prospects for global defence export industry in indian defence market
TRANSCRIPT
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
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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
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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
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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
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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.
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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
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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.
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• 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
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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-
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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.
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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
Prospects for Global Defence Export Industry in Indian Defence Market | 15
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
16 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 17
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)
18 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 19
• 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.
20 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 21
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
Source:UnionBudget(s)&EconomicSurvey2003-2011.Availableat:www.indiabudget.nic.in,accessedon23thMarch2010.DeloitteAnalysis
22 | CII Indian Defence Industry Mission EUROSATORY 2010
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%
Source:UnionBudget(s)&EconomicSurvey2003-2011.Availableat:www.indiabudget.nic.in,accessedon23thMarch2010.DeloitteAnalysis
Figure 11 : Expenditure by Service division (in both % and USD ($) terms)
Source:UnionBudget(s)&EconomicSurvey2003-2011.Availableat:www.indiabudget.nic.in,accessedon23thMarch2010.DeloitteAnalysis
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
Prospects for Global Defence Export Industry in Indian Defence Market | 23
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)
Source:UnionBudget(s)&EconomicSurvey2003-2011.Availableat:www.indiabudget.nic.in,accessedon23thMarch2010.DeloitteAnalysis
19 ProcurementPolicyandProcedure.StandingCommitteeonDefence(2005-06)SixthReport.
-10.00%
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2003 2004 2005 2006 2007 2008 2009 2010
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Unspent Funds as % of Budgeted Expentiture
-200
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2003 2004 2005 2006 2007 2008 2009 2010
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Underspending relative to budget
24 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 25
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.
26 | CII Indian Defence Industry Mission EUROSATORY 2010
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 27
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.
28 | CII Indian Defence Industry Mission EUROSATORY 2010
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®ionCode=sas&rank=31#in
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Prospects for Global Defence Export Industry in Indian Defence Market | 29
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.
30 | CII Indian Defence Industry Mission EUROSATORY 2010
Table 11: Indian defence acquisition plans in the land domain
Category Indicative Items (Quantity) Timing USD Source
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 31
Table 12: Indian defence acquisition plans in the aerospace domain
Category Indicative Items (Quantity) Timing USD Source
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.
32 | CII Indian Defence Industry Mission EUROSATORY 2010
Table 13 : Indian defence acquisition plans in the electronics domain
Category Indicative Items (Quantity) Timing USD Source
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 33
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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
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34 | CII Indian Defence Industry Mission EUROSATORY 2010
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Prospects for Global Defence Export Industry in Indian Defence Market | 35
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24. Sharma,R(2010),‘BSFacquiresadvancedthermaldetectors’,HinduTimes,9March2010,accessedonline:http://beta.thehindu.com/news/states/karnataka/article223678.ece,lastaccessed6April2010
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30. BharatRakshak(2005),HALChetak(AlouetteIII),5May2007,accessedonline:http://www.bharat-rakshak.com/NAVY/Chetak.html,lastaccessed7April2010
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36 | CII Indian Defence Industry Mission EUROSATORY 2010
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 37
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
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26 MinistryofDefence(2006)StandingCommitteeonDefence—ProcurementPolicyandProcedure’
27 Vishakhapatnam(2008),‘Navyorders30shipsfromIndiandockyards’,accessedonline:http://newsx.com/story/5657,lastaccessed22.March.2010
38 | CII Indian Defence Industry Mission EUROSATORY 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%
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30%
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10%
0%2000-012001-022002-032003-042004-05
Imported Indigineous
28 TheMilitaryBalance(2010),‘ChapterTen:ReformingIndia’sdefenceindustries’,110(1),pp437-478
Prospects for Global Defence Export Industry in Indian Defence Market | 39
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
40 | CII Indian Defence Industry Mission EUROSATORY 2010
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 41
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
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42 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 43
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)
44 | CII Indian Defence Industry Mission EUROSATORY 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
Prospects for Global Defence Export Industry in Indian Defence Market | 45
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
46 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 47
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
48 | CII Indian Defence Industry Mission EUROSATORY 2010
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 49
50 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 51
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.
52 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 53
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
54 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 55
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
56 | CII Indian Defence Industry Mission EUROSATORY 2010
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 57
Date Entities Involved Details
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.
58 | CII Indian Defence Industry Mission EUROSATORY 2010
Date Entities Involved Details
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 59
Date Entities Involved Details
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
60 | CII Indian Defence Industry Mission EUROSATORY 2010
Date Entities Involved Details
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
Prospects for Global Defence Export Industry in Indian Defence Market | 61
Date Entities Involved Details
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
62 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 63
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
64 | CII Indian Defence Industry Mission EUROSATORY 2010
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).
Prospects for Global Defence Export Industry in Indian Defence Market | 65
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
66 | CII Indian Defence Industry Mission EUROSATORY 2010
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 67
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).
68 | CII Indian Defence Industry Mission EUROSATORY 2010
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 69
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
70 | CII Indian Defence Industry Mission EUROSATORY 2010
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,
Prospects for Global Defence Export Industry in Indian Defence Market | 71
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
72 | CII Indian Defence Industry Mission EUROSATORY 2010
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.
Prospects for Global Defence Export Industry in Indian Defence Market | 73
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
Abbreviations Expansion
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
74 | CII Indian Defence Industry Mission EUROSATORY 2010
Abbreviations Expansion
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
TEC TechnicalEvaluationCommittee
TEC TechnicalEvaluationCommittee
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
Prospects for Global Defence Export Industry in Indian Defence Market | 75
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
76 | CII Indian Defence Industry Mission EUROSATORY 2010
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
Prospects for Global Defence Export Industry in Indian Defence Market | 77
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]
78 | CII Indian Defence Industry Mission EUROSATORY 2010
Prospects for Global Defence Export Industry in Indian Defence Market | 79
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