The Defense Sector in India: A short Brief

India’s GDP is estimated to have increased by 6.6 percent in 2017-18 and is expected to grow 7.3 percent in 2018-19. During the first half of 2018-19, GDP (at constant 2011-12 prices) grew by 7.6 percent.

India has retained its position as the third largest startup base in the world with over 4,750 technology startups, with about 1,400 new start-ups being founded in 2016, according to a report by NASSCOM.

India's labor force is expected to touch 160-170 million by 2020, based on the rate of population growth, increased labor force participation, and higher education enrolment, among other factors, according to a study by ASSOCHAM and Thought Arbitrage Research Institute.

India's foreign exchange reserves were US$ 393.29 billion in the week up to December 21, 2018, according to data from the RBI.

India's defence budget broke into the world's top five, beating the UK for the first time, a new report by a London-based global think-tank has said, signalling a key shift in the military balance between the two countries.

India overtook the UK as the fifth-largest defence spender in the world in 2017 at USD 52.5 billion, up from USD 51.1 billion in 2016, according to the 'Military Balance 2018' report by the International Institute for Strategic Studies (IISS).

In contrast, the UK's defence budget fell from USD 52.5 billion in 2016 to USD 50.7 billion last year.

"This represents a key shift in the military balance between India and the UK, with India allocating more capabilities to develop its regional resources than the UK in a global context," said IISS Senior Fellow for South Asia, Rahul Roy-Chaudhury.

The report notes that while India continues to modernize its military capabilities, China with the world's second-largest defense budget after the US remains far ahead with three times India's defense budget at USD 150.5 billion.

China's real defense spending increased by nearly 25 percent in 2016-17, whereas India's rose by just 2.4 percent.

"Post-Dokalam, India's military balance with China continues to be significantly in China's favor. Since 2000, China has built more submarines, destroyers, frigates, and corvettes than Japan, South Korea and India combined. China will continue to dominate the region militarily and seek to challenge the US in the region as well, Roy-Chaudhury notes.

According to the analysis, the Chinese army has over 600,000 more active personnel than India; it has nearly 1,200 tactical aircraft compared to India's 785; and 55 more cruisers, destroyers and frigates than India.

The report takes note of the Indian government's 'Make in India' policy, which aims to strengthen the defence-industrial base through measures such as "reforming the cap on foreign direct investment" (FDI) and that the country is one of the top troop contributors to UN peacekeeping operations.

"The overall capability of the (Indian) army is limited by inadequate logistics, and shortages of ammunition and spare parts. Defence cooperation with the US continues to grow, with an increasing level of exercising and sales of US equipment.

"Development and procurement programmes across the services are aimed at replacing ageing equipment, but many projects have experienced significant delays and cost overruns, particularly indigenous systems, the report finds.

IISS says the new Indian Joint Armed Forces Doctrine issued last year sees an "emerging triad" of space, cyber and special-operations capabilities complementing conventional land, sea and air capabilities as India continues to modernise its strategic forces, particularly its delivery systems.

Overall, the report found that China and Russia, with the world's fourth-largest defence budget at USD 61.2 billion, are challenging the military supremacy of the US (USD 602.8 billion) and its allies and that the West can no longer rely on the strategic advantage it has enjoyed until now.

Saudi Arabia, with a defence spending of USD 76.7 billion, came in third to complete the world's top five the US, China, Saudi Arabia, Russia and India.

 

Industry Scenario

5.3% increase in defence allocation was recorded in budget 2017-18 compared to budget 2016-17.

The allocation towards defence in budget 2017-18 stood at $ 41 bn with $ 13.3 bn (or 31.7% of the total budget) reserved for capital expenditure.

The total budget sanctioned for the Indian military for the financial year 2018-19 is $ 62.8 bn; accounting for 12.1% of the total Union Government expenditure for 2018-19.

India’s share in global military expenditure stood at 3.3% in 2016.

Service/ department-wise allocation as a percentage of total defence estimates 2017-18 (BE):

  • Army: 55.9%

  • Navy: 14.6%

  • Airforce: 22.5%

  • DGOF (Directorate General of Ordnance Factories): 0.8%

  • DGQA (Director General of Quality Assurance): 0.5%

  • R&D: 5.7%


 

As the Indian Economy experiences tremendous growth in the years to come investors keep a close eye on the countries industries identifying the goldmines to multiply their wealth. The defence sector is definitely a safe lucrative investment albeit with considerable barriers of entry. We at Kapso Business services have multiple businesses in the defence sector that have been in operation for decades