanAeronauticsLimited(HAL)

Design,development,manufacture,repairandoverhaulofaircraft,helicopters,enginesandtheiraccessories

BharatElectronicsLimited(BEL)

Design,developmentandmanufactureofsophisticatedstate-or-the-artelectronicequipmentcomponentsfortheuseofthedefenceservices,para-militaryorganisationsandothergovernmentusers

BharatEarthMoversLtd(BEML)

Multi-productcompanyengagedinthedesignandmanufactureofawiderangeofequipmentincludingspecial-isedheavyvehiclesfordefenceandre-engineeringsolutionsinautomotiveandaeronautics

MazagonDockLimited(MDL)

Submarines,missileboats,destroyers,frigatesandcorvettesfortheIndianNavy

GardenReachShipbuilders&EngineersLtd(GRSE)

BuildsandrepairswarshipsandauxiliaryvesselsfortheIndianNavyandtheCoastGuard

BharatDynamicsLimited(BDL)

Missiles,torpedocountermeasuresystem,countermeasuresdispensingsystem

MishraDhatuNigamLimited(MIDHANI)

Aeronautics,space,armaments,atomicenergy,Navyspecialproductslikemolybdenumwiresandplates,titaniumandstainlesssteeltubes,alloysetc.

GoaShipyardLtd(GSL) Buildsavarietyofmediumsize,specialpurposeshipsforthedefence,IndianCoastGuard(ICG)andcivilsectors

BEL is one of the 8 PSU’s under Ministry of Defence, Goverment of India. It has even earned the Goverment’s Nav Ratna status.

41FORCE(2010)‘Soldiers’PackDRDOshowcasesarangeofvitalequipments’,accessedonline:http://www.forceindia.net/november/coverstory9.aspx,lastaccessed23.March.2010

42DRDOwebsite,LDREAchievments,accessedonline:http://www.drdo.org/labs/lrde/achieve.html,lastaccessed6April2010

43 (2010)‘ChapterTen:ReformingIndia’sDefenceIndustries’inTheMilitaryBalance,February,pp.473-478

44 KPMG(2010)OpportunitiesintheIndianDefenceSector,preparedfortheConfederationofIndianIndustry


Private industryTheIndianprivatesectorhashistoricallybeenlimitedtothesupplyofbasicandintermediateproducts,componentsandsparepartsduetoarangeofrestrictionsonparticipationinarmsproduction.Theserestrictionshaveonlyrelativelyrecentlybeenrelaxed,with100percentprivateownershipofdefencesectorproductionbeingallowedin2001.

Currentprivatesectorcapabilitiescontinuetobelargelyfocussedoncomponentsandintermediatemanufacture,withkeyfirmsincluding:• TataGroupCompanies,whichmanufacturemissileand

rocketslaunchers,electronics,softeareservicesproviders,compositecomponentsandintermediateservicesforaerospaceanddefenceapplications.

• MahindraDefenceSystems,whichprovideslightvehicles,simulatorsforweaponsandweaponssystems,minesandsmallarms

• LarsenandToubro,whichprovidesdesign,developmentandmanufactureofmissilesystems,electronicsandnavalengineeringsystems

• PunjLloyd,whichprovidesengineeringandconstructionservices

• Samtel,whichisanintegratedmanufacturerofawiderangeofdisplaysforavionics,machineryandengi-neeringservices.

DespitetheGovernment’sobjectivesandpoliciessupportingtheindigenousindustry,inefficienciesinlocalproductionhaveledtosubstantialdelaysintheprovisionofarmsandequipment,oftenleadingtoopportunitiesforforeign-basedfirmstofillthegaps.

Forexample,the25yeardevelopmentandtestingperiodfortheTejaslightcombataircrafthasresultedintherequire-mentformediummulti-rolecombataircraft(MMRCA)beinglikelytobemetwithimportsfromtheUnitedStates.45

Raksha Udyog RatnasTheDPSUscurrentlyenjoyarangeoftaxexemptionsandconcessions,receivefundingfromGovernmenttodevelopR&Dandmanufacturingcapabilities,andcanalsoreceivepreferentialtreatmentintermsofselectionbytheGovernmentforreceivingtechnologyandundertakinglicensedproductionwithToTfromoverseassources.46

Inordertosupportthedevelopmentofprivatesectorcapabilities,theconceptoftheRakshaUdyogRatnas(RURs),orprivatesectorindustrychampions,wascreatedaspartofthe2006updatetotheDPP.RURstatuswouldbe

grantedtoaselectnumberofprivatesectordefencefirms,givingthemsimilartreatmentastheDPSUsintermsoftaxtreatmentandprioritisationforR&DfundingandaccesstoToTcontracts.FollowingtheDPP2006,twelvefirmswereconsideredforRURstatus.However,criticismfromthedefenceindustryhasledtheappointmentofRURstobeputonhold,withthestatusofthepolicynowuncertain.47

Table17setsoutthepotentialRURsthoughttobeunderconsiderationbytheMinistryofDefence(identifiedbyindustrysources).

Table 17 : Potential RURs identified

Potential RURs Products/services

AshokLeyland Design,developmentandmanufactureofspecialvehiclesforarmedforces.

BharatForge Manufactureofvariousforgedandmachinedcomponentsfortheautomotiveandnon-automotivesector.

GodrejandBoyce

Hightechengineering,includingaerospace,constructionandcustom-builtcriticalequipment.

HCLTechnologies

IT&softwaredevelopmentcompanyofferingvariousservicessuchasapplicationdevelopment,outsourcingsoftware,systemsintegrationandcommunication.

InfosysTechnologies

Systemsintegration,productengineering,customsoftwaredevel-opment,maintenance,re-engineering,independenttestingandvalidationservices,ITinfrastructureservicesandbusinessprocessoutsourcing.

KirloskarBrothers

Infrastructureprojects(watersupply,powerplants),engineeredandindustrialpumps.

LarsenandToubro

Design,developmentandmanufactureofintegratedland-basedandnavalmissilesystems,electronics,controlsystemsandinte-gratednavalengineeringsystems.

MahindraandMahindra

Lightcombatandarmouredvehicles,simulatorsforweaponsandweaponsystems,seamines,smallarmsandammunition.

TataConsultancy

Softwareservicesandconsulting,thelargestproviderofinfor-mationtechnologyandbusinessprocessoutsourcingservicesinIndia.

TataMotors India'slargestcompanyintheautomobileandcommercialvehiclesector.

TataPower India’slargestprivatesectorelectricitygeneratingcompany.

WiproTechnologies

ITandsystemssupportinautomobile,aerospace,high-tech,andindustrialdomains.

Sources:Sharma,R(2007),‘12firmstogetRakshaUdyogRatnastatus’,TheHindu,June182007,accessedonline:http://www.thehindu.com/2007/06/18/stories/2007061801911300.htmandSiddiqui,H.(2008),‘DefencemindoesawaywithRURstatusforpvtmilitaryhardwarecos’,FinancialExpress,3August2008,accessedonline:http://www.financialexpress.com/news/defence-min-does-away-with-rur-status-for-pvt-military-hardware-cos/343921/

45 2010)‘ChapterTen:ReformingIndia’sDefenceIndustries’inTheMilitaryBalance,February,pp.473-478

46 MinistryofDefence(2008),DefenceProcurementProcedure,p.164

47 OpportunitiesintheIndianDefenceSector,preparedfortheConfederationofIndianIndustrybyKPMG(2010)


Ordnance FactoriesWithmorethan200yearsofexperienceindefenceproduc-tion,theIndianOrdnanceFactoriesOrganisationisafamilyof40OrdnanceFactoriesfunctioningundertheaegisofasinglecorporateheadquarters,theOrdnanceFactoriesBoard,inKolkata(Box6.1).TheOrdnanceFactoriesBoardisengagedinproduction,testing,logistics,research,devel-opmentandmarketingofcomprehensiveproductrangeintheareasofland,seaandairsystems.TheOrdnanceFactoriesBoardisthelargestandoldestdepartmentallyrunproductionorganisationinthecountryandisengagedprimarilyintheproductionofstateofartbattlefieldequip-ments.Theordnancefactorieswereestablishedwithamandatetoensureselfrelianceinmanufacturingofdefencehardware.Theorganisationfunctionsunderthedepart-mentofDefenceProductionandSuppliesandisadedicatedfacilityformanufactureofweapons,ammunitions,vehicles(Armouredandtransport),clothing,generalstoresandequipmentfordefenceservices.48

Other private and public sector defence firmsThefollowingtable18providesabriefoverviewofprivatesectorfirmsinvolvedindefenceprocurementsinIndiaandnon-DPSUpublicsectorfirms.Itshouldbenotedthatthelistisbynomeanscomprehensive,particularlygiventheincreasinginvolvementofsmallandmediumenterprisesinthedefencesector.

Box 2 : Ordnance Factories in India

AmmunitionFactoryKhadki(AFK) OrdnanceFactoryBhusawal(OFBH)

CorditeFactoryAruvankadu(CFA) OrdnanceFactoryBolangir(OFBOL)

EngineFactoryAvadi(EFA) OrdnanceFactoryKanpur(OFC)

FieldGunFactoryKanpur(FGK) OrdnanceFactoryChandrapur(OFCH)

GunCarriageFactory(GCF) OrdnanceFactoryDumdum(OFDC)

GreyIronFoundry(GIF) OrdnanceFactoryDehuRoad(OFDR)

GunandShellFactory(GSF) OrdnanceFactoryDehradun(OFDUN)

HeavyAlloyPenetratorProject(HAPP) OrdnanceFactoryItarsi(OFI)

HighExplosiveFactory(HEF) OrdnanceFactoryKhamaria(OFK)

HeavyVehicleFactory(HVF) OrdnanceFactoryKatni(OFKAT)

MachineToolPrototypeFactory(MPF) OrdnanceFactoryMuradnagar(OFM)

MetalandSteelFactory(MSF) OrdnanceFactoryProjectNalanda(OFN)

OrdnanceClothingFactoryAvadi(OCFAV)

OrdnanceFactoryProjectMedak(OFPM)

OrdnanceCableFactoryChandigarh(OCFC)

OrdnanceFactoryTiruchirapalli(OFT)

OrdnanceClothingFactoryShahjahanpur(OCFS)

OrdnanceFactoryVarangaon(OFV)

OrdnanceEquipmentFactoryKanpur(OEFC)

OptoElectronicsFactory(OLF)

OrdnanceEquipmentFactoryHazratpur(OEFHZ)

OrdnanceParachuteFactory(OPF)

OrdnanceFactoryAmbernath(OFA) RifleFactoryIshapore(RFI)

OrdnanceFactoryAmbajhari(OFAJ) SmallArmsFactory(SAF)

OrdnanceFactoryBhandara(OFBA) VehicleFactoryJabalpur(VFJ)

Source:IndianOrdnanceFactories,accessedonlineat:http://ofbindia.gov.in

48 ManasDefenceYearbook2010-2011,pg139


Firm Navy Land Aerospace Electronics

ABGShipyards √

AdvanceTechControlPvtlimited

√

AllenReinforcedPlastics √

AlphaPhazotronradarEquipment&Systems

√

Alpha-ITLElectroOpticsPrivate

√

AnjaniTechnoplast √

AshokLeyland* √

AstraMicrowaveProductsLimited

√

AuroraIntegratedSystemsPvtLtd

√ √

AutomotiveCoaches&Components

√

B.F.UtilitiesLimited √

BharatForge* √ √

BharatiShipyard √

DataPatterns(India) √

DynamicTechnologiesLimited

√ √ √

EONInfotech √

GodrejandBoyce* √ √

HBLNifePowerSystems √

HCLTechnologies* √

HeavyEngineeringCorporation

√ √ √

HindustanOpticals √

IndtechConstruction √

InfosysTechnologies* √

InfotechEnterprisesLimited

√

ISTLimited √ √

JupiterStrategicTechnologies

√

KEWIndustriesLimited √

KirloskarBrothers* √

KPITCumminsInfosystems

√ √

Larsen&Toubro* √ √ √

Firm Navy Land Aerospace Electronics

MacmetTechnologiesLimited

√

MagnumAviation √

MahindraGroup* √ √ √

MaxAerospaceandAviationLimited

√ √

MELSystems&ServicesLimited

√

MemoryElectronics √

NovaIntegratedSystemsLimited

√ √ √ √

PipavavShipyard √

PunjLloydLimited √ √

RadiantCables √

RamossIndia √

RMXBridportDefenceSystemsPvt

√

Rolta √

SamtelDisplaySystems √

SECIndustriesPrivate √

SIGMAMicrosystems √

SouthernGroupIndustries √

SpeckSystems √

ShriBajrangAlloysLimited √

SteelAuthorityofIndiaLimited

√ √ √

SvipjaTechnologies √

TataGroup* √ √

TILTractorsIndiaLimited √

TSLDefenceTechnologiesPvt

√ √

VectraTechnologies √

VEMTechnologies √ √

VXLTechnologies √

WalchandnagarIndustriesLimited

√ √ √

WartsilaIndia √

WiproTechnologies* √ √ √

ZenTechnologies √

Note:*PreviouslyunderconsiderationforRURstatus

Table 18: Private sector defence firms & key operating domains


6 Financial implications

Adefenceindustrywillalwayslookforreducingcosts,taxesduringadefencedeal.Inordertogetthemaximumprofitintheshortestpossibletime,Governmentpoliciesmustensurespeedytransactionandlessercostsandtaxes.

6.1 Costs: OffsetsOffsetcontractstypicallyrefertorequirementsimposedbytheGovernmentonvendorstosourceaspecificlevelofcomponentsfromindigenousfirms.Offsetsimposeacostonthevendorinquestionandarethereforegenerallyrespondedtoanincreaseinthemarginforthepriceofthecontract.

Offsetrequirementsapplytoallacquisitionscatego-risedasBuy(Global),BuyandMakeorBuyandMake(Indian),wheretheestimatedcostoftheacquisi-tionisRs.300croreormore(approximatelyUSD75million).Contractsoflesservaluearenotsubjecttooffsetrequirements.Inaddition,defenceacquisitionsapprovedfortheFTParecompletelyexemptfromoffsetobligations.49

Offsetobligationshavehistoricallybeensetat30percentofthecontractvaluefortheBuy(Global)category,and30percentoftheforeignexchangecomponentinBuyandMakecategories.

The2009amendmenttothe2008-DPPallowstheDACtoprescribeoffsetpercentagesabove30percent,oralternativelywaiveoffsetobligationsentirelyatitsdiscretion.Thereisalsoaprovisionallowingvendorstoselecttheirownoffsetpartner,and(inratecases),changeoffsetpartnersinordertomeettherequirements.50However,oncethecontract(mainandOffset)aresigned,norevisionofcost,whetherupwardsordownwardsispermitted.

Underthe2008-DPP,offsetobligationscanbemetinthefollowingmanner:• Directpurchaseof,orexecutingexportorders

for,defenceproductsandcomponentsmanufac-turedby,orservicesprovidedby,Indiandefenceindustry,i.e.DefencePublicSectorUndertakings(DPSUs),OrdnanceFactoryBoard(OFB),andanyprivatedefenceindustrymanufacturingtheseproductsorcomponentsunderanindustriallicencegrantedforsuchmanufacture.Forthepurposeofdefenceoffsets,“services”willmeanmaintenance,overhaul,upgradation,lifeextension,engineering,design,testing,defencerelatedsoftwareorqualityassuranceservices.

• DirectforeigninvestmentinIndiandefenceindustriesforindustrialinfrastructureforservices,co-development,jointventuresandco-productionofdefenceproducts.

• DirectforeigninvestmentinIndianorganisa-tionsengagedindefenceR&DascertifiedbytheDefenceOffsetFacilitationAgency(DOFA).

TOTisnotrecognisedasamethodofmeetingoffsetrequirements.51The2008-DPPcontainsalistofdefenceproducts(andcovereddefenceindustries)thatareabletobeusedtomeetoffsetobligations.

Capital Acquisition and Offset: 52 Figure17givestheflowchartonrequiredoffsetundervariouscategoriesofacquisitions.

Offsetscanbeundertakenunderanyoftheabovementionedcategories.Oflate,therehasbeenadebateontheissueofIndiandefenceindustry’scapabilitytoabsorbahugeamountofoffsets.Thisisevenmorepertinentconsideringthatthearmedforces’modernisationhasbeensteppedupinrecentyears,witharelativelyhigherproportionofthedefencebudgetbeingallocatedforcapitalexpendi-ture.Thecapitalbudgetfor2007-08,forexample

49 MinistryofDefence(2008),DefenceProcurementProcedure,AppendixD,p.43

50 DefenceProcurementProcedure-2008(Amendment-2009)

51 VermaS.(2009)OffsetContractsunderDefenceProcurementRegulationsinIndia:Evolution,ChallengesandProspects,pp20-11

52Deloittecompilation


Figure 17: Flow chart of various categories of acquisition

Buy Outright (Purchase Equipment)

Buy Global(Indianaswellasforeign

vendors)

Buy + Make(Purchasefromforeignvendorfollowedbylicensedproduction/indigenousmanufac-

tureinthecountry)

Offset requirements to be30% of the foreign exchange

component to be fulfilled

Offset requirement to be 30% of the estimated

cost of acquisition

Offset obligations to be fulfilled on the foreign component i.e. offset to be 30%

of the foreign exchange component

Minimum 50% to be indigenous contents

No offset requirements

No offset requirements(Minimum30%indigenouscontentincaseofintegra-

tionbeingdonebyIndianvendor)

YES

Foreign VendorIndian Vendor

No offset requirements

Indigenouscontentinproduct

isatleast50%

Capital Acquisition and Offset Requirement

Buy Indian(IndianVendorsOnly)

NO

Make(Hightechnology,complexsystemstobedesigned,developedandproduced

indigenously)

Buy + Make (Indian) (PurchasefromIndiancompanies)

wasoverUSD10billion.Forthefollowingfinancialyear(2008-09),thisfigurewasaroundUSD12billion.Ifoneassumesthat70percentofthecapitalbudget(i.e.USD15billionoutofUSD22billion)iscateredformeetingimportrequirements,thesameshouldresultinoffsetsworthUSD4.5billionorRs18,000croreforthesetwoyearsalone,withaminimumthresholdof30percentofthemaincontract.Itispertinenttonotethatinsomecasessuchastheproposaltoacquire126MediumMulti-RoleCombatAircraft(MMRCA),theoffsetshavebeenpeggedhigherat50percentofthecontractvalue.Againstsuchahugepotentialofoffsets,thecurrentvalueofdefenceexportsfromthecountryappearstoosmall.Fortheyear2007-08(uptoDecember2007orthefirstninemonthsofthefinancialyear),thevalueofIndiandefenceexportsstoodatRs342crore(USD85million).53Onanannualisedbasis,thevalueofexportsworksouttoaroundRs456crore(USD114million).Asagainstsuchdefenceexportfigure,offsetsbetween


Rs3,000-4,000crore(USD750million-1billion)needtobeundertakeneveryyear,giventhecurrentratioofcapitalexpenditureallocationinthedefencebudget.54Inotherwords,thevalueofdefenceexportsneedstogoupby8to10timesthecurrentlevel.Thus,thegapbetweenexistingquantumofexportsandwhatisrequiredtobeundertakenaspartofoffsetobligationsofthevendorsistoohuge.

Tobeabletoundertakesuchhugeamountofexportsrequiresinvestmentofalargemagnitudeintheindig-enousdefenceindustrialinfrastructure.Inaddition,suchlargeinfrastructuralinvestmentsmaytakeyearsbeforetheproductioncanbesteppedup.Apartfromexportofdefenceequipmentandservices,thetwoareasforimplementingoffsetsareintheformofFDIinIndiandefenceindustryordefenceR&Dorganisations.Theentryoftheprivatesectorinthedefenceindustryhasbeenpermittedasrecentlyas2001withamaximumcapof26percentforeignequity.Theinitialresponsetosuchaliberalisedpolicywasmutedasnomajorprivatecompanycameforwardforinvestmentinthedefenceindustry,untilrecently.Oflate,afewJointVenture(IV)proposalsandMemorandumsofUnderstanding(MOUs)havebeenannouncedinvolvingmajorIndiancompaniessuchasTata,L&TandleadingarmsmanufacturingcompaniessuchasBoeing,LockheedMartin,etc.Buttheamountofinvestmentsannouncedintheseproposedtie-upsisonlyatrickleinwhatisseenasahugeoceanofoffsets,andtheroadaheadisratherlong.OnewaytoabsorbthehugequantumofoffsetsistohiketheFDIindefenceindustryfrom26percentto49percent,asdemandedbyasectionoftheindustry.Intheabsenceofdefenceexport

potentialandwithlimitedscopeforFDI,itmaybecomeanarduoustaskforundertakingtheoffsetobligationsbythevendorcompanies.This,inaway,isalsoamajorchallengeforthoseinthegovernmentresponsibleforimplementingthepolicy.

6.2 Relative Advantages

Opportunity in IndiaIndiahasgreatmarketadvantagesbecauseofhighdefence&commercialaircraftdemand,strongdomesticmanufacturingbase,costadvantages,well-educatedtalentpool,abundantlowcostskilledworkforce,abilitytoleverageITcompetitiveness,locationadvantageforMRO.

Further,IndianMROsegmentisestimatedtoreachUSD1.17billionby2010andUSD2.6billionby2020andIndianoffshoreengineeringisexpectedtobeat25percentofthetotaloffshoreengineeringspend.

TheGovernmentisalsogivingthrustwhichisexhibitedthroughlargeandgrowingspendondefence,space,civilaviationandResearchanddevelopment(R&D),liberalizationofdefenceandcivilaviationsectors,pushforprivateparticipationinmanufacturingandR&D,offsetpolicy,sharingofeightypercentofdevelopment,costswithprivateplayersforthedefenceR&D.

Besidesdefencespend,theGovernmenthasbudgetedforspace,homelandsecurity,etc.

India has great market advantages because of high defence & commercial aircraft demand, strong domestic manufacturing base, cost advantages, well-educated talent pool, abundant low cost skilled workforce, ability to leverage IT competitiveness, location advantage for MRO.

53 MinistryofDefence,GovernmentofIndiaAnnualReport,2007-08,Pan7.56.

54 AsperthepresentIndiandefenceoffsetspolicy,offsetscanbeunder-takenunderthreebroadcategoriesi.e.(a)exportofdefenceequipmentandservices;(b)FDIindefenceindustry;and(c)FDIinIndiandefenceR&Dorganisations.Onaroughapproximation,thesethreesegmentsmustaccountfor1/3Mofoffsetseacheveryyear.



7 Benefits in Indian defence industry and barriers thereto

7.1 Benefits in Indian defense industry56 for global aerospace and defence industry

Global trends in aerospace and defenceTheglobaldefencemarketsarelikelytostayflatthisyear,primarilyduetothesofteningoftheU.S.defensemarket,thelargestintheworld.CancellationsofmajorweaponsprogramsintheUnitedStates,coupledwithcostoverrunchallengesonmajorprogramsaroundtheworld,willlikelyhaveanimpactonadditionalspending.

Evenso,globaldefencespendingwilllikelystayatapproxi-mately2percentofglobalGDP,withSaudiArabia,Israel,

andtheUnitedStatesspendingaproportionatelyhigheramount,withEuropeanandAsiancountriesspendingless(seeFigures18and19).

Theglobalindustryistrulyataninflectionpointanditiscontinuingtomoverapidlyeast—towardChina,India,andtheMiddleEast.ThesecountriesareexpectedtobelargemarketsforA&Dindustryproductsandservices,aswellasparticipantsinthesupplychain.

A&D Prospects of India in AsiaInIndia,thesectorisgrowingatanunprec¬edentedrateandemergingasakeyparticipantintheAsiaPacificregion.UnitedStatesandEuropeanaerospacecompaniesarenowrecognizingIndiaasacriticalmarketaswellasapotentialmanufacturingpartner.Indiaisbecomingoneofthelargestmilitaryspendersintheworldandcatchingworldwideattention,withthethird-largestdefenceprocurementbudgetinAsia.In2010to2011,USD32.03billionhasbeenearmarkedfornationaldefence.Ofthis,USD13.04billionistobespentonacquisitionsfornewweaponssystemsequipmentandservices.ItisestimatedthatIndiandefenceprocurementwillrisetoanestimatedUSD45billionby2015,whichcouldmakeitoneofthemostattractivedefencemarketsintheworld.

InIndia,theprospectsforthedefencesectorarestrong.InlightoftheMumbaiattacksaswellastheoverallneedtomodernizeitsdefensivecapabilities,India’sarmedforcesareexpectedtoincreasetheirpurchasesofnewequipmentandtechnologyforthenext20to25years.LiberalizationofIndia’sdefenceprocurementpolicyoffersauniqueopportu-nityforIndiancompaniestoprovideservicesforthearmedforces.Currently,about70percentofprocurementinvaluetermsisfromforeignsources—withIndiancompaniessupplyingonlyaround25percentofcomponentsandsubassembliestostate-ownedcompanies.Butthesituationisexpectedtochangewiththecreationofmorepublic-privatepartner¬ships.However,inthenear-term,foreigncompanieswilllikelycontinuetohaveanedgeinthesupplyofdefencearmamentsandtransferoftechnology.

InIndia,foreignacquisitionsareexpectedtobemoreaffordableatthistime.IndustryconsolidationinIndiamaybeontheupswingforlargercompaniesthathavedesiretoentermanufacturingbusinesses.ThiswouldgivethemapresenceabroadtointeractanddobusinesswithOEMsandsuppliersdirectly,whilesimultaneouslyharnessingtheadvantagesthatIndiaasamanufacturingdestinationprovides.

Figure 18 : Defense spend as percentage of country GDP

Figure 19 : Percentage of total global defense spend

SaudiArabia

U.S.

India

World

Sweden

Canada

Mexico

10.00%7.30%

4.10%3.90%

2.50%2.40%

2.00%1.80%

1.50%1.30%1.10%

0.80%0.50%

0% 4% 8% 12%

Source:CentralIntelligenceAgency(CIA)

AsiaandOceania

13%

SouthAmerica

3%

NorthAmerica

45%

Africa1%MiddleEast

7%

Central&Europe

9%

WesternEurope22%

Source:SIPRandDTTGlobalManufacturingIndustry,A&Dsectoranalysis

56 Compass2010GlobalAerospace&Defensesectoroutlook–DeloitteReportbyDeloitteA&DTeamledbyTomCaptain,A&Dsectorleader,DTTGlobalManufacturingIndustry


Competitiveness in A&D SectorIndiaisbeingconsideredasthenextdestinationofmanufacturinggivencountry’sstrengthlikewidersupplierbase,lowcostmanufacturing,persistentfocusoninfrastructuredevelopment,hugepoolofskilledworkforceandincreasedpenchantforenhancingcompetitivenessbytherespectivefirms.Thereisalotofsynergybetweenautomotive,discreetmanufacturingandA&Dindustryduetoitssimilaroperationsandbusinessprocesses.ThesestrengthscanbeleveragedbytheexistingfirmsenteringintoA&Dspace.ThenatureofA&Dindustryisassuchtechnologyintensive,innovationandautomationdrivencoupledwiththecomplexsupplychain.ConsideringthemassiveopportunitiesthatA&Dsectorhasopenedupforrespectivefirms,thesefirmsneedafocussedapproachinordertoachieveeconomicsofscaleandatthesametimebeingefficientandleaninoperationstoremaincompetitive.HithertoIndianfirmslackedtheglobalcompetitivenessinengineering,qualityandtechnologyaspectsintheproducts.Howeverlatelythereisanincreasingthrustontheseaspects.WehavedelvedintothefollowingareastogettheperspectiveoncompetitivenessinIndianA&Dsector.

Supply ChainSincearoundtwothirdcostoftheendproductresideacrosssupplychain,managingcomplexsupplychainwouldremainoneofthevitalaspectsofA&Dindustry.Unlikeotherindustries,thenatureofsupplychaininA&Dsectorisentrenchedwithseveralplayersaddingvalueoncomponentandsub-assembliesatagivenpoint.ThefirmsundertakingopportunitiesinA&DsectorwouldevolvethemselvesasintegratorsorsuperintegratorsandtheirrolewillincreasinglybecomelargerintheA&Dvaluechain.Theemergedassemblersandintegratorswouldtreattheirupstreamsuppliersasrisksharingpartners.Theproximitytosourceswillnotbeabarrierasthespecializedcomponents/sub-assembliescanbesourcedfromotherlowcostregionswithdesiredtechnologyrequirements.Thesupplychainaspectssuchasresponsiveness,fasterdeliveries,leansupplychain,flexibilityinoperationsandqualitywouldremainthefocusareasfortheA&Dfirms.

Technology and quality Thoughintheinitialyears,thetechnologywouldbebroughtinmainlybyforeignplayers,theIndianfirmsneedtoquicklyrampupthetechnologybaseinordertoplayamorecollaborativerolewithassemblersandintegrators.Thefirmswouldbeexpectedtoplayavital

roleincollaborativeproductdevelopmentandensuringquicklaunchesbyleveragingre-useoftheexistingplatformsandcomponents.Onthequalityfront,theA&Dindustryessentiallyworkson9SigmaandthoughseveralIndianfirmshaveembracedstringentqualitystandards,mostofthesefirmshavereachedto6sigmalevelonly.Wehaveseenremarkabledevelopmentsinthesetwoareasintherecentyearsbutwestillneedconcertedeffortstotakeittothefullmaturity.

Productivity Indiahasatotallabourforceofaround450million.ThoughthereisaclearadvantageoflabourcostinIndia,therewouldbeincreasedpressurefromcostoflivingandinflationperspective.Thefirmswillhavetoreallyemphasizeonlabourproductivity,workingenvi-ronment,automationandmanufacturingbestpracticestoachievecompetitiveness.Government’singrainedfocusonenhancingtheskillsetsthroughsubstantialincreaseintechnicalskillcourses,industry-universityrelationships,settingupofR&Dbasewouldprovideamajorboosttoproductivityincrease.

ConsolidationsHithertoA&DspacewasownedbyverticallyintegratedOEMs.Butthistrendhaschangedgloballyintherecentyearsasfirmswanttoleveragecorecompetencyofthegroupandoffloadtherespectivevalueaddworktotheupstreamfirms.Giventhisopportunitycoupledwithoffsetpolicy,severallargerandmediumsizesuppliersareenteringintothefraytotakeapieofmammothA&Dindustry.SincethenatureofA&Dindustryismorespecializedthanotherindustries,theindustryis

India is being considered as the next destination of manufacturing given country’s strength like wider supplier base, low cost manufacturing, persistent focus on infrastructure development, huge pool of skilled workforce and increased penchant for enhancing competitiveness by the respective firms.


expectedtoseemoreconsolidations.TherewouldbeathrustonJVsandpartnershipstooinordertoachievetechnologyandcapacitiesquickly.Giventhecurrentconstraintsof26%FDI,theforeignfirmswouldholdcontrolofproductknow-how.Howeverinthelongrunitisnotacauseofworry.Thelocalfirmswouldbekeenonjointventuresandpartnershipswithforeignfirms.Atthesametime,theforeignacquisitionsarealsoexpectedtobeformedbylocalfirms.ThiswouldgivethemapresenceabroadtointeractanddobusinesswithOEMsandsuppliersdirectly,whilesimultaneouslyharnessingtheadvantagesthatIndiaasamanufacturingdestinationprovides.

7.2 Barriers and risks7.2.1 Restrictions on foreign investmentIndiahashistoricallyappliedtightrestrictionsontheallowableamountofforeigninvestmentinthedefenceindustry,duetoconcernsthatforeigninvolvementwouldhinderthedevelopmentoftheindigenousprivateandpublicsectorfirms.

In2001,theGovernmentopenedthedefencesectorforprivateIndiancompanieswith100%Indianshareholdingandallowedlimitof26%forforeignDirectinvestment.However,thisisstillseenasprohibitivelyrestrictivebypotentialinvestors.The2009AnnualEconomicSurvey,submittedtoIndianParliamentbytheChiefEconomicAdvisorintheMinistryofFinanceonbehalfoftheIndiancorporatesector,recommendedthattheFDIlimitshouldbeincreasedto49percent.57TherehasbeendebateddiscussiononincreaseofFDIfromthepresentlevelof26%inMinistryofCommerceandinprivateindustry.However,MinistryofDefenceisresilientonincrease.

7.2.2 Taxation IssuesThereisalsoarangeofindirecttaxesthatcanimpactordisadvantageforeignparticipationintheIndiandefenceindustry.ThereisnolevelplayingfieldforIndianprivatedefenceindustryvis-a-visDPSUs.Forexample,customsdutyand/orservicetaxesmayapplyto:• Importedequipmentortransferofintellectualproperty

underlicensingarrangementsforthepurposesofTransferofTechnology(TOT),whichisacommonrequirementofprocurementcontracts.

• Trainingservicesprovidedtothearmedforcesfornewequipmentandmachinery

• RepairandmaintenanceservicesJointventures(JVs)canbeformedtomeetoffsetobliga-tions.ThesearesubjecttothesametaxregimeasIndian

companies,butcanalsoincludeanumberofrequirementssuchasbusinessregistrations,filingtaxreturnsandpaymentofapplicablecustomduties.

AnoverviewofregulatoryandtaxationondefenceindustryisgivenintheAnnexure1.7.2.3 Domestic competitionIncreasingself-sufficiencyinthesupplyofdefencerequire-mentsthroughthesupportanddevelopmentoftheindig-enousdefenceindustryhaslongbeenanobjectiveoftheIndianGovernment.However,duetolimitationsofindig-enouscapabilities,Indiahashistoricallyreliedheavilyonforeignsupplyforitsdefenceneeds,consistentlyimportingover70percentofitsequipment.Thistopichasbeendiscussedindetailinsection6above.

7.2.4 Supply Chain IssuesThoughIndiahasawidespreadsupplychainnetwork,largesupplybaseandfavourableinvestmentenvironmentinplace,thereisamassivepotentialtobringstructuredimprovementsinsupplychainofA&Dindustry.Thesupplychainhasbecomeacornerstoneofafirm’ssuccessirre-spectiveofthescaleandcomplexityofthefirm.Ithasalsogainedwidermomentumintherecentyearsandfirmsareatdifferentstagesofadoptingthebestpracticesfromthesame/otherindustryintherelevantfunctions.SinceA&DisanewindustryparticularlyintheIndianmarket,thefirmsinthissectorcanadopttherelevantbestpracticesattheearlystageofsettingupfacility.Howeverseveralfirmshavestillnotreachedtoastageoffullmaturityofproduction,quality,delivery,distribution,maintenanceprocesses.Itisfurthercompoundedbyimpedimentssuchasinfrastructurebottle-necksanddelaysincompliancemeasures.Sincevalueaddwillbeimpartedbyseveralplayersinastagedapproach,theviabilityofoperationsofrespectivefirmsshouldbeapriorityareatoexploitthecompetitiveadvantageinthevaluechain.ThegovernmentandtherespectivefirmsneedtoputconcertedeffortsintandemtodebilitatetheseimpedimentsasasteptowardscompetitivenessintheA&Dsector.

7.2.5 DPP restrictionsTheDefenceProcurementProcedure(DPP)setsouttherequirementsfortheparticipationofforeignfirmsinthedefenceacquisitionsoftheIndianGovernment.TheDPPeffectivelyestablishesnon-tarifftradebarrierstothepartici-pationofforeignfirmsintheIndiandefencemarket.Thekeybarriersinclude:• thevariouscategoriesforcapitalacquisitions• theoffsetrequirements.

57 Misquitta,S.(2009)‘DefencecontractorsTargetBigJumpinIndia’sMilitarySpending’inTheWallStreetJournal,July17


Categories for capital acquisitionsAsnotedabove,theDPP-2008(Amendment2009)containedamendmentstotheexistingcategoriesforcapitalacquisitions.TherevisedcategoriesforcapitalacquisitionsaresummarisedinTable19.

UndertheDPP-2008BuyandMakecategory,RFPswereissuedtoforeignfirms,whowerethentoenterintoagree-mentswithIndianfirmsfortheToT.TheDefenceMinister,A.K.Antony,however,hasstatedthatthepreviousarrange-mentsdidnotleadtosufficientdevelopmentsintermsofjointventuresandco-productionarrangementsinIndia.58

UndertheBuyandMake(Indian)category,RFPsareissuedtoIndianfirms(ratherthanforeignfirms),whothenplayaleadroleinnegotiatingthetermsfortheToTandco-productionarrangementswithforeignfirms.ProjectproposalsarerequiredtosetoutthearrangementsforToTandco-productionarrangements.ItemsproducedundertheBuyandMake(Indian)categorymusthaveatleast50percentindigenouscontentonacostbasis.

TheBuyandMake(Indian)categoryisdesignedtoencouragejointventuresandco-productionarrangementsratherthanindigenousR&D.

CategorisationofprojectsasBuyandMake(Indian)requiresthefollowingprocedures:• DefenceServicesHeadquarters(SHQ)mustpreparea

CapabilityDefinitionDocumentoutliningtheacquisi-tionrequirementsandcurrentcapabilities,includingcriticaltechnologiestobeabsorbedbytheIndianPartner(identifiedinconsultationwiththeDRDO)

• TheServicesCapitalAcquisitionPlanCategorizationHigherCommittee(SCAPCHC)examinesthe

CapabilityDefinitionDocumentandprovidesarecommendationtotheDAC

• TheDACdecidestheoutcomeoftheprojectbasedontheSCAPCHC’srecommendation.

FollowingcategorisationasBuyandMake(Indian),theCapabilityDefinitionDocumentisprovidedtoselectedIndianfirms,whoarerequiredtoprovideaproposal,includingplansfordevelopmentandproduction.ProductionarrangementsmustincludedetailsofworkshareandtheToT,demonstratingthattheIndianpartnerwillabsorbcriticaltechnologies.59

Expediting acquisitionsFastTrackProcedures(FTP)wereintroducedintotheDPPin2001,andfurtherrevisedinthe2006amendments.AsstatedintheDPPtheobjectiveoftheFTPisto‘ensureexpe-ditiousprocurementforurgentoperationalrequirementsforeseenasimminentorforasituationinwhichacrisisemergeswithoutpriorwarning.’60

FTPappliesonlytoacquisitionsundertheBuycategory,andmaybeusedtoprocureadditionalitemsalreadyinservice,ornewequipment.However,FTPisnotavailableforequipmentrequiringfieldtrials,whichsignificantlylimitsthescopeofitsapplication.

Salescanbealsoexpeditedbywayofthegovernment-to-governmentForeignMilitarySales(FMS)procedures.

Table 19: Capital acquisition categories in the DPP

Category Description

Buy(Indian) TenderrequestsarereleasedtoIndianvendorsonly.Itemsmusthaveaminimumof30percentindigenouscontentifsystemsarebeingintegratedbyanIndianvendor.

Buy(Global) TenderrequestsarereleasedtobothforeignandIndianvendors.

BuyandMake

Itemsareacquiredfromaforeignvendor,followedbylicensedproductionandindigenousmanu-factureinIndia.

BuyandMake(Indian)

TenderrequestsarereleasedtoIndianvendorsonly,requiringIndianvendorstoformajointventureorestablishaproductionarrangementwithaforeignvendor,leadingtolicensedproduc-tionandindigenousmanufactureinIndia.Thiscategoryrequiresatleast50percentindigenouscontent(onacostbasis).

Make TendersarereleasedtoIndianvendorsonly,forindigenousdesign,developmentandproduction.

Source:DPP-2008(Amendment2009)

58 ‘DPP‘eases’proceduresforprivatesector’inVayuDaily,2009

59 Atleast50percentofcriticaltechnologiesmustbeincategoryIandIIassetoutintheDPP2008.

60 MinistryofDefence(2008),DefenceProcurementProcedure,p.191


FMSoffersanalternativepathtotheDefenceProcurementProcedures,whichdespitenumerousrevisionsappearstobeonerousandtimeconsuming(despitetheexistenceoftheFTP).61

Implications for future acquisitionsAsnotedabove,theacquisitioncategoryisdecidedonacasebycasebasis.Therefore,itisnotimmediatelyapparentwhichcategorywillapplyforthefutureprocurementsiden-tifiedinthefourdomains.

However,statementsfromtheMinistryofDefencefollowingthe2009amendmentshaveindicatedthattheuseofthenewBuyandMake(Indian)categoryislikelytobeprioritised.Forexample,attheNationalSeminaronDefenceAcquisitionsinlate2009,DefenceMinisterA.K.AntonystatedthattheexistingBuyandMakecategoryhadnotmetexpectationsofpromotingjointventuresorestablishingco-productionarrangements,ashortcomingthatthenewBuyandMake(Indian)categorywasintendedtoovercome.62

Offset contractsTheoffsetprovisionshavebeendiscussedatsection6above.

7.2.6 Identified risks: Bureaucratic delays, lack of trans-parency, uncertain contracts InadditiontothebarrierstoforeignparticipationintheIndiandefenceindustry,therearealsoanumberofriskstoinvolvement,includinghighcostsofsale,timedelays,bureaucracyandcorruption.Theseissueshavecontributedtoasignificantlevelofunderspendinthekeydomainsassetoutabove.Capitalacquisitionsaresubjecttoarangeofapprovalprocedures.TheDPPsetsoutthebroadstagesandtimeframesforprocurementprocesses,asshowninTable20.

BroadtimeframesforcapitalacquisitionssetoutintheDPPindicatethatprocurementsshouldtakebetweentwotothreeyears(includingfieldevaluationtrials).64

Giventhelengthandextentoftheprocurementprocess,thecostsofbiddingforprocurementcontractscanbeveryhigh,

61 ‘ModernizingArtilleryRetrospectandProspect’inIndiaStrategicDefenceMagazine,contributedbyBrigVinodAnand(Retd),SeniorFellowattheCentreforStrategicStudiesandSimulation,UnitedServiceInstitutionofIndia,NewDelhi,Feb1-March15,2010,Vol5,Issue2,pp.16-18,http://www.indi-astrategic.in/topstories483.htm,accessedMarch2010

62 “DPP‘eases’proceduresforprivatesector”inVayuDaily,2009

63 OpportunitiesintheIndianDefenceSector,preparedfortheCIIbyKPMG(2010)

64 MinistryofDefence(2008),DefenceProcurementProcedure,pp.41-42

Table 20: Procurement process and timeframes63

Stage Timeframe Procedures Authoritiesinvolved

DraftingofservicerequirementsAcceptanceofNecessity

1month Commencementofprocurementprocessbyissuingarequestforinterest(RFI),including:• ServicesQualitativeRequirements(SQRs)• AcceptanceofNecessity(AoN).

• SHQ• HQIDS• DPB• AcquisitionwingofMoD

IssueofRFPs 4months Descriptionofkeyrequirementsincluding:• Technicalparameters• Quantity,acquisitioncategoryoffsetobligations,trainingrequirements• Commercialaspects• Evaluationcriteria

• SHQ• DAC

Technicalevalu-ationsandfieldtrials

11-17months

• EvaluationofoffersbyTechnicalEvaluationCommittee(TEC)• VettingofTECreport• Fieldtrialsandapprovalofstaffevaluations

• TEC• SHQ• DRDO• DGQA–DirectorGeneral

ofQualityAssurance• AcquisitionwingofMoD

Commercialnegotiations

4-11months

• InvolvementoftechnicaloversightcommitteeforprocurementsoverUSD75million

• OpeningofbidsanddeterminationofL1• NegotiationswiththeContractNegotiationCommittee(CNC)• ApprovalbytheMinistryofDefence(MoD),MinistryofFinance(MoF),and

CabinetCommitteeonSecurity(CCS)• Evaluationofcommercialoffsetoffers

• TechnicalOversightCommittee

• CNC• CFA• MoD• MoF• CCS

Signingofcontract 2-3years

Source:ReportonopportunitiesintheIndianDefenceSectorpreparedforCIIbyKPMG2010


particularlywherethereisarequirementforfieldtrialstobeheldinIndia,ratherthaninthecountryofmanufacture.

Unforeseendelaysinthetenderingprocesscanalsoincreasecoststobidders.WhiletheDPPsetsouttimeframesofaroundtwotothreeyearsforprocurements,experiencehasshownthattheprocesscanoftentakeinexcessoffiveyears.Forexample,whileanumberofRFPshavebeenissuedfortheacquisitionofartilleryoverthelastdecade,nosignificantnewinductionshaveoccurredsincethe1986acquisitionoffieldhowitzersforSwedishfirmBofors.Thishasbeenpartlyduetoalackofsuitablevendorsandissueswithfieldtrials.65

Anumberofacquisitions(includingtheBoforsdeal)havealsobeensubjecttoallegationsofcorruption.Thishashadtheimpactofreducingthenumberofvendors,andlockingtheGovernmentinlegaldisputes.Itisimportanttonotethatpreviousallegationsofcorruptionhaveofteninvolvedinvestigationsofforeignfirms,andarenotnecessarilyrelatedtoindigenousissues.66

7.2.7 Quality Assurance Procedures in defence67 TheimpliedneedsofDefencearereliability,maintainability,robustnessandeaseofoperation.Thequalityassuranceisrequiredthroughequipmentlifecycle.TheDirectorateGeneralofQualityAssurance(DGQA)isthegoverningbodyforthequalityassurance.The primary roles of DGQA are: • qualityassurance(QA)ofdefensestoresprocuredfrom

ordnancefactories,PSUs(BEL,BDL,GSL,MDL,GRSE,MIDHANI,HAL,BEMLetc.)

• Initiateactionsnecessarytoensurethatthearmedforcesgettheentirerangeofarms,ammunition,equipment&storesofthedesiredqualitysoastoenhancethecombatefficiency&effectivenessoffightingforces.

ThemainfunctionsofDGQAarequalityassurance(QA),technicalservicesandguidance,defectinvestigation,evaluationofUser’sfeedbacks,vendorregistrationandmiscellaneous

Directorate wise responsibility of quality assurance of equipmentDQA (A): Weapons,SmallArms,Ammunition,Instruments–OpticalAndOpto-Electronics

DQA (L): TelecommunicationEquipment,ArmouredVehicleElectronicSystems,ElectronicWarfareEquipment,Batteries&Cables,GeneratorSets&ChargingSets,Counterled

Equipment,TestEquipment&MedicalElectronics

DQA(V): ‘B’Vehicles,SpecialistVehicles,TankTransporters,EarthMovers(TrackedDozers).

DQA(S):TextilesAndClothing,FootwearAndLeatherStores,PetroleumProducts,DrugsAndPharmaceuticals,PaintsAndChemicals,SpecialistEquipment,GeneralStores,Parachutes

DQA(M&E): MilitaryExplosives,NodalAgencyForMetallurgicalRelatedActivities

DQA(CV):TankT-72&ItsVariants,TankT-90,MBTArjun,ICVBmp&ItsVariants

DQA(R&S): Radars,MissileSystems–ATGM&Sam(OtherThanIGMDP),UnmannedAerialVehicles,Simulators,C3iSystems

DQA (EE):BridgingEquipmentAndWaterCraft,FireFightingEquipments,NBCSystems,AllWKSPEquipments

DQA (N): Electronicandelectronicitems,Weapons-bothconventionalandguided,FireControlsystems,RadarsandCommunication,SteelforShipbuilding,Navalstores

DQA(WP): Diesel,GasTurbines,SteamTurbines,SteeringGear,Stabilisers,DgSets,AC&RefPlants,Pumps,Compressors,Galleys&Stp.

65 ‘ACommentaryontheIndianArmy-Artilleryupgrades’(January2010),ReligareStrategicAdvisoryServices,(notpubliclyavailable)

66 ‘ACommentaryontheIndianArmy-Artilleryupgrades’(January2010),ReligareStrategicAdvisoryServices,(notpubliclyavailable)

67 ColonelVashishtpresenta-tiononQualityAssuranceandDGQA


8 Strategic Alliances

8.1 Defence Memorandum Of Understanding (MOUs) in IndiaTable21belowgivesatentativelistofMOUsinIndiasofarenteredbytheIndianGovernmentandIndianPublicandprivateindustry.

Table 21: Defence MOUs in India

Date Entities Involved Details

February200368 ConfederationofIndianIndustry(CII),thePolishChamberofNationalDefenceManufacturers

Tocooperateinthejointmarketingofmilitaryhardware.

September200369 India,Seyechelles SignedMoUonDefence.

April200570 Antrix,EADS SignedMoAtojointlyaddressthecommercialmarketforcommunicationssatelliteswithpayloadpowerbelow4Kwandalaunchmassintherangeof2to3tons.

September200671 HAL,EADS SignedaMoUthatwillexpandtheircooperationintonewmarketsegmentsandexploringmid-termandlong-termstrategiesonthekeysegmentsofaerospacebusiness.

February200772 HCL,Smith’sGroup’saerospaceUnit,SatyamTechnologies,NorthropGrumman

HCLTechnologiespartneringwithUK’sSmith’sGroup’saerospaceUnit,tosetupanengi-neeringservicescentreandM/sSatyamTechnologiesforminganalliancewithNorthropGrumman.Goingbythesurgeindealsandbusinessopportunitiesthuscreated,theaerospacemarketisexpectedtobebuoyantinthecomingyears.

February200773 M/sLarsenandToubro(L&T),EADS,Boeing

M/sLarsenandToubro(L&T),theengineeringgiant,isforayingintointernationalandaerospaceinpartnershipwithBoeingandEADS.ThecompanyhasdrawnupamegaplantosetuptwodefenceandaerospacecomponentmanufacturingunitswithaninvestmentofRs500crore.BothBoeingandEADShaveagreedtosourcecomponentsfromL&Tfortheirdomesticandinternationaluse.L&ThadsignedanMoUtothiseffectwithbothBoeingandEADSduringtheAeroIndiaAerospaceshowatBangaloreinFebruary2007.

February200774 BEL,NorthropGrummanCorporation

SignedaMoUtoexplorebusinessopportunitiesonpotentialco-productionopportunitiesinsupportoftheIndiangovernment’scurrentandfutureaerospaceanddefenceelectronicsrequirementsaswellasNorthropGrumman’sinternationalmarketrequirements.

February200775 BEL,ElbitSystemsElectroOpticsELOPLtdofIsrael

SignedanMoUforsettingupajointventurecompany(JVC)forco-operationinthedevel-opment,productionandmarketingofthermalimagingcamerasandforwardlookinginfrared(FLIRs)fortheIndianandglobalmarkets.

February200776 BEL,LockheedMartin SignedanMoUtoexplorebusinessopportunitiesonpotentialco-productionavenuesfordomesticaerospaceanddefenceelectronicsneeds.

December200777 HAL,Boeing SignedanMoUtosourcesub-systemsforfighteraircraftandhelicoptersworthUSD1billion,overaperiodof10years.TheMoUisexpectedtobenefitHALthroughenhancedexportopportunities,developmentofnewtechnologiesandprocess;andimplementationofbestpracticesandskillsforglobalcompetitiveness.

January200878 Boeing,IndianInstituteofScience,Wipro,HCL

BoeingenteredintoanagreementwiththeIndianInstituteofScienceandtwoleadingIndianinformationtechnologycompanies(MIs,WiproTechnologiesandM/sHCLTechnologies).Inaccordancewiththeagreement,anAerospaceNetworkResearchConsortium(ANRC)willbeformed.LedbyBoeing,theANRCisIndia’sfirstpublic-privateaerospaceresearchconsortium.



February200879 TataPower'sStrategicElectronicsDivision(SED),Thales

SignedaMoUintheareaofoptronics.ThroughthisMemorandumofUnderstanding,TataPowerSEDandThalesagreedtocooperateinordertoofferoptronicssolutionsforIndiandefensemarketsuchastheMMRCAprogrammeandfurtherprogramsonexistingorfutureairborneplatforms.ThisagreementallowedbothCompaniestodeveloptransferoftech-nologiesinordertoimplementlocalcontentsandmeettheOffsetrequirementsofIndianMOD.

February200880 TataGroup,IsraelAerospaceIndustries(IAI)

Signedamemorandumofunderstandingwiththeinfordevelopingandmanufacturingawiderangeofdefenceproducts,includingmissiles,unmannedaerialvehicles,radars,electronicwarfareandsecuritysystems.

February200881 HAL,AirbusIndustryofFrance HALhasbecomeanimportantoutsourcinghubforsupplyofdoorstoAirbusIndustryofFrance.In2008,itwonanorderworthUSD150millionforthesupplyof2,000doorsforthesingleaislefamilyofaircraftconsistingoftheA-318,A-319,A-320andA-321series.ThisisinadditiontotheearlierordersreceivedbyHALfromtheEuropeanmajor.Thecontractwillbegintobeexecutedin2009andwillstretchoveraperiodoffiveyears.

July2008 InfotechLimited,AltenGroup SignedaformalagreementtocreateanexclusivepartnershipspecificallyforEADS.Bycombiningthedomainexpertise,advancedprojectmanagementcapabilityandcustomerknow-howofALTENinEuropewithanefficient,scalableandcostefficientoffshoredeliveryexpertiseofINFOTECHinIndia,thecollaborationwillallowaddressingandachievingsomeofthekeyobjectivesofEADSinEuropeandfromIndia.Thetie-upenableshighdegreeofscalability;world-classqualityandquickresponsetimetoenableEADSsignificantlyimprovetimetomarketanddecreasecost.

December200882 India,US Signedamemorandumofunderstanding(MoU)toboostitsmissiledefencesystem.TheMoUaimedatgivingIndiathestateofthearttechnologythatwouldallowittointerceptanythreatfromballisticmissiles.

December200883 HindustanAeronauticsLimitedandRussia'sUnitedAircraftCorporation(UAC)

Inkedapacttojointlydevelopandproduceafifthgenerationfighteraircraft.

February200984 Boeing,BEL SignedanMOUforsettingupananalysisandexperimentationcentreinpartnershipwithBELinBangalore.Thecentrewouldanalyzepresentequipmentandvisualizefuturerequire-ments.Thecentrewoulddofluiddynamicsstudiesandotherresearchinaircraftdesign.

February200985 InfotechEnterprises,Eurocopter Enteredintoamemorandumofunderstandingfortheattackhelicopterprogramme.

February200986 QuestGlobal,Textron,Sikorsky SignedanMoUwiththeUS-basedTextronIncforthedevelopmentofaglobalSEZinKarnataka.AsperthetermsandconditionsofMoU,TextronandQuestGlobalwillworktogethertodevelopthemanufacturingcapabilitieswithintheSEZ.

QuestGlobalhasalsosignedanMoUwithSikorskytoexplorethepossibilityofsettingupamanufacturingbaseforcomponents.

February200987 TAML,Saab TataAdvancedMaterialsLtd(TAML)aTataGroupCompany&SaabhavesignedaBusinessAgreementonFebruary12formanufactureofstructuralcompositecomponents.TATAIndustrialServicesLimited(TISL)wasinstrumentalinstructuringthebusinessrelationshipbetweenSaabandTAML.

TheagreementisforaperiodoffouryearsformanufactureofcompositecomponentsforoneofSaab’scommercialprograms.



February200988 BEL,AstraMicrowaveProductsLtd

SignedMoUtoformajointventurecompany.

AccordingtothetermsoftheMoU,thejointventure,inwhichBharatElectronicswillown49%equityandAstraMicrowavewillown51%equity,willdesign,develop,prototype,manufacture,andmarketRFandmicrowaveproductsforuseindefense,space,andtelecommunications.TheJVisproposedtobetheplatformforthedesign,development,andmanufactureofBEL’smicrowaveintensiveproducts.

March200989 BEL,BHEL SignedanMoUtoexplorea250-MWjointmanufacturingfacilityforsolarphotovoltaiccells,modulesandsiliconwafers.

March200990 CSMSoftwarePvt.Ltd.,BEMLLimited,

UndertheMinistryofDefence,Govt.ofIndia,signedofastrategicMoU.TheobjectiveofthisMoUwastoaestablishaframeworkfortheexecutionoftheengineeringservicesorderslikelytobereceivedbyBEMLthroughCSM’ssalesandmarketingefforts,underthedefenceoffsetclause,andtoensuretotalcustomersatisfaction.

April200991 BrahMosAerospaceLtd,ISRO SignedanMOUforlaunchvehicleintegration.

April200992 OFB,IMI SignedadefencedealwithIsraelforsettingupanartillerymunitionsfactoryinBiharstate.

June200993 NAL,HAL enteredintoanagreementtodevelopandproducethelighttransportaircraftSaras.Theyhavesignedamemorandumofunderstandingtodevelopthe14-seateraircraftwhichcanalsobeusedasanambulance,civilapplicationsandexecutiverequirements.HAL'scontributiontotheprojectisintheareasofdesigninglandinggear,hydraulicsandelectricalsystemsandthemanufactureandassemblyofwings.

November200994 India,Sweden SignedMOUindefencethatwouldpromotebilateralco-operationindefence.

November200995 CFMInternational(CFM),GMRHyderabadInternationalAirportLimited(GHIAL).

SignedaMoUunderthetermsofthisagreement,GHIALandCFMwouldworktowardsthedevelopmentofanewCFM56MaintenanceTrainingCenterattheRajivGandhiAirportinHyderabad.

ThenewtrainingcenterisenvisionedtomirrorCFMfacilitiescurrentlyoperatinginFrance,theUnitedStates,andChina,andwouldinitiallyprovideadvancedcoursesinlinemain-tenanceandinspectionofCFM56-5BandCFM56-7Bengines,whichpowerthemajorityofAirbusA320familyaircraftandallBoeing737s,respectively.Thenewcenter’splannedlocationisinaspecialeconomiczoneattheairportdedicatedtomaintenance,repairandoverhaul(MRO).

January201096 IndiaandGovernmentsofRussia,BrazilandMalaysia

SignedanMoUtofightterror.TheMoUsignedfocusesonenhancingcooperationbetweentheconcernednationsandensureasmoothflowofinformationpertainingtoterrorandthesourceoffinancingterrorandmoneylaundering.TheMoUwouldalsoenablethegovernment’sFinancialIntelligenceUnit(FIU),whichisresponsibleforreceiving,processing,analyzinganddisseminatinginformationrelatingtosuspectfinancialtransac-tionstoenforcementagenciesandforeignFIUs,toshareinformationwiththesecountriesonsuspectedmoneylaunderingactivities.

January201097 DRDO SignedsixMOUswithJyothyLaboratoriesforwoolcare;VantageSecurityforexplosivedetectionkit;DeltapureWaterIndiaLtd.andArivaGroupforRObasedWaterPurificationSystem;MGMAssociatesforHighAltitudePulmonaryOedema(HAPO)ChamberandGSCGlassLtd.forelectrochromicwindow.

February201098 SpeckSystemsLtd,IsraelAerospaceIndustriesLtd(IAI)

EnteredintoanagreementwithIsraelAerospaceIndustriesLtd(IAI)formanufacturingandservicesupportofthelatter’sminiandmicrounmannedaerialvehiclesproductrangeinIndia.



February201099 ShriLakshmiDefenceSolutionsLtd(SLDS),"Ukrinmash"

Signedanagreementformanufacturingandmarketingofhundred8x8and6x6APC(ArmouredPersonnelCarrier)requiredbyIndianArmyfortheUnitedNations(U.N.)Mission.

February2010100 ShriLakshmiDefenceSolutionsLtd(SLDS),M/sADCOMMILITARYINDUSTRIES

SignedanMoUwithforsupplyingandmarketing100to300hightecharmouredvehiclesintheMiddleEastandSouthAfrica.

February2010101 Larsen&ToubroLimited(L&T),RaytheonCompany

AnnouncedteamingupinaL&TledproposaltoupgradeIndianArmyT72tanks.Undertheproposal,RaytheonwillprovideinfraredimagingsightsandElectronicsthatwillgreatlyimprovetargetaccuracyandincreaseoverallsystemlethalityonthebattlefieldforT72tankbattalions.Raytheonhasprovided20,000thermalsightsinmorethan15countries.

February2010102 BharatElectronics,FinmeccanicasubsidiarySelexGalileo

Signedanoutlineagreementtoexplorepossiblecollaborationintheelectronicwarfaresector.PotentialopportunitiesinthisMOUincludefulfillingoffsetrequirementsandcontractmanufacturingforexportmarkets.

March2010103 WalchandnagarIndustriesLimited(WIL),DCNS

SignedanMOUtomanufacturecriticalequipmentforScorpenesubmarinestobeusedbytheIndianNavy.Thesubmarinesarebuiltbystate-ownedMazgaonDocksLtd,andareexpectedtojointhenavalfleetby2018.

March2010104 India,Russia Signedaslewofagreements,includingsomelong-pendingdefenceaccordsandpactsinthatwouldstrengthentheircooperationintheareasofcivilnuclearenergyandspace.

68 http://news.indiamart.com/news-analysis/indian-polish-defenc-2170.html69 http://www.encyclopedia.com/doc/1G1-107561726.html70 http://www.accessmylibrary.com/article-1G1-133337825/antrix-and-eads-sign.

html71 http://findarticles.com/p/articles/mi_hb3126/is_685/ai_n29296873/72 <www.arcweb.com>73 TheHindustantimes,Mumbai,November29,200774 http://www.indiaprwire.com/pressrelease/defense/200702061814.htm75 http://www.accessmylibrary.com/article-1G1-159426557/bel-inks-mous-aero.html76 http://www.prdomain.com/companies/B/BharatElectronicsLimited/newsre-

leases/20072938976.htm77 <www.india-defence.com/3774>78 http://www.ciol.com/news/news-reports/

boeing-ties-up-with-iisc,-wipro,-hcl/30108103207/0/79 http://www.stockwatch.in/tata-power-signs-mou-french-defense-major-244580 http://www.thehindu.com/2008/02/18/stories/2008021854801200.htm81 TheHindu,NewDelhi,March19,200882 http://www.geo.tv/12-18-2008/30928.htm83 http://www.india-defence.com/reports/411284 http://www.thehindu.com/2009/02/11/stories/2009021155461600.htm85 http://www.allvoices.com/

news/2463319/s/28409992-infotech-signs-mou-with-eurocopter86 http://www.exchange4projects.com/SEZ/

quest-global-teams-up-with-textron-for-global-sez87 http://machinist.in/index.php?option=com_content&task=view&id=1931&Itemi

d=288 http://www.valuenotes.com/press/pr_BEL_11FEb09.

asp?ArtCd=141936&Cat=C&Id=136989 http://www.moneycontrol.com/news/business/bel-bhel-plan-250-mw-solar-

venture-_391021.html

90 http://www.indiaprwire.com/pressrelease/defense/2009030420850.htm91 http://www.mynews.in/news_details.php?storyid=1730692 http://www.google.co.in/search?hl=en&q=OFB+and+Israel+military+industries&m

eta=&aq=o&aqi=&aql=&oq=&gs_rfai=93 http://www.faqs.org/abstracts/Business-international/HAL-NAL-TO-DEVELOP-

SARAS-FRESENIUS-KABI-EYES-TWO-BRANDS-FOR-ACQUISITION.html-94 http://www.swedenabroad.com/News____21610.aspx?slaveid=9943195 http://www.cfm56.com/press/news/cfm+signs+agreement+for+cfm56+training+c

enter+in+india/48196 http://www.8ak.in/8ak_india_defence_news/2010/01/india-signs-mou-with-

russia-brazil-malaysia-to-fight-terror.html97 http://www.mynews.in/News/DRDO_signs_six_MoUs_with_industry_for_tech_

transfer_N36280.html98 http://www.thehindubusinessline.com/2009/02/11/stories/2009021152010500.

htm99 http://www.defenseworld.net/go/defensenews.

jsp?showid=103&id=4174&h=Shri%20Lakshmi%20Defence%20Solutions%20signs%20with%20Ukrainian%20firm%20manufacture%20over%20100%20armoured%20vehicles

100 http://www.defenseworld.net/go/defensenews.jsp?showid=103&id=4174&h=Shri%20Lakshmi%20Defence%20Solutions%20signs%20with%20Ukrainian%20firm%20manufacture%20over%20100%20armoured%20vehicles

101 http://www.defenseworld.net/go/defensenews.jsp?id=4165102 http://www.defensenews.com/osd_story.php?sh=VSDI&i=3944907103 http://timesofindia.indiatimes.com/city/pune/WIL-signs-MoU-with-French-naval-

shipbuilder/articleshow/5744748.cms104 http://netindian.in/news/2010/03/12/0005733/

india-russia-sign-civil-nuclear-defence-space-agreements



July2005105 HAL,SNECMAofFrance

HALandSNECMAofFrancesignedanagreementtoformaJVthatwouldbeacentreforexcellenceforthemanufactureofkeycomponentsandassembliesofaeroengines.WhileHALwouldbringitsmanufac-turingexperienceinIndia,SNECMAwouldtransfertechnologytotheJV,providingHALadditionalexportavenuesandgreateraccesstocivilaerospaceindustry.

August2007106

LockheedMartin,WiproTechnologiesofIndia

LockheedMartinoftheUS,theworld’slargestdefencemanufacturingcompany,andWiproTechnologiesofIndia,togetherannouncedopeningofaNetworkOperationsCentreinGurgaon,nearNewDelhi.Knownas“AmbarJyoti,”thislabwilldevelop,demonstrateandexperimentwithemergingnetwork-enabledcapabilitiesandapplications.LockheedMartinandWiprowillutilisecutting-edgetechnologiesandrealenvironmentalemulationtodevelopnet-enabledcapabilitiesandsolutionstoemployagainstcurrent,realworldproblems.

February2008107

Boeing,Tata BoeingandTatautilizesexistingTatamanufacturingcapabilityandalsodevelopsnewsupplysourcesthroughouttheIndianmanufacturingandengineeringcommunitiesforbothcommercialanddefenseapplications.Manufacturingcapabilitiesestablishedwithinthejoint-venturecompanywouldinlaterphasesbeleveragedacrossmultipleBoeingprograms,includingtheMediumMulti-RoleCombatAircraftcompetition.ThisinvolvedUSD500millionofdefenserelatedaerospacecomponentwork.

May2008108

Thales,Samtel FrenchdefenceandaerospacemajorThalesandthecity-basedSamtelgroupannouncedajointventuretodesign,manufactureandsellavionicssystemsintheIndianmarket.SamtelandThaleswouldhold74:26intheventurethatwasstartedwithacapitalofUSD12.5millionwithmoreinvestmentstobepumpedinasthejointdevelopmenteffortswouldprogress

September,2008109

TCS,SAAB ITservicesproviderTataConsultancyServices(TCS)announceditspartnershipwithSaab,aproviderinproductsandservicescateringtomilitaryandcivilsecurity,fortheestablishmentofSaab’sAeronauticalDesignandDevelopmentCenter(ADDC)inIndia.

ThepartnershipwouldestablishAeronauticalDesignandDevelopmentCenter(ADDC)thatwouldaimataddressingtheglobalaeronauticalmarket.ItwouldcreateasinglesourceofdesignanddevelopmentcapabilitieswithinIndia,inaddressingdomesticandtheglobaldefenseandcivilaeronauticalapplications.

January2009110

L&T,DRDO Larsen&Toubro(L&T)tiedupwithDRDOtosetuparesearchfacilityforweaponsconceptualizationforallcommercialproductionundertakenbyDRDO.

February2009111

DassaultSystèmes,KPITCumminsInfosystemsLtd

DassaultSystèmes(DS)theworldleaderforProductLifecycleManagement(PLM)softwaresolutionsandKPITCumminsInfosystemsLtdaspecialistsolutionspartnertoglobalmanufacturingcorporations,signedago-to-marketpartnershipforjointsolution&businessdevelopmentonENOVIAPlatform.

February2009112

TataGroup,IsraelAerospaceindustry

TataGroupandIsraelAerospaceindustrytiedupwithinajointventureincalledNovaintegratedsystemswithFDIof50millionUSD,whichwouldbemakingmissiles,pilotlessdrones,electronicwarfaresystemsandotherdefenceequipment.Tataowns74%whileIAIowns26%.

March2009113

Wipro,GESecurity WiproforgedaJVwithGESecurityofUSduringtojointlyproduceandmarketphysicalsecuritysolutionsforIndiandefenceforces.

April2009114

TAAL,TIDCO BangalorebasedTanejaAerospaceisplanningtofloatajointventurewithTamilNaduownedTIDCOtocreateanewfacilityatHosur,manufactureaeropartsandwouldexploitopportunityintheMRO.

May2009115

Larsen&Toubro,Europe'sEADS

AnnouncedtheformationofajointventurecompanyfordefenceelectronicsinIndiaaimatdevelopment,design,manufacturingandrelatedservicesinthefieldsofelectronicwarfare,radars,militaryavionicsandmobilesystemsformilitaryrequirements.

8.2 Defence Joint Ventures in IndiaTable22givesalistofjointventuresbetweenforeigncompaniesandDPSUsaswellaswithIndianprivatedefenceindustry.

Table 22: Defence Joint Ventures in India



June2009116 HAL,CAE HALandCanada’sCAEjointlysetupanewhelicoptertrainingcentre.

October2009117

SAERTEX,KEMROCK

SAERTEX,theworldleaderinnon-crimpglass,carbonandaramidefabrics,plannedtosetupa50:50JointVenturecompanyinIndiawithKEMROCKIndustriesandExportsLimited,Vadodara,Gujarat;andaccord-ingly,anMOUwasenteredintobyandbetweenSAERTEXandKEMROCKtoformtheJV.

ThejointventurenamedasSAERTEX-KEMROCKINDIALIMITED,wouldsetupanewfacilityforproducingvariouscomponentsforIndianandglobalaeronauticalindustry.

November2009118

Sikorsky,TataAdvancedSystems

SikorskysignedajointventurewithTataadvancedSystemsintoproducecabinsfortheS-92helicopterandaerospacepartsatHyderabadcity.

November2009119

Airbus,AirspaceInfrastructurePvt.Ltd,AirlogicLtd

Airbus,AirspaceInfrastructurePvt.LtdandAirlogicLtdhaveestablishedanewsparepartsandlogisticssupportjointventure-SparesSupportSolutionsIndia,Pvt.Ltd.(SSSI).

ThejointventurewillmaintainaninventoryofrotablecomponentsusedonalltypesofAirbuscommer-cialaircraftbyoperatorsinIndiaforoutrightsale,exchangeandcustomizedpoolingarrangements.SSSIwillalsooffersale/leasebackofcomponentinventories;thepurchaseofinventoriesassociatedwithfleetphase-outs;andlocalized,just-in-time,supporttobothairlinesandMROsinIndia.

TheJVissplit26%betweenAirbusand37%eachfortheotherpartners.AirspaceInfrastructurehasexpertiseinbondedwarehousingandcompliancewiththeIndiancustomsregimewhileAirlogicspecializesincomponenttrading,distribution,repairmanagementandsparesexchangeprograms.

February2010120

Wipro,CAE WiprosignedanagreementwithCAEintoprovidesimulation-basedtrainingforareaslikewargaming,C4ISRandarangeofdefenceplatformsexpectedtobeacquiredbyIndia’sdefenceforces.ThetwocompaniesalsoagreedtohelporiginalequipmentmanufacturersmeetoffsetobligationsinIndiathatarerequiredbydefenceministry.

February2010121

BEL,SurinameArmedForces

BELsignedacontractwithSurinameArmedforcesfordeliveryofcoastalcommunicationsystemnetworkserver.

February2010122

Agustawestland,TataSonsLtd

AgustawestlandandTataSonsLtdsignedtocreateaJointVenturewithduringwhichwouldbeconcen-tratingonassemblyworkofAW119helicopterfortheworldwidemarket,withaproductionrateof30ayearandthefirstaircraftpotentiallyreadyfordeliveryin2011.TheAW119wouldbeproposedtoIndianmilitaryReconnaissanceandSurveillanceHelicopterprogram.

April2010123 RollsRoyce,HAL RollsRoyceandHALforgeda50:50jointventuretomanufacturecompressorshroudringsandconstruc-tionofanewproductionfacilitythatwouldincorporatethelatestinmodernmanufacturingtechniques.

April2010124 Mahindra&MahindraLtd,BAE

Mahindra&MahindraLtdandBAEforgedaJVtodevelopstrikevehiclesforIndianArmy.M&Mowns74%equityandBAEowns26%.

105 <www.newindpress.com>106 <www.wipro.com>107 http://www.industryweek.com/articles/boeing_tata_industries_announce_india_

joint_venture_15820.aspx108 http://www.thaindian.com/newsportal/sci-tech/thales-samtel-form-joint-venture-

for-avionics_10046498.html109 http://www.ciol.com/News/News-Reports/

TCS,-Saab-to-setup-ADDC-in-India/10908110181/0/110 http://www.india-defence.com/reports/4181111 http://www.kpitcummins.com/downloads/Dassault-Systemes-and-KPIT-Cummins-

Joint-Press-Release.pdf112 http://indiadefenceonline.com/379/iaitata-group-joint-venture-kick-starts/113 http://www.livemint.com/2009/03/10174039/GE-Security-Wipro-Infotech-in.html114 http://stockmarketing.in/news/taneja-aerospace-likely-to-float-jv-with-tidco/5861/115 http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/

LT-EADS-announce-JV-for-defence-tech/articleshow/4485612.cms

116 http://www.indianaviationnews.net/careers/2007/08/hal-canadas-cae-in-jv-for-pilot-school-in-blore.html

117 http://www.mydigitalfc.com/corporate-releases/saertex-launches-saertex-kemrock-india-limited-jv-kemrock-industries-and-exports-

118 http://www.defenseworld.net/go/defensenews.jsp?id=4175119 http://machinist.in/index.php?option=com_content&task=view&id=2455&Itemi

d=2120 http://www.defenseworld.net/go/show.jsp?id=103&name=DEFEXPO%20

INDIA%202010121 http://www.defenseworld.net/go/defensenews.jsp?id=4162122 http://www.agustawestland.com/news/

agustawestland-and-tata-sons-establish-joint-venture-company123 http://www.dnaindia.com/money/report_hal-and-rolls-royce-announce-manufac-

turing-joint-venture-in-india_1365345124 http://www.baesystems.com/Newsroom/NewsReleases/

autoGen_1091030101550.html


8.3 Defence Offsets in IndiaSofar,offsetcontractsofaboutUSD2billionhavebeenenteredintobyDefencecontractorsandexpectationistoreachtoUSD10billionby2011.

Table 23 Tentative list of offset contracts agreed to date.

No.Contract holder

Details of contract DateContract value in

US$millions

Contract value in

IN(Rs.Crore)

Minimum offset %

Offset amount IN (Rs.Crore)

1 ELTA(Israel)

AcontractworthUSD225million(Rs.900crore)forsupplyingradarsbyELTA.OffsetcontractshavebeensignedwithtwoIndianfirmsforpurchaseofcomponents,fromAstraMicrowaveHyderabadandLarsen&Toubro(L&T)securingacontractworthUSD25million

10Feb2009

225 900 30% 100

2Notdisclosed

ContractforfleetRefuellingTankersforNavy.TheestimatedpriceisUSD100million(Rs.400crore)withoffsetworthUSD32.5million(Rs.130crore).ThebeneficiarycompaniesareWartsilaIndia,OFB,BEL,L&T,Almot,VelgearandJohnsonPumps.

- 100 400 30% 130

3RACMiG(Russia)

TheMIG-29upgradecontractworthUSD1billion(Rs.4,000crore)hasbeenawardedtoaRussianmanufacturer.ThevendorhasagreedtooffsetsofUSD300million(Rs.1200crore)andtheBaseRepairDepotsofIAF,HAL,BDL,AlphaTechnologiesarebeneficiaries.

10March2008

1000 4000 30% 1200

4Rosonboronexport(Russia)

ThemediumlifthelicoptersfortheIAF,wherethetotalcostoftheprogrammeisUSD138million(Rs.552crore)andtheoffsetvalueisUSD41.4million(Rs.165.6crore).Thebenefi-ciariesoftheoffsetareTata,L&T,etc.

6Dec2008

138 552 30% 165.6

5

HAL(likelytotieupwithBAe)(UnitedKingdom)

TheJaguarupgradevaluedatUSD82.5million(Rs.330.6crore)andtheoffsetvalueistobeUSD20.25million

- 82.5 330.6 30% 81

6Boeing(UnitedStates)

BoeinghasplannedforoffsetinaerospacestructuresandaviationelectronicsproductsworthatleastUSD600millionfromsevenfirmsinIndiaaspartofoffsetsagainstwinningaUSD2.1billion(Rs.8,400crore)contractinJan09tosupplyeightP-8IreconnaissanceplanestotheIndianNavy.TheoffsetcontractsarebeingplacedwithL&T,BharatElectronicsLtd,WiproLtd,HCLTechnologiesLtd,HindustanAeronauticsLtd(HAL),DynamaticTechnologiesltdandMacmetTechnologiesLtd,aunitofCanada’saerospacesimulatormakerCAEInc.

- 2100 8400 30% 2400

7Fincantieri(Italy)

AccordingtoDefenseworld.netinMay2009,seniorBELexecutivesstatedthataspartoftheoffsetsforthefirstfleettanker,Fincantieri,in2008,placedanorderworth14.3MeurosforthesupplyofCompositeCommunicationSystem,VersatileCommunicationSystem,ESMSystem,ElectricOptoFireControlSystemandtheirintegrationonboardthefleettanker.BELwillimplementthisorderin2009.BELalsoexpectsafollowonorderinFY2009-2010forthesecondfleettanker.

5June2008

1300 30% 390


No.Contract holder

Details of contract DateContract value in

US$millions

Contract value in

IN(Rs.Crore)

Minimum offset %

Offset amount IN (Rs.Crore)

8

IsraelAerospaceIndustries(Israel)

theIsraelAerospaceIndustries(IAI)hasagreedtoprovide2,000ofthelatestversionofitsBaraksurface-to-airmissilefortheIndianNavyatanestimatedpricetagofUSUSD1.4billion.Underthetermsoftheagreement,athirdofthevalueofthedealwillbespentorinvestedinIndia,wheretheIAIwillmakeoffsettingpurchasesfromTata.TheMumbai-basedmultinational’swhollyownedsubsidiaryTataAdvancedSystems(TASL)isforgingadirectpartnershiprelationshipwiththeIAIthatisexpectedtobewide-ranging,involvingmissiles,drones,radars,electronicwarfaresystemsandhomelandsecuritysystems–allareasofIsraelidefenseindustryspecialization.

30April2009

1400 5600 30% 1866.8

9M/sRafael(Israel)

TheIndianministryofdefencehasconfirmedthatithassignedacontractwithM/sRafael,IsraelforthesupplyoftheSPYDER(Surface-to-airPythonandDerby)lowlevelquickreactionmissilesystem(LLQRM)fortheIndianAirForce.ReportsinthemediaoverthepreviousthreemonthshavesuggestedthattheUSD260millioncontractwouldinvolvethesupplyof18SPYDERsystems,withdeliveriesrunningthroughearly2011toAugust2012.

12Dec

2008260 1040 30% 312

10Rosoboronexport(Russia)

RosoboronexporthassignedacontracttoupgradeIndianAirForceSukhoi30MKIFighterJetsatacostofUSD700millionasperagencyreportbyInterfax.Thiswillbealonghaulversion.Indiaisscheduledtoacquire230Su30MKI4.5generationfightersconsideredasoneofthemostadvancedintheWorldatpresent

- 700 2800 30% 840

11

LockheedMartin(UnitedStates)

TheIndianGovernmenthassignedaLetterofOffer&AcceptancewiththeUSGovernmentfortheprocurementofsixC-130J-30aircraftfortheIndianAirForce.Theestimatedvalueoftheaircraftalongwithassociatedgroundsupportequipment,groundhandlingequipmentandroleequipmentisUSD962,454,677.ThedeliveryoftheseaircraftislikelytobecompletedbyDecember2011

18March2008

1000 4000 30% 1200

Source:Variouswebsites


9 Conclusion

Substantialbenefitsaretobederivedifforeignindustrycanbecomemoreinvolvedinoverseasdefencemarkets,eitherthroughexportsorforeigndirectinvestment.Apartfromtheobviousbenefitsofadditionalrevenueandprofitability,onemajoradvantageconcernsthepotentialforsmoothingouttheworkload.AbigproblemforlocalfirmsisthelevelofinvestmentthatisrequiredtoparticipateintheForeigndefenceindustrywhentheworkloadcanoftenreflectafeastorfaminecycle.Thisnotonlycausesconsiderabledisadvantagesforthelocalfirmsthemselves,butalsoaddstoDefence’scostsinseekingtosustaintheindustryinpursuitofself-reliance.

Therearealsostrongpotentialbenefitsfrominvolvementinoverseasmarketsintermsofcapability.Thechallengeofsatisfyinganewanddemandingcustomer,perhapsbyrefiningtheparticularproductordevelopingnewandmoreadvancedapplications,canbringprivatebenefitstothefirmconcernedbutalsobroaderbenefitstotheglobaldefencecompaniesasthespin-offsarebroughthome.Participationinajointventureinalargerdefencemarketoverseascanalsobringbenefitsintermsofeconomiesofscale,movementdownthelearningcurveandalsosomepotentialToTandknowhowfromrelatedfirmsoperatingintheoverseasmarketconcerned.

9.1 The opportunityIndiaisembarkingonaverysubstantialprogramtoexpandandupgradeitsdefenceforce.Thereareanumberoffactorsunderlyingthisprogram,including:• India’sgrowingeconomicstrength,whichallowsthe

developmentofasubstantialmoderndefenceforcewhilekeepingdefenceexpenditurebelow2.5percentofGDP

• Thefactthatterritorialdisputeswithtwopowerfulneighbouringcountries(ChinaandPakistan)thatarenuclear-armedanddevelopingcloserrelationswith

oneanotheropensupthepossibilityofawarontwofronts

• ThedemonstrationinrecentdisputesthatmuchofIndia’sdefenceequipmentisobsolescentandthattheRevolutioninMilitaryAffairspassedIndiaby,suggestingthatamajor‘catch-up’effortisrequired.

Thistranslatesintoamajorprocurementprogramoverthenextfewyears.IndiaisseekingtoacquiresomeofthemostgloballyadvancedplatformsandsystemsforitsNavy(SLBMnuclearsubmarinesandaircraftcarriers),Army(largenumbersofT-90mainbattletanksandotherassetstoequipeightdivisionalsizedbattlegroups)andAirForce(Su-30advancedfighteraircraftandafollow-upstateoftheartairsuperiorityfightersinabout2017).Indiaisalsoseekingtoacquiresophisticateddefenceelectronicsandcommu-nicationssystems,includingtheintentiontoequipinfantrysoldiers(andtheIndianArmycanfieldover30infantrydivisions)withadvancedequipmentundertheFutureInfantrySoldierasaSystemproject.

Overall,theacquisitionsbudgetwillgrowfromaroundUSD17billionin2011toUSD19.20billionin2015,anincreaseofnearly15percent.

Clearlyanexpansionsuchasthisoffersconsiderableoppor-tunitiestotheinternationaldefenceindustry,includingForeigncompanies.Itisimportant,however,torecognisetheveryconsiderablechallengesinvolvedinwinningdefenceworkinIndia.

9.2 Some challenges

CompetitionThefirstchallengefacingforeignfirmsiscompetition,particularlyfromtransnationalcorporationsofferingstateofthearttechnology.India’ssubstantialdefenceexpansion

India is seeking to acquire some of the most globally advanced platforms and systems for its Navy (SLBM nuclear submarines and aircraft carriers), Army (large numbers of T-90 main battle tanks and other assets to equip eight divisional sized battlegroups) and Air Force (Su-30 advanced fighter aircraft and a follow-up state of the art air superiority fighters in about 2017).


isinstarkcontrastwithwhatisoccurringamongtheNATO(andex-WarsawPact)countrieswheretheendoftheColdWartwentyyearsagobroughtaboutasteepdeclineindefenceexpenditure.Italsobroughtaboutashake-outandrationalisationindefenceindustriesinthosecountries.Despitethisrationalisation,manydefencecontractorsinwesterncountries(andpresumablyintheformerSovietUnionaswell)areoperatingwellbelowcapacity.

Manyoftheforeigndefencecompaniesgenerallysufferfromalackofscaleandmayhavedifficultyincompetingwithothernon-indigenousplayerswithmuchhigherlevelsofproductionandamoreadvantageouspositiononthelearningcurve.Unlesstheyhaveauniquecapability,theywillalsohavegreatdifficultycompetingonpricewithIndiancompanies,withtheirmuchcheaperlabourrates(evenforsoftwareengineers)andtaxadvantages.

Competitioninmarketsfordefenceequipmentalsodoesnottakeplaceonalevelplayingfield.Governmentsupportisparticularlyimportant.Thisdoesnothavetobefinancialsupport;oftenbackingforthebidfromthedefenceforceintheexportingcountrycanbeinfluentialinitsownright.IfseniorofficersfromtheRoyalForeignNavy,forexample,demonstrateenthusiasmforaparticularForeign-madesensor,thisislikelytohavesomeinfluenceonnavalofficersinthepurchasingcountry.

Itisinevitablethatrelationsbetweengovernmentsarealsoimportantintheseareas.AstrongrelationshipbetweenaforeigncountryandIndiawoulddonoharminfosteringrelationshipsbetweendefenceindustriesinthetwocountries.AnymarketingstrategyfortheForeigndefenceindustryinIndiawouldneedtotakeaccountofthefactthatrelationsbetweenthetwocountrieshavebeensubjecttosomerecentheadwinds.Forexample,thefactthatonecountryrefusestoselloneproducttoIndiawhileanothercountryhasagreedtosupplythesameproductcouldprovidearelativeadvantagetothatanothercountry’sfirminthedefenceindustry.

Tendering process

ItappearsthatthetenderingprocessfordefenceequipmentinIndiaisnothighlytransparent.Theprocesscanbeextremelylongandthebasisonwhichtendersareeventu-allyawardedisoftennotatallclear.Thereiseveryprospectthatforeigncompaniescouldspendagreatdealoftimeandmoneyworkingupabidonlytobeadvised,muchlater,thattheywereunsuccessfulforreasonsthatarenotapparent.Whilecompanieswillwanttoseeksomeearlysignalsinregardtotheirperceivedqualificationstobeselectedasacontractor,atthesametimetheyneedtoensuretheyhavestrictgovernanceprotocolsinplacetoavoidanysuggestionofcorruption.

Buy local, offsets and licensingAsshowninthebodyofthereport,Indiaismovingtowardsastrong‘buylocal’policy,aimedatachievinganindigenousshareoftotalexpenditureof70percent.While,Indiahasapolicyofself-relianceindefence,thisisaphrasecapableofdifferentinterpretations.InIndia,itsmeaningseemstobe


closertoself-sufficiency.Thisisambitiousandisoperational-ised,inpart,byestablishingoffsetrequirementsforforeigndefencepurchasesofatleast30percentandlimitingforeigninvestmentinaprojectto26percent.Thissuggestsfirstofallthatitwouldbedifficultforanyforeignfirmwithouta‘musthave’capabilityofpieceofequipmenttowinacontractinIndia.Ifthathurdlecanbeovercome,anycontracttosupplyequipmenttoIndiawillinvolveworkingcloselywiththelocalindustry.Thismayinvolvesignificantrisks.

ThedefencesectorhastraditionallybeengovernmentownedinIndiaandthelevelofefficiencyisquestionable.Ontheonehand,Indianindustryhasdesignedandbuiltsomehighlysophisticatedweaponssystems.TwothatimmediatelycometomindaretheTejaslightfighteraircraftandtheArjunmainbattletank.Inboththeseprojects,Indianindustryhashadtheresponsibilityfordesigning,producingandintegratinghighlysophisticatedequipment,includingadvancedcomposites,electronicsystemsandamaintankgun.

Ontheotherhand,whilesomeofthegoalshavebeenachievedfortheseprojects,ingeneraltheyhavenotbeensuccessful.TheTejashasevolvedfromanoriginalrequire-mentdatingfromoverhalfacenturyagoandstillisnotfitforfrontlinedeployment.TherequirementfortheArjundatesfromnearlyfortyyearsagoandinthecourseoftheprojecttheproblemswiththeArjunmeantthatlargenumbersofT-72shadtobeacquiredfromRussia.Morerecently,whilearound120Arjuntankswillbedeployed,theIndianArmyisacquiringthelatestT-90tankstoequipitsfrontlinearmouredbrigadesintheeightbattlegroups.

Whiletheseprojectswereclearlyoverambitious,theforwardacquisitionplanreflectsasimilarlevelofambition.Althoughtheprivatesectorhasnowbeguntotakeitsplaceinthedefenceindustryalongsidethetraditionalgovern-ment-ownedbusinesses,theirlevelofcompetenceremainsunclear.Ifforeignfirmsaretosupplydefenceequipment

toIndia,theywillnecessarilyhavetobecomeinvolvedwiththeIndianindustry,eitherasareciprocalpurchaserofIndianequipmentandcomponentsundertheoffsetsregimeorasaminorityinvestorinajointventure.Thismaywellcontainsignificantrisksintermsofefficientandtimelydeliveryofprojects.Itmayinvolvedelays,areductioninthenumberofplatformsorsystemstobeacquiredorevencancellationoftheproject.

Becauseofthebuylocalpolicy,therewillbepressureonforeigncompaniessupplyingsignificantitemsofequipmentandplatformstoenterlicensingagreementssothatlocalfirmscanmanufacturetheproductinIndiaunderlicence.Sucharrangementscanprovidevaluablerevenueandotherbenefitstothelicensor,buttheyalsocaninvolvethetransferofsignificantproprietarytechnology.Foreigncompaniesenteringsucharrangementswillneedtoensuretheyhavesecuresafeguardsintermsoftheirintellectualpropertyprotection.

9.3 India: a potential market for the world?ThechallengesinvolvedinparticipationintheIndiandefencemarketshouldnotbeunder-estimated.Yetthepotentialrewardsforforeigncompaniesaresignificant.WhileitisclearthatIndiaisseekingahighlevelofself-sufficiencyindeliveringitsambitiousdefencere-equipmentandexpansionprogram,itisalsoevidentthattherewillbeahighlevelofrelianceonoverseasintereststosupplythenecessarytechnologyinanumberofareas.Theexportcountrieswhichalreadydominatetheglobalmarketcansupplycompleteplatformsorsystems.OtherCountrieswillnecessarilybeanicheplayerhere.YetinthecontextofIndia’saspirationsintermsofself-reliance,beinganicheplayermaybenobadthing.Bytheirverynature,nicheplayersarenotthreateningoroverbearingandaremorewillingthanthebigtransnationalcorporationstoworkcloselywithlocalindustry.TheyalsotendtobemoreawareofthereciprocalbenefitsofworkingoverseasandmaybemorewillingtoincorporateIndianfirmsintotheirsupplychains.


10 A brief about CII

CIIhasbeenactivelypartneringwiththeMinistryofDefence,ArmedForcesandDRDOinpromotingIndustry’sparticipa-tioninDefenceproduction.CIIDefenceDivisionhasbeencommittedtoworkingintheareasofsteeringpolicyformulation,defencemarketdevelopment/tradepromotionandformationofinternationaljointventures/technologytransfers.

CIIhadformedtheDefenceDivisionin1993tocatalysechangeintheDefencesectorbypursuingtheGovernmenttoliberaliseDefenceProductionandbyinitiatingtheprocessofpartneringwiththeDefenceestablishmentsinorganisinginteractivemeetingswiththeendusers,i.e.theArmedForces.Realisingtheimportanceofharnessingthetech-nologiesdevelopedwithinthecountry,CIIhasalsobeenapioneerinorganisingInteractivesessionswiththeDefenceResearchandDevelopmentOrganisationtoenlargetheroleofPrivatesectorinDefenceR&D.AmajorpartnershipwiththeMinistryofDefencehasbeentheorganisationoftheDefexpoIndia(Asia’slargestLandandNavalSystemsexhibi-tion)in1999,2002,2004and2006.

CII’sDefenceDivisionstrivestoforgeindustryinitiativestostrengthentheIndianDefenceSector.TheobjectiveofthisDivisionisto“EstablishastrongpartnershipbetweenDefenceServices&IndustryandenlargetheroleandscopeofIndianIndustryinDefenceProductionformutualbenefitandenhancetheNationalSecurity”.

CII’sinitiativesintheareaofpolicyreformsreallygotaboostwhen,CIIhadtheCEOsmeetingwiththeMinistryofDefenceonthe18thJune1998.ThemeetingprovidedanopportunityfortheIndustrytointeractwiththeseniorofficialsoftheMinistryofDefence(MoD)andDRDO.Asafalloutofthismeeting6Jointtaskforces,chairedbyservingofficersfromthearmedforces/MinistryofDefenceandco-chairedbyCIIwereformed.Thiswasanepochmakingevent,whichhadneverpreviouslyhappenedinthehistoryofIndia.

OneofthemajorrecommendationsoftheTaskForceswasthatprivatesectorshouldbegivenanimportantroleintheDefenceproductionofthecountry.Subsequenttothis,CIIhadalsosubmitteda‘Paper’totheGovernmentofIndiaonasuggestedmechanismforawardingLicenceforDefence

Production.Incontinuation,CIIhassubmittedseveralpolicyrecommendationstotheGovernmentofIndiaforpromotingcontributionandparticipationofIndianIndustryindefenceproduction.

ByrepresentingtheinterestsoftheIndianIndustrybothpublicandprivatesectoraswellastheendusers–TheArmedForces,CIIhasbeenrecognisedasthevoiceofIndianDefenceIndustrybytheGovernmentofIndia.Thiswouldbringaboutcompetitionandhelpprovidequalityequipmenttothearmedforcesattherighttimeandattherightprice.Thiswouldinturnincreasedefenceexportsofthecountry.CIIhelpstheIndianDefenceIndustrytopromotetheircontri-butioninIndianDefenceprocurementbyhelpingthemtoidentifytheopportunitiesthatexistinDefence.CIIorganisesseveralsectorfocussedinteractivesessionwiththeArmedForcestoenabletheindustrytoidentifytheirrequirements.CIIhasinstitutionalisedseveraleventswiththeArmedForcessuchasAIP(ArmyIndustryPartnership),NIP(NavyIndustryPartnershipMeet),DIP(DefenceIndustryPartnershipMeet),DEFCOM(DefenceCommunicationsSeminar),ArtilleryTechnologySeminar,DefenceITConventiontonameafew.

CIIDefenceEventsprovideexcellentplatformsforIndustrytounderstandthefuturerequirementsoftheArmedForces.TheseeventsalsoprovideaplatformforindustrytointroducetheircapabilitiesintermsofofferingnewproductsandtechnologiestotheIndianDefence.

InternationalLinkagesforTechnologyCooperation,JointVenturesandExport

CIIprovidesinternationalexposuretoIndianDefenceIndustrybyorganisinginwardandoutwardindustrymissions.IthasorganisedDefenceIndustryMissiontoUSA,UK,SouthAfricaandIsrael.IthasalsoreceivedinternationaldelegationfromUSA,UK,Russia,SouthAfrica,Poland,Slovakiaetc.TheCommitteehassignedMemorandumofUnderstandingwiththeDefenceManufacturersAssociationofUK(DMA);TheUnitedStatesIndiaBusinessCouncil(USIBC);PolishChamberofNationalDefenceManufacturers,AssociationoftheDefenceIndustryoftheSlovakRepublish(ADISR)andAssociationofItalianDefenceandAerospace(AIDA).


11 A brief about Deloitte

DeloittereferstooneormoreofDeloitteToucheTohmatsu,aSwissVerein,anditsnetworkofmemberfirms,eachofwhichisalegallyseparateandindependententity.Pleaseseewww.deloitte.com/aboutforadetaileddescriptionofthelegalstructureofDeloitteToucheTohmatsuanditsmemberfirms

Deloitteprovidesaudit,tax,consultingandfinancialadvisoryservicestopublicandprivateclientsspanningmultipleindustries.Withagloballyconnectednetworkofmemberfirmsinmorethan140countries,Deloittebringsworld-classcapabilitiesanddeeplocalexpertisetohelpclientssucceedwherevertheyoperate.Deloitte’smorethan168,000professionalsarecommittedtobecomingthestandardofexcellence.

Deloitte’sprofessionalsareunifiedbyacollaborativeculturethatfostersintegrity,outstandingvaluetomarketsandclients,commitmenttoeachother,andstrengthfrom

culturaldiversity.Theyenjoyanenvironmentofcontinuouslearning,challengingexperiences,andenrichingcareeropportunities.Deloitte’sprofessionalsarededicatedtostrengtheningcorporateresponsibility,buildingpublictrust,andmakingapositiveimpactintheircommunities.

TheDeloitteGlobalAerospace&Defense(A&D)industrygroupservesallsectorsintheA&Dindustry,includingcommercialandmilitaryaircraft,enginesandpropulsionssystems,guidedmissiles,spacevehiclesandshipbuilding.

Deloittehasastrongdefensepracticethatdrawsonbestpractices,experience,Aerospaceanddefense,manu-facturingandourothercommercialindustrypractices.Wefocusonthetopissuesfacingtheindustry,includingSupplyChainStrategy,CustomerSupportandSustainment(CS&S),ProgramManagement,Mid-marketERPSolutions,CorporateFinance,TalentManagement,andTaxStrategies.


12 Annexure

Quick overview of taxation and regulatory for a foreign company in Defence industryIndiahasawell-developedtaxstructurewithclearlydemarcatedauthoritybetweentheCentralandStateGovernmentsandlocalbodies.TheCentralGovernmentleviestaxesonincome,customsduties,centralexciseandservicetax,etc.ThentherearealsoleviesontaxessuchassurchargeandeducationcesswhichisthecollectionbytheGovernmenttomeetspecificobjective.

ValueAddedTax(VAT),stampduty,StateExcise,landrevenueandtaxonprofessionsareleviedbytheStateGovernments.Localbodiesareempoweredtolevytaxonproperties,octroiandforutilitieslikewatersupply,drainageetc.Indiantaxationsystemhasundergonetremendousreformsduringthelast10-15years.Thetaxrateshavebeenrationalizedandtaxlawshavebeensimplifiedresultinginbettercompliance,easeoftaxpaymentandbetterenforcement.Theprocessofrationali-zationoftaxadministrationiscontinuinginIndiawiththeGovernmentintendingtoimplementNewDirectTaxCode(DTC)andnewGoodsandServicesTax(GST)w.e.f.April1,2011.

Requlatory and Income tax overviewForeign CompanyAforeigncompanyisacompany,whichisnotadomesticcompany.AdomesticcompanymeansanIndiancompanyorothercompany,whichdeclaresandpaysdividendsinIndia.Generally,acompanyregisteredoutsideIndia,isregardedasaforeigncompany.

AforeignenterprisemaycarryonitsbusinessoperationsinIndianinanyofthefollowingmanner:• ThroughaLiaisonofficeinIndia• ThroughabranchsetupinIndia• ThroughaProjectofficeinIndia• WithoutanyphysicalpresenceinIndia

Liaison Office (LO)PriorapprovalofReserveBankofIndia(RBI)isrequiredforestablishingLO.DefencerelatedrequestsforLOneedGovernment’sinter-ministerialconsultation.LOisnotpermittedtocarryoncommercialactivitiesinIndia.Itsroleisusuallyrestrictedtocollectionanddisseminationofinfor-mationonbehalfoftheforeignentity.Therefore,generallyaliaisonofficeisnotliabletotaxinIndia.

Branch Office (BO)PriorapprovalofRBIisrequiredforestablishingBO.

DefencerelatedrequestsforBOneedGovernment’sinter-ministerialconsultation.BOcancarryonfull-fledgedbusinessactivities(exceptnotpermittedactivitiesviz.manufacturing).However,sinceabranchofficeisanextensionofitsheadoffice,underthetaxtreaties,abranchwouldbeconsideredasaPermanentestablish-ment(PE)oftheforeigncompany.Therefore,thebusinessincomeaccruinginIndiawouldbetaxableattherateoftaxapplicabletotheforeigncompanies(i.e.effectivetaxrateis42.23%125onnetprofits)whichishigherthantherateoftaxapplicabletocompaniesincorporatedinIndia(effectivetaxrateis33.22%126onnetprofits).Incomputingtheincomeofthebranch,therearecertainrestrictionsonallocationofheadofficeexpenditure.

Project Office (PO)AlthoughPOdoesnotneedpriorapprovalofRBI,however,beingadefencesector,approvalfromRBImayberequired.DefencerelatedrequestsforPOneedgovernment’sinter-ministerialconsultation.APOcanbeestablishedtoexecuteaspecificproject.Aprojectofficewouldnotbeconsideredalegalentityseparatefromitsparentcompany.Therefore,incomeofaprojectofficewouldalsobetaxableattherateapplicabletotheforeigncompanies(effectivetaxrateis42.23%onnetprofits).Thecomputationoftheprofitoftheprojectofficedoesinvolvecomplexitiessuchasthebaseonwhichthetaxisleviable.

Further,LO/BO/POneedsregistrationwithregistrarofcompanies,incometaxdepartmentetc.ItisalsorequiredtofulfilannualcomplianceswithRBIandROC.

Business Operations without Physical Presence in IndiaAforeignenterprisemayoperateinIndiawithoutanyactualphysicalpresenceinIndia.Forinstance,aforeigncompanymaysupplygoods,plant&machinerytoIndianpartiesfromitshomecountry.AforeigncompanyistaxableinIndiaontheincomereceivedorincomeaccrued/arisinginIndia.WherethesupplyisaffectedinamannerthatnoincometherefromisreceivedoraccruesinIndia,thentaxliabilitymaynotariseinIndia.

Theabovewouldbeacasewheresaleofplant&machineryisaffectedoutsideIndia;thetitleingoodsistransferredinfavouroftheIndianbuyeroutsideIndia;andthepaymentforsuchsupplyisreceivedoutsideIndia.Insuchacase,incomefromsuchtransactionmaynotbetaxableinIndia.However,whereaforeignentityhasa‘businessconnection’inIndia,taxispayableontheincomearisingfromoperationsinIndia.

[email protected]%(whereincomeexceedsRs.10million)andeducationcess@2%andsecondaryandhighereducationcess@1%).DraftDTChasproposedtaxrateat25%forforeigncompaniesandadditionaltaxof15%as‘Branchprofitstax’.

[email protected]%(whereincomeexceedsRs.10million)andeducationcess@2%andsecondaryandhighereducationcess@1%).DraftDTChasproposedtaxrateat25%fordomesticcompanies


Thenormalbusinessincomeiscomputedbyreducingfromthegrossbusinessreceipts,expensesincurredinearningsuchincomesubjecttocertainrestrictionsprescribedundertheIncome-taxAct,1961(ITA).

Joint venture Company (JV)TheInvestmentindefenceproductionwasliberalizedinMay2001,videPressNoteNo.4of2001,subjecttolicensingforproduction.TheguidelinesforlicensingwereissuedinPressNoteNo.2of2002.TheIndiandomesticprivatesectorwasallowed100%participationindefenceproduction,whereas26%isforforeigndirectinvestment(withFIPBapproval)inanIndianjointventurecompany(JV).ThemanagementoftheJVshouldbeinIndianhandswithmajorityrepresentationontheBoardaswellastheChiefExecutiveofthecompanybeingresidentIndians.

TheFIPBissuedpressnote2of2009seriesontheguide-linesforcalculationoftotalforeigninvestmentwherebyithasprovidedinter-aliathatJVshouldbeownedandcontrolledbyresidentcitizensandIndiancompanieswhichareownedandcontrolledbyresidentIndiancitizens.Thewords‘ownership’and‘control’havealsobeendefinedinthesaidpressnote.

Whereaforeigncompanymakesforeigndirectinvest-mentinaJVinIndia,theJVisconsideredasa‘domesticcompany’.TheincomeofJVistaxableattherateappli-cablefordomesticcompanies.Theeffectiverateoftaxis33.22%.

RemittancesLO/BO/POcanremitsurplusfundstoforeigncompanysubjecttoapprovalsfromRBIandtaxdepartmentWhereascashremittancebytheJVtotheforeignJVpartnercompanycanbemadethroughdividendpay-outs,interestpayments,royalty/feefortechnicalservices,exitthroughtransferofshares,buy-back,capitalreduction,capitalrestructuring.

Automaticapprovalforremittancesunderforeigntech-nologyagreementshasbeenrecentlyliberalized.

Supply of Technical Know-How/ServicesIncomefromsupplyoftechnicalknow-howortechnicalservicestoIndianpartiesistaxableinIndiaeitheras‘Royalty’oras‘Feefortechnicalservices(FTS)’asdefinedundertheITA.

Thedefinitionofroyaltycoverspaymentfortheuseofor

therighttouse,industrialcommercialorscientificequip-ments.UndertheITA,royaltyistaxable@10%ongrosspayment,plussurchargeandeducationcess(aggregateto10.56%)oralowerwithholdingtaxrateundertheapplicabletaxtreaty.

FTSisdefinedtomeanconsiderationforprovisionofanytechnical,managerialorconsultancyservicesincludingsupplyoftechnicalpersonnel.Likeroyalty,FTSisalsotaxable@10%ongrossbasisincertaincasesoralowerwithholdingtaxrateundertheapplicabletaxtreaty.

Interest IncomeInterestIncomeearnedinIndiaistaxableinIndiaatthenormaltaxrateapplicabletoforeignentities,viz,20%(effectiverate21.12%).UnderTaxTreaties,generally,theinterestincomeistaxedatthereducedrateof10%or15%.

Capital GainsGainarisingfromtransferofacapitalassetisliabletocapitalgainstaxinIndia.MostofthetaxtreatiessignedbyIndiaprovidefortaxationofcapitalgainsasperdomestictaxlawsoftherespectivecountries.Accordingly,capitalgainsfromsaleofcapitalassets/immovablepropertiessituatedinIndiaaregenerallytaxableinIndia.

Dividend Distribution Tax (DDT)Inadditiontothenormalincometax,aDomesticCompanyisliabletopayDDT@15%onamountdistrib-utedasdividends.Thus,theeffectiverateoftaxis16.61%.Ontheotherhand,receiptofdividendisfullyexemptfromtaxinthehandsoftherecipientshareholders.ForeigncompaniesarenotrequiredtopayDDT.

Withholding taxAnIndianresidentisobligedtowithholdtaxwhilemakingpaymenttoaforeignparty.ThewithholdingtaxratesvarydependinguponthenatureofpaymentslikeRoyalties,FTS,interest,etc.Generally,undertheTaxTreatymechanism,withholdingtaxratesarelowerascomparedtothetaxratesunderthedomestictaxlawsofIndia.

UnderthedomestictaxlawsofIndia,amechanismhasbeenprovidedwherebyiftheentireincomeofanon-resi-dentisnotbelievedtobetaxableinIndia,thepayerorthepayeeoftheincomecanobtainalowerratewithholdingorderfromthetaxauthorities.

Anewprovisionhasbeeninsertedrecentlyw.e.f.April1,


2010,wherebyanypersonwhosereceiptsaresubjecttowithholdingtaxundertheITA,shouldfurnishPANtothepersonresponsibleforsuchwithholdingtax.OnfailuretofurnishPAN,higherofthefollowingtobedeductedastaxatsource:• RateoftaxspecifiedinITA;• RatesinforceasspecifiedundertheFinanceActor

underrelevanttaxtreaties;• Rateoftaxat20%

Minimum Alternate TaxWhereincometaxpayablebycorporatetaxpayersislessthan18%ofthebookprofits,18%ofthebookprofitsisregardedastheirtaxliability.BookprofitsmeanprofitsasperprofitandlossaccountpreparedinaccordancewiththeIndianCompaniesAct,subjecttocertainspecifiedadjustments.

Thus,effectiverateofminimumAlternateTax(MAT)forDomesticcompaniesis19.93%ofthebookprofits.ForForeigncompanies,theeffectiverateofMATis19.00%ofthebookprofits.

Further,taxpayersareallowedcreditinrespectofMATpaidonorafter1April2006totheextentofdifferencebetweenMATpaidandtaxpayableontotalincomecomputedasperotherprovisionsoftheITA.MATcreditcanbesetoffagainstthetaxpayableintheyearinwhichtaxpayerisliabletopaytaxundernormalprovisionsoftheITA.Itcanbecarriedforwardfor10yearsfromtheAYitbecomesallowable.DraftDTChasproposedMATat2%ofthe‘grossassets’ofthecompanyandeliminatingcarryforwardofMATcredit.

Corporate tax Incentives relevant to this industry• Developersandco-developersofSpecialEconomic

Zone(SEZ)entitledto100%taxholiday.• UnitssetupinSEZeligiblefor100%taxholidayon

profitsonexportsfor5yearsand50%taxholidayforthenext10years.

• ExportOrientedUnits(EOUs)/ElectronicHardwareTechnologyParks(EHTPs)/SoftwareTechnologyParks(STPs)eligiblefordeductionof90%ofexportprofitsfor10years(uptoMarch312011).

UndertheDTC,taxableprofitsofthebusinessofdevelopingSEZshallbethegrossincomefromthebusinesscarriedonduringthefinancialyearasreducedbycapitalandrevenueexpenditure

NotaxholidayavailabletounitsinSEZ/EOU/EHTP/STPundertheCode

• CompaniesmanufacturingeligiblegoodsinNorthEasternStates(upto31stMarch2017)eligiblefor100%taxholidayfor10yearsandinHimachalPradeshandUttaranchal(uptoMarch2012)eligiblefor100%taxholidayavailablefor5yearsand30%thereafter.DraftDTCdoesnotallowarea-basedexemptions.Taxholidayavailabletoanundertakingmanufacturingeligiblegoodsinspecifiedareastobediscontinuedwithoutaffectingtaxpayerscurrentlyenjoyingsuchincentives,whichwillbegrandfathered.

• Exemptionavailableonroyalty/feesfortechnicalservicesreceivedbyanotifiedforeigncompanyunderanagreementwiththeGovernmenttoprovideservicesinoroutsideIndiainprojectsconnectedwiththesecurityofIndia.

• ExpenditureonScientificResearchisallowedat: – 100%deductionforanyrevenueexpenditureon

scientificresearch – 100%deductionforcapitalexpenditure(otherthan

land)onscientificresearch – 200%weighteddeductionforin-housescientific

researchavailabletocompaniesengagedinmanu-facturing/productionofanygoods(exceptgoodssuchasliquor,tobacco,cosmeticsetc.)

– 125%ofdeductiononpaymentsforresearchactivi-tiestoanapprovedIndiancompanyinscientificR&D

Transfer Pricing• TheIndiantransferpricingregulationsrequireinter-

nationaltransactionswithassociatedenterprisestobeatarm’slengthpriceandfurthersupportedwithprescribeddocumentation.Therearestrictpenaltiesfornon-compliance.

• Asameasureofsimplification,CentralBoardofDirectTaxes(CBDT)empoweredtoformulatesafeharbourrules.DetailedSafeharbourrulesarestilltobeprescribed.

• InthedraftDTC,thereisaproposaltointroduceadvancepricingagreementswithregardtotheInternationaltransactionsbetweenassociatedenterprises.

Advance Ruling• TaxpayerscanapproachtheAuthorityforAdvance

Rulingtodetermineincome-taxaspectsofanyproposedorcurrenttransactionswiththenon-resident.

• Indiahasenteredintocomprehensivetreatiesforavoidanceofdoubletaxationwithover70countries


andlimitedagreementswith18countries.Taximplica-tionsunderthedomesticlawscouldbemitigatedbyresortingtoataxtreaty.

AlternativeDisputeResolutionMechanism(ADRM)Withaviewtoencouragethegrowthofforeigninvest-mentinIndia,adisputeresolutionmechanismhasbeenrecentlyintroducedtofacilitateexpeditiousresolutionofdisputesonafasttrackbasis.SalientfeaturesofADRMare:• Foreigncompaniesandcasesinvolvingtransferpricing

disputeseligibleforADRM.• DRPdirectionsbindingontheAssessingofficer.• ADRMmandatoryforeligibletaxpayers.

Indirect Tax Overview Customs LawsEffectiverateofcustomsdutypayablebyimporteronimportofgoodswouldbe26.85%basedonpeakrateofcustomsduty.Customsdutyexemptionisavailableonimportsforaerospaceanddefensepurposessubjecttothefulfillmentofspecifiedconditions.

Central Excise Laws• Effectiveexcisedutyrateonmanufacturingactivityis

10.3%(inclusiveofcess).• Presently,excisedutyexemptionbenefitisrestrictedto

notifiedinstitutionsonlysuchasDPSUsandOFBs.

Value Added Tax (‘VAT’)/ CST Laws• Inter-StatesaleofgoodsissubjecttolevyofCST,intra-

StatesaleofgoodsissubjecttolevyofVAT.• CSTrateis2%againstsubmissionofprescribed

statutoryformbythepurchaser.Otherwise,VATrateoftheoriginatingStatewouldapply.TherateofVATtypicallyrangesbetween4%to14.5%.

• Nogeneral/specificexemptions/concessionsavailableonsaleofgoodsmadetodefenceEachStateVATlegislationshouldbeexamined.

Foreign Trade Policy 2009 - 14• ExportofmanufacturedgoodsissubjecttoSCOMET

guidelines,etc.Service Tax (including Cenvat Credit) Laws• Specifiedservicesaresubjecttoservicetaxandliability

topaythesameisonserviceprovider.ForfewservicesincludingservicesreceivedfromoutsideIndia,liabilitytopayservicetaxshiftstotheservicerecipientlocatedinIndia.

• Servicetaxapplicableoninputserviceslikepaymentfor

technicalknow-how,licensingofintellectualpropertyrights(‘IPRs’)inrelationtoequipments,drawingsetc./engineeringservices.

• ServicetaxtobepaidbyIndianjointventureasrecipientoftaxableservicebyvirtueofreversechargemechanism

• Setoffofsuchservicetaxpaidcouldbeavailedagainstoutputexciseduty.

• Servicetaxrateis10.3%(inclusiveofcess).• Servicestransactionsbetweenassociatedenterprises

wouldbesubjectedtoservicetaxonbookentrybasisinsteadofreceipt/paymentbasis.

Research and development (R&D) Cess• ResearchandDevelopment(R&D)Cess@5%isappli-

cableonimportoftechnologyintoIndiabyanindus-trialconcern.R&DCesscanbeadjustedagainstservicetaxliability,incertaincases.

Entry Tax/ Octroi• TheStates,LocalauthoritiesandMunicipalcorpora-

tionsalsolevyotherlocaltaxessuchasentrytax,octroi,etc.onentryofgoodsinthedesignatedareasforthepurposeofconsumption,useorsale.

Special Economic Zone (‘SEZ’) Incentives• IndirecttaxincentivesavailabletoSEZunitsfortheir

authorizedoperations.NoservicetaxleviableonservicesprovidedtoSEZwhollyconsumedwithintheSEZ.

• TheexemptiontothetaxableservicesprovidedtoSEZconsumedpartiallyorwhollyoutsidetheSEZ,isprovidedbywayofrefund.

Inlightofabove-mentionedstructureofindirecttaxesinIndia,itcouldbestatedthatJointventuresformedforoffsetpurposeincuranumberofindirecttaxobliga-tions.However,appropriatereviewofthetransactionscouldresultintax-optimization,inviewofcertainbenefitsavailable,includingundertheForeignTradePolicy.


13 Abbreviations

Abbreviations

Abbreviations Expansion

AAP AnnualAcquisitionPlan

ADGES AirDefenceGroundEnvironmentSystem

ALH AdvancedLightHelicopter

AOPVs ArcticOffshorePatrolVessels

ASW Anti-submarinewarfare

ATV AdvancedTechnologyVessel

AVD AvalancheVictimDetector

BDL BharatDynamicsLimited

BEL BharatElectronicsLimited

BEML BharatEarthMoversLtd

BFSR-SR BattleFieldSurveillanceRadar-ShortRange

CAGR CompoundAverageGrowthRate

CCS CabinetCommitteeonSecurity

CNC CommercialNegotiationCommittee

DAC DefenceAcquisitionCouncil

DGAQA DirectorateGeneralofAeronauticalQualityAssurance

DGQA DirectorateGeneralofQualityAssurance

DPB DefenceProcurementBoard

DPP DefenceProcurementProcedure,2008

DPSU DefencePublicSectorUndertaking

DQA(A) DirectorateofQualityAssurance(Armaments)

DQA(CV) DirectorateofQualityAssurance(CombatVehicles)

DQA(EE) DirectorateofQualityAssurance(EngineeringEquipment)

DQA(L) DirectorateofQualityAssurance(Electronics)

DQA(M&E) DirectorateofQualityAssurance(MetalsandExplosives)

DQA(N) DirectorateofQualityAssurance(Naval)

DQA(R&S) DirectorateofQualityAssurance(RadarsandSimulators)

DQA(S) DirectorateofQualityAssurance(Stores)

DQA(V) DirectorateofQualityAssurance(Vehicles)

DQA(WP) DirectorateofQualityAssurance(WarshipProject)

DRDO DefenceResearchandDevelopmentOrganisation

DWT DeadWeightTonnage

EADS EuropeanAeronauticDefenceandSpaceCompany

ESO EngineeringServicesOutsourced

FARP FieldArtilleryRationalisationPlan

FDI ForeignDirectInvestment


FGFA FifthGenerationFighterAircraft

FIPB ForeignInvestmentPromotionBoard

FSU FormerSovietUnion

FTP FastTrackProcedure

GDP GrossDomesticProduct

GFC GlobalFinancialCrisis

GRSE GardenReachShipbuilders&EngineersLtd

GSL GoaShipyardLtd

HAL HindustanAeronauticsLimited

HVF HeavyVehicleFactory

IAC IndigenousAircraftCarrier

IAF IndianAirforce

ICG IndianCoastGuard

ICT InformationandCommunicationTechnologies

ICV InfantryCarrierVehicle

IMF InternationalMonetaryFund

INS IndianNavyService

ISRO IndianSpaceResearchOrganisation

ITARS InternationalTrafficinArmsRegulations

JV Jointventure

L&T LarsenandToubro

LCA LightCombatAircraft

LPI LowProbabilityofIntercept

LRDE Electronics&RadarDevelopmentEstablishment

LTIPP LongTermIntegratedPerspectivePlan

M&M Mahindra&Mahindra

MBT MainBattleTank

MDL MazagonDockLimited

MHA MinistryofHomeAffairs

MIDHANI MishraDhatuNigamLimited

MiG MikoyanandGurevich

MMRCA MediumMulti-RoleCombatAircraft

MOD MinistryofDefence

MRO MaintenanceRepairandOverhaul

MRSAM MediumRangeSurfacetoAirMissileSystems

MTA Multi-RoleTransportAircraft

NATO NorthAtlanticTreatyOrganisation

OEM OriginalEquipmentManufacturers

OFB OrdnanceFactoryBoard



PSU PublicSectorUnit

QA QualityAssurance

R&D ResearchandDevelopment

RFI RequestforInformation

RFP RequestforProposals

RMA RevolutioninMilitaryAffairs

RUR RakshaUdyogRatnas

SAM Surface-to-AirMissile

SCAP ServicesCapitalAcquisitionPlan

SCAPCHC ServiceCapitalAcquisitionPlanHigherCommittee

SED StrategicElectronicsDivision

SHQ ServiceHeadquarters

SLBM Submarinelaunchedballisticmissiles

SME Smallandmediumenterprises

SQR ServicesQualitativeRequirements

SRSAM ShortRangeSurfacetoAirMissileSystem

TAS TataAdvancedSystems

TEC TechnicalEvaluationCommittee

ToT TransferofTechnology

UAC UnitedAircraftCorporation

UAV UnmannedAerialVehicle

ULH Ultralighthowitzers

USD UnitedStatesDollars

VVIP VeryVeryImportantPerson

SQR ServicesQualitativeRequirements

SRSAM ShortRangeSurfacetoAirMissileSystem

TAS TataAdvancedSystems



ToT TransferofTechnology

UAC UnitedAircraftCorporation

UAV UnmannedAerialVehicle

ULH Ultralighthowitzers

USD UnitedStatesDollars

VVIP VeryVeryImportantPerson

Table No.

Data description Page No

1 ProjectedexpenditurebyeachServiceDivision 8

2 UrbanpopulationandUrbandisposableincomedemographics2001

16

3 GovernmentofIndiaBudget2010-11 16

4 Expendituredefinitions 19

5 ExpenditurebyServicedivision 22

6 Importedvsindigenousproduction 25

7 ForecastExpenditureonDefenceServices 26

8 ForecastGrowthofImportedvsindigenousproduction,iftargetsaremet

27

9 ForecastExpenditureonDefenceServices 27

10 IndiandefenceacquisitionplansintheNavydomain

29

11 Indiandefenceacquisitionplansinthelanddomain

30

12 IndiandefenceacquisitionplansintheAerospacedomain

31

13 IndiandefenceacquisitionplansintheElectronicsdomain

32

14 MajorNavyproductioncurrentlyoccurringinIndia

37

15 HALKeyFinancialPerformanceIndicators,2007-08and2008-09

40

16 DefencePublicSectorUndertakings 42

17 PotentialRURsidentified 43

18 Privatesectordefencefirmsandkeyoperatingdomains

45

19 CapitalacquisitioncategoriesintheDPP 53

20 Procurementprocessandtimeframe 54

21 DefenceMOUsinIndia 56

22 DefenceJointVenturesinIndia 60

23 TentativelistofOffsetscontractinIndiaagreedtodate

62

Summary of tables


Figure No Data description Page No

1 GDPShared,GDPGrowthrateandIndustrialproduction 14

2 Exportandimport 14

3 GrowthRateofvarioussectors 15

4 PopulationVsAgegroup(2001) 15

5 Tierdistributionofcities 15

6 ExpenditureonDefencebyGOI 16

7 IndianGDP(1980-2014) 17

8 ExpenditureBreakdown 20

9 DefenceExpenditureas%ofGDP–BudgetedExpenditure

20

10 Unspentfunds–TotalDefenceBudget 21

11 ExpenditurebyServicedivision 22

12 Unspentfunds–ServiceDivisionCapitalBudgets 23

13 PublicDebttoGDP–Keycountrycomparisons 28

14 IndianNavyProcurementsthroughimportsversusindig-enousproduction(2000-2005)

37

15 IndianArmyprocurementsthroughimportsversusindigenousproduction(2000-2005)

38

16 HALDomesticSalesandIndianGovernmentIAFAircraftandAero-engineCapitalOutlays,1997-2008

41

17 Flowchartofvariouscategoriesofacquisition 47

18 DefencespendaspercentageofcountryGDP 50

19 Percentageoftotalglobaldefencespend 50

Box1:OverviewofIndian’sindigeousdefenceproductionBox2:OrdnanceFactoriesinIndia

Summary of figures


14 Acknowledgement

Inordertoprovideacomprehensiveindustryviewinthestudy,wehaveinteractedwithvariousparticipantsinthissector,independentdefenceconsultants,ex-officialsfromtheMinistryofDefenceandotherrelevantgovernmentalorganisationslikeDefenceResearchDevelopmentOrganisation(DRDO),InstituteforDefenceStudiesandAnalysis(IDSA),CentresforAirpowersStudies(CAPS)andUnitedServiceInstitutionofIndia(USI).Wewouldliketothankthevariousindustryparticipants,whoseinvaluablecontributionshavemadethisstudypossible.

WewouldliketothanktheteamatCIIespeciallyGurpalSingh,DeputyDirectorGeneralandHead(DefenceandAerospace),AmitKumarSingh,Director,DefenceandAerospace/Security/Space),forassistingusduringthecourseofthisstudy.

Deloittewouldliketothankfullyacknowledgethevaluableinputsreceivedfromthefollowingparticipants

Sujeet SamaddarVicePresident(Operations)NovaIntegratedSystemsLimited

Brig Anand Mehra (Retd.)Advisor(Marketing)BharatElectronicsLimited

Laxman Kumar BeheraAssociateFellow–IDSA

Brig. Vinod Anand (Retd)SeniorAssociate-USI

Air Vice Marshal Kapil Kak (Retd)DeputyDirector-CAPS

Surbhi SareenAssistantLibrarian–CAPS

Wing Commander Sandeep Sapra (Retd)AerospaceandDefenceConsultant


15 Contacts

BangaloreDeloitteCentre,AnchorageII,100/2,RichmondRoad,Bangalore560025,IndiaPhone:+91(080)66276000

ChennaiOlNo.37th,NewNo:52,7thFloor,ASVNRamanaTowers,VenkatnarayanaRoad,TNagar,Chennai600017,IndiaPhone:+91(044)66885000

Delhi NCR7thFloor,Building10TowerB,DLFCyberCityComplex,DLFCityPhaseII,Gurgaon122002,IndiaPhone:+91(0124)679-2000

Hyderabad1-8-384&385,3rdFloor,GoraGrand,S.P.Road,Begumpet,Hyderabad500003,IndiaPhone:+91(040)40312600

Mumbai12,Dr.AnnieBesantRoad,Opp.ShivSagarEstate,Worli,Mumbai400018,IndiaPhone:+91(022)66679000

Deloitte aerospace and defence contact e-mail id [email protected]

CII aerospace and defence contact e-mail id

Gurpal SinghDeputyDirectorGeneral&Head(Defence&Aerospace)ConfederationofIndianIndustryTheMantoshSondhiCentre23,InstitutionalArea,LodiRoad,NewDelhi110003Tel:91-11-24629994-7Email:[email protected]

Amit Kumar SinghDirector(DefenceandAerospace/Security/Space)ConfederationofIndianIndustryTheMantoshSondhiCentre23,InstitutionalArea,LodiRoad,NewDelhi110003Tel:91-11-24629994-7Email:[email protected]



MemberofDeloitte Touche Tohmatsu

DeloittereferstooneormoreofDeloitteToucheTohmatsu,aSwissVerein,anditsnetworkofmemberfirms,eachofwhichisalegallyseparateandindependententity.Pleaseseewww.deloitte.com/aboutforadetaileddescriptionofthelegalstructureofDeloitteToucheTohmatsuanditsmemberfirms.ThismaterialandtheinformationcontainedhereinpreparedbyDeloitteToucheTohmatsuIndiaPrivateLimited(DTTIPL)isintendedtoprovidegeneralinformationonaparticularsubjectorsubjectsandisnotanexhaustivetreatmentofsuchsubject(s)andaccordinglyisnotintendedtoconstituteprofessionaladviceorservices.Theinformationisnotintendedtoberelieduponasthesolebasisforanydecisionwhichmayaffectyouoryourbusiness.Beforemakinganydecisionortakinganyactionthatmightaffectyourpersonalfinancesorbusiness,youshouldconsultaqualifiedprofessionaladvisor.NoneofDTTIPL,DeloitteToucheTohmatsu,itsmemberfirms,oritsandtheiraffiliatesshallberesponsibleforanylosswhatsoeversustainedbyanypersonwhoreliesonthismaterial.©2010DeloitteToucheTohmatsuIndiaPrivateLimited

Documents

Prospects for Global Defence Export Industry in Indian Defence Market