Deloitte Indian Defence

Confederation of Indian Industry Since 1895
Prospects for Global Defence Export Industry in Indian Defence Market
CII Indian Defence Industry Mission EUROSATORY 2010
Contents
1. 2. 3. 4 5 6 7 8 9
Foreword from CII Preface from Deloitte Executive summary Indian defence requirements Domestic capacity Financial implications Benefits in Indian defence industry and barriers thereto Strategic Alliances Conclusion
4 5 6 14 37 46
50 56 64 67 68 69 73 76 77
10 A brief about CII 11 A brief about Deloitte 12 Annexure 13 Abbreviations 14 Acknowledgement
15 Contacts
Prospects for Global Defence Export Industry in Indian Defence Market | 3
1. Foreword from CII
The opening up of the Indian economy during the early nineties heralded an era of unprecedented industrial growth in India. The growth rates seen match those of the fastest growing economies. A confident and resurgent Indian Industry is making forays into almost all the sectors of manufacturing. Lately, the huge opportunities for growth within the domestic and global defence and aerospace industries have attracted the attention of Indian industry. India is one of the largest global military spenders. In the Union Budget 2010-11, expenditure is of about USD 32.03 billion has been earmarked for national defence, which has been increased from USD 29.62 billion revised estimates for the last year. The total defence budget has increased by 8.13 % and out of which budget for capital acquisition of USD 13.04 billion has been increased by 25.46 % from last year. Outright purchase and upgradation and maintenance of the existing equipment for modernisation will continue to provide immense opportunities to the industry in the coming future as well. The Indian defence industry has evolved and has been developing capabilities in land, naval and air systems. After the introduction of defence Offset Policy, India is gradually becoming a key outsourcing hub for the global defence industry. The continuous revisions of the Defence Equipment Procurement Procedures in the recent past suggest the intent of the Indian Government to streamline the procedures and make the system more transparent. Confederation of Indian Industry (CII) views
the introduction of Buy & Make (Indian) category in Defence Procurement Procedures in November 2009 as a very positive step. It would encourage the participation of the Indian private industry in defence acquisitions. CII has been playing an active role in the areas of steering defence policy formulation, market development, trade promotion and formulation of international joint ventures and technology transfers. It is with this objective that CII in partnership with Deloitte is publishing this report to bring to the notice of global and domestic defence industry of the opportunities for them for the defence requirements in India. I hope that this report will enable the domestic and the global defence companies to understand the emerging business opportunities in the areas of defence and to understand the defence ecosystem in India. Further, this will help foreign OEMs and defence major companies to understand the Indian capabilities for making investments in India in this sector.
Gurpal Singh Deputy Director General & Head- Defence & Aerospace Confederation of Indian Industry Amit Kumar Singh Director (Defence and Aerospace/Security/Space) Confederation of Indian Industry
2. Preface from Deloitte
The global Defence industry is truly at an inflection point and we see it continuing to move rapidly east toward China, India, and the Middle East. These countries are expected to be large markets for A&D industry products and services, as well as participants in the supply chain. In India, the aerospace and defence sector is growing at an unprecedented rate and emerging as a key participant in the Asia Pacific region. United States and European aerospace companies are now recognizing India as a critical market as well as a potential manufacturing partner. India is becoming one of the largest military spenders in the world and catching worldwide attention, with the third-largest defense procurement budget in Asia. In 2010-11, USD 32.03 billion has been earmarked for national defense. Of this, USD13.04 billion is to be spent on acquisitions for new weapons systems equipment and services. It is estimated that Indian defence procurement will rise to an estimated USD 42 billion by 2015 (including USD 19.20 billion for capital acquisitions) which could make it one of the most attractive defense markets in the world. In other words, India is likely to spend nearly USD 100 billion on military procurement during the current five year plan (2007-12) and USD 120 billion in the next plan period (2012-17), the latter coinciding with the last phase of Indias ambitious military modernisation plan. There are greater opportunities for Indian defence industry to work with partnership or in collaboration with overseas companies, thus enabling them to have broader market access. In light of the Mumbai attacks as well as the overall need to modernize its defensive capabilities, Indias
armed forces are expected to increase their purchases of new equipment and technology for the next 20 to 25 years. Liberalization of Indias defense procurement policy offers a unique opportunity for Indian companies to provide services for the armed forces. Currently, about 70 percent of procurement in value terms is from foreign sources-with Indian companies supplying only around 30% indigenous items (including 25 percent of components and subassemblies) to state-owned companies. In the near term, foreign companies will likely continue to have an edge in the supply of defence armaments and transfer of technology. In India, foreign acquisitions are expected to be more affordable at this time. Industry consolidation in India may be on the upswing for larger companies that have desire to enter manufacturing businesses. This would give them a presence abroad to interact and do business with OEMs and suppliers directly, while simultaneously harnessing the advantages that India as a manufacturing destination provides. 1 The key drivers of Indian aerospace and defence industry are high domestic demand, offset policy, cost advantages, talent base and leveraging IT competitiveness. There are challenges too, such as infrastructure, customs clearances, complex tax laws, certifications, quality assurance, setting up measures like supply chain management, security, taxes and various legislations etc. Kumar Kandaswami Senior Director, Deloitte India Nidhi Goyal
1 eloitte compilation: D Compass 2010 Global Aerospace & Defense sector outlook
3. Executive summary
3.1 Background Over the past decade, the Indian Ministry of Defence has put into motion plans for an unprecedented modernisation program of its defence capabilities. Following the Kargil conflict in 1999, India was confronted with the recognition that much of its Soviet-era equipment was outdated and obsolescent compared with its regional rivals. India faces the theoretical prospect of a war on two fronts, one with a major power rival (China) and the other with a powerfully-armed middle power that poses potential threats to its homeland security (Pakistan). Both China and Pakistan have significantly expanded their military capabilities in the past decade. In this context, India has embarked on a major defence acquisition program, aimed at increasing the size, capability and self-reliance of its Defence Armed Forces. The scale of the planned investments reflects both its need to make up for lost time as well as its expanding economic power. India has seen its economic capacity to fund its capability modernisation expand almost exponentially over the past two decades. During this time India has been increasingly moving towards a more open-market economy, reducing historic controls on foreign trade and investment and privatising a range of government-owned companies across a range of sectors, from airports to electricity generation to telecommunication firms. This has catalysed India to be one of the fastest growing emerging markets, with its GDP growing by seven per cent each year on an average since 1995. Indias economic miracle has been underpinned by a significant expansion in its advanced manufacturing, engineering and ICT industries and is forecast to continue. The IMF in 2009 projected Indias GDP would grow in real terms by more than 7.5 per cent on an average from 2010 to 2014. Indias economy is projected to be 60 per cent of the size of the United States economy by 2025 and second only to China by 2050. Its acquisition plans include a substantial procurement program for the Army, Navy and Air Force. Realising that the Revolution in Military Affairs (RMA) effectively passed India by in the 1990s, the government is seeking to develop a flexible, mobile and networked defence force with substantial power projection capabilities. Many of the assets India is acquiring are at the leading
6 | CII Indian Defence Industry Mission EUROSATORY 2010
edge of technology, including 180 Sukhoi Su-30MKI aircrafts, Scorpne class submarines, advanced Russian T-90 main battle tanks and state-of-the art information and communication systems. More than USD 42 billion in total defence expenditure is targeted by 2015, of which approximately USD 19.20 billion would be expected to be spent on capital equipment for the Defence Armed Forces. The parallel challenge for India in meeting its policy objectives will be expanding its indigenous production capabilities at the same time as meeting its ambitious acquisition agenda. Historically, India has imported more than 70 per cent of its defence assets, most notably from Russia, on which it continues to have a strong reliance. Over the past decade the Ministry of Defence has implemented a series of reforms to its procurement policy framework with the aim of reversing this historical spending pattern, including through the introduction of offsets requirements for designated equipment. The sheer volume of planned expenditure is expected to create new opportunities for foreign firms, as total spending will grow in absolute terms. Moreover, Indias domestic defence sector, which will benefit from increasing requirements to buy local as well as taxation arrangements that advantage domestic firms, will also likely require specialist inputs into both platform and systems development that can be met by foreign firms. 3.2 Objectives The primary objective of this study is to provide the Global Defence Industry with information on Indias defence requirements across four key domains: Maritime (Navy and Coast Guard) Land Aerospace Electronics
In addition, the report seeks to highlight both potential opportunities for global defence exporters as well as potential risks to these opportunities, such as risks of the Indian Government being unable to commit to the identified plans (fiscal capacity assessment), potential regulatory barriers to foreign firms and indigenous production advantages. 3.2.1 Key findings: acquisition plans by each domain Indias budgeted acquisition plans are expected to see an overall expansion of capital expenditure from approximately USD 19.20 billion by 2015 (Table 1). The Defence Services capital expenditure budget is expected to achieve a compound annual growth rate (CAGR) of 10 per cent from 2011 to 2015. This represents a marginal slow down in budgeted expenditure from the past decade (CAGR of budgeted expenditure of 13.8 per cent from 2003-2010). Taking account of inflation, however, tempers the estimate of the overall opportunity; when accounting for Indias inflation rate, the real growth in Defence Service capital expenditure is expected to be marginal over the next two years before increasing to a real growth rate of about 5.3 per cent from 2012 to 2015. Navy and Coast Guard acquisitions The Indian Government has publicly recognised that Indias expanding maritime responsibilities and interests necessitate enhancement in naval and coast guard force levels. By 2022, the Indian Navy has plans to have a 160-plus ships Navy, including three aircraft carriers, 60 major combatants (including submarines), and close to 400 aircrafts of different types. The Indian Coast Guard is all set to double its force levels and manpower in the next few years and triple it in the next decade in order to protect the countrys maritime zones and assets.
Table 1 : Projected expenditure by each Service Division (USD million) 2010-11 Capital Expenditure (USD million) Army (53 %) Navy (16 %) Air Force (31 %) 13110 6948 2098 4064 2011-12 14421 7643 2307 4471 2012-13 15863 8407 2538 4918 2013-14 17450 9249 2792 5410 2014-15 19195 10173 3072 5950 Total 2011-2015 80039 42421 12806 24812
Source: Indian Thirteenth Finance Commision Report, Dec 2009; Union Budget(s) & Economic Survey 2003-2011; and Deloitte Analysis of allocations by Service Division. 8 | CII Indian Defence Industry Mission EUROSATORY 2010
While the smallest of the three Indian Defence Force Services, the Indian Navy is already a rapidly expanding maritime force with 36 ships and six Scorpne submarines currently on order. Two aircraft carriers are also currently in varied stages of construction alongside eight Boeing P8-I Maritime Multi-Mission Aircrafts and 16 Mig-29Ks which are under production in Russia. In addition to the construction already underway, the Navy has further plans to acquire: Submarines, including both four nuclear and twenty four diesel-powered vessels A range of additional warships, including additional frigates, destroyers, corvettes, offshore patrol vessels, and other survey vessels Navalised helicopters and aircrafts Marine equipments and weapon systems Indias 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. The Navy also requires unspecified numbers of unmanned aerial vehicles (UAVs), air defence missiles, twin engine helicopter fighters, AEW aircraft, heavyweight torpedoes for submarines and additional warships. Upon completion of the six Scorpne class submarines currently in production, India expects to float a tender on six more diesel submarines. It also plans to indigenously build between three and five additional nuclear-powered Arihant class submarines. A key potential opportunity also exists to support the modernisation of Indian shipyards which lack both capacity and modern technology to undertake advanced production on such a large scale. As noted by the Indian Defence Review in 2010: 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. The Ministry of Defence (Navy) Indigenisation Plan (2008) lists forecast requirements of the Navy for marine engineering equipment, weapon systems and submarine equipment and systems from 2008-2022. Examples of equipment contained within this plan include gas turbines, diesel engines, pressure cylinders, hydraulic manipulators, and motors. Naval acquisitions have been earmarked for the greatest degree of indigenisation across each of the four domains. India already produces more than half of its acquisitions in this space, and it has had the best track record among the services for delivering projects to budget and timelines. India has developed strong relationships with French firms, which have been transferring technology to local firms through a range of recent contracts.
2 anas Defence yearbook M 2010-11
Indias 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.
The Indian Coast Guard is 70% short of its requirements and therefore modernizing of the countrys maritime forces was the top priority. The coast guard is reportedly eyeing upon maritime ambitious ramping up of its assets to 217 ships and 74 aircrafts in next five years from the present strength of 76 ships and 45 aircrafts. The coast guard is hoping to induct these assets during 11th five year plan period (2007-12), of the new ships, some 70 would be bigger vessels like AOPVs, interceptor boats and inshore patrol vessels, six multimission-maritime patrol aircraft and twin-engine helicopters. To augment the force level of the Coast Guard, the government has sanctioned 40 ships, 20 boats and 42 aircrafts, 7 offshore patrol vessels, 20 fast patrol vessels and 12 Domier aircrafts. Land acquisitions Indian Army acquisition plans include upgrades and purchases of artillery, tanks and vehicles, missiles and other items such as infantry upgrades. The intention is to create eight divisional-sized armoured battlegroups, comprising artillery, armour and motorised infantry, with state of the art communications equipment and coordinated air support. Many acquisitions outlined appear to be part of the USD 8 billion artillery modernisation program, FARP, originally formulated in 1999. The program aims to induct around 2,184 guns over 20 years, at a minimum rate of 100 units per annum. In its 11th Defence Plan, spanning 2007-2012, the Indian Army has designated around 600 modernisation schemes, amounting to around USD 1.44 billion. The FARP is expected to require the purchase of between 2,700 and 3,600 guns, involving acquisitions of between USD 4.77 billion and USD 6.48 billion over the next 15 to 20 years. Key acquisitions planned under the FARP include: Air Mobile Ultra light howitzers Towed and wheeled 155mm guns Self-propelled tracked and wheeled guns Mounted gun systems. Given the urgent requirement for ultra light howitzers at the Line of Actual Control (LAC) the effective border between India and China the Foreign Military Sale route for expediting sales has been cleared by the Defence Acquisition Council. The IAF is currently in the
final stages of negotiations for purchase of USD 2.2 billion worth 10C-17 aircraft and the Army is finalizing the purchase of 145 ultra light howitzers worth about USD647 million. In relation to tanks and vehicles, the main planned acquisitions include upgrades and acquisitions of main battle tanks, UAVs and infantry fighting and light strike vehicles (to replace ageing BMP-1 and BMP-2 infantry combat vehicles). Army aviation would also be inducting about 300 helicopters together with the Indian Air Force trials for which are in the final stages. The final main area is in upgrades to air defence systems. Indias main air defence systems include the SAM-6 (Kvadrat), SAM-8 OSA-AK and Tungushka systems, all of which are at or near obsolescence. Production on land acquisitions has suffered a serious slowdown in 2009 and consequently India is well behind plan in this sector relative to budget. Aerospace acquisitions The major acquisitions of the Air Force over the next decade will be: 180 Sukhoi Su-30MKI aircrafts at a value of more than USD 9.9 billion MMRCA at a value of more than USD 9.09 billion (mainly to replace ageing MiG 21s) , for which competitive field trials are underway between six international companies 120 indigenously produced Tejas fighters, for which the government recently announced an additional USD 1.71 billion in funding
In defence acquisitions, this is perhaps the sector where there are significant opportunities for firms with specialised knowledge looking to enter the Indian market.
10
Additional Advanced and Intermediate Jet Trainer aircrafts The Fifth Generation Fighter, the value of which is unknown, but has been estimated to be in the order of USD 9.9 billion Upgrades of more than 60 MiG 29 fighters, Jaguars and Mirage aircrafts Airborne Early Warning Aircraft Additional Aerostats While the Air Force plans for expansion and replacement of the ageing MiG 21s are well underway, a key risk for the Air Force is that delays and cost overruns in the new fighter programs (in particular, the MMRCA and Tejas programs) will mean that the existing but aged MiGs will need to be kept in service for a longer period than initially planned, with the MiGs increasingly obsolete systems needing to be upgraded and safety features improved to maintain current squadron numbers. Aerospace continues to be a sector where India struggles to indigenise production. India has historically sourced much of its aircraft from Russia, but is increasingly seeking to diversify the vendor base, with United States, European and Israel firms in particular. Shortlisted firms in bid for the MMRCA production include Lockheed Martin and Boeing (United States the F16 and F/A 18 fighters, respectively), Dassault (France Rafale), SAAB (Sweden Gripen), EADS (European Consortium Eurofighter Typhoon), and RAC MiG (Russia MiG-35). Electronics acquisitions Electronics acquisitions are subsumed under each Service Division (Army, Navy and Air Force) in Indias forward budget plans. Key acquisitions by Service include: Navy systems The Indian Navy is seeking sonars, navigational radars with Low Probability of Intercept (LPI) capability, multi-functional radars with capability to integrate various surveillance/weapon delivery
systems, new generation gyros, new generation logs and new generation echo sounders between 2008 and 2022. The Coast Guard is seeking coastal surveillance radars and sophisticated long range electrooptic solutions for offshore security. Army systems The Indian Army has plans to acquire handheld battlefield surveillance radars, hand held thermal imaging devices for night vision, stand alone infrared seismic and acoustic sensors, integrated observation equipment and short range secure radio sets in significant quantities. Modern strategic and tactical command and control systems are also required. The Chief of the Defence Research and Development Organisation (DRDO) has recently stated that they are also seeking industry partners to co-develop technology related to gallium nitride semi-conductors and nanotechnologies related to structures, sensors, propulsions and communication. Further, the DRDO has disclosed that they are seeking to build Indian capabilities in the manufacture of infrared seeker technology and imaging facilitated through working relationships with other countries Air Force systems The Air Force is currently going through a period of modernisation and has recently inducted mid-air refuellers, aerostats, airborne warning and control systems and new generation air defence systems. Recently, it has been announced that the Air Force would also like to upgrade avionics in the Cheetak helicopter and in MiG-29s. A major modernisation of the Su-30MKI aircraft is also planned including the installation of a more powerful radar and newer avionics. The Air Force would also be modernizing its airfields with sophisticated radars, DF and communication and equipment and with enhanced perimeter security arrangements. Although India has a strong engineering skills base and growing ICT industry, and some significant domestic competitors (e.g., Tata), given the legacy distortions in the markets from controlling private sector participation in defence acquisitions, this is perhaps the sector
where there are significant opportunities for firms with specialised knowledge looking to enter the Indian market. 3.2.2 Challenges and risks While the market size is large and growing, market entry is not without challenges and risks for exporters. Regulatory barriers and risks Currently there are a number of regulatory barriers to entry, including in the main foreign direct investment restrictions (26%), taxation advantages afforded to DPSUs as compared to domestic Indian companies and offset requirements (ranging from 30% to 50% depending on DPP restrictions).Industrial licensing, protection of intellectual property rights, capability of Indian joint venture partners, customer clearance required for both Import and Export, etc. Potential opportunities, such as Fast Track Procedures, appear to be applied to acquisitions that are behind schedule or for where there is only one likely sole supplier (which tend to be large primes from other countries), and therefore have limited benefit to foreign exporters. One of the benefits that have recently been accorded is the abolition of controls on foreign remittances under Foreign Technology Collaboration Agreements under Press Note 8/2009. The current timelines for procurement, which are described by the DPP to be 2-3 years but have been reported to take more than 4-5 years, also make it difficult for small to medium enterprises to enter the market. This is largely due to the often high costs of tendering processes, such as in-country trials and the requirements to demonstrate how offset and Transfer of Technology obligations will be met. One of the major impediments is the necessity for No Cost No Commitment Trials which can take several years and consequently small players with sophisticated expertise do not have the resilience to survive this mammoth risk. It also appears that the tendering process for defence equipment in India is not highly transparent. The process can be extremely long and the basis on which tenders are eventually awarded is often not at all clear. There is every prospect that foreign companies could spend a great deal of time and money working up a bid only to be advised, much later, that they were unsuccessful for reasons that are not apparent. Consistent underspending Given its strong economic growth projections, the modest ratio of defence expenditure to GDP and its mandate to
modernise its military, overall it was assessed that it was unlikely that budgeted outlays would come under pressure in the future due to fiscal capacity constraints. The chief risk, rather, was the inability of domestic and foreign firms to keep up with the rate of growth. Although budgets for capital expenditure on Defence Force Services have consistently been increasing, there has also been a trend of significant underspending by the Indian Defence Service. Over the period of 2003 to 2010 the defence service has underspent about USD 6.75 billion of its capital expenditure budget; from 2003-2010: the Navy underspent 21 per cent of allocated capital expenditure the Army underspent 31 per cent of allocated capital expenditure the Air Force underspent 47 per cent of allocated capital expenditure Importantly, however, this can be seen as both a risk and an opportunity for foreign firms. The Indian Government is seeking to expand indigenous production, particularly within the maritime and land domains; however, domestic private firms will need to access specialist inputs to meet these uplift targets in the context of an acquisitions budget that is growing in absolute terms. 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. Total indigenous production over the 2011-2015 period would need to expand from approximately USD 30 billion to more than USD 70 billion in the space of five years. This would translate to an average growth rate of the local industry of 30 per cent a year over the next five years. In any market, this is highly unlikely to occur. Competition Like many countries, India confers on its domestic firms regulatory and taxation advantages that improve their cost-competitiveness compared to their international counterparts. India is also host to a mature manufacturing sector, which means it will often be able to offer more cost-competitive terms for large platform builds. Foreign firms are best able to compete where they have specialised knowledge or inputs. In some sectors, too, there are very strong incumbent positions such as the DPSUs - Hindustan Aeronautics Limited (aerospace) and Bharat Electronics Limited (elec-
tronics) that will provide strong competition to exporters seeking to enter the market. Moreover, global exporters will face fierce competition from transnational corporations offering state of the art technology. Competition in markets for defence equipment also does not take place on a level playing field. Government support, particularly with respect to market entry in India, is important. This does not have to be financial support; often backing for the bid from the defence force in the exporting country can be influential in its own right. 3.2.3 Key opportunities for foreign suppliers The challenges involved in participation in the Indian defence market should not be under-estimated. Yet the potential rewards for foreign companies are significant. While it is clear that India is seeking a high level of selfsufficiency in delivering its ambitious defence re-equipment and expansion program, it is also evident that there will be a high level of reliance on overseas interests to supply the necessary technology in a number of areas. The export countries which already dominate the global market can supply complete platforms or systems. Other Countries
will necessarily be a niche player here. Yet in the context of Indias aspirations in terms of self-reliance, being a niche player may be no bad thing. By their very nature, niche players are not threatening or overbearing and are more willing than the big transnational corporations to work closely with local industry. They also tend to be more aware of the reciprocal benefits of working overseas and may be more willing to incorporate Indian firms into their supply chains.
If the Indian Defence Forces increase its indigenous procurement from the current 30 per cent to the target 70 per cent over the next five years, the output of Indian firms would need to more than double each year.
4 Indian defence requirements
4.1 Basis for requirements 4.1.1 Overview of the Indian economy Per capita income of India has reached USD 1016 billion in the year 2008 (more than doubled in the last 7 years). The last fiscal and the first half of the current fiscal saw India dealing with the impact of the global slowdown that resulted in the GDP growth rate slowing down from an average of 9 % achieved in the last 5 years to 6.7 %.The slowdown also resulted in plummeting exports, a booming fiscal deficit and an alarming fall in the industrial production. Capital flows shrinked and the stock market tumbled into an abyss landing a blow to the decoupling hypothesis. Despite these negative impacts, when compared to the rest of the world,India stood out as one of the better performers and continues to remain a primary focus for many businesses. The recently released economic survey for financial year 2009-10 reveals that some of the key macroeconomic fundamentals of the economy have revived over the past few months. Aided by the fiscal stimulus package and a liberal monetary policy , the countrys GDP growth rate for FY 2009-10 is expected to be 7.2 %.In addition, industrial production has seen record levels (touching 11.7% in November 2009),exports (USD 81.14 billion as on September 2009) have regained the lost momentum, domestic private consumption have increased from last year level and the capital markets have remained strong and robust. The policymakers deserve for the well calibrated and synchronized policies that have helped restore the lost optimism in the future prospects of the economy3.
3 eloittes Budget 2010: D Snapshots for the Aerospace and Defence Sector
Figure 1: GDP shared, GDP growth rate and Industrial production Share of GDP
Agriculture 17% Industry 21%
GDP Growth rate of India

12 10 8 GDP (%) 6 4 2 0 Services 62% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Source: The Economic Survey 2009-10 GDP Linear 7.5% Growth in Real GDP 9.5% 9.7% 9.2% 6.7% 7.2%
Industrial production 2009-10
14% 12% 10% 8% 6% 4% 2% 0%
11.6% 7.0% 8.4% 8.2% 8.5% 8.6% 2.6%
IIP Growth (%)
20
03
-04 4-05 5-06 6-07 7-08 8-09 9-10 0 0 0 0 0 0 20 20 20 20 20 20

IIP (Y-o-Y)
Source: Economic Survey
India is highly consumer driven with consumption forecasted to contribute 63% to GDP growth. India would emerge as the second largest economy in the world by the year 2050. By 2025 Indias economy is projected to be about 60% of the size of the US economy. Figure 2: Export and Import Principal export 2007/08 (USD billion fiscal year Apr-May)
Engineering Goods, 36.6 Others, 65
Principal import 2007/08 (USD billion fiscal year Apr-May)
Others, 40.8
Petroleum Products and Petroleum , 79.6
Agriculture and Applied Products, 18.1 Gems and Jewellery, 19.7
Petroleum Products, 24.9 Textile and Clothing, 19.0
Chemicals, 18.6 Gold & Silver, 17.8 Capital Goods, 37.3 Electronic Goods, 20.3 Source: Economist Intelligence Unit
14
Sector Performance: Recovery is evident! Manufacturing sector has grown at 8.9% in FY 2009-10, higher than that of services (8.7%) and industry (8.2%) Figure 3: Growth Rate of various sectors 10 8.7 8.9 8 6 4 2 0 -2 Services Manufacturing Industry -0.2 Agriculture
The classification based on population density is as follows Tier 1 Population > 4 million Tier 2 Population > 1 million Tier 3 Population > 500 thousand Tier 4 Population < 500 thousand Most multi-nationals operate in eight tier 1 cities as they accounted for 40% of disposable income. Delhi and Mumbai has experienced rapid growth in their suburbs and the mushrooming of satellite towns. Tier 1 and Tier 2 cities together account for 44% of urban population and 53% of urban disposable income. The man power (labour ) available in India can be estimated through the graph below. Labour being the most important resource in manufacturing sector can contribute great deal to the productivity and GDP of the country. The industrialisation in India has turned towards small towns and they have become the key to increased productivity and enhanced standards of living. The purchasing power of Indian middle class is expected to attract global producers to find attractiveness in Indian markets.
Figure 5: Tier distribution of cities
8.2
Growth rate Source: Economic Survey of India, 2009-10
Several other sectors have made a strong recovery - Auto, BFSI, cement & steel, rubber, plastic, textile, wood products and chemical industries. Population and Indian cities: Population is estimated at 1,129 million and growing at 1.38%.
Figure 4: Population (million) Vs age group (2001)
(0-4) 106.5
(55+) 101.7 (45-54) 85.7 (35-44) 122 (25-34) 156.6
Mumbai, Kolkata, Chennai, Delhi, Bangalore, Pune Hyderbad, Ahemdabad Surat, Kanpur, Nagpur, Lucknow, Jaipur, Kochi, Madurai, Meerut, Kozhikode, Nasik, Agra, Rajkot
(5-14) 239 (15-24) 199
Trichy, Amritsar, Faridabad, Goa, Aligarh, Moradabad, Pondicherry, Bhavnagar, Jodhpur
Rohtak, Rourela, Anand, Hassan, Villupuram, Gurgaon, Shillong, Faizabad, Palghat, Shimla, Kolar Tier 1 8 Major Cities Tier 2 26 Mainstream Cities Source: NCAER Prospects for Global Defence Export Industry in Indian Defence Market | 15 Tier 3 33 Cities Tier 4 5094 Small Towns
Table 2: Urban population and urban disposable income demographics 2001 Classification Tier 1 Tier 2 Tier 3 Tier 4 Urban population tier wise (million) 83.73 43.31 25.99 135.7 Urban population tier wise as a % of total population 8.14% 4.21% 2.53% 13.19% Urban disposable income (USD Billion) 75.85 26.6 16.75 75.23 Urban disposable income as a % of total disposable income (USD Billion) 16.23% 5.69% 3.58% 16.09%
4.1.1.1 Impact of defense on Indian Economy In the Union Budget 2010-11, expenditure of about USD 32.03 billion has been earmarked for national defence which has been increased from USD 29.62 billion revised estimates for the last year. This will account for about 2.43% of GDP. The budgeted allocation keeps growing by 7-8% every year. The targeted defense expenditure till 2015 is 100 billion dollars. India is expected to be one of the largest buyers of defense equipment and services in the world. The total defence budget has increased by 8.13 % and out of which capital acquisition of USD 13.04 billion has been increased by 25.46 % from the last year (see figure 6). The total defence budget accounts for about 13.29 % of the total Central Government expenditure. If the scope of national defence is enlarged to national security, it would include expenses for civil defence, security aspects of the Department of space, expenditure of the Ministry of Home Affairs, research and development, which roughly account for about 20 % of total Government budget.4 (see table 3) Figure 6: Expenditure on Defence by GOI
Table 3 below provides a summary of the Government of India budget for defence, Home Affairs, Space, Civil Aviation etc. Table 3: Government of India Budget 201011 (1 USD=INR 46) (figures in USD billion) Ministries/ Departments Defence Home Affairs Space Civil Aviation Revenue 18.99 6.09 0.67 0.32 Capital Total 13.04 1.55 0.59 0.31 0.01 0.01 32.03 7.64 1.26 0.63 0.52 0.66
Department of Science 0.51 and Technology Scientific and Industrial 0.65 Research
4.1.1.2 Growth in the Manufacturing Market The growth in defence production is a growth in manufacturing sector. Growth of Defence Public Sector Undertakings (DPSUs): The DPSUs in India have historically dominated Indian aerospace, shipbuilding, communications and electronics.. They have grown tremendously through protection, monopoly and have developed and have passed off outdated technologies to the services. On a positive note they have also succeeded in building fine warships and aircrafts albeit at substantial cost and time overruns. Growth of IT/Engineering Companies: Indian software companies are active in the field of avionics and are aggressively trying to increase their share of the engineering services outsourced (ESO) market. All big players have already set up a separate aerospace vertical. There are a few standalone ESO companies as well.
11.5
13.04
17.5
18.99
2009 -10
4 eloittes Budget 2010: D Snapshots for the Aerospace and Defence Sector. 16 |
2010 -11
Revenue
Capital
(figures in USD Billion dollars)
Growth of Other Private Players: There are many SMEs who entered post liberalization . Key drivers for their growth are subcontracting for DPSUs, liberalization and the offset policy. For example, big houses like Tata, L&T, M&M and other domestic private players like Dynamatic Aerospace have been aggressively building capabilities in different spheres.5 Growth of Auto Component Manufacturers: Indian automotive companies have been the recent entrants in this sector primarily due to synergy of operations and business processes.The primary drivers for entering this sector is risk diversification, process similarities, slowdown in auto sector, higher margins and offset opportunities. Also the automotive industry was in the forefront in adoption of best practices particularly in manufacturing and supply chain processes. Therefore the penchant of several automotive players for A&D sector is a logical choice than other industries. 4.1.2 Defense acquisitions : Strategic imperatives and economic context 4.1.2.1 Indian defence strategic directions and priorities Indias overall military strategy is shaped by a range of ongoing and emerging issues in the region. This includes conventional threats and border disputes with China and Pakistan, growing concerns about terrorism from non-state and state-sponsored groups, and the ongoing Maoist Naxalian insurgency. Figure 7: Indian GDP 1980-2014 (%, INR) 120,000 100,000 GDP (INR, D 2000) 80,000 60,000 40,000 20,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 GDP (INR, real terms) GDP (INR, nominal terms) GDP % change (real terms)
India has been engaged in an ongoing dispute with Pakistan along the Line of Control (LoC) in Kashmir for decades. In addition to direct confrontations, this encompasses threats from a range of non-state groups, which India has frequently blamed for terrorist activities.6 Reports of the growing strategic relationship between China and Pakistan (for example, the Chinese proposal to establish foreign military bases in Pakistan) are also a cause for concern. These issues are further complicated by the ongoing relationship between Pakistan and the United States, primarily due to the ongoing United States military presence in Afghanistan.7 Further development of this strategy remains focussed on avoiding a nuclear response, but maintaining the ability to engage in rapid retaliatory responses to any attacks. This would include the ability to respond on dual fronts to Pakistani and Chinese incursions. The resulting doctrine is focussed on eight integrated battlegroups of division size, which would combine mobile ground forces with air power, and be connected via advanced networking and communication systems. 4.1.2.2 Rapidly expanding economic power India has seen its economy expand almost exponentially over the past two decades (Figure 7). During this time, India has been increasingly moving towards a more open-market economy, reducing historic controls on foreign trade and investment and privatising a range of government-owned companies. This has catalysed India to be one of the fastest
12% 10% 8% 6% 4% 2% 0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 % change in GDP
5 eloitte A&D Presentation D for Belgium Economic Mission March 26,2010 6 ired in Red Tape in M SPs Land Forces Defence Magazine, contributed by Brig Gurmeet Kanwal (Retd), Feb Mar 2010, Vol 7, Number 1, pp.1-6 & 13-14 7 atoch, Lieutenant General K (Rtd) (2010) Restructure Capabilities in SPs Land Forces, January, pp.32-33
Source: IMF (2009) World Economic Outlook Database (Last Release October)
growing emerging markets, with its GDP growing by seven per cent each year on average since 1995. Indias economic miracle has been underpinned by a significant expansion in its advanced manufacturing, engineering and ICT industries. Moreover, Indias economic growth forecast to not only continue but accelerate. The IMF projected in October 2009 that Indias real GDP growth rate would exceed 7.5 per cent on average from 2010 to 2014 (Figure 7). The increased focus on privatisation of government controlled firms and engagement with the private sector has also impacted on Indias defence sector. The government is seeking to establish a new class of domestic private enterprise, the Raksha Udyog Ratnas (RURs), which would enjoy the same tax treatments as incumbent publicly owned firms (the Defence Public Sector Undertakings). It has also agreed to provide greater detail to the private sector about future defence acquisition plans; historically, the private sector has only been provided one-year forward estimates. 4.1.2.3 Defence spending and acquisitions It is in the above military and economic contexts that India has moved over the past decade to implement a transformational capability upgrade across all defence service divisions. In implementing the modernisation plans, the Ministry of Defence is seeking to: Correct legacy underspending Following the Bofors acquisition scandal in 1986, Indias expenditure on defence was reduced, which contributed to a decade of underspending that became apparent in 1999 during the Kargil conflict. The Kargil conflict highlighted a range of deficiencies in the capabilities of the Indian Armed Forces. Even today it is still estimated that around 50 per cent of the Indian Armed Forces existing equipment is obsolete.8 Accordingly, modernisation is a key priority for future defence acquisitions. Establish self-reliance The Indian Government also has aspirations to significantly enhance indigenous production capabilities (particularly in relation to advanced technologies). This would represent a shift from historical patterns of defence procurement, which have typically involved foreign supply of critical components, with some licensed indigenous production. Supporting this objective, and in keeping with broader moves to open up the Indian economy, the Ministry of Defence has implemented a series of changes to the governance and planning processes for defence acquisitions to improve the transparency of long term defence acquisition plans to the private sector. Improve value for money Revisions to procurement
procedures have been focused on increasing the number of vendors from which India sources its capabilities. In particular, India is looking to other countries for acquisitions as so far traditionally India has been relying on Russian equipments. 4.1.3 Defense expenditure: Historical trends, future plans & fiscal capacity 4.1.3.1 Acquisition governance and planning Responsible agencies The Indian Ministry of Defence is responsible for all defencerelated activities in India, spanning the Army, Navy and Air Force. The principal task of the Defence Ministry is to frame policy directions of the Government on all defence and security related matters for communication to the Services Headquarters and other relevant organisations. The Ministry of Defence is comprised of four Departments: Department of Defence responsible for the defence budget, establishment matters, defence policy, matters relating to Parliament, defence co-operation with foreign countries and co-ordination of all defence related activities Department of Defence Production responsible for matters pertaining to defence production and indigenisation of imports Department of Research and Development responsible for advising the Government on scientific aspects of military equipment and logistics. The Defence Research and Development Organisation (DRDO), which works in a range of areas of indigenous military technology development Department of Ex-Servicemen Welfare deals with resettlement, welfare and pensions matters of Ex-Servicemen. The MoD also has a Finance Division which is fully integrated with the Ministry & performs an advisory role. The Defence Acquisition Council (DAC) was established in 2001 and is charged with the approval of capital acquisitions. The DAC is the responsible authority for determining the category of proposed acquisitions under the DPP, and is assisted in this role by: Service Headquarters (SHQ) Service Capital Acquisition Plan Higher Committee (SCAPCHC). Planning framework and procedures Planning for capital acquisitions is undertaken on a short, medium and long-term basis, by way of the following documents:
8 pportunities in the O Indian Defence Sector, Report prepared by the Confederation of Indian Industry in partnership with KPMG
Annual Acquisition Plan (AAP) 5-year Services Capital Acquisition Plan (SCAP) 15-year Long Term Integrated Perspective Plan (LTIPP). The planning process is under the overall guidance of the DAC. The DAC is responsible for approving the LTIPP and SCAP. The AAP is a subset of the SCAP, and is subject to the approval of the Defence Procurement Board (DPB). The Defence Procurement Procedures 2008 (DPP-2008) is a policy document providing formalised guidelines for capital acquisitions. In November 2009, the DPP-2008 (Amendment 2009) was released, comprising the following key reforms: Supporting the development of indigenous Defence industry through the introduction of new category for acquisition Buy and Make (Indian) Encouraging competition by broadening the vendor base, including through increased domestic private sector involvement and continued foreign firm equipment, hardware and services provision
Implementing policies and procedures to increase the quality, reliability and transparency of procurement processes Enhancing the delegation of financial powers to the Services. Under one of the key amendments to the DPP-2008, the LTIPP will be made publicly available for the first time in June 2010, reflecting Indias strong desire to increase engagement with the private sector. This amendment is designed to assist the private sector in more effectively undertaking planning (including R&D and collaboration) for tender proposals. 4.1.3.2 Defence Expenditure: key definitions and areas of focus The 2010 budget for defence spending in India is INR 175,772 crore or USD 38.21 billion, which will account for about 2.53% of GDP. 9, 10 Defence force expenditure is split into Revenue and Capital expenditure. Table 4 below gives general terms and their definitions.
9 t an exchange rate of 46 A INR to 1 USD 10 ne crore is a Hindi measO urement equivalent to 10 million. 11 xpenditure Budget 2010E 2011, Vol 1, p 12. 12 bid. I
Table 4: Expenditure definitions Expenditure type Budget Revised Estimates Budget Plan Expenditure Definition The budget for the defence force is prepared prior to each financial year and estimates the capital and revenue expenditure that will occur in that year. The Revised Estimates Budget is calculated at the end of the year and captures the actual revenue and capital expenditure spent during the financial year. Plan Expenditure is expenditure requirements identified and discussed by respective ministers or departments and discussed with the Ministry of Finance. Indian Government Plan Expenditure includes health and education. It comprises 34% of the total Central Government budget.11 Non-Plan Expenditure is all expenditure that was not identified in the plan expenditure; in spite of its name, most of the budget prepared by the Planning Commission is categorised as non-Plan (66% of total budget).12 This expenditure includes salaries for government employees, loans to private enterprises, States, Union Territories, local governments and foreign government, tax collection and social services. *The Indian Defence Forces Expenditure budget is predominantly Non-Plan expenditure. The Capital Expenditure Budget is primarily used by the Defence Force to construct infrastructure, and procure land, armaments, and other equipment required by the defence services. The Revenue Expenditure Budget is used for the everyday operating expenses of the Defence Force. Salary and wages for the Defence Force Personnel accounts for about half of this budget. Defence Services expenditure is comprised of direct defence spending, including: capital outlay on machinery, construction and land (capital expenditure), other works expenditure (revenue); pay and allowances for the armed force personnel (revenue); stores purchases (revenue) and transportation and miscellaneous expenditure (revenue). Defence Civil expenditure is spending that is considered to be auxiliary to the defence services. It includes: secretarial and general services; the coast guard; canteen stores department; housing; public works; investment in public enterprises; and defence pensions.
General budget terms
Non-Plan Expenditure
Defence-specific categories of spending Capital Expenditure Revenue Expenditure Defence - Services Expenditure Defence - Civil Expenditure
4.1.3.3 Historical defence spending
13 nion Budget(s) & U Economic Survey 20032011. Available at: www. indiabudget.nic.in, accessed on 23th March 2010. 14 nion Budget(s) & U Economic Survey 20032011. Available at: www. indiabudget.nic.in, accessed on 23th March 2010. 15 bid I 16 Ibid 17 here was no change in T 2005 between the budgets for revenue and capital expenditure. Considering the prior and following year differences, it seems unlikely that all expenditure occurred as planned during this one period. This aberration in the data could have several causes, such as a change in accounting methods. 18 n nominal currency I amounts.
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.
For the purposes of this analysis, the primary focus is on capital expenditure in Defence Services. In 2009-2010, Defence Services capital expenditure will account for approximately one third of Indias total spending on defence (Figure 8). 13
Trends in defence acquisition spending 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.14 While this is a high rate of growth, it does signal that defence spending has been falling as a percentage of GDP, which has achieved a nominal CAGR of about 13.8 per cent for the same period (8 per cent in real terms). 15 Not all areas of defence budgeted expenditure, however, have been falling as a proportion of GDP. Budgeted capital expenditure across both Defence Services and Civil Expenditure categories has been keeping in line with GDP with a CAGR of about 13.8 per cent, compared to a CAGR of 9.1 per cent for revenue expenditure.16 Figure 9: Defence Expenditure as % of GDP Budgeted Expenditure 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2003 2005 2007 2009 2011
Defence Revenue / GDP Defence Capital / GDP Total Defence / GDP
Figure 8 : Expenditure breakdown Service Expenditure (USD, billions) Capital Expenditure Budget (USD, billions) Civil Expenditure (USD, billions) Total Expenditure (USD, billions) $13.30 (33.8%) Total Capital Expenditure $24.91 (66.2%) Total Revenue Expenditure $38.21 billion (100%) Total Defence Expenditure
Source: Union Budget(s) & Economic Survey 2003-2011. Available at: www.indiabudget.nic.in, accessed on 23th March 2010. Deloitte Analysis
$13.04b (34.13%) $0.26b (0.68%)
Revenue Expenditure Budget (USD, billions)
Reflecting the high proportion of the overall capital expenditure budget, capital expenditure on Defence Services has also increased by a CAGR of 13.8 per cent (in line with overall capital expenditure trends). Budgeted capital expenditure on Defence Services has increased from USD 5 billion in 2003 to a budget of USD 14 billion in 2011. Consistent underspending Although budgets for capital expenditure on Defence Services have consistently been increasing, there has also been a trend of significant underspending by the Indian Defence Service. Figure 10 shows the historical difference between the budget and the revised
$18.99b (49.70%) $5.92b (15.49%)
Total Expenditure (USD, billions)
$32.03 (83.83%) Total Services Expenditure
$6.18 (16.17)% Total Civil Expenditure
20
estimates budget. It highlights the defence service consistently underspends their monies allocated to capital expenditure. 17
Over the period of 2003 to 2010 the defence service has underspent about Rs 31,135 crore or USD 6.75 billion18 of its capital expenditure budget. This is about equivalent to 57 per cent of the 2011 budget for capital expenditure.
Figure 10: Unspent funds Total Defence Budget (in both % and USD terms)
Unspent funds as % of Budgeted Expenditure

40%
Unspent funds in USD

3,000 2,000 USD Billions 1,000 0 -1,000 -2,000 -3,000
Underspending relative to budget
% Overspend % Underspend
30% 20% 10% 0% -10% -20% -30% -40% 2003 2004 2005 2006 2007 2008 2009 2010 Defence Revenue Defence Capital Total Defence
Overspending relative to budget

2003 2004 2005 2006 2007 2008 2009 2010
-4,000
Source: Union Budget(s) & Economic Survey 2003-2011. Available at: www.indiabudget.nic.in, accessed on 23th March 2010. Deloitte Analysis Prospects for Global Defence Export Industry in Indian Defence Market | 21
Trends in acquisitions by each Defence Force division The Indian Defence Force includes the Army, Navy and Air Force. Budgeted capital expenditure for the three services, shown in Figure 11, has remained relatively constant as a proportion of GDP since 2003. Each Service undertakes their own systems procurement which falls under other equipment within the defence budgets. The spike in budgeted expenditure for the Air Force in 2005 is due to doubling in expenditure on aircraft and aeroengines, and an increase in expenditure on other equipment, which related to systems acquisitions, of about 50 per cent from 2004. The 2005 financial year was the abnormal year where all spending targets were met within the defence force. Figure 11 : Expenditure by Service division (in both % and USD ($) terms)
Expenditure by Division as % GDP 0.45% 0.40% 0.35% 0.30% USD Billions 2003 2004 2005 2006 2007 2008 2009 2010 2011 Army Navy Airforce 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% $2.0 $12.0 Expenditure by Service Division $14.0
$10.0
$8.0
$6.0
$4.0
$0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011
Table 5 identifies some of the areas within the defence service that have been receiving large proportions of the services capital expenditure allocation or have been growing at a rate greater than that of the capital expenditure budget which has a CAGR of 13.8 per cent. Table 5: Expenditure by Service division (in both % and USD terms) Proportion of total capital expenditure (2003-2011) Air Force -aircraft and aero-engine Army systems Air Force systems Navy naval fleet Research and Development 26.7% 18.3% 10.6% 14.1% 6.4% CAGR (2003-2011) 13.8% 7.4% 21.5% 13.8% 21.6%
Source: Union Budget(s) & Economic Survey 2003-2011. Available at: www.indiabudget.nic.in, accessed on 23th March 2010. Deloitte Analysis 22 | CII Indian Defence Industry Mission EUROSATORY 2010
Underspending by Service Division Excluding the 2005 year, however, all divisions of the defence service were consistent in their underspending of budgeted capital expenditure. The consistent underspending by all three divisions may indicate that procurement issues regularly arise within the whole defence service as opposed to within just one division (Figure 12). The Air Force has been the most consistent area of underspend relative to budget, although recent indigenous production delays have also resulted in a significant underspend by the Army as well. Figure 12: Unspent funds Service Division Capital Budgets (in both % and USD terms)
Unspent Funds as % of Budgeted Expentiture 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% 2003 2004 2005 2006 2007 2008 2009 2010
Army Navy Airforce
USD underspent by Service 1,400 1,200 1,000
Underspending relative to budget
USD Millions
800 600 400 200 0 -200 2003 2004 2005 2006 2007 2008 2009 2010
19 rocurement Policy and P Procedure. Standing Committee on Defence (2005-06) Sixth Report.
Trends in indigenous versus imported acquisitions In 2005, the Indian Standing Committee on Defence reviewed the defence force procurement policy and procedures.19 This report identified that although India had been independent for 55 years, cutting edge military technologies had not been locally developed and the procurement of capital equipment remained reliant on imports. Production of defence equipment was a purely government function up until 2001, when the sector was opened to private industry.
Box 1: Overview of Indias indigenous defence production Achieving self-reliance in defence production has been a goal of Indian policy-makers since the attainment of independence in 1947. At that time, Indias productive capabilities were limited to small run arms, ammunition, mines and explosives, all of which were undertaken by 16 ordnance factories. Developing indigenous defence capabilities was seen as a key means of maintaining foreign policy independence. The Industrial Policy Resolution of 1948 decreed that the public sector would be the main source of production in a range of areas, including defence. Policy revisions in 1956 explicitly excluded the private sector from taking part in the munitions, aircraft and shipbuilding industries. In the following decades, a number of new public sector ordnance factories were built, so that by the mid 1980s there were 35 factories manufacturing tanks, armoured vehicles and trucks in addition to the previous products. Currently, there are 40 state-run ordinance factories which focus primarily on land-based systems and operate under the guidance of the Ordnance Factories Board. In addition to the ordnance factories, there are eight Defence Public Sector Undertakings (DPSUs) controlled directly by the Ministry of Defence. The DPSUs produce combat aircraft, helicopters, warships, missiles, defence electronics, heavy earth moving equipments and specialist alloys. The DPSUs have been the recipients of significant support from the Government in terms of research and development assistance (particularly through the work of the Defence Research and Development Organisation), investments in productive capacity, tax breaks and prioritisation for tenders. However, the performance of the DRDO has been subject to a range of criticism, and as such, the production activities of the DPSUs in relation to complex systems have typically been by way of licensed production based on foreigndeveloped technology. Industrial policy meant that the private sector was limited to producing elementary and intermediate products, components and spare parts until 2001, when the defence sector was opened to private sector, with complete private ownership of defence production and up to 26 foreign direct investment permissible. These policy changes were intended to open the way for the private sector to become more involved in the production of advanced weapons systems and equipment. In addition to major industrial companies such as Tata Advanced Systems and Mahindra, there are also a large number of small and medium-sized businesses that assist the DPSUs and private companies with the provision of components.
Source: (2010) Chapter Ten: Reforming Indias Defence Industries in The Military Balance, February, pp.473-478
The private defence industry in India is still relatively young with the Ministry of Defence, noting that the private defence sector is still embryonic and that it will take time to come of age. Further, the private defence industry will have a number of barriers to overcome before it reaches maturity, including: Prohibitive industry entry costs Barriers to the export of defence intellectual property from foreign countries Integration difficulties when combining complex weapon systems. Understanding of the Defence Domain requirements
20 inger, P. W. (2003) S Corporate Warriors: The Rise of the Privatized Military Industry, Cornell University Press, Ithaca and London. 21 rocurement Policy and P Procedure. Standing Committee on Defence (2005-06) Sixth Report. 22 ibid 24 |
fighters, frigates and tanks to the electronic systems that support them and even many of the munitions carried by these vehicles.20 Complex weapons systems are differentiated from other defence weapon systems by the technical difficulties that occur at the conception, development and production stages, in addition to uncertain outcomes which increase the risk to the buyer and seller of a complex weapon system. Adding to the complexity of creating these systems, complex weapon systems often require the integration of many systems, each of which may be produced by a different supplier.21 Under these constraints, entry into many parts of the defence industry requires significant investment into R&D before, during and after a complex weapon system has entered production. And in addition to long term commitments to R&D, organisations wishing to enter into the defence industry face significant infrastructure and production facility costs.
These barriers to the growth of the defence industry are predominantly for the sectors that produce equipment that may be considered to fall under the title of complex weapon systems. Although relatively simple systems such as mines and rifles account for the bulk of fatalities in current conflicts, complex weapon systems account for a majority of a defence forces capital expenditure. Complex weapon systems range from
The issues surrounding complex weapons systems are compounded by the fact that the effectiveness of a weapon system is relative to other like or adversarial systems. For this reason, governments which fund the invention and development of these systems have an interest in restraining the transfer of cutting edge weapon systems to other countries and therefore create export barriers or denial regimes for some systems. One example of an exporting barrier is the USAs International Traffic in Arms Regulations (ITARS). ITARS is a set of regulations that controls defence-related equipment and services which are on the United States Munitions List. In practice, ITARS regulations dictate
that technology and information used by or for the military cannot be shared with any non-US individual unless proper authorisation has been provided. The USA therefore restricts knowledge that is used in the production of their complex weapons systems. Most countries implement similar denial regimes to protect their technological competitive advantage in weapon systems.22 India will necessarily need to develop the capability of their defence industry prior to making serious advances in proportion of capital equipment that is manufactured locally. Up until 2005, India still procured most of its defence force equipment from international suppliers (Table 6).
Table 6: Imported vs indigenous production Year Imports 2000-01 2001-02 2002-03 2003-04 2004-05 2006-07 2007-08 2008-09 Average 36% 49% 50% 58% 58% 5% 23% 46% 41% Navy Indig. 64% 51% 50% 42% 42% 95% 77% 54% 59% Imports 46% 34% 65% 52% 42% 22% 42% 34% 42% Army Indig. 54% 66% 35% 48% 58% 78% 58% 66% 58% 81% 74% 70% 76% 62% 11% 42% 27% 55% Air Force Imports Indig. 19% 26% 30% 24% 38% 89% 58% 73% 45% Imports 54% 52% 62% 62% 54% 5% 23% 46% 45% Total Indig. 46% 48% 8% 38% 46% 95% 77% 54% 52%
Source: Procurement Policy and Procedure. Standing Committee on Defence (2005-06) Sixth Report and Standing Committee on Defence (2009-10) Sixth Report.
Even in recent times India has struggled to lift indigenous production above 50 per cent of the total cost of the acquisition. It has had the greatest success in naval and land acquisitions, where large platform builds have required less advanced technological know-how and Indias mature manufacturing and engineering sector is able to strongly compete. While the private defence industry may be growing in India, the high barriers to entry will probably mean that the Indian Defence force will still need to procure much of its desired equipment from outside of the countries. This is likely to be particularly true for items that require high levels of technological sophistication. For example, naval production is currently focused on heavy engineering rather that the complex electronic systems design and integration.
4.2
Defence requirements
4.2.1 Future defence spending Table 7 presents Indian Government forecasts for future defence service expenditure. Table 7: Forecast expenditure on defence services Year Capital Expenditure (USD million) Army (53 %) Navy (16 %) Air Force (34 %) 2011 13110 6948 2098 4064 2012 14421 7643 2307 4471 2013 15863 8407 2538 4918 2014 17450 9249 2792 5410 2015 19195 10173 3071 5950
Source: Indian Thirteenth Finance Commission Report, Dec 2009; Union Budget(s) & Economic Survey 2003-2011; and Deloitte Analysis of allocations by Service Division.
The above Table shows that the Defence Services capital expenditure budget is expected to grow in nominal terms, with capital expenditure achieving a 10 per cent CAGR. This represents a marginal slow down in budgeted expenditure from the past decade (CAGR of budgeted expenditure of 13.8 per cent from 20032010). However, considering the degree of underspend and in turn the level of activity that is yet to occur for which budgets have already been allocated, this may be a more realistic growth rate of the Indian defence budget. Moreover, it is important to consider the real growth rate of expenditure when evaluating forward projections. When accounting for Indias inflation rate in the near future, which is expected to peak this year around 9.0 per cent in 2010, before falling to 7.3 per cent in 2011 and subsequently stabilising in the long run at around 4.7 per cent by 2015, the real growth in Defence Service capital expenditure growth will be marginal over the next two years before increasing to about 5.3 per cent from 2012 to 2015. This may mean that competition for new opportunities is higher than the nominal figures suggest. The future balance of indigenous vs imported procurement: defence policy objectives India has established a notional target for 70 per cent of new acquisitions in the future to be sourced from indigenous production; the Navy has a slightly higher target of 85 per cent but this is likely to be offset by lower levels of indigenisation in other domains. This would represent an effective reversal of historic trends.
In very recent times India has struggled to lift the indigenous share of its budgeted acquisitions; in 2010, capital defence procurement that originates in India fell to about 30 per cent.23 If the Indian Defence Service wished for their indigenous industry to supply 70 per
cent of the armed forces capital goods by 2015, then the local industry would need to more than double in size in five years. This is highly unlikely to occur, due to the combination of the aspirational growth rates for total spend and the proportion of defence equipment that is manufactured within India today. Table 8 highlights the growth rate required for the indigenous defence industry to provide 70 per cent of the capital goods to the defence service by 2015. As shown in the table, indigenous production would need to expand by an average of 30 per cent a year over the next five years. Table 8 : Forecast Growth of Imported vs indigenous production, if targets are met Year Capital Expenditure (USD million) Indigenous growth rate Imported growth rate 2011 13,110 39.33% -2.57% 2012 14,421 33.16% -4.19% 2013 15,863 29.13% -6.30% 2014 17,450 26.30% -9.13% 2015 19,195 24.19% -13.16%
Source: Indian Thirteenth Finance Commission Report, Dec 2009; Deloitte analysis nominal projections.
It would be very difficult for the Indian indigenous defence industry to achieve the growth rate above without significant government intervention. 4.2.2 Fiscal capacity considerations Indian GDP has achieved a very high growth rate in the past ten years. This contrasts with Indias developed nation counterparts, which are expected to achieve much slower GDP and revenue receipts growth, combined with harder spending choices driven predominantly by ageing populations. As a consequence, although the Indian Government has budgeted substantial increase in nominal capital expenditure (and more modest growth in real terms to 2015), overall expenditure is expected to remain a modest proportion of GDP (and steady component of government budgets). Defence Expenditure, including revenue expenditure and capital expenditure within this, is forecast to decline as a proportion of GDP over the next five years to 2015 (Table 9). 24 Table 9: Forecast Expenditure on Defence Services Year Forecast GDP Nominal Growth Rate Forecast GDP Nominal (INR billion) Forecast GDP Nominal (USD billion) Total Def Expenditure as % of GDP Def Rev Expenditure as % of GDP Def Cap Expenditure as % of GDP 2011 12.50% 76,898 1660.5 2.12% 1.20% 0.92% 2012 13.00% 86,895 1876.5 2.03% 1.14% 0.89% 2013 13.50% 98,625 2130.3 1.94% 1.07% 0.87% 2014 13.50% 111,940 2417.4 1.85% 1.01% 0.84% 2015 13.50% 127,052 2744.1 1.76% 0.95% 0.81%
Source: Economics Intelligence Unit, Country Monitor India. Indian Thirteenth Finance Commission Report, Dec 2009.
23 ilitary Balance (2010), M Chapter Ten: Reforming Indias defence industries, 110(1), pp 437-478 24 ndian Thirteenth Finance I CommissionReport, Dec 2009.
In general, the strong economic growth projected by India would be expected to build confidence in Indias capacity to commit to its budgeted outlays for defence. However, with the majority of Defence Expenditure categorised as Non-Plan expenditure, there is a potential risk that expected growth in Plan Expenditure could put pressure on proposed acquisitions. This pressure could be exacerbated in the event of a double dip recession, which could be more protracted given the current debt positions of governments following the Global Financial Crisis (GFC). In addition, Indias public debt as a proportion of GDP is currently high by world standards (Figure 13). India ranks 31st in terms of the proportion of debt to GDP, and exceeds the world average of 53 per cent. Critically, it also outpaces its emerging market peers: Brazils public debt as a percentage of GDP is 47%, Chinas public debt as a percentage of GDP is 18% and Russias is only 7%. To the extent that a double dip recession were to occur, Indias
Figure 13: Public Debt to GDP Key country comparisons (2009 estimates)
200% 180% 160% 140% Debt% of GDP 120% 100% 80% 60% 40% 20% 0% New Zealand Saudi Arabia Australia China Greece France Germany Thailand Iceland Canada Ireland Sweden United Kingdom South Africa 36 Singapore Norway World United States Russia Japan Spain Brazil Israel India Italy 18% 7% 60% 53% 47%
Source: CIA World Factbook, 2009 estimates, accessed online at: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html?countryName=India&count ryCode=in&regionCode=sas&rank=31#in
debt position would be expected to potentially weaken its ability to commit to its proposed acquisition plans. Offsetting its high debt position, however, is the more balanced nature of its growth. In contrast to China, which relies heavily on exports for its economic growth, India enjoys a strong domestic demand component. As a result India weathered the GFC well, posting the second highest real growth rate globally. In 2009-10, its deficit was reported to be 6.8% of GDP. This suggests that although Indias fiscal position is not bullet proof there are overall low risks to its capacity to commit to future spending. Even in the event that Plan Expenditure grows in the near future, it is generally considered that, given the security environment in and around India with boarder disputes with Pakistan and China, the government would continue to expand Defence Service capital expenditure in line with their desire to modernise the defence force. It is likely that pressure would first be focused on reigning in the defence forces revenue expenditure growth.25
4.2.3 Future acquisition plans 4.2.3.1 Navy Acquisitions The Indian Government has publicly recognised that Indias expanding maritime responsibilities and interests necessitate enhancement in naval and coast guard force levels. By 2022, the Indian Navy has plans to have a 160-plus ship Navy, including three aircraft carriers, 60 major combatants (including submarines), and close to 400 aircraft of different types. The Indian Coast Guard is all set to double its force levels and manpower in the next few years and triple it in the next decade in order
to protect the countrys maritime zones and assets. While the smallest of the three Indian Defence Force Services, the Indian Navy is already a rapidly expanding maritime force with 36 ships and six Scorpne submarines currently on order. Two aircraft carriers are also currently in varied stages of construction alongside eight Boeing P8-I Maritime Multi-Mission Aircraft and 16 Mig-29Ks which are under production in Russia. In addition to the construction already underway, the Navy has further plans to acquire:
25 Arvind Kadyan, Indias Defence Budget (20102011): Wakeup call for defence managers. Institute for Defence Studies & Analysis.
Table 10 : Indian defence acquisition plans in the Navy domain Category Indicative Items (Quantity) Diesel Submarines (6) Submarines ATVs (nuclear subs) (3-5) Indigenous Aircraft Carriers (2) ASW Corvettes (8) Off-shore Patrol Vessels (4) Sail Training Ship (1) Warships Survey vessels (6) Destroyers (4) Frigates (7) Mid-Life Upgrades of the Kirch Class Corvettes (5) Landing Platform Dock (2) Mid-Life Upgrades of the Brahmaputra Frigates (3) Fighters for IAC2 MiG-29K (29) Alternatives for six Naval Tejas Navalised aircraft Long Range Maritime Patrol Aircraft - Boeing P8-I (20) Long Range Maritime Patrol Aircraft IL-38 (5) Medium-range Maritime Reconnaissance Aircraft (6) Short-range Maritime Reconnaissance Aircraft (11) Advanced Light Helicopters (47) Helicopters Maritime Helicopters (16) Training aircraft 17 Advanced Jet Trainers(17) Weapons Missiles Weapons other Equipment Marine engineering equipment Marine engineering equipment propulsion systems SSK/EKM Submarine Equipment 2010-2022 2010-2022 2010-2022 2010-2022 2010-2022 2010-2022 2015+ 2010-2015 2010-2015 2010-2022 2007 (project has been delayed) 2010-2022 2010-2022 2010-2022 2010-2022 US$1 billion USD1 billion USD 2.25 billion USD 1.17 billion USD 2.07 billion Timing Tenders released 2010-2011 2010-2015 From 2010-2015 2010-2017 2010-2020 Over 15 years Over 15 years Over 15 years Over 15 years Over 15 years 2010-2022 USD 3.33 billion USD 8 billion USD USD 3.42b each (USD 20.7billion) Source 4, 25, 26
>USD 1.8 b (USD 5.4 9, 25, 26 b- USD 9 billion +) USD 450 million > USD 1.8 billion 17, 21, 23, 25, 26 10, 11, 18, 19,26 22, 26 25, 26 25, 26, 27 25, 26, 28, 29 24, 25, 26 25 25 25 12, 25, 26, 30 12, 20, 25, 26, 30 12, 13, 30, 31 1, 2. 25, 26, 30 14, 15, 25, 26, 30 16, 25, 26, 30 25, 26, 30 25, 26, 30 5, 25, 26 25, 26 6 6 6 6 6
4.2.3.2 Land Acquisitions Indian Army acquisition plans include upgrades and purchases of artillery, tanks and vehicles, missiles and other items such as infantry upgrades. The intention is to create eight divisional-sized armoured battlegroups, comprising artillery, armour and motorised infantry, with state of the art communications equipment and coordinated air support.
Many acquisitions outlined appear to be part of the USD 8 billion artillery modernisation program, the FARP, originally formulated in 1999. The program aims to induct around 2,184 guns over 20 years, at a minimum rate of 100 units per annum. In its 11th Defence Plan, spanning 2007-2012, the Indian Army has designed around 600 modernisation schemes, amounting to around USD 1.44 billion. The Indian army has further plans for acquisition.
Table 11: Indian defence acquisition plans in the land domain Category Indicative Items (Quantity) Main battle tanks (1500) Infantry fighting vehicles Tanks and Vehicles Light strike vehicles and Bullet proof vehicles Mine protected vehicles (600) Unarmed/unmanned aerial vehicles (200) Unmanned combat air vehicles Field Artillery Rationalisation Plan 155mm self-propelled guns (400) 155 mm medium guns Air Mobile Ultra light howitzers (ULH) (140) Towed and wheeled guns Artillery Self-propelled tracked guns - 155mm/52 calibre guns Self-propelled wheeled 155mm/52 calibre guns with armour protection (mounted on a sixwheeled vehicle ) Towed 155 mm Gun-howitzers (400) Mounted gun system (200) 155mm precision guided munitions (50,000) 155mm ammunition all types (150,000 rounds) Tracked medium range surface to air missile systems (100) Replacement of air defence systems Missiles ZU-23-2 anti-aircraft upgrade (468) 40 mm Anti- aircraft Gun (115) Hand-held anti-tank guided missiles (5000) ICV-mounted anti -tank guided missiles (1000) Other
30 |
Timing 2010-2015 DRDO production plans are for 2020-2025 Ongoing, with DRDO production planned for 2020-2025 Ongoing DRDO trials are ongoing DRDO trials are ongoing Up to 2020 Up to 2020 2010-2020 2007-ongoing 2007-2012 2007-2012
USD
Source 1, 2, 8 1, 2, 12 1, 2, 10 1, 7, 9, 10, 11 1, 3, 13 1, 4, 13
USD 4.77 billion to 5 USD 6.57 billion 1, 2 5 USD 1.35 billion Cost of USD 792 million USD 0.99 billion USD 0.9 billion 1, 2, 5 5 2, 5
2007-2012
2, 5 3, 5 5 1, 2 1, 2 1, 2 1, 4
2010
USD 1.89 billion
2010 2010 2009-2012 Ongoing
USD 522 million USD 270 million USD 393.3 million
2 2 1 1 1, 15, 16
Bullet proof jackets (59,000)

4.2.3.3 Aerospace acquisitions Aerospace continues to be a sector where India struggles to indigenize production. However due to urgent requirement of new technology, high demand from the Indian Airforce and limited indigeneous capacity. the Airforce has planned for major acquisitions.
Table 12: Indian defence acquisition plans in the aerospace domain Category Indicative Items (Quantity) MiG-29 Upgrade (63) Mirage 2000 Upgrade (51) Su-30 MKI 80 (40+40) Su-30 MKI (140) Fighter Aircraft 2008 onwards 2015 Timing 2013 USD USD 0.99 billion USD 2.187 billion USD 1.593 billion Source 1,2,3,4 5,6 7,8
Original agreement 7, 9,10 USD 8.46 billion USD 9.09 billion USD 434.7 million+ USD 1.71 billion Estimates of up to USD 9.9 billion USD 1.17 billion USD 1.98 billion USD 810 million USD 397.8 million USD 869.4 million USD 2.52 billion USD 1.9 billion USD 5.8 billion USD 232 million USD 2.44 billion USD 110 million 11,12
Medium Multi Role Combat Aircraft (MMRCA) (126 with an option for 64-74 more) LCA (Tejas) (120) 2013-2014
13,14
Fifth Generation Fighter Aircraft (FGFA) ( number) Medium lift Helicopters (80) Combat and Heavy Lift helicopters (22 +15) Helicopters VVIP helicopters (12) Dhruv helicopters (245) Cheetal Helicopters (10) Observation Helicopter (187) Multi-Role Tanker Transport (6) AN-32 Upgrade (105) Transport and Other Aircraft C 130J Hercules aircraft (6) Strategic Transports/Advanced Airlifters Hawk Mk 132 Advanced Jet Trainer (66) Basic trainer aircraft (181) Embraer Jets (3) Missile Systems UAVs Other Short Range Surface to Air Missile System (SRSAM) Medium Range Surface to Air Missile Systems (MRSAM) Israeli Harop killer UAVs (10) Airfields for infrastructure upgrade (30)
2017 2013 2013 Deliveries ongoing Deliveries Ongoing 2017 Upgrade underway, to be completed by 2013 2012 Not specified Final delivery due 2011 2011 2011 Induction due in 2012 2011
15, 16, 24 17 17, 33 17, 25 7, 17 17 17, 34 18, 22, 23 32 7, 19 20 7 21 7 26, 29 26, 27 30, 31 28
4.2.3.4 Electronics Acquisitions Electronics acquisitions are subsumed under each service division ( Army, Navy and AirForce ) in Indias forward budget plans. Key acquisition plans are given below.
Table 13 : Indian defence acquisition plans in the electronics domain Category Indicative Items (Quantity) Short/medium range battlefield surveillance radars Weapon locating radars (40-50) Hand-held thermal imaging devices (up to 5,000) Integrated observation equipment (1,200) Standalone infrared, seismic and acoustic sensors Infantry upgrades under the Future Infantry Soldier as a System (F-INSAS) project Networked communications and modern strategic and tactical level command and control systems Technology related to gallium nitride semi-conductors Nanotechnologies related to structures, sensors, propulsions and communication Detection Devices, NBC systems, remotely operated robots and micro-UAVs based on DRDO technologies Various general electronics including rectifiers (70) and rotary converters (35). Radars (130) Navy Sonar Gyros (100) Logs (100) Echo sounders (40) Integration of various surveillance/weapon delivery systems (25). Upgrade of Cheetah/Cheetak helicopters Upgrade MIG-27s Upgrade of avionics in Sukhois Aerospace Surface-to-air Guided Weapon System (SAGW) Medium Range Surface to Air Missile Systems (MRSAM) Short Range Surface to Air Missile System (SRSAM) Air Defence Ground Environment System (ADGES) modernisation 2010-2015 2010-2020 2010-2020 2010-2020 Ongoing USD 1.6 billion USD 2.16 billion 2008-2022 2008-2022 2010-2014 2008-2022 2008-2022 2008-2022 2008-2022 Timing 2010-2020 Ongoing 2010-2020 2010-2020 2010 2010-2020 2010 USD 0.99 billion USD USD 0.99 billion USD 198 million USD 144 million USD 0.99 billion Source 1, 8, 20, 21 1, 2, 22, 23 1, 9, 24 1, 10 1, 3, 27 3, 25, 26 3,16, 29 4, 12 4 4 5 5, 29 33, 35 5 5 5, 28 5 13, 30 13, 14, 31 13,15 17 17 18 32
Land
32
Table 10 sources
1. Rai, R.B., Luthra, G.R. (2009), Indian Navy: Power Packed for a Strong Nation, Indian Strategic, accessed online: www.indianstrategic.in/topstories454.htm, last accessed 22 March 2010 Boeing (2010), Boeing Defence, Space and Security, accessed online: www. boeing.co.in/ViewContent.do?id=3264, last accessed 22 March 2010 Garg, B. (2008), Article Indian naval Aviation: Modernisation and Opportunities, India Strategic NTI (2010), Indias current capabilities, accessed online: www.nti.org/db/ submarines/india/index.html Roa,R. (2008), SP Naval Forces , 3(5) pg 11 Directorate of Indigenisation (2008) 15 Year Indigenisation Plan, accessed online: http://indianNavy.nic.in/New15year_Indigenisation_Plan_of_the_ Indian_Navy.pdf, last accessed 22.March.2010 Indian Navy Today, Tupolev TU-142 Bear-F, accessed online: http://www. bharat-rakshak.com/NAVY/Tu-142.html, last accessed 24 March 2010 India Defence, 2007, INS Vikramaditya: Aircraft Carrier Acquisition from Russia Delayed, Cost Overruns Expected, accessed online: http://www.india-defence. com/reports/3084 Tech Space, 2009, INS ARIHANT INDIAs First Nuclear Submarine, accessed online: http://techspaceofatul.wordpress.com/2009/08/03/ ins-arihant-indias-first-nuclear-submarine/ Outlook India (2007), Forty new ships to be commissioned in coming years: Mehta, accessed online, http://www.bharat-rakshak.com/NEWS/newsrf. php?newsid=8611 , last accessed 25 March 2010 The Indian News (2009) 40 warships, new jets on Indian Navys Buy list, accessed online:http://www.thaindian.com/newsportal/uncategorized/40warships-new-jets-on-indian-navys-buy-list_100283320.html, last accessed 25 March 2010 The Times of India (2009), Hung on for fighters for aircraft carriers, accessed online: http://timesofindia.indiatimes.com/india/Hunt-on-for-fighters-foraircraft-carriers/articleshow/5265661.cms, last accessed 25 March 2010 India Defence (2009), Indian Navy orders six Naval Tejas LCA Fighters; Infuses Rs 900 Crore in Programme, accessed online: http://www.india-defence.com/ reports-4480, last accessed 25 March 2010 Rao, R. (2008), Defence ties with Russia why India prefers Israel accessed online: http://www.sarkaritel.com/news_and_features/infa/february08/29def_ tie_russia.htm , last accessed 6 April 2010 Zhukov, A (2006), External Drivers for OPK Success: Arms transfers to India, accessed online:http://epress.anu.edu.au/apps/bookworm/view/ Phoenix+from+the+Ashes%3F/97/ch05.xhtml , last accessed 6 April 2010 India Strategic (2010), Coast Guard prepares for the bigger battle, accessed online:http://www.indiastrategic.in/topstories486.htm, last accessed 6 April 2010 Unnithan, S. (2009), First indigenous aircraft carrier to be launched next year: Navy chief, India Today, December, accessed online: http://indiatoday.intoday. in/site/Story/73256/Top%20Stories/First+indigenous+aircraft+carrier+to+be+lau nched+next+year:+Navy+chief.html Bharat Rakshak (2007), Project 28, accessed online at: http://www.bharatrakshak.com/NAVY/Project28.html Global Security (2010), Project 28 ASW Corvette, accessed online at: http:// www.globalsecurity.org/military/world/india/p-28.htm Pandit, R. (2010), India, Russia to ink $1.2 bn deal for 29 more MiG-29Ks, The Times of India, Jan 18, accessed online at: http://timesofindia.indiatimes. com/india/India-Russia-to-ink-12-bn-deal-for-29-more-MiG-29Ks/articleshow/5460879.cms Anandan, S. (2008), Keel-laying of indigenous aircraft carrier in December, The Hindu, September 29, accessed online: http://www.hindu. com/2008/09/29/stories/2008092955681400.htm Bharat Rakshak (2009), Saryu Class, accessed online: http://www.bharatrakshak.com/NAVY/Saryu.html Bharat Rakshak (2009), Vikrant Class, accessed online: http://www.bharatrakshak.com/NAVY/Vikrant.html Bharat Rakshak (2009), Project 17 Shivalik Class frigate, accessed online: http:// www.bharat-rakshak.com/NAVY/Project17A.html
2. 3. 4. 5. 6.
7. 8.
25. Manas (2010), Manas Defence Yearbook 2010-11 26. SPS Naval Forces (2009), Indian Navy hand-out for Navy Day 2008, accessed online at http://www.spsnavalforces.net/pdf/Media_handout_2009.pdf 27. Project Monitor (2010), Alcock Ashdown builds survey catamarans for Indian Navy, accessed online at http://www.projectsmonitor.com/PORT/ alcock-ashdown-builds-survey-catamarans-for-indian-navy 28. Indian Military (2010), Type 15/Project 15 Delhi Class Guided Missile Destroyer, accessed online at: http://indian.military.org/navy/ships/destroyers/262-type15project-15-delhi-class-guided-missile-destroyer.html 29. Indian Military (2010), Type 15A/Project 15A Kolkatta Class Guided Missile Destroyer, accessed online at: http://indian.military.org/navy/ships/ destroyers/143-type-15aproject-15a-kolkatta-class-guided-missile-destroyer. html 30. Defence Industry Daily (2009), Indias Navy Picks its future Maritime Patrol Aircraft, accessed online at http://www.defenseindustrydaily.com/ indias-navy-holding-maritime-patrol-aircraft-competition-updated-01991/ 31. India Defence (2009), Indian Navy Orders Six Naval Tejas LCA Fighters; Infuses Rs. 900 crore in programme, accessed online at http://www.india-defence. com/reports-4480
9.
Table 11 sources
1. Kanwal, G.B. (2010), Indian Army modernisation needs a major push, Indian strategic defence magazine, 5(2), accessed online: www.indiastrategic.in/ topstories482.htm, last accessed 22 March 2010 2. Religare Strategic Advisory Services (2010) A Commentary on the Indian Army artillery upgrades, accessed online: http://www.scribd.com/doc/26500931/ Commentary-Artillery-Projects-Jan-2010-Guns-Howitzers-ULH-INDIA-DPPProcurement-MOD-Defence-Ministry-Religare-Strategic-Advisory-prog, last accessed 22 March 2010 3. Kanwal, G.B. (2010), Mined in Red Tape, SPs Land Forces Defence Magazine, 7(1), pp 1 6 & 13 -14, accessed online: http://www.spslandforces.net/ ebook.asp?id=100212145153-66d09a480f7d45a690df68981bccd702& Name=sps-land-forces-feb-mar-2010&Info=SPs%20Land%20Forces%20 Fab-Mar%202010&t=1266237474406&r=6, last accessed 22 March 2010 4. Katoch, P.C. (2010), Restructure Capabilities, SPs Land Forces Defence Magazine,7(1), pp 32 33, 37, accessed online: http://www.spslandforces. net/ebook.asp?id=100212145153-66d09a480f7d45a690df68981bccd702 &Name=sps-land-forces-feb-mar-2010&Info=SPs%20Land%20Forces%20 Fab-Mar%202010&t=1266237474406&r=6, last accessed 22 March 2010 5 . Anand, B.V (2010), Modernizing artillery retrospect and prospect, Indian Strategic Defence Magazine,5(2), accessed online: http://www.indiastrategic. in/topstories483.htm, last accessed 22 March 2010 6. Kanwal, B.G (2010), Modernisation of Indian Army, Part 2, Vayu Daily Defence Magazine, accessed online: http://www.vayuaerospace.in, 22 March 2010 7. Misquitta, S. (2009), Defence contractors target big jump in Indias military spending , The Wall Street Journal, July 17 8. Standing Committee on Defence (2007), Ministry of Defence Defence Research and Development Organisation (DRDO): Fourteenth Report, March 9. Defence Land Systems India (2010), Defence Land Systems India - A Mahindra & BAE Systems Company - Unveils Mine Protected Vehicle [MPV-I] for Indian Armed Forces, press release, 15 February 2010, accessed online: http://www. mahindra.com/Admin/tmpupload/Defense%20Land%20Systems%20India%20 Unveils%20Mine%20Protected%20Vehicle.pdf, last accessed 31 March 2010 10. (2010), Three Indian Teams Unveil Mine Protected Vehicles, Anticipating a Growing Local Market for Armoured Vehicles, Defence Update online defence magazine, accessed online: http://defense-update.com/features/2010/ february/mpv_india_defexpo2010_170210.html#more, last accessed 1 April 2010 11. Unnithan, S. (2010), Comabat Unready, India Today, 21 January, accessed online: http://indiatoday.intoday.in/site/Story/80318/Combat+unready. html?complete=1, last accessed 1 April 2010 12. (2010), BMP-2, Wikipedia, accessed online: http://en.wikipedia.org/wiki/ BMP-2, last accessed 1 April 2010
10.
11.
12.
13.
14.
15.
16.
17.
18. 19. 20.
21.
22. 23. 24.
13. Religare Strategic Advisory Services (2010) A Commentary on Unmanned Systems unmanned capability, March, New Delhi 14. (2010), Why The Indian Infantry Are Irritated, Strategy Page, 18 February 2010, accessed online: http://www.strategypage.com/htmw/htinf/20100218. aspx, last accessed 1 April 2010 15. Ministry of Home Affairs (2009), Procurement of Bullet Proof Jackets for PMFs Press Release, December 8 2009, accessed online: http://pib.nic.in/release/ release.asp?relid=55432&kwd=, last accessed 6 April 2010 16. Sood, M (2010), MHA asks for fresh bid after scam in bullet proof procurement exposed, 8AK Indian Defence News, 15 January 2010, accessed online: http://www.8ak.in/8ak_india_defence_news/2010/01/mha-asks-forfresh-bid-after-scam-in-bullet-proof-procurement-exposed.html, last accessed 6 April 2010
Table 12: Sources

1. 2. 3. 4. 5. 6. 7. 8. Indian Government Press Release, July 15 2009. http://pib.nic.in/release/ release.asp?relid=50414&kwd= Indian Government Press Release, 10 March 2010. http://pib.nic.in/release/ release.asp?relid=59336&kwd= Rebuild and Rejuvenate, Contributed by Air Marshal(Retd) V.K. Bhatia, SPs Aviation Defence Magazine, Issue 2, 2010, page 13. Indian Air Force MiG 29 Fighters Upgradation to be Completed by 2013 Indian Defence, http://www.india-defence.com/reports/4478 Indian Government Press Release, 7 March 2007. http://pib.nic.in/release/ release.asp?relid=25537&kwd= India, France to sign Mirage upgrade deal Indian Express, http://www.indianexpress.com/news/india-france-to-sign-mirage-upgrade-deal/585684/ The International Institute for Strategic Studies (2010) The Military Balance, Basingstoke, England: Taylor and Francis, page 375. Vladimir Putin to visit India to sign defence deals 10 March 2010, Daily News and Analysis, http://www.dnaindia.com/world/ report_vladimir-putin-to-visit-india-to-sign-defence-deals_1357661 HAL 2008-09 Annual Report, page 11. HAL to supply components for Sukhoi fighters to Russia Daily News and Analysis, August 20 2009. http://www.dnaindia.com/money/ report_hal-to-supply-components-for-sukhoi-fighters-to-russia_1283882 MMRCA to be political decision: Eurofighter Strapost, 16 March 2010. India Considers MMRCA Radar Competition Janes Defence Weekly, 10 March 2010. On for 27 yrs, LCA project gets Rs 8,000 crore more, The Times of India, Feb 3 2010. http://timesofindia.indiatimes.com/india/On-for-27-yrs-LCA-projectgets-Rs-8000-crore-more/articleshow/5529518.cms. India Can Manufacture Only 8 Light Aircraft a Year, Thaindian News, December 2008 (The Tribune), http://www.thaindian.com/newsportal/ uncategorized/india-can-manufacture-only-8-light-combat-aircraft-ayear_100286169.html Pyadushkin, M. and Mathews, N. (2009)Russia and India Discuss Decade of Defense Ties, Aerospace Daily and Defense Report, 16 October 2009. Luthra, G. and Air Marshal Ashok Goel (retd) IAF: A peep into the future December 2008 (The Tribune) http://www.indiastrategic.in/topstories218.htm Exploring New Horizons By Air marshal (Retd) V.K.Bhatia,SPs Aviation magazine, February 2010 edition, page 16 http://spsaviation.net/ebook. asp?id=100208055126-53475cae39534498830c1c5c375c41a8&name =sp_s_aviation_february_2010&info=SPs%20Aviation%20February%20 2010&t=1265609621953&r=92 India issues RFI for refuelling tankers, Flightgobal.com, 21 January 2010. http://www.flightglobal.com/articles/2010/01/21/337388/india-issues-rfi-forrefuelling-tankers.html Lockheed Martin press release, Indias Lockheed Martin C-130J Super Hercules Airlifter http://www.lockheedmartin.com/products/c130/india/index.html Boeing News, Jan 8 2010. http://boeing.mediaroom.com/index. php?s=43&item=1025 IAF to procure 181 basic trainer jets Economic Times, 24 February 2010, http://economictimes.indiatimes.com/news/politics/nation/IAF-to-procure-181-
basic-trainer-jets/articleshow/5611816.cms 22. Centre cancels contract for midair refuellers for fighter aircraft, Daily News and Analysis, http://www.dnaindia.com/india/report_centre-cancels-contract-formidair-refuellers-for-fighter-aircraft_1331383 23. FinMin opposes IAF choice for refuelling aircraft Indianexpress. com, Sept 28 2009http://www.indianexpress.com/news/ finmin-opposes-iaf-choice-for-refuelling-aircraft/522160/0 24. First Russia-India agreements on new fighter jet due shortly. ITAR-TASS World Service, 9 March 2010. 25. India signs 12 VVIP helicopter deal with British-Italian firm Press Trust of India, 12 March 2010. 26. Massive air-to-air and air defence missiles modernisation of the Indian Air Force, contributed by Chief of staff of the Indian Air Force (IAF), Air Chief Marshal P.V. Naik, Vayu aerospace defence magazine. http://www.defenseworld.net/go/detailinterview.jsp?id=26&h=Massive%20air-to-air%20%20 defence%20missiles%20modernisation%20%20Indian%20 27. Medium Range Surface to Air Missile (MRSAM) Global Security.org, http:// www.globalsecurity.org/military/world/india/mr-sam.htm 28. Indian Air Force plans modernisation programme, January 18 2009. http:// www.thaindian.com/newsportal/lifestyle/indian-air-force-plans-modernisationprogramme_100143979.html 29. MBDA Looks to India for New Air Defense Missile http://www.defensenews. com/osd_story.php?sh=VSDI&i=3944771 30. Rajat Pandit,India lines up Israeli drones in race with Pak The Times of India, March 26 2010. http://timesofindia.indiatimes.com/india/India-lines-up-Israelidrones-in-race-with-Pak/articleshow/5724232.cms 31. IAF plans to induct Harop UCAV by 2011 Economic Times, 30 September 2009, http://economictimes.indiatimes.com/news/politics/nation/IAF-plans-toinduct-Harop-UCAV-by-2011/articleshow/5073678.cms 32. Ukraine To Execute Indian Air Forcess AN-32 Upgrade, India Defence Online, March 2010, http://indiadefenceonline.com/1717/ ukraine-to-execute-indian-air-forcess-an-32-upgrade/
9. 10.
Table 13: Sources

1. Kanwal, G.B. (2010), Indian Army modernisation needs a major push, Indian strategic defence magazine, 5(2), accessed online: www.indiastrategic.in/ topstories482.htm, last accessed 22 March 2010 2. Kanwal, G.B. (2009) Artillery modernisation is gathering momentum, India Strategic Defence Magazine, accessed online: www.indiastrategic.in/topstories240.htm, last accessed 22 March 2010 3. Kanwal, G.B.(2010) Mined in Red Tape, SPs Land Forces Defence Magazine, accessed online: www.spslandforces.net/ebook, last accessed 22 March 2010 4. Thapar V, (2010), DRDO seeks JV in Critical Technologies, SP Show News, www.spshownews.com, last accessed 22 March 2010 5. Directorate of Indigenisation (2008) 15 Year Indigenisation Plan, accessed online: http://indianNavy.nic.in/New15year_Indigenisation_Plan_of_the_ Indian_Navy.pdf, last accessed 22.March.2010 6. Barbora, P.K, (2010), Force Defence Magazine, 7(6), pg 48 7. Luthra, G., Goel, M, (2008), India Strategic Defence Magazine, accessed online: www.indiastrategic.in/topstories218.htm last accessed 22March 2010 8. Joseph, C.P, (2007), Bharat Electronics and defence production, accessed online: http://frontierindia.net/bharat-electronics-and-defence-production , last accessed 22 March 2010 9. Indian Defence Online (2010) BSF Buys Thermal Detectors, accessed online: http://indiadefenceonline.com/1737/bsf-buys-thermal-detectors/, last accessed 25 March 2010 10. Indian Defence Online (2009), BEL Achieves Turnover of $923.6 million, accessed online: http://indiadefenceonline.com/555/bel-achieves-turnover-of9236-million/, last accessed 25 March 2010 11. Defence Electronics (2007), Italian and Indian team to supply Indian Army radios, accessed online: http://rfdesign.com/military_defense_electronics/ news/indian_Army_radios_0228/, last accessed 25 March 2010 12. EE Times Asia (2009), DOD extends GaN contract with RFMD, accessed online: http://www.eetasia.com/ART_8800552470_499488_NT_5ca4fcc3.
11. 12. 13.
14
15. 16. 17.
18.
19. 20. 21.
34
HTM, last accessed 25 March 2010 13. Bhatia, V.K (2010), Exploring new horizons, SPs Aviation Magazine, accessed online: http://spsaviation.net/ebook.asp?id=100208055126-53475cae39534 498830c1c5c375c41a8&name=sp_s_aviation_february_2010&info=SP's%20 Aviation%20February%202010&t=1265609621953&r=92, last accessed 24 March 2010 14. Fidsns (2006) MiG -27 Avionics upgrade, accessed online: http://frontierindia. net/album/main.php?g2_itemId=928 , last accessed 22 March 2010 15. Pubby (2009) Sukhoi upgrade on Antony Russia agenda, accessed online: http://www.indianexpress.com/news/sukhoi-upgrade-on-antony-russiaagenda/527875/, last accessed 22 March 2010 16. Institute for defence studies and analyses (2010), The imperative of modernising military communication systems accessed online: http://www.idsa.in/ idsacomments/TheImperativeofModernisingMilitaryCommunicationsSystems_ gkanwal_160210 last accessed 24 March 2010 17. Massive air-to-air and air defence missiles modernisation of the Indian Air Force, contributed by Chief of staff of the Indian Air Force (IAF), Air Chief Marshal P.V. Naik,Vayu available online at:http://www.defenseworld.net/ go/detailinterview.jsp?id=26&h=Massive%20air-to-air%20%20defence%20 missiles%20modernisation%20%20Indian%20Force 18. Contributed by Vice chief of Air Staff, Air Marshal P.K.Barbora PVSM,VM, Force, Volume 7 No.6 February 2010, Pg 48 19. Air marshal(Retd)V.K.Bhatia,SP (2010), Exploring New Horizons, Aviation, February 2010 edition, pg No.16 available online at:http://spsaviation.net/ ebook.asp?id=100208055126-53475cae39534498830c1c5c375c41a8&na me=sp_s_aviation_february_2010&info=SP's%20Aviation%20February%20 2010&t=1265609621953&r=92 20. (2004), Bharat Electronics eyes 15 pc sales growth, The Hindu, 13 April 2004, accessed online: http://www.thehindubusinessline.com/2004/04/13/ stories/2004041301810200.htm, last accessed 6 April 2010 21. DRDO website LDRE Achievements, accessed online: http://www.drdo.org/ labs/lrde/achieve.html, last accessed 6 April 2010 22. Ministry of Defence (2003), Press release weapon locating radar, 30 July 2003, accessed online: http://pib.nic.in/archieve/lreleng/lyr2003/ rjul2003/30072003/r3007200336.html, last accessed 6 April 2010
23. (2004), India to test long-range Agni missile next year India Digest, 15 January 2004, accessed online: http://www.indianembassy.org/i_digest/2004/ jan_15/agni.htm, last accessed 6 April 2010 24. Sharma, R (2010), BSF acquires advanced thermal detectors, Hindu Times, 9 March 2010, accessed online: http://beta.thehindu.com/news/states/ karnataka/article223678.ece, last accessed 6 April 2010 25. Defence Electronics (2010), Rockwell Collins Ships ECCM Modules To India, accessed online: http://www.rfdesign.com/military_defense_electronics/supplement/rockwell-collins-ships-eccm-modules-201003/index.html, last accessed 6 April 2010 26. Ministry of Defence (2003), Press release F-INSAS project of Army, 22 July 2010, accessed online: http://www.bharat-rakshak.com/NEWS/ newsrf.php?newsid=11001http://pib.nic.in/archieve/lreleng/lyr2003/ rjul2003/30072003/r3007200336.html, last accessed 6 April 2010 27. Tenders India (2010), RFI for Procurement of Sound Ranging System by Ministry of Defence, India, 11 February 2010, accessed online: http://tenders. gov.in/innerpage.asp?choice=tc5&tid=del277200&work=1, last accessed 6 April 2010 28. India Defence (2007), Indian Navy Defense Deals Under Anti Corruption Group Scanner, 10 July 2007, accessed online: http://www.india-defence. com/reports/3418, last accessed 7 April 2010 29. Tyagi, P. (2010), Aerospace and defence news, Indian Defence Review, vol 25, 1 Jan-Mar 2010, accessed online: http://www.indiandefencereview. com/2010/02/aerospace-and-defence-news.html, last accessed 7 April 2010 30. Bharat Rakshak (2005), HAL Chetak (Alouette III), 5 May 2007, accessed online: http://www.bharat-rakshak.com/NAVY/Chetak.html, last accessed 7 April 2010 31. (2010), India grounds MiG-27 fleet for investigation after crash, RIA Novosti, 24 February 2010, accessed online: http://en.rian.ru/ world/20100224/157990329.html, last accessed 7 April 2010 32. Maharaj, Dr S. B. (2009), Ballistic Missile Defence for India, Bharat Rakshak, 2 July 2009, accessed online: http://www.bharat-rakshak.com/IAF/Today/ Contemporary/328-BMD.html, last accessed 7 April 2010
4.2.4 Conclusion on Defence Requirements India has the tenth largest defence budget in the world. Countries that spend more on defence than India include developed countries which currently have much lower GDP growth including America, France, United Kingdom, Japan, Germany and Italy. India therefore presents an overall significant opportunity for defence equipment exporting companies from around the world. In addition to the rapidly expanding defence budget, Indias defence force is currently undergoing a modernisation program across the three services of the Army, Navy and Air Force. The Indian Government has budgeted for a substantial increase in nominal Defence Services capital expenditure. Total expenditure is expected to grow at a CAGR of 10 per cent from 2011 to 2015, with capital expenditure on Defence Services expanding from USD 15.3 billion in 2001 to USD 19.20 billion by 2015. By and large the analysis indicates that there are low risks to the Indian Government being able to commit the money it has budgeted. Expenditure as a proportion of GDP is expected to remain low, and although Defence Expenditure is classified as Non Plan expenditure it is likely that other aspects of the budget would come under greater pressure before the capital expenditure budget due to the Central Governments focus on modernising the armed forces. The major risk lies not in fiscal capacity but the challenge of meeting such a high rate of growth. Although the projected
growth in expenditure is high, each of Indias Services have shown a consistent inability to keep up with the massive rate of growth in outlays, with an average of 57 per cent underspend in budgeted capital expenditure since 2003. Moreover, while India has a stated goal to transition to a higher proportion of indigenous production (with a notional target of 70 per cent identified), the private defence industry in India is relatively immature, compared to the size of the defence forces budget and comparable industries worldwide. This has been an effect of the governments refusal to allow an industry to develop prior to 2001 and the state of the Indian economy prior to the 1990s which constrained public funding in technologically sophisticated weapons and systems development. The future growth of the defence industry will continue to face barriers to growth because of the high infrastructure and investment costs that necessarily accompany state of the art development and manufacturing of defence equipment. The Indian defence industry also faces export bans by countries limiting the transfer of knowledge and technology to foreign countries. As a consequence, reliance on imports is still expected to continue, particularly where the equipment has a high level of technology sophistication. It would be expected that even if indigenous procurements are able to be increased as a percentage of the defence budget, the absolute amount spent on imports of equipment will still grow as the growth in capital expenditure holds up imports, creating potentially significant opportunities for Foreign defence exporters.
36
5 Domestic capacity
Figure 14: Indian Navy procurements through imports versus indigenous production (2000-2005)
70% 60% 50% 40% 30% 20% 10% 0% 2000-01 2001-02 2002-03 2003-04 2004-05 Imported Indigenous Source: Standing Committee on Defence (2005-06) Procurement Policy and Procedure
5.1 Indian manufacturing capabilities Navy capabilities Domestic capacity Indigenous production has historically accounted for roughly half the Indian Navys procurements. Figure 14 shows the share of imports and indigenous production for Indian Army capital acquisitions from 2000 to 2005.26 In 2006, a position for a Directorate of Indigenisation was created with the charter to pursue indigenisation and import substitution for naval requirements. In 2008 the Indian Navy committed to a 15 year program to achieve 85 per cent indigenisation of hardware.27
Table 14 : Major Navy production currently occurring in India Production Agency Mazagon Dockyards Ltd, Mumbai
26 inistry of Defence (2006) M Standing Committee on Defence Procurement Policy and Procedure 27 ishakhapatnam (2008), V Navy orders 30 ships from Indian dockyards, accessed online: http://newsx.com/ story/5657 , last accessed 22.March.2010
Production Three Kolkota (P-15A) destroyers; two Shivalik (P-17) stealth frigates; six Scorpne submarines Landing ship tanks large; fast attack craft; four P-28 Corvettes Patrol vessels; fast attack craft Two air-defence ships (P-71) Three Arihant nuclear-powered submarines
Garden Reach Shipbuilders & Engineers Ltd, Kolkata Goa Shipyard Ltd, Mormugao Cochin Shipyard Ltd, Cochin Ship Building Centre, Vishakapatnam
Source: The Military Balance (2010), Chapter Ten: Reforming Indias defence industries, 110(1), pp 437-478
Examples of Indias current capabilities in Submarine production India is currently in the process of constructing six Scorpne-class boats that are being indigenously built at the Mazagon Dock in Mumbai, under the supervision of French technicians. The process has faced challenges of time and cost overruns. India expects to tender for the procurement of six more diesel submarines in the near future. In addition to its fleet of diesel-electric submarines, India is also in the process of developing an indigenously built nuclear-submarine capability. India briefly used a nuclear submarine on lease from the Russians from 1988 to 1991 (the Chakra), but has faced many challenges
in developing its own indigenously-produced subs. The Advanced Technology Vessel (ATV) submarine, work on which began in the 1970s, is a complex project that has faced multiple difficulties. Private sector Indian firm Larsen and Toubro began work from 1985. Although Larsen and Toubro were able to manufacture the hulls and develop or acquire necessary systems for the secret project (code name S2), it faced a number of challenges relating to systems integration and reactor design. Ultimately, India was forced to purchase the reactor designs from Russia around 1998. In July 2009, India launched its first ATV
submarine, the INS Arihant, at the Ship Building Centre in Vishakapatnam. It is expected that the vessel will undergo at least two years of extensive sea trials before it can be commissioned into the Indian Navy. The Arihant is the first of three ATVs currently being built, with plans for an eventual fleet of 5-6 nuclear-propelled submarines that will perform a strategic nuclear role. The vessels are likely to carry 12 Sagarika submarine launched ballistic missiles (SLBM) with a range of around 700km. The construction project is being conducted jointly by the DRDO, the Department of Atomic Energy (DAE), private contractor Larsen and Toubro, and the Indian Navy at Visakhapatnam.
Source: NTI (2010) Indias current capabilities, accessed online: http://www.nti.org/db/submarines/india/index.html; India Defence (2007) INS Vikramaditya: Aircraft Carrier Acquisition from Russia Delayed, Cost Overruns Expected, accessed online: http://www.india-defence.com/reports/3084; Tech Space, (2009) INS ARIHANT INDIAs First Nuclear Submarine, accessed online: http://techspaceofatul.wordpress.com/2009/08/03/ins-arihant-indias-first-nuclear-submarine/ Prospects for Global Defence Export Industry in Indian Defence Market | 37
While the Indian Navy has the highest number of indigenous principal platforms among the armed services, time and cost overruns persist. In July 2009, the Defence Ministry acknowledge that the Scorpne production was running at least two years behind schedule due to difficulties with the absorption of technologies. The construction of six improved Project 17A frigates, which were ordered in 2009, is also expected to be delayed due to the lack of sufficient construction capacity and the modernisation that is required in Indian defence shipyards.28 As reported in 2010 by the Indian Defence Review: Army Capabilities: Indigenous production has historically accounted for around half of Indias Army procurements. Figure 16 shows the share of imports to indigenous production for Indian Army capital acquisitions from 2000 to 2005.
Figure 15 Indian Army procurements through imports versus indigenous production (2000-2005)
70% 60% 50% 40% 30% 20% 10% 0% 2000-01 2001-02 2002-03 2003-04 2004-05 Imported Indigineous
Source: Standing Committee on Defence (2005-06) Procurement Policy and Procedure
28 he Military Balance (2010), T Chapter Ten: Reforming Indias defence industries, 110(1), pp 437-478
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. Indias 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: Indian Defence Review (2010) Indian Shipbuilding Key to Maritime and Economic Security, accessed online at: http://www.indiandefencereview.com/2010/03/indianshipbuilding-key-to-maritime-and-economic-security.html March 2010
38
There does not appear to be any Indian indigenous capacity in relation to artillery production. This is supported by the fact that no significant acquisitions have occurred for over 20 years. However, there does appear to be indigenous capacity to develop tanks and other vehicles, and air defence missiles. Indigenous firms have been involved in a range of tank and vehicle production activities, including the following activities by the DRDO: Development of the Arjun MBT by the DRDO (with assistance from German defence firms), which entered serial production, but had recurring technological problems and cost over-runs, with only 124 being ordered as a final consequence In December 2007, a contract was signed for 347 T-90 tanks to be assembled under licence by the Heavy Vehicle Factory (HVF), Avadi 1,700 T-72 M1s have been manufactured under licence, also by the HVF. While the T-90 and T-72s are Russian designs produced under licence, the Arjun MBT is an indigenous design. As such, it was a highly ambitious project that originated in a requirement in 1972. The requirement included indigenous design and production of a gas turbine power plant (later cancelled in favour of a diesel engine), composite armour, hydro-pneumatic suspension and a 120mm rifled gun. The failure of the project
to come in within the required timelines led to the acquisition of the T-72 tank. Nevertheless, Arjun tanks are currently being built and the development of this MBT has lead to the creation of considerable capability in the Indian defence industry. The DRDO has commenced conceptual stage development of Future Main Battle Tank and Future Infantry Combat Vehicle, expected within the 2020-25 timeframe. 29 The private sector has also been involved in the production of military vehicles, in particular Mahindra Defence Systems and Ashok Leyland. Mahindra Defence systems announced a joint venture with BAE (valued at USD 20m) in January for the production of land-based weapons systems including mine-protected vehicles. India has a strong history of missile development, derived from the DRDOs Integrated Guided Missile Development Program (IGMD), which was operational from the 1980s to 2009. Projects undertaken as part of the IGMD met with varying levels of success, for example: The Akash SAM developed in collaboration with Bharat Electronics Limited (BEL). The Akash was subject to significant delays but is now operational The Trishul SAM project, which was shut down after unsuccessful trials.30
29 anwal, G.B. (2010), K Indian Army modernisation needs a major push, Indian strategic defence magazine, 5(2), accessed online: www.indiastrategic. in/topstories482.htm, last accessed 22 March 2010 30 anwal, G.B. (2010), K Indian Army modernisation needs a major push, Indian strategic defence magazine, 5(2), accessed online: www.indiastrategic. in/topstories482.htm, last accessed 22 March 2010 and India shuts down Trishul missile project, in Rediff India Abroad, Feb 27, 2008, available at http://www.rediff.com/ news/2008/feb/27trishul. htm
The state owned HAL is Indias only military aircraft producer, and is a significant player in the defence industry as a whole. HAL is one of Indias DPSUs.
In early 2009 the IGMD was closed down, with the DRDO announcing that while most future weapon systems would be developed in collaboration with foreign partners, some items such as longer range missiles would be developed indigenously.31 A range of indigenous UAVs are in the design and development pipeline, including the Gagan, Pawan (a joint program between the DRDO and Israelis Aerospace Industries) and Rustom (a medium altitude long endurance UAV).32 Air Force Capabilities : Domestic capacity: Hindustan Aeronautics Limited (HAL) The state owned HAL is Indias only military aircraft producer, and is a significant player in the defence industry as a whole. HAL is one of Indias DPSUs. To put HALs size in perspective, during 2007-08 the value of production by all Indian defence public-sector undertakings totalled nearly 19,200 crore rupees (USD 4.14 billion), which was an increase of more than 20 per cent compared to the previous year; the state run HAL manufactures combat aircraft and helicopters, has 12 divisions, and accounted for around half of total DPSU production by value in 2006-07.33 The companys current order book has a value of more than 60,000 crore Rs (USD 13.05 billion). Table 15 below shows that HAL has also recently experienced rapid growth (28 per cent) in export earnings.
31 India scraps integrated guided missile programme in the Hindu Times, January 9, 2008 available at http:// www.hindu.com/thehindu/ holnus/000200801090301. htm last accessed 24 March 2010 32 anwal, G.B. (2010), K Mined in Red Tape, SPs Land Forces Defence Magazine, 7(1), pp 1 6 & 13 - 14, accessed online: http://www. spslandforces.net/ebook. asp?id=10021214515366d09a480f7d45a690 df68981bccd702&Nam e=sps-land-forces-febmar-2010&Info=SPs%20 Land%20Forces%20 Fab-Mar%20 2010&t=1266237474406&r=6, last accessed 22 March 2010 33 peech by Defence S Minister Shri AK Antony at the National Seminar on Defence Industry, New Delhi, January 2009. http://www.defenseaerospace.com/articleview/verbatim/101644/ indian-minister-speech-ondefense-industry.html
Table 15: HAL Key Financial Performance Indicators, 2007-08 and 2008-09 Year Turnover Exports Profit Before Tax Profit After Tax R&D Spending 2007-08 (Rupees in crore) 8,625 341 2,164 1,632 662 2008-09 (Rupees in crore) 10,373 437 2,335 1,740 675 % Growth 20.27 28.00 7.88 6.62 1.91 2008-09 (USD million) 2255.4 94.5 507.6 378 146.7
Source: HAL 2008-09 Annual Report, page 10. Note: One crore = 10 million Rupees, and 1 USD = 46 Rupees. 40 | CII Indian Defence Industry Mission EUROSATORY 2010
As Table 15 shows, in 2008-09 HAL had turnover of USD2.5 billion. HAL is also Indias main beneficiary of offset policies.34 Under the current rules, foreign companies that receive import orders worth over USD 64.6 million must draw at least 30 per cent of that order from domestic suppliers or make a similar sized investment within India.35 Since HAL is Indias only military aircraft manufacturer, foreign companies often turn to HAL to meet this offset requirement, either through direct supply or by setting up joint venture arrangements. These investments directly benefit HAL. Figure 16 below illustrates HALs dominance of the Indian military aircraft market. The Indian 2008-09 Budget allowed for 11,986.7 crore rupees for Air Force capital outlays on Air-Craft and Aero Engines.36 In comparison, HALs inland sales for the 2008-09 financial year totalled 9,936.80 crore rupees, over 80 per cent of the total government capital outlay in that year.37 Figure 16 : HAL Domestic Sales and Indian Government IAF Aircraft and Aeroengine Capital Outlays,1997-2008
14000 12000 10000
Crore of Rupees
In terms of product lines, HAL has produced MiG 21s, Jaguars, the Hawk trainer aircraft, the Dhruv advanced light helicopter (ALH). The company is currently building the Sukhoi Su-30 MKI aircraft, and has a one-for-one matching program for production of this aircraft with Russia. Under domestic production requirements HAL will also likely build most (108 out of 126) of the MMRCA aircraft, even though the contract will be awarded to a foreign supplier. The company will jointly develop the fifth generation fighter aircraft (FGFA) with the United Aircraft Corporation (UAC) of Russia, and there are plans for a joint venture (also with UAC) to produce a medium multi-role transport aircraft (MTA). Despite the delays in the LCA/Tejas program, in 2008 the India Defence Minister ruled out a foreign partnership to accelerate the program. Electronics Manufacturing Capabilities: Domestic Capacity The strategic electronics market is a rapidly expanding industry within India. The Department of Information Technology reported that in 2007-08, the production of strategic electronics within India was approximately INS 61 billion, with an annual growth rate of around 35 per cent. India has adopted a two layered approach to achieving increased techno-economic development in the Indian defence sector. The first relates to creating a climate for the indigenous development of technology in the country and the second deals with the transfer and adaptation of technology from advanced countries. Opportunities in the Defence Industry include the major modernisation of existing electronics equipment, indigenisation of major assembly and spare parts, innovation and product improvement, ToT from advanced countries (such as United States and Israel) and Research and Development and Technical support to the field Army. 38 Both private companies and public units are rapidly entering into the defence electronics development and manufacturing market. Tata Power SED is the leading domestic player in strategic electronics, recognised for its vast engineering capabilities. It is fast emerging as a prime contractor to the Ministry of Defence for indigenous defence electronics production.39 Another example of a successful public-private partnership is Samtel Display Systems SDS-HAL JV. Under this JV, Samtel is to provide MFDs (Multifunctional Displays) for the S-30MKI and LCA aircraft being produced by HAL.40
8000 6000 4000 2000 0
Year Indian Government Budgeted Capital Outlays on IAF Aircraft and Aeroengine Capital Outlays Value of HAL Domestic Sales
Source: Indian Government Budget, various issues; HAL Annual Report 2008-09.
34 ovindsamy, S. (2010) HAL Sets Sites on Global Presence, Flight International, March. http://www. G flightglobal.com/ articles/2010/03/01/338726/hal-sets-sights-on-global-presence.html 35 ttp://www.financialexpress.com/news/boeinghal-ink-4.5m-deal-for-reconnaissance-aircraft/578734/ h 36 ttp://indiabudget.nic.in/ub2008-09/eb/sbe26.pdf h 37 AL 2008-09 Annual Report, page 3. H 38 ETimes India (2010) Defence offers opportunities to Indian Electronics, accessed online: http:// E www.eetindia.co.in/ART_8800599239_1800003_NT_2bd24a4d.HTM , last accessed 23.March.2010 39 as, S. (2010) Defence Electronics Growing Fast, Electronics for You, May 2009 pp 111, accessed D online: www.efymag.com, last accessed 22.March.2010 40 http://www.indiaprwire.com/pressrelease/defense/2010020943158.htm, accessed on 01 Jun 2010
41 ORCE (2010) Soldiers Pack F DRDO showcases a range of vital equipments, accessed online: http://www. forceindia.net/november/ coverstory9.aspx , last accessed 23.March.2010 42 RDO website, LDRE D Achievments, accessed online: http://www.drdo. org/labs/lrde/achieve.html, last accessed 6 April 2010 43 2010) Chapter Ten: ( Reforming Indias Defence Industries in The Military Balance, February, pp.473-478 44 PMG (2010) Opportunities K in the Indian Defence Sector, prepared for the Confederation of Indian Industry
The DRDO has a network of more than 50 laboratories in Indian engaged in developing defence technologies covering various disciplines. The laboratories are involved in the production of surveillance and reconnaissance equipment, communicating and networking technologies and detection technologies.41 The LRDE is Indias foremost radar design and development establishment. DPSU Bharat Electronics Limited (BEL) is the LRDEs primary production partner, however it also works with various private firms. The LRDE has been responsible for the development of a range of radar systems including: INDRA-I and INDRA-II vehicle-mounted surveillance radars, and the Battle Field Surveillance Radar - Short Range (BFSR-SR) (a man portable, battery operated surveillance radar), produced by BEL and used by the army
Rajendra and 3D-CAR radars for the Akash surface to air missile system Super Vision Maritime Patrol Radar (SV-2000 MPAR), designed and developed for the Advanced Light Helicopter Avalanche Victim Detector (AVD), manufactured by private industry and in wide use in the defence services. 42 5.2 Domestic competition Increasing self-sufficiency in the supply of defence requirements through the support and development of the indigenous defence industry has long been an objective of the Indian Government. However, due to limitations of indigenous capabilities, India has historically relied heavily on foreign supply for its defence needs, consistently importing over 70 per cent of its equipment.43 Defence Public Sector Undertakings Indigenous defence production is heavily weighted towards the public sector, which accounts for around 86 per cent of the indigenous market. The eight Defence Public Sector Undertakings (DPSUs) are responsible for over 65 per cent of the total value of public sector production.44 Table 16 sets out the main products and services provided by each DPSU.
BEL is one of the 8 PSUs under Ministry of Defence, Goverment of India. It has even earned the Goverments Nav Ratna status.
Table 16 : Defence Public Sector Undertakings DPSU Hindustan Aeronautics Limited (HAL) Bharat Electronics Limited (BEL) Bharat Earth Movers Ltd (BEML) Mazagon Dock Limited (MDL) Garden Reach Shipbuilders & Engineers Ltd (GRSE) Bharat Dynamics Limited (BDL) Mishra Dhatu Nigam Limited (MIDHANI) Goa Shipyard Ltd (GSL)
42 |
Product areas Design, development, manufacture, repair and overhaul of aircraft, helicopters, engines and their accessories Design, development and manufacture of sophisticated state-or-the-art electronic equipment components for the use of the defence services, para-military organisations and other government users Multi-product company engaged in the design and manufacture of a wide range of equipment including specialised heavy vehicles for defence and re-engineering solutions in automotive and aeronautics Submarines, missile boats, destroyers, frigates and corvettes for the Indian Navy Builds and repairs warships and auxiliary vessels for the Indian Navy and the Coast Guard Missiles, torpedo counter measure system, counter measures dispensing system Aeronautics, space, armaments, atomic energy, Navy special products like molybdenum wires and plates, titanium and stainless steel tubes, alloys etc. Builds a variety of medium size, special purpose ships for the defence, Indian Coast Guard (ICG) and civil sectors
Private industry The Indian private sector has historically been limited to the supply of basic and intermediate products, components and spare parts due to a range of restrictions on participation in arms production. These restrictions have only relatively recently been relaxed, with 100 per cent private ownership of defence sector production being allowed in 2001. Current private sector capabilities continue to be largely focussed on components and intermediate manufacture, with key firms including: Tata Group Companies , which manufacture missile and rockets launchers, electronics, softeare services providers, composite components and intermediate services for aerospace and defence applications. Mahindra Defence Systems, which provides light vehicles, simulators for weapons and weapons systems, mines and small arms Larsen and Toubro, which provides design, development and manufacture of missile systems, electronics and naval engineering systems Punj Lloyd, which provides engineering and construction services Samtel, which is an integrated manufacturer of a wide range of displays for avionics, machinery and engineering services. Despite the Governments objectives and policies supporting the indigenous industry, inefficiencies in local production have led to substantial delays in the provision of arms and equipment, often leading to opportunities for foreign-based firms to fill the gaps. For example, the 25 year development and testing period for the Tejas light combat aircraft has resulted in the requirement for medium multi-role combat aircraft (MMRCA) being likely to be met with imports from the United States. 45 Raksha Udyog Ratnas The DPSUs currently enjoy a range of tax exemptions and concessions, receive funding from Government to develop R&D and manufacturing capabilities, and can also receive preferential treatment in terms of selection by the Government for receiving technology and undertaking licensed production with ToT from overseas sources.46 In order to support the development of private sector capabilities, the concept of the Raksha Udyog Ratnas (RURs), or private sector industry champions, was created as part of the 2006 update to the DPP. RUR status would be
granted to a select number of private sector defence firms, giving them similar treatment as the DPSUs in terms of tax treatment and prioritisation for R&D funding and access to ToT contracts. Following the DPP 2006, twelve firms were considered for RUR status. However, criticism from the defence industry has led the appointment of RURs to be put on hold, with the status of the policy now uncertain.47 Table 17 sets out the potential RURs thought to be under consideration by the Ministry of Defence (identified by industry sources). Table 17 : Potential RURs identified Potential RURs Products/services Ashok Leyland Bharat Forge Godrej and Boyce HCL Technologies Infosys Technologies
45 010) Chapter Ten: 2 Reforming Indias Defence Industries in The Military Balance, February, pp.473-478 46 inistry of Defence (2008), M Defence Procurement Procedure, p.164 47 pportunities in the Indian O Defence Sector, prepared for the Confederation of Indian Industry by KPMG (2010)
Design, development and manufacture of special vehicles for armed forces. Manufacture of various forged and machined components for the automotive and non-automotive sector. High tech engineering, including aerospace, construction and custom-built critical equipment. IT & software development company offering various services such as application development, outsourcing software, systems integration and communication. Systems integration, product engineering, custom software development, maintenance, re-engineering, independent testing and validation services, IT infrastructure services and business process outsourcing. Infrastructure projects (water supply, power plants), engineered and industrial pumps. Design, development and manufacture of integrated land-based and naval missile systems, electronics, control systems and integrated naval engineering systems. Light combat and armoured vehicles, simulators for weapons and weapon systems, sea mines, small arms and ammunition. Software services and consulting, the largest provider of information technology and business process outsourcing services in India. India's largest company in the automobile and commercial vehicle sector. Indias largest private sector electricity generating company. IT and systems support in automobile, aerospace, high-tech, and industrial domains.
Kirloskar Brothers Larsen and Toubro Mahindra and Mahindra Tata Consultancy Tata Motors Tata Power Wipro Technologies
Sources: Sharma, R (2007), 12 firms to get Raksha Udyog Ratna status, The Hindu, June 18 2007, accessed online: http://www.thehindu.com/2007/06/18/stories/2007061801911300. htm and Siddiqui, H. (2008), Defence min does away with RUR status for pvt military hardware cos, Financial Express, 3 August 2008, accessed online: http://www.financialexpress.com/news/ defence-min-does-away-with-rur-status-for-pvt-military-hardware-cos/343921/ Prospects for Global Defence Export Industry in Indian Defence Market | 43
Ordnance Factories With more than 200 years of experience in defence production, the Indian Ordnance Factories Organisation is a family of 40 Ordnance Factories functioning under the aegis of a single corporate headquarters, the Ordnance Factories Board, in Kolkata (Box 6.1). The Ordnance Factories Board is engaged in production, testing, logistics, research, development and marketing of comprehensive product range in the areas of land, sea and air systems. The Ordnance Factories Board is the largest and oldest departmentally run production organisation in the country and is engaged primarily in the production of state of art battlefield equipments. The ordnance factories were established with a mandate to ensure self reliance in manufacturing of defence hardware. The organisation functions under the department of Defence Production and Supplies and is a dedicated facility for manufacture of weapons, ammunitions, vehicles (Armoured and transport), clothing, general stores and equipment for defence services. 48 Other private and public sector defence firms The following table 18 provides a brief overview of private sector firms involved in defence procurements in India and non-DPSU public sector firms. It should be noted that the list is by no means comprehensive, particularly given the increasing involvement of small and medium enterprises in the defence sector.
Box 2 : Ordnance Factories in India Ammunition Factory Khadki (AFK) Cordite Factory Aruvankadu (CFA) Engine Factory Avadi (EFA) Field Gun Factory Kanpur (FGK) Gun Carriage Factory (GCF) Grey Iron Foundry (GIF) Gun and Shell Factory (GSF) Heavy Alloy Penetrator Project (HAPP) High Explosive Factory (HEF) Heavy Vehicle Factory (HVF) Machine Tool Prototype Factory (MPF) Metal and Steel Factory (MSF) Ordnance Clothing Factory Avadi (OCFAV) Ordnance Cable Factory Chandigarh (OCFC) Ordnance Factory Bhusawal (OFBH) Ordnance Factory Bolangir (OFBOL) Ordnance Factory Kanpur (OFC) Ordnance Factory Chandrapur (OFCH) Ordnance Factory Dumdum (OFDC) Ordnance Factory Dehu Road (OFDR) Ordnance Factory Dehradun (OFDUN) Ordnance Factory Itarsi (OFI) Ordnance Factory Khamaria (OFK) Ordnance Factory Katni (OFKAT) Ordnance Factory Muradnagar (OFM) Ordnance Factory Project Nalanda (OFN) Ordnance Factory Project Medak (OFPM) Ordnance Factory Tiruchirapalli (OFT)
Ordnance Clothing Factory Shahjahanpur Ordnance Factory Varangaon (OFV) (OCFS) Ordnance Equipment Factory Kanpur (OEFC) Ordnance Equipment Factory Hazratpur (OEFHZ) Ordnance Factory Ambernath (OFA) Ordnance Factory Ambajhari (OFAJ) Ordnance Factory Bhandara (OFBA) Opto Electronics Factory (OLF) Ordnance Parachute Factory (OPF) Rifle Factory Ishapore (RFI) Small Arms Factory (SAF) Vehicle Factory Jabalpur (VFJ)
Source: Indian Ordnance Factories, accessed online at: http://ofbindia.gov.in
48 anas Defence Yearbook M 2010-2011, pg 139 44 | CII Indian Defence Industry Mission EUROSATORY 2010
Table 18: Private sector defence firms & key operating domains Firm ABG Shipyards Advance Tech Control Pvt limited Allen Reinforced Plastics Alpha Phazotron radar Equipment & Systems Alpha-ITL Electro Optics Private Anjani Technoplast Ashok Leyland* Astra Microwave Products Limited Aurora Integrated Systems Pvt Ltd Automotive Coaches & Components B.F. Utilities Limited Bharat Forge* Bharati Shipyard Data Patterns (India) Dynamic Technologies Limited EON Infotech Godrej and Boyce* HBL Nife Power Systems HCL Technologies* Heavy Engineering Corporation Hindustan Opticals Indtech Construction Infosys Technologies* Infotech Enterprises Limited IST Limited Jupiter Strategic Technologies KEW Industries Limited Kirloskar Brothers* KPIT Cummins Infosystems Larsen & Toubro* Navy Land Aerospace Electronics Firm Macmet Technologies Limited Magnum Aviation Mahindra Group* Max Aerospace and Aviation Limited MEL Systems & Services Limited Memory Electronics Nova Integrated Systems Limited Pipavav Shipyard Punj Lloyd Limited Radiant Cables Ramoss India RMX Bridport Defence Systems Pvt Rolta Samtel Display Systems SEC Industries Private SIGMA Microsystems Southern Group Industries Speck Systems Shri Bajrang Alloys Limited Steel Authority of India Limited Svipja Technologies Tata Group* TIL Tractors India Limited TSL Defence Technologies Pvt Vectra Technologies VEM Technologies VXL Technologies Walchandnagar Industries Limited Wartsila India Wipro Technologies* Zen Technologies
Note: *Previously under consideration for RUR status Prospects for Global Defence Export Industry in Indian Defence Market | 45
Navy
Land
Aerospace
Electronics
6 Financial implications
The 2009 amendment to the 2008-DPP allows the DAC to prescribe offset percentages above 30 per cent, or alternatively waive offset obligations entirely at its discretion. There is also a provision allowing vendors to select their own offset partner, and (in rate cases), change offset partners in order to meet the requirements.50 However, once the contract (main and Offset) are signed, no revision of cost, whether upwards or downwards is permitted. Under the 2008-DPP, offset obligations can be met in the following manner: Direct purchase of, or executing export orders for, defence products and components manufactured by, or services provided by, Indian defence industry, i.e. Defence Public Sector Undertakings (DPSUs), Ordnance Factory Board (OFB), and any private defence industry manufacturing these products or components under an industrial licence granted for such manufacture. For the purpose of defence offsets, services will mean maintenance, overhaul, upgradation, life extension, engineering, design, testing, defence related software or quality assurance services. Direct foreign investment in Indian defence industries for industrial infrastructure for services, co-development, joint ventures and co-production of defence products. Direct foreign investment in Indian organisations engaged in defence R&D as certified by the Defence Offset Facilitation Agency (DOFA). TOT is not recognised as a method of meeting offset requirements.51 The 2008-DPP contains a list of defence products (and covered defence industries) that are able to be used to meet offset obligations. Capital Acquisition and Offset: 52 Figure 17 gives the flow chart on required offset under various categories of acquisitions. Offsets can be undertaken under any of the above mentioned categories. Of late, there has been a debate on the issue of Indian defence industrys capability to absorb a huge amount of offsets. This is even more pertinent considering that the armed forces modernisation has been stepped up in recent years, with a relatively higher proportion of the defence budget being allocated for capital expenditure. The capital budget for 2007-08, for example
A defence industry will always look for reducing costs,taxes during a defence deal. In order to get the maximum profit in the shortest possible time, Government policies must ensure speedy transaction and lesser costs and taxes. 6.1 Costs: Offsets Offset contracts typically refer to requirements imposed by the Government on vendors to source a specific level of components from indigenous firms. Offsets impose a cost on the vendor in question and are therefore generally responded to an increase in the margin for the price of the contract. Offset requirements apply to all acquisitions categorised as Buy (Global), Buy and Make or Buy and Make (Indian), where the estimated cost of the acquisition is Rs. 300 crore or more (approximately USD 75 million). Contracts of lesser value are not subject to offset requirements. In addition, defence acquisitions approved for the FTP are completely exempt from offset obligations. 49 Offset obligations have historically been set at 30 per cent of the contract value for the Buy (Global) category, and 30 per cent of the foreign exchange component in Buy and Make categories.
49 inistry of Defence (2008), M Defence Procurement Procedure, Appendix D, p.43 50 efence Procurement D Procedure- 2008 (Amendment-2009) 51 erma S. (2009) Offset V Contracts under Defence Procurement Regulations in India: Evolution, Challenges and Prospects, pp20-11 52 Deloitte compilation 46 |
was over USD 10 billion. For the following financial year (2008- 09), this figure was around USD12 billion. If one assumes that 70 percent of the capital budget (i.e. USD 15 billion out of USD 22 billion) is catered for meeting import requirements, the same should result in offsets worth USD 4.5 billion or Rs 18,000 crore for these two years alone, with a minimum threshold of 30 percent of the main contract. It is pertinent to note that in some cases such as the proposal to acquire 126 Medium Multi-Role Combat Aircraft (MMRCA), the offsets have been pegged higher at 50 percent of the contract value. Against such a huge potential of offsets, the current value of defence exports from the country appears too small. For the year 2007-08 (up to December 2007 or the first nine months of the financial year), the value of Indian defence exports stood at Rs 342 crore (USD 85 million).53 On an annualised basis, the value of exports works out to around Rs 456 crore (USD 114 million). As against such defence export figure, offsets between Figure 17: Flow chart of various categories of acquisition
Capital Acquisition and Offset Requirement
Buy Outright (Purchase Equipment)
Buy + Make (Purchase from foreign vendor followed by licensed production/ indigenous manufacture in the country) Buy Global (Indian as well as foreign vendors) Offset requirements to be 30% of the foreign exchange component to be fulfilled
Make (High technology, complex systems to be designed, developed and produced indigenously)
Buy Indian (Indian Vendors Only)
No offset requirements
No offset requirements (Minimum 30% indigenous content in case of integration being done by Indian vendor)
Indian Vendor
Foreign Vendor
Buy + Make (Indian) (Purchase from Indian companies)
Indigenous content in product is at least 50%
Offset requirement to be 30% of the estimated cost of acquisition
Minimum 50% to be indigenous contents
YES
NO
No offset requirements
Offset obligations to be fulfilled on the foreign component i.e. offset to be 30% of the foreign exchange component
Rs 3,000-4,000 crore (USD 750 million-1 billion) need to be undertaken every year, given the current ratio of capital expenditure allocation in the defence budget.54 In other words, the value of defence exports needs to go up by 8 to 10 times the current level. Thus, the gap between existing quantum of exports and what is required to be undertaken as part of offset obligations of the vendors is too huge. To be able to undertake such huge amount of exports requires investment of a large magnitude in the indigenous defence industrial infrastructure. In addition, such large infrastructural investments may take years before the production can be stepped up. Apart from export of defence equipment and services, the two areas for implementing offsets are in the form of FDI in Indian defence industry or defence R&D organisations. The entry of the private sector in the defence industry has been permitted as recently as 2001 with a maximum cap of 26 percent foreign equity. The initial response to such a liberalised policy was muted as no major private company came forward for investment in the defence industry, until recently. Of late, a few Joint Venture (IV) proposals and Memorandums of Understanding (MOUs) have been announced involving major Indian companies such as Tata, L&T and leading arms manufacturing companies such as Boeing, Lockheed Martin, etc. But the amount of investments announced in these proposed tie-ups is only a trickle in what is seen as a huge ocean of offsets, and the road ahead is rather long. One way to absorb the huge quantum of offsets is to hike the FDI in defence industry from 26 percent to 49 percent, as demanded by a section of the industry. In the absence of defence export
potential and with limited scope for FDI, it may become an arduous task for undertaking the offset obligations by the vendor companies. This, in a way, is also a major challenge for those in the government responsible for implementing the policy. 6.2 Relative Advantages Opportunity in India 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. Further, Indian MRO segment is estimated to reach USD 1.17 billion by 2010 and USD 2.6 billion by 2020 and Indian offshore engineering is expected to be at 25 per cent of the total offshore engineering spend. The Government is also giving thrust which is exhibited through large and growing spend on defence, space, civil aviation and Research and development (R&D), liberalization of defence and civil aviation sectors, push for private participation in manufacturing and R&D, offset policy, sharing of eighty percent of development, costs with private players for the defence R&D. Besides defence spend, the Government has budgeted for space, homeland security, 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 inistry of Defence, M Government of India Annual Report, 2007-08, Pan 7.56. 54 s per the present Indian A defence offsets policy, offsets can be undertaken under three broad categories i.e. (a) export of defence equipment and services; (b) FDI in defence industry; and (c) FDI in Indian defence R&D organisations. On a rough approximation, these three segments must account for 1/3M of offsets each every year.
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 defence The global defence markets are likely to stay flat this year, primarily due to the softening of the U.S. defense market, the largest in the world. Cancellations of major weapons programs in the United States, coupled with cost overrun challenges on major programs around the world, will likely have an impact on additional spending. Even so, global defence spending will likely stay at approximately 2 percent of global GDP, with Saudi Arabia, Israel, Figure 18 : Defense spend as percentage of country GDP Saudi Arabia U.S. India World Sweden Canada Mexico 0% 2.50% 2.40% 2.00% 1.80% 1.50% 1.30% 1.10% 0.80% 0.50% 4% 8% 12% 7.30% 4.10% 3.90% 10.00% and the United States spending a proportionately higher amount, with European and Asian countries spending less (see Figures 18 and 19). The global industry is truly at an inflection point and it is continuing to move rapidly east toward China, India, and the Middle East. These countries are expected to be large markets for A&D industry products and services, as well as participants in the supply chain. A&D Prospects of India in Asia In India, the sector is growing at an unprecedented rate and emerging as a key participant in the Asia Pacific region. United States and European aerospace companies are now recognizing India as a critical market as well as a potential manufacturing partner. India is becoming one of the largest military spenders in the world and catching worldwide attention, with the third-largest defence procurement budget in Asia. In 2010 to 2011, USD 32.03 billion has been earmarked for national defence. Of this, USD 13.04 billion is to be spent on acquisitions for new weapons systems equipment and services. It is estimated that Indian defence procurement will rise to an estimated USD 45 billion by 2015, which could make it one of the most attractive defence markets in the world. In India, the prospects for the defence sector are strong. In light of the Mumbai attacks as well as the overall need to modernize its defensive capabilities, Indias armed forces are expected to increase their purchases of new equipment and technology for the next 20 to 25 years. Liberalization of Indias defence procurement policy offers a unique opportunity for Indian companies to provide services for the armed forces. Currently, about 70 percent of procurement in value terms is from foreign sources with Indian companies supplying only around 25 percent of components and subassemblies to state-owned companies. But the situation is expected to change with the creation of more publicprivate partnerships. However, in the near-term, foreign companies will likely continue to have an edge in the supply of defence armaments and transfer of technology. In India, foreign acquisitions are expected to be more affordable at this time. Industry consolidation in India may be on the upswing for larger companies that have desire to enter manufacturing businesses. This would give them a presence abroad to interact and do business with OEMs and suppliers directly, while simultaneously harnessing the advantages that India as a manufacturing destination provides.
56 ompass 2010 Global C Aerospace & Defense sector outlook Deloitte Report by Deloitte A&D Team led by Tom Captain, A&D sector leader, DTT Global Manufacturing Industry
Source: Central Intelligence Agency (CIA)
Figure 19 : Percentage of total global defense spend Asia and Oceania 13% South America 3%
Western Europe 22%
North America 45%
Central & Europe 9%
Middle East 7%
Africa 1%
Source: SIPR and DTT Global Manufacturing Industry, A&D sector analysis 50 | CII Indian Defence Industry Mission EUROSATORY 2010
Competitiveness in A&D Sector India is being considered as the next destination of manufacturing given countrys 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. There is a lot of synergy between automotive, discreet manufacturing and A&D industry due to its similar operations and business processes. These strengths can be leveraged by the existing firms entering into A&D space. The nature of A&D industry is as such technology intensive, innovation and automation driven coupled with the complex supply chain. Considering the massive opportunities that A&D sector has opened up for respective firms, these firms need a focussed approach in order to achieve economics of scale and at the same time being efficient and lean in operations to remain competitive. Hitherto Indian firms lacked the global competitiveness in engineering, quality and technology aspects in the products. However lately there is an increasing thrust on these aspects. We have delved into the following areas to get the perspective on competitiveness in Indian A&D sector. Supply Chain Since around two third cost of the end product reside across supply chain, managing complex supply chain would remain one of the vital aspects of A&D industry. Unlike other industries, the nature of supply chain in A&D sector is entrenched with several players adding value on component and sub-assemblies at a given point. The firms undertaking opportunities in A&D sector would evolve themselves as integrators or super integrators and their role will increasingly become larger in the A&D value chain. The emerged assemblers and integrators would treat their upstream suppliers as risk sharing partners. The proximity to sources will not be a barrier as the specialized components/sub-assemblies can be sourced from other low cost regions with desired technology requirements. The supply chain aspects such as responsiveness, faster deliveries, lean supply chain, flexibility in operations and quality would remain the focus areas for the A&D firms. Technology and quality Though in the initial years, the technology would be brought in mainly by foreign players, the Indian firms need to quickly ramp up the technology base in order to play a more collaborative role with assemblers and integrators. The firms would be expected to play a vital
India is being considered as the next destination of manufacturing given countrys 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.
role in collaborative product development and ensuring quick launches by leveraging re-use of the existing platforms and components. On the quality front, the A&D industry essentially works on 9 Sigma and though several Indian firms have embraced stringent quality standards, most of these firms have reached to 6 sigma level only. We have seen remarkable developments in these two areas in the recent years but we still need concerted efforts to take it to the full maturity. Productivity India has a total labour force of around 450 million. Though there is a clear advantage of labour cost in India, there would be increased pressure from cost of living and inflation perspective. The firms will have to really emphasize on labour productivity, working environment, automation and manufacturing best practices to achieve competitiveness. Governments ingrained focus on enhancing the skill sets through substantial increase in technical skill courses, industry-university relationships, setting up of R&D base would provide a major boost to productivity increase. Consolidations Hitherto A&D space was owned by vertically integrated OEMs. But this trend has changed globally in the recent years as firms want to leverage core competency of the group and offload the respective value add work to the upstream firms. Given this opportunity coupled with offset policy, several larger and medium size suppliers are entering into the fray to take a pie of mammoth A&D industry. Since the nature of A&D industry is more specialized than other industries, the industry is
expected to see more consolidations. There would be a thrust on JVs and partnerships too in order to achieve technology and capacities quickly. Given the current constraints of 26% FDI, the foreign firms would hold control of product know-how. However in the long run it is not a cause of worry. The local firms would be keen on joint ventures and partnerships with foreign firms. At the same time, the foreign acquisitions are also expected to be formed by local firms. This would give them a presence abroad to interact and do business with OEMs and suppliers directly, while simultaneously harnessing the advantages that India as a manufacturing destination provides. 7.2 Barriers and risks 7.2.1 Restrictions on foreign investment India has historically applied tight restrictions on the allowable amount of foreign investment in the defence industry, due to concerns that foreign involvement would hinder the development of the indigenous private and public sector firms. In 2001, the Government opened the defence sector for private Indian companies with 100% Indian shareholding and allowed limit of 26% for foreign Direct investment. However, this is still seen as prohibitively restrictive by potential investors. The 2009 Annual Economic Survey, submitted to Indian Parliament by the Chief Economic Advisor in the Ministry of Finance on behalf of the Indian corporate sector, recommended that the FDI limit should be increased to 49 per cent.57 There has been debated discussion on increase of FDI from the present level of 26% in Ministry of Commerce and in private industry. However, Ministry of Defence is resilient on increase. 7.2.2 Taxation Issues There is also a range of indirect taxes that can impact or disadvantage foreign participation in the Indian defence industry. There is no level playing field for Indian private defence industry vis-a-vis DPSUs. For example, customs duty and/or service taxes may apply to: Imported equipment or transfer of intellectual property under licensing arrangements for the purposes of Transfer of Technology (TOT), which is a common requirement of procurement contracts. Training services provided to the armed forces for new equipment and machinery Repair and maintenance services Joint ventures (JVs) can be formed to meet offset obligations. These are subject to the same tax regime as Indian
companies, but can also include a number of requirements such as business registrations, filing tax returns and payment of applicable custom duties. An overview of regulatory and taxation on defence industry is given in the Annexure 1. 7.2.3 Domestic competition Increasing self-sufficiency in the supply of defence requirements through the support and development of the indigenous defence industry has long been an objective of the Indian Government. However, due to limitations of indigenous capabilities, India has historically relied heavily on foreign supply for its defence needs, consistently importing over 70 per cent of its equipment. This topic has been discussed in detail in section 6 above. 7.2.4 Supply Chain Issues Though India has a widespread supply chain network, large supply base and favourable investment environment in place, there is a massive potential to bring structured improvements in supply chain of A&D industry. The supply chain has become a cornerstone of a firms success irrespective of the scale and complexity of the firm. It has also gained wider momentum in the recent years and firms are at different stages of adopting the best practices from the same/other industry in the relevant functions. Since A&D is a new industry particularly in the Indian market, the firms in this sector can adopt the relevant best practices at the early stage of setting up facility. However several firms have still not reached to a stage of full maturity of production, quality, delivery, distribution, maintenance processes. It is further compounded by impediments such as infrastructure bottlenecks and delays in compliance measures. Since value add will be imparted by several players in a staged approach, the viability of operations of respective firms should be a priority area to exploit the competitive advantage in the value chain. The government and the respective firms need to put concerted efforts in tandem to debilitate these impediments as a step towards competitiveness in the A&D sector. 7.2.5 DPP restrictions The Defence Procurement Procedure (DPP) sets out the requirements for the participation of foreign firms in the defence acquisitions of the Indian Government. The DPP effectively establishes non-tariff trade barriers to the participation of foreign firms in the Indian defence market. The key barriers include: the various categories for capital acquisitions the offset requirements.
57 isquitta, S. (2009) M Defence contractors Target Big Jump in Indias Military Spending in The Wall Street Journal, July 17
Categories for capital acquisitions As noted above, the DPP-2008 (Amendment 2009) contained amendments to the existing categories for capital acquisitions. The revised categories for capital acquisitions are summarised in Table 19. Table 19: Capital acquisition categories in the DPP Category Buy (Indian) Buy (Global) Buy and Make Buy and Make (Indian) Make Description Tender requests are released to Indian vendors only. Items must have a minimum of 30 per cent indigenous content if systems are being integrated by an Indian vendor. Tender requests are released to both foreign and Indian vendors. Items are acquired from a foreign vendor, followed by licensed production and indigenous manufacture in India. Tender requests are released to Indian vendors only, requiring Indian vendors to form a joint venture or establish a production arrangement with a foreign vendor, leading to licensed production and indigenous manufacture in India. This category requires at least 50 per cent indigenous content (on a cost basis). Tenders are released to Indian vendors only, for indigenous design, development and production.
Source: DPP-2008 (Amendment 2009)
Under the DPP-2008 Buy and Make category, RFPs were issued to foreign firms, who were then to enter into agreements with Indian firms for the ToT. The Defence Minister, A. K. Antony, however, has stated that the previous arrangements did not lead to sufficient developments in terms of joint ventures and co-production arrangements in India.58 Under the Buy and Make (Indian) category, RFPs are issued to Indian firms (rather than foreign firms), who then play a lead role in negotiating the terms for the ToT and co-production arrangements with foreign firms. Project proposals are required to set out the arrangements for ToT and co-production arrangements. Items produced under the Buy and Make (Indian) category must have at least 50 per cent indigenous content on a cost basis. The Buy and Make (Indian) category is designed to encourage joint ventures and co-production arrangements rather than indigenous R&D. Categorisation of projects as Buy and Make (Indian) requires the following procedures: Defence Services Headquarters (SHQ) must prepare a Capability Definition Document outlining the acquisition requirements and current capabilities, including critical technologies to be absorbed by the Indian Partner (identified in consultation with the DRDO) The Services Capital Acquisition Plan Categorization Higher Committee (SCAPCHC) examines the
Capability Definition Document and provides a recommendation to the DAC The DAC decides the outcome of the project based on the SCAPCHCs recommendation. Following categorisation as Buy and Make (Indian), the Capability Definition Document is provided to selected Indian firms, who are required to provide a proposal, including plans for development and production . Production arrangements must include details of work share and the ToT, demonstrating that the Indian partner will absorb critical technologies.59 Expediting acquisitions Fast Track Procedures (FTP) were introduced into the DPP in 2001, and further revised in the 2006 amendments. As stated in the DPP the objective of the FTP is to ensure expeditious procurement for urgent operational requirements foreseen as imminent or for a situation in which a crisis emerges without prior warning. 60 FTP applies only to acquisitions under the Buy category, and may be used to procure additional items already in service, or new equipment. However, FTP is not available for equipment requiring field trials, which significantly limits the scope of its application. Sales can be also expedited by way of the governmentto-government Foreign Military Sales (FMS) procedures.
58 DPP eases procedures for private sector in Vayu Daily, 2009 59 t least 50 per cent of A critical technologies must be in category I and II as set out in the DPP 2008. 60 inistry of Defence (2008) M , Defence Procurement Procedure, p.191
61 Modernizing Artillery Retrospect and Prospect in India Strategic Defence Magazine, contributed by Brig Vinod Anand (Retd), Senior Fellow at the Centre for Strategic Studies and Simulation, United Service Institution of India, New Delhi, Feb1-March 15, 2010, Vol 5, Issue 2, pp.16-18, http://www.indiastrategic.in/topstories483. htm, accessed March 2010 62 DPP eases procedures for private sector in Vayu Daily, 2009 63 pportunities in the Indian O Defence Sector, prepared for the CII by KPMG (2010) 64 inistry of Defence (2008) M , Defence Procurement Procedure, pp.41-42
FMS offers an alternative path to the Defence Procurement Procedures, which despite numerous revisions appears to be onerous and time consuming (despite the existence of the FTP).61 Implications for future acquisitions As noted above, the acquisition category is decided on a case by case basis. Therefore, it is not immediately apparent which category will apply for the future procurements identified in the four domains. However, statements from the Ministry of Defence following the 2009 amendments have indicated that the use of the new Buy and Make (Indian) category is likely to be prioritised. For example, at the National Seminar on Defence Acquisitions in late 2009, Defence Minister A.K. Antony stated that the existing Buy and Make category had not met expectations of promoting joint ventures or establishing co-production arrangements, a shortcoming that the new Buy and Make (Indian) category was intended to overcome.62
Offset contracts The offset provisions have been discussed at section 6 above. 7.2.6 Identified risks: Bureaucratic delays, lack of transparency, uncertain contracts In addition to the barriers to foreign participation in the Indian defence industry, there are also a number of risks to involvement, including high costs of sale, time delays, bureaucracy and corruption. These issues have contributed to a significant level of underspend in the key domains as set out above. Capital acquisitions are subject to a range of approval procedures. The DPP sets out the broad stages and timeframes for procurement processes, as shown in Table 20. Broad timeframes for capital acquisitions set out in the DPP indicate that procurements should take between two to three years (including field evaluation trials). 64 Given the length and extent of the procurement process, the costs of bidding for procurement contracts can be very high,
Table 20: Procurement process and timeframes63 Stage Drafting of service requirements Acceptance of Necessity Issue of RFPs Timeframe 1 month Procedures Commencement of procurement process by issuing a request for interest (RFI), including: Services Qualitative Requirements (SQRs) Acceptance of Necessity (AoN). Description of key requirements including: Technical parameters Quantity, acquisition category offset obligations, training requirements Commercial aspects Evaluation criteria Evaluation of offers by Technical Evaluation Committee (TEC) Vetting of TEC report Field trials and approval of staff evaluations Authorities involved SHQ HQ IDS DPB Acquisition wing of MoD
4 months
SHQ DAC
Technical evaluations and field trials
11-17 months
TEC SHQ DRDO DGQA Director General of Quality Assurance Acquisition wing of MoD Technical Oversight Committee CNC CFA MoD MoF CCS
Commercial negotiations
4-11 months
Involvement of technical oversight committee for procurements over USD 75million Opening of bids and determination of L1 Negotiations with the Contract Negotiation Committee (CNC) Approval by the Ministry of Defence(MoD), Ministry of Finance (MoF), and Cabinet Committee on Security (CCS) Evaluation of commercial offset offers
Signing of contract
2-3 years
Source: Report on opportunities in the Indian Defence Sector prepared for CII by KPMG 2010 54 | CII Indian Defence Industry Mission EUROSATORY 2010
particularly where there is a requirement for field trials to be held in India, rather than in the country of manufacture. Unforeseen delays in the tendering process can also increase costs to bidders. While the DPP sets out timeframes of around two to three years for procurements, experience has shown that the process can often take in excess of five years. For example, while a number of RFPs have been issued for the acquisition of artillery over the last decade, no significant new inductions have occurred since the 1986 acquisition of field howitzers for Swedish firm Bofors. This has been partly due to a lack of suitable vendors and issues with field trials.65 A number of acquisitions (including the Bofors deal) have also been subject to allegations of corruption. This has had the impact of reducing the number of vendors, and locking the Government in legal disputes. It is important to note that previous allegations of corruption have often involved investigations of foreign firms, and are not necessarily related to indigenous issues.66 Equipment, Test Equipment & Medical Electronics 7.2.7 Quality Assurance Procedures in defence67 The implied needs of Defence are reliability, maintainability, robustness and ease of operation. The quality assurance is required through equipment life cycle. The Directorate General of Quality Assurance (DGQA) is the governing body for the quality assurance. The primary roles of DGQA are: quality assurance (QA) of defense stores procured from ordnance factories, PSUs (BEL, BDL, GSL, MDL, GRSE, MIDHANI, HAL, BEML etc.) Initiate actions necessary to ensure that the armed forces get the entire range of arms, ammunition, equipment & stores of the desired quality so as to enhance the combat efficiency & effectiveness of fighting forces. The main functions of DGQA are quality assurance (QA), technical services and guidance, defect investigation, evaluation of Users feedbacks, vendor registration and miscellaneous Directorate wise responsibility of quality assurance of equipment DQA (A): Weapons, Small Arms, Ammunition ,Instruments Optical And Opto -Electronics DQA (L): Telecommunication Equipment , Armoured Vehicle Electronic Systems ,Electronic Warfare Equipment, Batteries & Cables, Generator Sets & Charging Sets, Counter led DQA(V): B Vehicles, Specialist Vehicles, Tank Transporters, Earth Movers (Tracked Dozers). DQA(S): Textiles And Clothing, Footwear And Leather Stores, Petroleum Products, Drugs And Pharmaceuticals, Paints And Chemicals, Specialist Equipment, General Stores, Parachutes DQA(M&E): Military Explosives , Nodal Agency For Metallurgical Related Activities DQA(CV): Tank T-72 & Its Variants ,Tank T-90, MBT Arjun, ICV Bmp & Its Variants DQA(R&S): Radars, Missile Systems ATGM & Sam (Other Than IGMDP), Unmanned Aerial Vehicles, Simulators,C3i Systems DQA (EE): Bridging Equipment And Water Craft, Fire Fighting Equipments, NBC Systems, All WKSP Equipments DQA (N): Electronic and electronic items, Weapons - both conventional and guided, Fire Control systems, Radars and Communication, Steel for Ship building, Naval stores DQA(WP): Diesel, Gas Turbines, Steam Turbines, Steering Gear, Stabilisers, Dg Sets ,AC & Ref Plants, Pumps, Compressors, Galleys & Stp.
65 A Commentary on the Indian Army-Artillery upgrades (January 2010), Religare Strategic Advisory Services, (not publicly available) 66 A Commentary on the Indian Army-Artillery upgrades (January 2010), Religare Strategic Advisory Services, (not publicly available) 67 olonel Vashisht presentaC tion on Quality Assurance and DGQA
8 Strategic Alliances
8.1 Defence Memorandum Of Understanding (MOUs) in India Table 21 below gives a tentative list of MOUs in India so far entered by the Indian Government and Indian Public and private industry. Table 21: Defence MOUs in India Date February 200368 Entities Involved Confederation of Indian Industry (CII) , the Polish Chamber of National Defence Manufacturers Antrix,EADS Details To cooperate in the joint marketing of military hardware.
September 200369 India , Seyechelles April 200570
Signed MoU on Defence. Signed MoA to jointly address the commercial market for communications satellites with payload power below 4 Kw and a launch mass in the range of 2 to 3 tons. Signed a MoU that will expand their cooperation into new market segments and exploring mid-term and long-term strategies on the key segments of aerospace business. HCL Technologies partnering with UKs Smiths Groups aerospace Unit, to set up an engineering services centre and M/s Satyam Technologies forming an alliance with Northrop Grumman. Going by the surge in deals and business opportunities thus created, the aerospace market is expected to be buoyant in the coming years. M/s Larsen and Toubro (L&T), the engineering giant, is foraying into international and aerospace in partnership with Boeing and EADS. The company has drawn up a mega plan to set up two defence and aerospace component manufacturing units with an investment of Rs 500 crore. Both Boeing and EADS have agreed to source components from L&T for their domestic and international use. L&T had signed an MoU to this effect with both Boeing and EADS during the Aero India Aerospace show at Bangalore in February 2007. Signed a MoU to explore business opportunities on potential co-production opportunities in support of the Indian governments current and future aerospace and defence electronics requirements as well as Northrop Grummans international market requirements. Signed an MoU for setting up a joint venture company (JVC) for co-operation in the development, production and marketing of thermal imaging cameras and forward looking infra red (FLIRs) for the Indian and global markets. Signed an MoU to explore business opportunities on potential co-production avenues for domestic aerospace and defence electronics needs. Signed an MoU to source sub-systems for fighter aircraft and helicopters worth USD 1 billion, over a period of 10 years. The MoU is expected to benefit HAL through enhanced export opportunities, development of new technologies and process; and implementation of best practices and skills for global competitiveness. Boeing entered into an agreement with the Indian Institute of Science and two leading Indian information technology companies (MIs, Wipro Technologies and M/s HCL Technologies). In accordance with the agreement, an Aerospace Network Research Consortium (ANRC) will be formed. Led by Boeing, the ANRC is Indias first public-private aerospace research consortium.
September 200671 HAL , EADS February 200772 HCL,Smiths Groups aerospace Unit,Satyam Technologies, Northrop Grumman M/s Larsen and Toubro (L&T), EADS, Boeing
February 200773
February 200774
BEL , Northrop Grumman Corporation BEL , Elbit Systems Electro Optics ELOP Ltd of Israel BEL , Lockheed Martin
February 200775
February 200776
December 200777 HAL , Boeing
January 200878
Boeing, Indian Institute of Science ,Wipro , HCL
56
Date February 2008

79
Entities Involved
Details
Tata Power's Strategic Electronics Signed a MoU in the area of optronics. Through this Memorandum of Understanding, Tata Division (SED) , Thales Power SED and Thales agreed to cooperate in order to offer optronics solutions for Indian defense market such as the MMRCA programme and further programs on existing or future airborne platforms. This agreement allowed both Companies to develop transfer of technologies in order to implement local contents and meet the Offset requirements of Indian MOD. Tata Group ,Israel Aerospace Industries (IAI) HAL , Airbus Industry of France Signed a memorandum of understanding with the in for developing and manufacturing a wide range of defence products, including missiles, unmanned aerial vehicles, radars, electronic warfare and security systems. HAL has become an important outsourcing hub for supply of doors to Airbus Industry of France. In 2008, it won an order worth USD 150 million for the supply of 2,000 doors for the single aisle family of aircraft consisting of the A-318, A-319, A-320 and A-321 series. This is in addition to the earlier orders received by HAL from the European major. The contract will begin to be executed in 2009 and will stretch over a period of five years. Signed a formal agreement to create an exclusive partnership specifically for EADS. By combining the domain expertise, advanced project management capability and customer know-how of ALTEN in Europe with an efficient, scalable and cost efficient offshore delivery expertise of INFOTECH in India, the collaboration will allow addressing and achieving some of the key objectives of EADS in Europe and from India. The tie-up enables high degree of scalability; world-class quality and quick response time to enable EADS significantly improve time to market and decrease cost. Signed a memorandum of understanding (MoU) to boost its missile defence system. The MoU aimed at giving India the state of the art technology that would allow it to intercept any threat from ballistic missiles. Inked a pact to jointly develop and produce a fifth generation fighter aircraft.
February 200880
February 200881
July 2008
Infotech Limited , Alten Group
December 200882
India , US
December 200883
Hindustan Aeronautics Limited and Russia's United Aircraft Corporation (UAC) Boeing , BEL
February 200984
Signed an MOU for setting up an analysis and experimentation centre in partnership with BEL in Bangalore. The centre would analyze present equipment and visualize future requirements.The centre would do fluid dynamics studies and other research in aircraft design. Entered into a memorandum of understanding for the attack helicopter programme. Signed an MoU with the US-based Textron Inc for the development of a global SEZ in Karnataka. As per the terms and conditions of MoU, Textron and Quest Global will work together to develop the manufacturing capabilities within the SEZ. Quest Global has also signed an MoU with Sikorsky to explore the possibility of setting up a manufacturing base for components.
February 200985 February 2009

86
Infotech Enterprises , Eurocopter Quest Global, Textron, Sikorsky
February 200987
TAML, Saab
Tata Advanced Materials Ltd (TAML) a Tata Group Company & Saab have signed a Business Agreement on February 12 for manufacture of structural composite components. TATA Industrial Services Limited (TISL) was instrumental in structuring the business relationship between Saab and TAML. The agreement is for a period of four years for manufacture of composite components for one of Saabs commercial programs.
Date February 2009

88
Entities Involved BEL, Astra Microwave Products Ltd
Details Signed MoU to form a joint venture company. According to the terms of the MoU, the joint venture, in which Bharat Electronics will own 49% equity and Astra Microwave will own 51% equity, will design, develop, prototype, manufacture, and market RF and microwave products for use in defense, space, and telecommunications. The JV is proposed to be the platform for the design, development, and manufacture of BELs microwave intensive products.
March 200989 March 200990
BEL ,BHEL CSM Software Pvt. Ltd., BEML Limited,
Signed an MoU to explore a 250-MW joint manufacturing facility for solar photo voltaic cells, modules and silicon wafers. Under the Ministry of Defence, Govt. of India, signed of a strategic MoU . The objective of this MoU was to a establish a framework for the execution of the engineering services orders likely to be received by BEML through CSMs sales and marketing efforts, under the defence offset clause, and to ensure total customer satisfaction. Signed an MOU for launch vehicle integration. Signed a defence deal with Israel for setting up an artillery munitions factory in Bihar state. entered into an agreement to develop and produce the light transport aircraft Saras. They have signed a memorandum of understanding to develop the 14-seater aircraft which can also be used as an ambulance, civil applications and executive requirements. HAL's contribution to the project is in the areas of designing landing gear, hydraulics and electrical systems and the manufacture and assembly of wings. Signed MOU in defence that would promote bilateral co-operation in defence. Signed a MoU under the terms of this agreement, GHIAL and CFM would work towards the development of a new CFM56 Maintenance Training Center at the Rajiv Gandhi Airport in Hyderabad. The new training center is envisioned to mirror CFM facilities currently operating in France, the United States, and China, and would initially provide advanced courses in line maintenance and inspection of CFM56-5B and CFM56-7B engines, which power the majority of Airbus A320 family aircraft and all Boeing 737s, respectively. The new centers planned location is in a special economic zone at the airport dedicated to maintenance, repair and overhaul (MRO).
April 200991 April 2009

92
BrahMos Aerospace Ltd,ISRO OFB,IMI NAL,HAL
June 200993
November 200994 India ,Sweden November 200995 CFM International (CFM) , GMR Hyderabad International Airport Limited (GHIAL).
January 201096
India and Governments of Russia, Signed an MoU to fight terror. The MoU signed focuses on enhancing cooperation Brazil and Malaysia between the concerned nations and ensure a smooth flow of information pertaining to terror and the source of financing terror and money laundering. The MoU would also enable the governments Financial Intelligence Unit (FIU), which is responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs, to share information with these countries on suspected money laundering activities. DRDO Signed six MOUs with Jyothy Laboratories for woolcare; Vantage Security for explosive detection kit; Deltapure Water India Ltd. and Ariva Group for RO based Water Purification System; MGM Associates for High Altitude Pulmonary Oedema (HAPO) Chamber and GSC Glass Ltd. for electrochromic window. Entered into an agreement with Israel Aerospace Industries Ltd (IAI) for manufacturing and service support of the latters mini and micro unmanned aerial vehicles product range in India.
January 201097
February 201098
Speck Systems Ltd, Israel Aerospace Industries Ltd (IAI)
58
Date February 2010

99
Entities Involved Shri Lakshmi Defence Solutions Ltd (SLDS), "Ukrinmash" Shri Lakshmi Defence Solutions Ltd (SLDS) ,M/s ADCOM MILITARY INDUSTRIES Larsen & Toubro Limited (L&T) , Raytheon Company
Details Signed an agreement for manufacturing and marketing of hundred 8x8 and 6x6 APC (Armoured Personnel Carrier) required by Indian Army for the United Nations (U.N.) Mission. Signed an MoU with for supplying and marketing 100 to 300 high tech armoured vehicles in the Middle East and South Africa. Announced teaming up in a L&T led proposal to upgrade Indian Army T72 tanks. Under the proposal, Raytheon will provide infrared imaging sights and Electronics that will greatly improve target accuracy and increase overall system lethality on the battlefield for T72 tank battalions. Raytheon has provided 20,000 thermal sights in more than 15 countries.
February 2010100
February 2010101
February 2010102
Bharat Electronics , Finmeccanica Signed an outline agreement to explore possible collaboration in the electronic warfare subsidiary Selex Galileo sector .Potential opportunities in this MOU include fulfilling offset requirements and contract manufacturing for export markets. Walchandnagar Industries Limited (WIL), DCNS India , Russia Signed an MOU to manufacture critical equipment for Scorpene submarines to be used by the Indian Navy. The submarines are built by state-owned Mazgaon Docks Ltd, and are expected to join the naval fleet by 2018. Signed a slew of agreements, including some long-pending defence accords and pacts in that would strengthen their cooperation in the areas of civil nuclear energy and space.
March 2010103
March 2010104
68 ttp://news.indiamart.com/news-analysis/indian-polish-defenc-2170.html h 69 ttp://www.encyclopedia.com/doc/1G1-107561726.html h 70 ttp://www.accessmylibrary.com/article-1G1-133337825/antrix-and-eads-sign. h html 71 ttp://findarticles.com/p/articles/mi_hb3126/is_685/ai_n29296873/ h 72 www.arcweb.com> < 73 he Hindustan times,Mumbai, November 29, 2007 T 74 ttp://www.indiaprwire.com/pressrelease/defense/200702061814.htm h 75 ttp://www.accessmylibrary.com/article-1G1-159426557/bel-inks-mous-aero.html h 76 ttp://www.prdomain.com/companies/B/BharatElectronicsLimited/newsreh leases/20072938976.htm 77 www.india-defence.com/3 774> < 78 ttp://www.ciol.com/news/news-reports/ h boeing-ties-up-with-iisc,-wipro,-hcl/30108103207/0/ 79 ttp://www.stockwatch.in/tata-power-signs-mou-french-defense-major-2445 h 80 ttp://www.thehindu.com/2008/02/18/stories/2008021854801200.htm h 81 he Hindu, New Delhi, March 19,2008 T 82 ttp://www.geo.tv/12-18-2008/30928.htm h 83 ttp://www.india-defence.com/reports/4112 h 84 ttp://www.thehindu.com/2009/02/11/stories/2009021155461600.htm h 85 ttp://www.allvoices.com/ h news/2463319/s/28409992-infotech-signs-mou-with-eurocopter 86 ttp://www.exchange4projects.com/SEZ/ h quest-global-teams-up-with-textron-for-global-sez 87 ttp://machinist.in/index.php?option=com_content&task=view&id=1931&Itemi h d=2 88 ttp://www.valuenotes.com/press/pr_BEL_11FEb09. h asp?ArtCd=141936&Cat=C&Id=1369 89 ttp://www.moneycontrol.com/news/business/bel-bhel-plan-250-mw-solarh venture-_391021.html
90 ttp://www.indiaprwire.com/pressrelease/defense/2009030420850.htm h 91 ttp://www.mynews.in/news_details.php?storyid=17306 h 92 ttp://www.google.co.in/search?hl=en&q=OFB+and+Israel+military+industries&m h eta=&aq=o&aqi=&aql=&oq=&gs_rfai= 93 ttp://www.faqs.org/abstracts/Business-international/HAL-NAL-TO-DEVELOPh SARAS-FRESENIUS-KABI-EYES-TWO-BRANDS-FOR-ACQUISITION.html94 ttp://www.swedenabroad.com/News____21610.aspx?slaveid=99431 h 95 ttp://www.cfm56.com/press/news/cfm+signs+agreement+for+cfm56+training+c h enter+in+india/481 96 ttp://www.8ak.in/8ak_india_defence_news/2010/01/india-signs-mou-withh russia-brazil-malaysia-to-fight-terror.html 97 ttp://www.mynews.in/News/DRDO_signs_six_MoUs_with_industry_for_tech_ h transfer_N36280.html 98 ttp://www.thehindubusinessline.com/2009/02/11/stories/2009021152010500. h htm 99 ttp://www.defenseworld.net/go/defensenews. h jsp?showid=103&id=4174&h=Shri%20Lakshmi%20Defence%20Solutions%20 signs%20with%20Ukrainian%20firm%20manufacture%20over%20100%20 armoured%20vehicles 100 ttp://www.defenseworld.net/go/defensenews. h jsp?showid=103&id=4174&h=Shri%20Lakshmi%20Defence%20Solutions%20 signs%20with%20Ukrainian%20firm%20manufacture%20over%20100%20 armoured%20vehicles 101 ttp://www.defenseworld.net/go/defensenews.jsp?id=4165 h 102 ttp://www.defensenews.com/osd_story.php?sh=VSDI&i=3944907 h 103 ttp://timesofindia.indiatimes.com/city/pune/WIL-signs-MoU-with-French-navalh shipbuilder/articleshow/5744748.cms 104 ttp://netindian.in/news/2010/03/12/0005733/ h india-russia-sign-civil-nuclear-defence-space-agreements
8.2 Defence Joint Ventures in India Table 22 gives a list of joint ventures between foreign companies and DPSUs as well as with Indian private defence industry. Table 22: Defence Joint Ventures in India Date July 2005
105
Entities Involved HAL ,SNECMA of France
Details HAL and SNECMA of France signed an agreement to form a JV that would be a centre for excellence for the manufacture of key components and assemblies of aero engines. While HAL would bring its manufacturing experience in India, SNECMA would transfer technology to the JV, providing HAL additional export avenues and greater access to civil aerospace industry. Lockheed Martin of the US, the worlds largest defence manufacturing company, and Wipro Technologies of India, together announced opening of a Network Operations Centre in Gurgaon, near New Delhi. Known as Ambar Jyoti, this lab will develop, demonstrate and experiment with emerging networkenabled capabilities and applications. Lockheed Martin and Wipro will utilise cutting-edge technologies and real environmental emulation to develop net-enabled capabilities and solutions to employ against current, real world problems. Boeing and Tata utilizes existing Tata manufacturing capability and also develops new supply sources throughout the Indian manufacturing and engineering communities for both commercial and defense applications. Manufacturing capabilities established within the joint-venture company would in later phases be leveraged across multiple Boeing programs, including the Medium Multi-Role Combat Aircraft competition. This involved USD 500 million of defense related aerospace component work. French defence and aerospace major Thales and the city-based Samtel group announced a joint venture to design, manufacture and sell avionics systems in the Indian market. Samtel and Thales would hold 74:26 in the venture that was started with a capital of USD 12.5 million with more investments to be pumped in as the joint development efforts would progress IT services provider Tata Consultancy Services (TCS) announced its partnership with Saab, a provider in products and services catering to military and civil security, for the establishment of Saabs Aeronautical Design and Development Center (ADDC) in India. The partnership would establish Aeronautical Design and Development Center (ADDC) that would aim at addressing the global aeronautical market. It would create a single source of design and development capabilities within India, in addressing domestic and the global defense and civil aeronautical applications.
August 2007 106
Lockheed Martin , Wipro Technologies of India
February 2008 107
Boeing ,Tata
May 2008 108
Thales, Samtel
September , 2008109
TCS , SAAB
January 2009110 February 2009111 February 2009112 March 2009113 April 2009114 May 2009115
L&T,DRDO Dassault Systmes, KPIT Cummins Infosystems Ltd Tata Group ,Israel Aerospace industry Wipro ,GE Security TAAL,TIDCO Larsen&Toubro, Europe's EADS
Larsen & Toubro (L&T) tied up with DRDO to setup a research facility for weapons conceptualization for all commercial production undertaken by DRDO. Dassault Systmes (DS) the world leader for Product Lifecycle Management (PLM) software solutions and KPIT Cummins Infosystems Ltd a specialist solutions partner to global manufacturing corporations, signed a go-to-market partnership for joint solution & business development on ENOVIA Platform. Tata Group and Israel Aerospace industry tied up with in a joint venture in called Nova integrated systems with FDI of 50 million USD, which would be making missiles ,pilotless drones , electronic warfare systems and other defence equipment. Tata owns 74 % while IAI owns 26 %. Wipro forged a JV with GE Security of US during to jointly produce and market physical security solutions for Indian defence forces. Bangalore based Taneja Aerospace is planning to float a joint venture with Tamil Nadu owned TIDCO to create a new facility at Hosur, manufacture aero parts and would exploit opportunity in the MRO. Announced the formation of a joint venture company for defence electronics in India aim at development, design, manufacturing and related services in the fields of electronic warfare, radars, military avionics and mobile systems for military requirements.
60
Date June 2009 October 2009117

116
Entities Involved HAL , CAE SAERTEX , KEMROCK
Details HAL and Canadas CAE jointly set up a new helicopter training centre. SAERTEX, the world leader in non-crimp glass, carbon and aramide fabrics, planned to set up a 50:50 Joint Venture company in India with KEMROCK Industries and Exports Limited, Vadodara, Gujarat; and accordingly, an MOU was entered into by and between SAERTEX and KEMROCK to form the JV. The joint venture named as SAERTEX-KEMROCK INDIA LIMITED, would set up a new facility for producing various components for Indian and global aeronautical industry.
November 2009118 November 2009119
Sikorsky , Tata Advanced Systems Airbus,Airspace Infrastructure Pvt. Ltd , Airlogic Ltd
Sikorsky signed a joint venture with Tata advanced Systems in to produce cabins for the S-92 helicopter and aerospace parts at Hyderabad city. Airbus, Airspace Infrastructure Pvt. Ltd and Airlogic Ltd have established a new spare parts and logistics support joint venture - Spares Support Solutions India, Pvt. Ltd. (SSSI). The joint venture will maintain an inventory of rotable components used on all types of Airbus commercial aircraft by operators in India for outright sale, exchange and customized pooling arrangements. SSSI will also offer sale/leaseback of component inventories; the purchase of inventories associated with fleet phase-outs; and localized, just-in-time, support to both airlines and MROs in India. The JV is split 26% between Airbus and 37% each for the other partners. Airspace Infrastructure has expertise in bonded warehousing and compliance with the Indian customs regime while Airlogic specializes in component trading, distribution, repair management and spares exchange programs.
February 2010120
Wipro ,CAE
Wipro signed an agreement with CAE in to provide simulation-based training for areas like war gaming, C4ISR and a range of defence platforms expected to be acquired by Indias defence forces. The two companies also agreed to help original equipment manufacturers meet offset obligations in India that are required by defence ministry. BEL signed a contract with Suriname Armed forces for delivery of coastal communication system network server. Agusta westland and Tata Sons Ltd signed to create a Joint Venture with during which would be concentrating on assembly work of AW119 helicopter for the worldwide market, with a production rate of 30 a year and the first aircraft potentially ready for delivery in 2011.The AW119 would be proposed to Indian military Reconnaissance and Surveillance Helicopter program. Rolls Royce and HAL forged a 50:50 joint venture to manufacture compressor shroud rings and construction of a new production facility that would incorporate the latest in modern manufacturing techniques. Mahindra & Mahindra Ltd and BAE forged a JV to develop strike vehicles for Indian Army. M&M owns 74 % equity and BAE owns 26% .
116 ttp://www.indianaviationnews.net/careers/2007/08/hal-canadas-cae-in-jv-forh pilot-school-in-blore.html 117 ttp://www.mydigitalfc.com/corporate-releases/ h saertex-launches-saertex-kemrock-india-limited-jv-kemrock-industries-and-exports118 ttp://www.defenseworld.net/go/defensenews.jsp?id=4175 h 119 ttp://machinist.in/index.php?option=com_content&task=view&id=2455&Itemi h d=2 120 ttp://www.defenseworld.net/go/show.jsp?id=103&name=DEFEXPO%20 h INDIA%202010 121 ttp://www.defenseworld.net/go/defensenews.jsp?id=4162 h 122 ttp://www.agustawestland.com/news/ h agustawestland-and-tata-sons-establish-joint-venture-company 123 ttp://www.dnaindia.com/money/report_hal-and-rolls-royce-announce-manufach turing-joint-venture-in-india_1365345 124 ttp://www.baesystems.com/Newsroom/NewsReleases/ h autoGen_1091030101550.html Prospects for Global Defence Export Industry in Indian Defence Market | 61
February 2010121 February 2010122
BEL ,Suriname Armed Forces Agusta westland ,Tata Sons Ltd
April 2010123 Rolls Royce , HAL April 2010124 Mahindra & Mahindra Ltd , BAE
105 www.newindpress.com> < 106 www.wipro.com> < 107 ttp://www.industryweek.com/articles/boeing_tata_industries_announce_india_ h joint_venture_15820.aspx 108 ttp://www.thaindian.com/newsportal/sci-tech/thales-samtel-form-joint-ventureh for-avionics_10046498.html 109 ttp://www.ciol.com/News/News-Reports/ h TCS,-Saab-to-setup-ADDC-in-India/10908110181/0/ 110 ttp://www.india-defence.com/reports/4181 h 111 ttp://www.kpitcummins.com/downloads/Dassault-Systemes-and-KPIT-Cumminsh Joint-Press-Release.pdf 112 ttp://indiadefenceonline.com/379/iaitata-group-joint-venture-kick-starts/ h 113 ttp://www.livemint.com/2009/03/10174039/GE-Security-Wipro-Infotech-in.html h 114 ttp://stockmarketing.in/news/taneja-aerospace-likely-to-float-jv-with-tidco/5861/ h 115 ttp://economictimes.indiatimes.com/news/news-by-company/corporate-trends/ h LT-EADS-announce-JV-for-defence-tech/articleshow/4485612.cms
8.3 Defence Offsets in India So far, offset contracts of about USD 2 billion have been entered into by Defence contractors and expectation is to reach to USD 10 billion by 2011. Table 23 Tentative list of offset contracts agreed to date. No. Contract holder Details of contract A contract worth USD 225 million (Rs. 900 crore) for supplying radars by ELTA. Offset contracts have been signed with two Indian firms for purchase of components, from Astra Microwave Hyderabad and Larsen & Toubro (L&T) securing a contract worth USD 25 million Contract for fleet Refuelling Tankers for Navy. The estimated price is USD100 million (Rs. 400 crore) with offset worth USD 32.5 million (Rs. 130 crore). The beneficiary companies are Wartsila India, OFB, BEL, L&T, Almot, Velgear and Johnson Pumps. The MIG-29 upgrade contract worth USD 1 billion (Rs. 4,000 crore) has been awarded to a Russian manufacturer. The vendor has agreed to offsets of USD300 million (Rs. 1200 crore) and the Base Repair Depots of IAF, HAL, BDL, Alpha Technologies are beneficiaries. The medium lift helicopters for the IAF, where the total cost of the programme is USD 138 million (Rs. 552 crore) and the offset value is USD 41.4 million (Rs. 165.6 crore). The beneficiaries of the offset are Tata, L&T, etc. The Jaguar upgrade valued at USD 82.5 million (Rs. 330.6 crore) and the offset value is to be USD 20.25 million Boeing has planned for offset in aerospace structures and aviation electronics products worth at least USD 600 million from seven firms in India as part of offsets against winning a USD2.1 billion (Rs. 8,400 crore) contract in Jan09 to supply eight P-8I reconnaissance planes to the Indian Navy. The offset contracts are being placed with L&T, Bharat Electronics Ltd, Wipro Ltd, HCL Technologies Ltd, Hindustan Aeronautics Ltd (HAL), Dynamatic Technologies ltd and Macmet Technologies Ltd, a unit of Canadas aerospace simulator maker CAE Inc. According to Defenseworld.net in May 2009, senior BEL executives stated that as part of the offsets for the first fleet tanker, Fincantieri, in 2008, placed an order worth 14.3M euros for the supply of Composite Communication System, Versatile Communication System, ESM System, Electric Opto Fire Control System and their integration on board the fleet tanker. BEL will implement this order in 2009. BEL also expects a follow on order in FY 2009-2010 for the second fleet tanker. Date Contract value in US$millions Contract value in IN(Rs.Crore) Minimum offset % Offset amount IN (Rs.Crore)
ELTA (Israel)
10 Feb 2009
225
900
30%
100
Not disclosed
100
400
30%
130
RAC MiG (Russia)
10 March 2008
1000
4000
30%
1200
Rosonboron export (Russia) HAL (likely to tie up with BAe) (United Kingdom)
6 Dec 2008
138
552
30%
165.6
82.5
330.6
30%
81
Boeing (United States)
2100
8400
30%
2400
Fincantieri (Italy)
5 June 2008
1300
30%
390
62
No.
Contract holder
Details of contract the Israel Aerospace Industries (IAI) has agreed to provide 2,000 of the latest version of its Barak surface-to-air missile for the Indian Navy at an estimated price tag of USUSD1.4 billion. Under the terms of the agreement, a third of the value of the deal will be spent or invested in India, where the IAI will make offsetting purchases from Tata. The Mumbai-based multinationals wholly owned subsidiary Tata Advanced Systems (TASL) is forging a direct partnership relationship with the IAI that is expected to be wide-ranging, involving missiles, drones, radars, electronic warfare systems and homeland security systems all areas of Israeli defense industry specialization. The Indian ministry of defence has confirmed that it has signed a contract with M/s Rafael, Israel for the supply of the SPYDER (Surface-to-air Python and Derby) low level quick reaction missile system (LLQRM) for the Indian Air Force. Reports in the media over the previous three months have suggested that the USD260 million contract would involve the supply of 18 SPYDER systems, with deliveries running through early 2011 to August 2012. Rosoboronexport has signed a contract to upgrade Indian Air Force Sukhoi 30 MKI Fighter Jets at a cost of USD 700 million as per agency report by Interfax. This will be a long haul version. India is scheduled to acquire 230 Su 30 MKI 4.5 generation fighters considered as one of the most advanced in the World at present
Date
Contract value in US$millions
Contract value in IN(Rs.Crore)
Minimum offset %
Offset amount IN (Rs.Crore)
Israel Aerospace Industries (Israel)
30 April 2009
1400
5600
30%
1866.8
M/s Rafael (Israel)
12 Dec 2008
260
1040
30%
312
10
Rosoboron export (Russia)
700
2800
30%
840
11
Lockheed Martin (United States)
The Indian Government has signed a Letter of Offer & Acceptance with the US Government for the procurement of 18 six C-130J-30 aircraft for the Indian Air Force. The estimated March value of the aircraft along with associated ground support equipment, ground handling equipment and role equipment 2008 is USD962,454,677.The delivery of these aircraft is likely to be completed by December 2011
1000
4000
30%
1200
Source: Various websites
9 Conclusion
Substantial benefits are to be derived if foreign industry can become more involved in overseas defence markets, either through exports or foreign direct investment. Apart from the obvious benefits of additional revenue and profitability, one major advantage concerns the potential for smoothing out the workload. A big problem for local firms is the level of investment that is required to participate in the Foreign defence industry when the workload can often reflect a feast or famine cycle. This not only causes considerable disadvantages for the local firms themselves, but also adds to Defences costs in seeking to sustain the industry in pursuit of self-reliance. There are also strong potential benefits from involvement in overseas markets in terms of capability. The challenge of satisfying a new and demanding customer, perhaps by refining the particular product or developing new and more advanced applications, can bring private benefits to the firm concerned but also broader benefits to the global defence companies as the spin-offs are brought home. Participation in a joint venture in a larger defence market overseas can also bring benefits in terms of economies of scale, movement down the learning curve and also some potential ToT and knowhow from related firms operating in the overseas market concerned. 9.1 The opportunity India is embarking on a very substantial program to expand and upgrade its defence force. There are a number of factors underlying this program, including: Indias growing economic strength, which allows the development of a substantial modern defence force while keeping defence expenditure below 2.5 per cent of GDP The fact that territorial disputes with two powerful neighbouring countries (China and Pakistan) that are nuclear-armed and developing closer relations with
one another opens up the possibility of a war on two fronts The demonstration in recent disputes that much of Indias defence equipment is obsolescent and that the Revolution in Military Affairs passed India by, suggesting that a major catch-up effort is required. This translates into a major procurement program over the next few years. 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). India is also seeking to acquire sophisticated defence electronics and communications systems, including the intention to equip infantry soldiers (and the Indian Army can field over 30 infantry divisions) with advanced equipment under the Future Infantry Soldier as a System project. Overall, the acquisitions budget will grow from around USD 17 billion in 2011 to USD 19.20 billion in 2015, an increase of nearly 15 per cent. Clearly an expansion such as this offers considerable opportunities to the international defence industry, including Foreign companies. It is important, however, to recognise the very considerable challenges involved in winning defence work in India. 9.2 Some challenges Competition The first challenge facing foreign firms is competition, particularly from transnational corporations offering state of the art technology. Indias substantial defence expansion
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).
is in stark contrast with what is occurring among the NATO (and ex-Warsaw Pact) countries where the end of the Cold War twenty years ago brought about a steep decline in defence expenditure. It also brought about a shake-out and rationalisation in defence industries in those countries. Despite this rationalisation, many defence contractors in western countries (and presumably in the former Soviet Union as well) are operating well below capacity. Many of the foreign defence companies generally suffer from a lack of scale and may have difficulty in competing with other non-indigenous players with much higher levels of production and a more advantageous position on the learning curve. Unless they have a unique capability, they will also have great difficulty competing on price with Indian companies, with their much cheaper labour rates (even for software engineers) and tax advantages. Competition in markets for defence equipment also does not take place on a level playing field. Government support is particularly important. This does not have to be financial support; often backing for the bid from the defence force in the exporting country can be influential in its own right. If senior officers from the Royal Foreign Navy, for example, demonstrate enthusiasm for a particular Foreign-made sensor, this is likely to have some influence on naval officers in the purchasing country. It is inevitable that relations between governments are also important in these areas. A strong relationship between a foreign country and India would do no harm in fostering relationships between defence industries in the two countries. Any marketing strategy for the Foreign defence industry in India would need to take account of the fact that relations between the two countries have been subject to some recent headwinds. For example, the fact that one country refuses to sell one product to India while another country has agreed to supply the same product could provide a relative advantage to that another countrys firm in the defence industry.
Tendering process It appears that the tendering process for defence equipment in India is not highly transparent. The process can be extremely long and the basis on which tenders are eventually awarded is often not at all clear. There is every prospect that foreign companies could spend a great deal of time and money working up a bid only to be advised, much later, that they were unsuccessful for reasons that are not apparent. While companies will want to seek some early signals in regard to their perceived qualifications to be selected as a contractor, at the same time they need to ensure they have strict governance protocols in place to avoid any suggestion of corruption. Buy local, offsets and licensing As shown in the body of the report, India is moving towards a strong buy local policy, aimed at achieving an indigenous share of total expenditure of 70 per cent. While, India has a policy of self-reliance in defence, this is a phrase capable of different interpretations. In India, its meaning seems to be
closer to self-sufficiency. This is ambitious and is operationalised, in part, by establishing offset requirements for foreign defence purchases of at least 30 per cent and limiting foreign investment in a project to 26 per cent. This suggests first of all that it would be difficult for any foreign firm without a must have capability of piece of equipment to win a contract in India. If that hurdle can be overcome, any contract to supply equipment to India will involve working closely with the local industry. This may involve significant risks. The defence sector has traditionally been government owned in India and the level of efficiency is questionable. On the one hand, Indian industry has designed and built some highly sophisticated weapons systems. Two that immediately come to mind are the Tejas light fighter aircraft and the Arjun main battle tank. In both these projects, Indian industry has had the responsibility for designing, producing and integrating highly sophisticated equipment, including advanced composites, electronic systems and a main tank gun. On the other hand, while some of the goals have been achieved for these projects, in general they have not been successful. The Tejas has evolved from an original requirement dating from over half a century ago and still is not fit for front line deployment. The requirement for the Arjun dates from nearly forty years ago and in the course of the project the problems with the Arjun meant that large numbers of T-72s had to be acquired from Russia. More recently, while around 120 Arjun tanks will be deployed, the Indian Army is acquiring the latest T-90 tanks to equip its front line armoured brigades in the eight battlegroups. While these projects were clearly over ambitious, the forward acquisition plan reflects a similar level of ambition. Although the private sector has now begun to take its place in the defence industry alongside the traditional government-owned businesses, their level of competence remains unclear. If foreign firms are to supply defence equipment
to India, they will necessarily have to become involved with the Indian industry, either as a reciprocal purchaser of Indian equipment and components under the offsets regime or as a minority investor in a joint venture. This may well contain significant risks in terms of efficient and timely delivery of projects. It may involve delays, a reduction in the number of platforms or systems to be acquired or even cancellation of the project. Because of the buy local policy, there will be pressure on foreign companies supplying significant items of equipment and platforms to enter licensing agreements so that local firms can manufacture the product in India under licence. Such arrangements can provide valuable revenue and other benefits to the licensor, but they also can involve the transfer of significant proprietary technology. Foreign companies entering such arrangements will need to ensure they have secure safeguards in terms of their intellectual property protection. 9.3 India: a potential market for the world? The challenges involved in participation in the Indian defence market should not be under-estimated. Yet the potential rewards for foreign companies are significant. While it is clear that India is seeking a high level of selfsufficiency in delivering its ambitious defence re-equipment and expansion program, it is also evident that there will be a high level of reliance on overseas interests to supply the necessary technology in a number of areas. The export countries which already dominate the global market can supply complete platforms or systems. Other Countries will necessarily be a niche player here. Yet in the context of Indias aspirations in terms of self-reliance, being a niche player may be no bad thing. By their very nature, niche players are not threatening or overbearing and are more willing than the big transnational corporations to work closely with local industry. They also tend to be more aware of the reciprocal benefits of working overseas and may be more willing to incorporate Indian firms into their supply chains.
66
10 A brief about CII
CII has been actively partnering with the Ministry of Defence, Armed Forces and DRDO in promoting Industrys participation in Defence production. CII Defence Division has been committed to working in the areas of steering policy formulation, defence market development / trade promotion and formation of international joint ventures / technology transfers. CII had formed the Defence Division in 1993 to catalyse change in the Defence sector by pursuing the Government to liberalise Defence Production and by initiating the process of partnering with the Defence establishments in organising interactive meetings with the end users, i.e. the Armed Forces. Realising the importance of harnessing the technologies developed within the country, CII has also been a pioneer in organising Interactive sessions with the Defence Research and Development Organisation to enlarge the role of Private sector in Defence R&D. A major partnership with the Ministry of Defence has been the organisation of the Defexpo India (Asias largest Land and Naval Systems exhibition) in 1999, 2002, 2004 and 2006. CIIs Defence Division strives to forge industry initiatives to strengthen the Indian Defence Sector. The objective of this Division is to Establish a strong partnership between Defence Services & Industry and enlarge the role and scope of Indian Industry in Defence Production for mutual benefit and enhance the National Security. CIIs initiatives in the area of policy reforms really got a boost when, CII had the CEOs meeting with the Ministry of Defence on the 18th June 1998. The meeting provided an opportunity for the Industry to interact with the senior officials of the Ministry of Defence (MoD) and DRDO. As a fall out of this meeting 6 Joint task forces, chaired by serving officers from the armed forces / Ministry of Defence and co-chaired by CII were formed. This was an epoch making event, which had never previously happened in the history of India. One of the major recommendations of the Task Forces was that private sector should be given an important role in the Defence production of the country. Subsequent to this, CII had also submitted a Paper to the Government of India on a suggested mechanism for awarding Licence for Defence
Production. In continuation, CII has submitted several policy recommendations to the Government of India for promoting contribution and participation of Indian Industry in defence production. By representing the interests of the Indian Industry both public and private sector as well as the end users The Armed Forces, CII has been recognised as the voice of Indian Defence Industry by the Government of India. This would bring about competition and help provide quality equipment to the armed forces at the right time and at the right price. This would in turn increase defence exports of the country. CII helps the Indian Defence Industry to promote their contribution in Indian Defence procurement by helping them to identify the opportunities that exist in Defence. CII organises several sector focussed interactive session with the Armed Forces to enable the industry to identify their requirements. CII has institutionalised several events with the Armed Forces such as AIP (Army Industry Partnership), NIP (Navy Industry Partnership Meet), DIP (Defence Industry Partnership Meet), DEFCOM (Defence Communications Seminar), Artillery Technology Seminar, Defence IT Convention to name a few. CII Defence Events provide excellent platforms for Industry to understand the future requirements of the Armed Forces. These events also provide a platform for industry to introduce their capabilities in terms of offering new products and technologies to the Indian Defence. International Linkages for Technology Cooperation, Joint Ventures and Export CII provides international exposure to Indian Defence Industry by organising inward and outward industry missions. It has organised Defence Industry Mission to USA, UK, South Africa and Israel. It has also received international delegation from USA, UK, Russia, South Africa, Poland, Slovakia etc. The Committee has signed Memorandum of Understanding with the Defence Manufacturers Association of UK (DMA); The United States India Business Council (USIBC); Polish Chamber of National Defence Manufacturers, Association of the Defence Industry of the Slovak Republish (ADISR) and Association of Italian Defence and Aerospace (AIDA).
11 A brief about Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms Deloitte provides audit, tax, consulting and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloittes more than 168,000 professionals are committed to becoming the standard of excellence. Deloittes professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from
cultural diversity. They enjoy an environment of continuous learning, challenging experiences, and enriching career opportunities. Deloittes professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. The Deloitte Global Aerospace & Defense (A&D) industry group serves all sectors in the A&D industry, including commercial and military aircraft, engines and propulsions systems, guided missiles, space vehicles and shipbuilding. Deloitte has a strong defense practice that draws on best practices, experience, Aerospace and defense, manufacturing and our other commercial industry practices. We focus on the top issues facing the industry, including Supply Chain Strategy, Customer Support and Sustainment (CS&S), Program Management, Mid-market ERP Solutions, Corporate Finance, Talent Management, and Tax Strategies.
68
12 Annexure
Quick overview of taxation and regulatory for a foreign company in Defence industry India has a well-developed tax structure with clearly demarcated authority between the Central and State Governments and local bodies. The Central Government levies taxes on income, customs duties, central excise and service tax, etc. Then there are also levies on taxes such as surcharge and education cess which is the collection by the Government to meet specific objective. Value Added Tax (VAT), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc. Indian taxation system has undergone tremendous reforms during the last 10-15 years. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is continuing in India with the Government intending to implement New Direct Tax Code (DTC) and new Goods and Services Tax (GST) w.e.f. April 1, 2011. Requlatory and Income tax overview Foreign Company A foreign company is a company, which is not a domestic company. A domestic company means an Indian company or other company, which declares and pays dividends in India. Generally, a company registered outside India, is regarded as a foreign company. A foreign enterprise may carry on its business operations in Indian in any of the following manner: Through a Liaison office in India Through a branch set up in India Through a Project office in India Without any physical presence in India Liaison Office (LO) Prior approval of Reserve Bank of India (RBI) is required for establishing LO. Defence related requests for LO need Governments inter-ministerial consultation. LO is not permitted to carry on commercial activities in India. Its role is usually restricted to collection and dissemination of information on behalf of the foreign entity. Therefore, generally a liaison office is not liable to tax in India. Branch Office (BO) Prior approval of RBI is required for establishing BO.
Defence related requests for BO need Governments inter-ministerial consultation. BO can carry on full-fledged business activities (except not permitted activities viz. manufacturing). However, since a branch office is an extension of its head office, under the tax treaties, a branch would be considered as a Permanent establishment (PE) of the foreign company. Therefore, the business income accruing in India would be taxable at the rate of tax applicable to the foreign companies (i.e. effective tax rate is 42.23%125 on net profits) which is higher than the rate of tax applicable to companies incorporated in India (effective tax rate is 33.22%126 on net profits). In computing the income of the branch, there are certain restrictions on allocation of head office expenditure. Project Office (PO) Although PO does not need prior approval of RBI, however, being a defence sector, approval from RBI may be required. Defence related requests for PO need governments inter-ministerial consultation. A PO can be established to execute a specific project. A project office would not be considered a legal entity separate from its parent company. Therefore, income of a project office would also be taxable at the rate applicable to the foreign companies (effective tax rate is 42.23% on net profits). The computation of the profit of the project office does involve complexities such as the base on which the tax is leviable. Further, LO/BO/PO needs registration with registrar of companies, income tax department etc. It is also required to fulfil annual compliances with RBI and ROC. Business Operations without Physical Presence in India A foreign enterprise may operate in India without any actual physical presence in India. For instance, a foreign company may supply goods, plant & machinery to Indian parties from its home country. A foreign company is taxable in India on the income received or income accrued/ arising in India. Where the supply is affected in a manner that no income therefrom is received or accrues in India, then tax liability may not arise in India. The above would be a case where sale of plant & machinery is affected outside India; the title in goods is transferred in favour of the Indian buyer outside India; and the payment for such supply is received outside India. In such a case, income from such transaction may not be taxable in India. However, where a foreign entity has a business connection in India, tax is payable on the income arising from operations in India.
125 or foreign companiesF surcharge @ 2.5% (where income exceeds Rs. 10 million) and education cess @2% and secondary and higher education cess @1%). Draft DTC has proposed tax rate at 25% for foreign companies and additional tax of 15% as Branch profits tax. 126 or domestic companies F surcharge @ 7.5% (where income exceeds Rs. 10 million) and education cess @2% and secondary and higher education cess @1%). Draft DTC has proposed tax rate at 25% for domestic companies
The normal business income is computed by reducing from the gross business receipts, expenses incurred in earning such income subject to certain restrictions prescribed under the Income-tax Act, 1961 (ITA). Joint venture Company (JV) The Investment in defence production was liberalized in May 2001,vide Press Note No. 4 of 2001, subject to licensing for production. The guidelines for licensing were issued in Press Note No. 2 of 2002. The Indian domestic private sector was allowed 100 % participation in defence production, whereas 26% is for foreign direct investment (with FIPB approval) in an Indian joint venture company (JV). The management of the JV should be in Indian hands with majority representation on the Board as well as the Chief Executive of the company being resident Indians. The FIPB issued press note 2 of 2009 series on the guidelines for calculation of total foreign investment whereby it has provided inter-alia that JV should be owned and controlled by resident citizens and Indian companies which are owned and controlled by resident Indian citizens. The words ownership and control have also been defined in the said press note. Where a foreign company makes foreign direct investment in a JV in India, the JV is considered as a domestic company. The income of JV is taxable at the rate applicable for domestic companies. The effective rate of tax is 33.22%. Remittances LO/BO/PO can remit surplus funds to foreign company subject to approvals from RBI and tax department Whereas cash remittance by the JV to the foreign JV partner company can be made through dividend pay-outs, interest payments, royalty/fee for technical services, exit through transfer of shares, buy-back, capital reduction, capital restructuring. Automatic approval for remittances under foreign technology agreements has been recently liberalized. Supply of Technical Know-How/Services Income from supply of technical know-how or technical services to Indian parties is taxable in India either as Royalty or as Fee for technical services (FTS) as defined under the ITA. The definition of royalty covers payment for the use of or
the right to use, industrial commercial or scientific equipments. Under the ITA, royalty is taxable @ 10% on gross payment, plus surcharge and education cess (aggregate to 10.56%) or a lower withholding tax rate under the applicable tax treaty. FTS is defined to mean consideration for provision of any technical, managerial or consultancy services including supply of technical personnel. Like royalty, FTS is also taxable @ 10% on gross basis in certain cases or a lower withholding tax rate under the applicable tax treaty. Interest Income Interest Income earned in India is taxable in India at the normal tax rate applicable to foreign entities, viz, 20% (effective rate 21.12%). Under Tax Treaties, generally, the interest income is taxed at the reduced rate of 10% or 15%. Capital Gains Gain arising from transfer of a capital asset is liable to capital gains tax in India. Most of the tax treaties signed by India provide for taxation of capital gains as per domestic tax laws of the respective countries. Accordingly, capital gains from sale of capital assets/immovable properties situated in India are generally taxable in India. Dividend Distribution Tax (DDT) In addition to the normal income tax, a Domestic Company is liable to pay DDT @ 15% on amount distributed as dividends. Thus, the effective rate of tax is 16.61%. On the other hand, receipt of dividend is fully exempt from tax in the hands of the recipient shareholders. Foreign companies are not required to pay DDT. Withholding tax An Indian resident is obliged to withhold tax while making payment to a foreign party. The withholding tax rates vary depending upon the nature of payments like Royalties, FTS, interest, etc. Generally, under the Tax Treaty mechanism, withholding tax rates are lower as compared to the tax rates under the domestic tax laws of India. Under the domestic tax laws of India, a mechanism has been provided whereby if the entire income of a non-resident is not believed to be taxable in India, the payer or the payee of the income can obtain a lower rate withholding order from the tax authorities. A new provision has been inserted recently w.e.f. April 1,
2010, whereby any person whose receipts are subject to withholding tax under the ITA, should furnish PAN to the person responsible for such withholding tax. On failure to furnish PAN, higher of the following to be deducted as tax at source: Rate of tax specified in ITA; Rates in force as specified under the Finance Act or under relevant tax treaties; Rate of tax at 20% Minimum Alternate Tax Where income tax payable by corporate taxpayers is less than 18% of the book profits, 18% of the book profits is regarded as their tax liability. Book profits mean profits as per profit and loss account prepared in accordance with the Indian Companies Act, subject to certain specified adjustments. Thus, effective rate of minimum Alternate Tax (MAT) for Domestic companies is 19.93% of the book profits. For Foreign companies, the effective rate of MAT is 19.00% of the book profits. Further, taxpayers are allowed credit in respect of MAT paid on or after 1 April 2006 to the extent of difference between MAT paid and tax payable on total income computed as per other provisions of the ITA. MAT credit can be set off against the tax payable in the year in which taxpayer is liable to pay tax under normal provisions of the ITA. It can be carried forward for 10 years from the AY it becomes allowable. Draft DTC has proposed MAT at 2% of the gross assets of the company and eliminatingcarry forward of MAT credit. Corporate tax Incentives relevant to this industry Developers and co-developers of Special Economic Zone (SEZ) entitled to 100% tax holiday. Units set up in SEZ eligible for 100% tax holiday on profits on exports for 5 years and 50% tax holiday for the next 10 years. Export Oriented Units (EOUs)/Electronic Hardware Technology Parks (EHTPs)/Software Technology Parks (STPs) eligible for deduction of 90% of export profits for 10 years (up to March 31 2011). Under the DTC, taxable profits of the business of developing SEZ shall be the gross income from the business carried on during the financial year as reduced by capital and revenue expenditure No tax holiday available to units in SEZ/ EOU/ EHTP/ STP under the Code
Companies manufacturing eligible goods in North Eastern States (up to 31st March 2017) eligible for 100% tax holiday for 10 years and in Himachal Pradesh and Uttaranchal (up to March 2012) eligible for 100% tax holiday available for 5 years and 30% thereafter. Draft DTC does not allow area-based exemptions. Tax holiday available to an undertaking manufacturing eligible goods in specified areas to be discontinued without affecting tax payers currently enjoying such incentives, which will be grandfathered. Exemption available on royalty/fees for technical services received by a notified foreign company under an agreement with the Government to provide services in or outside India in projects connected with the security of India. Expenditure on Scientific Research is allowed at: 00% deduction for any revenue expenditure on 1 scientific research 00% deduction for capital expenditure (other than 1 land) on scientific research 00% weighted deduction for in-house scientific 2 research available to companies engaged in manufacturing/ production of any goods (except goods such as liquor, tobacco, cosmetics etc.) 25% of deduction on payments for research activi1 ties to an approved Indian company in scientific R&D Transfer Pricing The Indian transfer pricing regulations require international transactions with associated enterprises to be at arms length price and further supported with prescribed documentation. There are strict penalties for non-compliance. As a measure of simplification, Central Board of Direct Taxes (CBDT) empowered to formulate safe harbour rules. Detailed Safe harbour rules are still to be prescribed. In the draft DTC, there is a proposal to introduce advance pricing agreements with regard to the International transactions between associated enterprises. Advance Ruling Taxpayers can approach the Authority for Advance Ruling to determine income-tax aspects of any proposed or current transactions with the non-resident. India has entered into comprehensive treaties for avoidance of double taxation with over 70 countries
and limited agreements with 18 countries. Tax implications under the domestic laws could be mitigated by resorting to a tax treaty. Alternative Dispute Resolution Mechanism (ADRM) With a view to encourage the growth of foreign investment in India, a dispute resolution mechanism has been recently introduced to facilitate expeditious resolution of disputes on a fast track basis. Salient features of ADRM are: Foreign companies and cases involving transfer pricing disputes eligible for ADRM. DRP directions binding on the Assessing officer. ADRM mandatory for eligible taxpayers. Indirect Tax Overview Customs Laws Effective rate of customs duty payable by importer on import of goods would be 26.85% based on peak rate of customs duty. Customs duty exemption is available on imports for aerospace and defense purposes subject to the fulfillment of specified conditions. Central Excise Laws Effective excise duty rate on manufacturing activity is 10.3% (inclusive of cess). Presently, excise duty exemption benefit is restricted to notified institutions only such as DPSUs and OFBs. Value Added Tax (VAT)/ CST Laws Inter-State sale of goods is subject to levy of CST, intraState sale of goods is subject to levy of VAT. CST rate is 2% against submission of prescribed statutory form by the purchaser. Otherwise, VAT rate of the originating State would apply. The rate of VAT typically ranges between 4% to 14.5%. No general/specific exemptions/concessions available on sale of goods made to defence Each State VAT legislation should be examined. Foreign Trade Policy 2009 - 14 Export of manufactured goods is subject to SCOMET guidelines,etc. Service Tax (including Cenvat Credit) Laws Specified services are subject to service tax and liability to pay the same is on service provider. For few services including services received from outside India, liability to pay service tax shifts to the service recipient located in India. Service tax applicable on input services like payment for
technical know-how, licensing of intellectual property rights(IPRs) in relation to equipments, drawings etc./ engineering services. Service tax to be paid by Indian joint venture as recipient of taxable service by virtue of reverse charge mechanism Set off of such service tax paid could be availed against output excise duty. Service tax rate is 10.3% (inclusive of cess). Services transactions between associated enterprises would be subjected to service tax on book entry basis instead of receipt / payment basis.
Research and development (R&D) Cess Research and Development (R&D) Cess @ 5% is applicable on import of technology into India by an industrial concern. R&D Cess can be adjusted against service tax liability, in certain cases. Entry Tax/ Octroi The States, Local authorities and Municipal corporations also levy other local taxes such as entry tax, octroi, etc. on entry of goods in the designated areas for the purpose of consumption, use or sale. Special Economic Zone (SEZ) Incentives Indirect tax incentives available to SEZ units for their authorized operations. No service tax leviable on services provided to SEZ wholly consumed within the SEZ. The exemption to the taxable services provided to SEZ consumed partially or wholly outside the SEZ, is provided by way of refund. In light of above-mentioned structure of indirect taxes in India, it could be stated that Joint ventures formed for offset purpose incur a number of indirect tax obligations. However, appropriate review of the transactions could result in tax-optimization, in view of certain benefits available, including under the Foreign Trade Policy.
13 Abbreviations
Abbreviations Abbreviations AAP ADGES ALH AOPVs ASW ATV AVD BDL BEL BEML BFSR-SR CAGR CCS CNC DAC DGAQA DGQA DPB DPP DPSU DQA(A) DQA(CV) DQA(EE) DQA(L) DQA(M&E) DQA(N) DQA(R&S) DQA(S) DQA(V) DQA(WP) DRDO DWT EADS ESO FARP FDI Expansion Annual Acquisition Plan Air Defence Ground Environment System Advanced Light Helicopter Arctic Offshore Patrol Vessels Anti-submarine warfare Advanced Technology Vessel Avalanche Victim Detector Bharat Dynamics Limited Bharat Electronics Limited Bharat Earth Movers Ltd Battle Field Surveillance Radar - Short Range Compound Average Growth Rate Cabinet Committee on Security Commercial Negotiation Committee Defence Acquisition Council Directorate General of Aeronautical Quality Assurance Directorate General of Quality Assurance Defence Procurement Board Defence Procurement Procedure, 2008 Defence Public Sector Undertaking Directorate of Quality Assurance (Armaments) Directorate of Quality Assurance ( Combat Vehicles) Directorate of Quality Assurance(Engineering Equipment) Directorate of Quality Assurance (Electronics) Directorate of Quality Assurance (Metals and Explosives) Directorate of Quality Assurance(Naval) Directorate of Quality Assurance(Radars and Simulators) Directorate of Quality Assurance (Stores) Directorate of Quality Assurance (Vehicles) Directorate of Quality Assurance(Warship Project) Defence Research and Development Organisation Dead Weight Tonnage European Aeronautic Defence and Space Company Engineering Services Outsourced Field Artillery Rationalisation Plan Foreign Direct Investment Abbreviations FGFA FIPB FSU FTP GDP GFC GRSE GSL HAL HVF IAC IAF ICG ICT ICV IMF INS ISRO ITARS JV L&T LCA LPI LRDE LTIPP M&M MBT MDL MHA MIDHANI MiG MMRCA MOD MRO MRSAM MTA NATO OEM OFB Expansion Fifth Generation Fighter Aircraft Foreign Investment Promotion Board Former Soviet Union Fast Track Procedure Gross Domestic Product Global Financial Crisis Garden Reach Shipbuilders & Engineers Ltd Goa Shipyard Ltd Hindustan Aeronautics Limited Heavy Vehicle Factory Indigenous Aircraft Carrier Indian Airforce Indian Coast Guard Information and Communication Technologies Infantry Carrier Vehicle International Monetary Fund Indian Navy Service Indian Space Research Organisation International Traffic in Arms Regulations Joint venture Larsen and Toubro Light Combat Aircraft Low Probability of Intercept Electronics & Radar Development Establishment Long Term Integrated Perspective Plan Mahindra & Mahindra Main Battle Tank Mazagon Dock Limited Ministry of Home Affairs Mishra Dhatu Nigam Limited Mikoyan and Gurevich Medium Multi-Role Combat Aircraft Ministry of Defence Maintenance Repair and Overhaul Medium Range Surface to Air Missile Systems Multi-Role Transport Aircraft North Atlantic Treaty Organisation Original Equipment Manufacturers Ordnance Factory Board
Abbreviations PSU QA R&D RFI RFP RMA RUR SAM SCAP SCAPCHC SED SHQ SLBM SME SQR SRSAM TAS TEC ToT UAC UAV ULH USD VVIP SQR SRSAM TAS TEC TEC ToT UAC UAV ULH USD VVIP
Expansion Public Sector Unit Quality Assurance Research and Development Request for Information Request for Proposals Revolution in Military Affairs Raksha Udyog Ratnas Surface-to-Air Missile Services Capital Acquisition Plan Service Capital Acquisition Plan Higher Committee Strategic Electronics Division Service Headquarters Submarine launched ballistic missiles Small and medium enterprises Services Qualitative Requirements Short Range Surface to Air Missile System Tata Advanced Systems Technical Evaluation Committee Transfer of Technology United Aircraft Corporation Unmanned Aerial Vehicle Ultra light howitzers United States Dollars Very Very Important Person Services Qualitative Requirements Short Range Surface to Air Missile System Tata Advanced Systems Technical Evaluation Committee Technical Evaluation Committee Transfer of Technology United Aircraft Corporation Unmanned Aerial Vehicle Ultra light howitzers United States Dollars Very Very Important Person
Summary of tables Table No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Data description Projected expenditure by each Service Division Urban population and Urban disposable income demographics 2001 Government of India Budget 2010-11 Expenditure definitions Expenditure by Service division Imported vs indigenous production Forecast Expenditure on Defence Services Forecast Growth of Imported vs indigenous production, if targets are met Forecast Expenditure on Defence Services Indian defence acquisition plans in the Navy domain Indian defence acquisition plans in the land domain Indian defence acquisition plans in the Aerospace domain Indian defence acquisition plans in the Electronics domain Major Navy production currently occurring in India HAL Key Financial Performance Indicators, 2007-08 and 2008-09 Defence Public Sector Undertakings Potential RURs identified Private sector defence firms and key operating domains Capital acquisition categories in the DPP Procurement process and timeframe Defence MOUs in India Defence Joint Ventures in India Tentative list of Offsets contract in India agreed to date Page No 8 16 16 19 22 25 26 27 27 29 30 31 32 37 40 42 43 45 53 54 56 60 62
74
Summary of figures Figure No Data description 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 GDP Shared, GDP Growth rate and Industrial production Export and import Growth Rate of various sectors Population Vs Age group (2001) Tier distribution of cities Expenditure on Defence by GOI Indian GDP (1980-2014) Expenditure Breakdown Defence Expenditure as % of GDP Budgeted Expenditure Unspent funds Total Defence Budget Expenditure by Service division Unspent funds Service Division Capital Budgets Public Debt to GDP Key country comparisons Indian Navy Procurements through imports versus indigenous production (2000-2005) Indian Army procurements through imports versus indigenous production (2000-2005) HAL Domestic Sales and Indian Government IAF Aircraft and Aero-engine Capital Outlays,1997-2008 Flowchart of various categories of acquisition Defence spend as percentage of country GDP Percentage of total global defence spend Page No 14 14 15 15 15 16 17 20 20 21 22 23 28 37 38 41 47 50 50
Box 1: Overview of Indians indigeous defence production Box 2: Ordnance Factories in India
14 Acknowledgement
In order to provide a comprehensive industry view in the study, we have interacted with various participants in this sector, independent defence consultants, ex-officials from the Ministry of Defence and other relevant governmental organisations like Defence Research Development Organisation (DRDO), Institute for Defence Studies and Analysis (IDSA), Centres for Airpowers Studies (CAPS) and United Service Institution of India (USI). We would like to thank the various industry participants, whose invaluable contributions have made this study possible. We would like to thank the team at CII especially Gurpal Singh, Deputy Director General and Head (Defence and Aerospace), Amit Kumar Singh, Director, Defence and Aerospace/Security/Space), for assisting us during the course of this study. Deloitte would like to thankfully acknowledge the valuable inputs received from the following participants Sujeet Samaddar Vice President (Operations) Nova Integrated Systems Limited Brig Anand Mehra (Retd.) Advisor (Marketing) Bharat Electronics Limited Laxman Kumar Behera Associate Fellow IDSA Brig. Vinod Anand (Retd) Senior Associate - USI Air Vice Marshal Kapil Kak (Retd) Deputy Director - CAPS Surbhi Sareen Assistant Librarian CAPS Wing Commander Sandeep Sapra (Retd) Aerospace and Defence Consultant
76
15 Contacts
Deloitte aerospace and defence contact e-mail id indiaknowledge@deloitte.com Bangalore Deloitte Centre, Anchorage II, 100/2, Richmond Road, Bangalore 560025, India Phone: +91 (080) 6627 6000 Chennai Ol No. 37th, New No: 52, 7th Floor, ASV N Ramana Towers, Venkatnarayana Road, T Nagar, Chennai 600 017, India Phone: +91 (044) 66885000 Delhi NCR 7th Floor, Building 10 Tower B, DLF Cyber City Complex, DLF City Phase II, Gurgaon 122002, India Phone: +91 (0124) 679-2000 Hyderabad 1-8-384 & 385, 3rd Floor, Gora Grand, S.P. Road, Begumpet, Hyderabad 500 003, India Phone : +91 (040) 40312600 Mumbai 12, Dr. Annie Besant Road, Opp. Shiv Sagar Estate, Worli, Mumbai 400 018, India Phone : +91 (022) 6667 9000
CII aerospace and defence contact e-mail id Gurpal Singh Deputy Director General & Head (Defence & Aerospace) Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi 110 003 Tel: 91-11-24629994-7 Email: gurpal.singh@cii.in Amit Kumar Singh Director (Defence and Aerospace/Security/Space) Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi 110 003 Tel: 91-11-24629994-7 Email: amit.singh@cii.in
78
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s) and accordingly is not intended to constitute professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional advisor. None of DTTIPL, Deloitte Touche Tohmatsu, its member firms, or its and their affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this material. 2010 Deloitte Touche Tohmatsu India Private Limited
Member of Deloitte Touche Tohmatsu

Deloitte Indian Defence

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Deloitte Indian Defence

Uploaded by

Copyright:

Available Formats

Confederation of Indian Industry Since 1895

Prospects for Global Defence Export Industry in Indian Defence Market

CII Indian Defence Industry Mission EUROSATORY 2010

CII Indian Defence Industry Mission EUROSATORY 2010

10 A brief about CII 11 A brief about Deloitte 12 Annexure 13 Abbreviations 14 Acknowledgement

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

1. Foreword from CII

CII Indian Defence Industry Mission EUROSATORY 2010

2. Preface from Deloitte

Prospects for Global Defence Export Industry in Indian Defence Market | 5

Prospects for Global Defence Export Industry in Indian Defence Market | 7

2 anas Defence yearbook M 2010-11

CII Indian Defence Industry Mission EUROSATORY 2010

Prospects for Global Defence Export Industry in Indian Defence Market | 11

Prospects for Global Defence Export Industry in Indian Defence Market | 13

4 Indian defence requirements

GDP Growth rate of India

Industrial production 2009-10

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

11.6% 7.0% 8.4% 8.2% 8.5% 8.6% 2.6%

IIP Growth (%)

-04 4-05 5-06 6-07 7-08 8-09 9-10 0 0 0 0 0 0 20 20 20 20 20 20

Source: Economic Survey

Principal import 2007/08 (USD billion fiscal year Apr-May)

Petroleum Products and Petroleum , 79.6

Agriculture and Applied Products, 18.1 Gems and Jewellery, 19.7

Petroleum Products, 24.9 Textile and Clothing, 19.0

CII Indian Defence Industry Mission EUROSATORY 2010

Growth rate Source: Economic Survey of India, 2009-10

Figure 4: Population (million) Vs age group (2001)

(55+) 101.7 (45-54) 85.7 (35-44) 122 (25-34) 156.6

(5-14) 239 (15-24) 199

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

(figures in USD Billion dollars)

CII Indian Defence Industry Mission EUROSATORY 2010

Prospects for Global Defence Export Industry in Indian Defence Market | 17

General budget terms

4.1.3.3 Historical defence spending

$13.04b (34.13%) $0.26b (0.68%)

Revenue Expenditure Budget (USD, billions)

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

Total Expenditure (USD, billions)

$32.03 (83.83%) Total Services Expenditure

$6.18 (16.17)% Total Civil Expenditure

CII Indian Defence Industry Mission EUROSATORY 2010

Unspent funds as % of Budgeted Expenditure

Unspent funds in USD

Underspending relative to budget

Overspending relative to budget

USD underspent by Service 1,400 1,200 1,000

Underspending relative to budget

Prospects for Global Defence Export Industry in Indian Defence Market | 23

CII Indian Defence Industry Mission EUROSATORY 2010

Prospects for Global Defence Export Industry in Indian Defence Market | 25

Prospects for Global Defence Export Industry in Indian Defence Market | 29

USD 1.89 billion

2010 2010 2009-2012 Ongoing

USD 522 million USD 270 million USD 393.3 million

Bullet proof jackets (59,000)

Prospects for Global Defence Export Industry in Indian Defence Market | 31

CII Indian Defence Industry Mission EUROSATORY 2010

18. 19. 20.

22. 23. 24.